NexPoint Residential Trust, Inc. (NYSE:NXRT) Q4 2023 Earnings Call Transcript
NexPoint Residential Trust, Inc. (NYSE:NXRT) Q4 2023 Earnings Call Transcript February 20, 2024
NexPoint Residential Trust, Inc. misses on earnings expectations. Reported EPS is $0.68 EPS, expectations were $0.88. NexPoint Residential Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Residential Trust Fourth Quarter 2023 Conference Call. [Operator Instructions] I would now like to turn the conference over to Kristen Thomas, Investor Relations. Please go ahead.
Kristen Thomas: Thank you. Good day, everyone, and welcome to NexPoint Residential Trust's conference call to review the company's results for the fourth quarter ended December 31, 2023. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermett, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the company's website at nxrt.nexpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions and beliefs.
Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's most recent Annual Report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect any forward-looking statements. The statements made during this conference call speak only as of today's date, and except as required by law, NXRT does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes an analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures, see the company's earnings release that was filed earlier today. I would now like to turn the call over to Brian Mitts.
Please go ahead, Brian.
Brian Mitts: Thank you, Kristen. Welcome, everyone. Appreciate you joining this morning. I'm Brian Mitts, and I'm also joined by Matt McGraner and Bonner McDermett. I'll kick off the call and cover our fourth quarter and full year results and highlights. I'll update our NAV calculation and then provide initial guidance for 2024. I'll then turn it over to Matt and Bonn to discuss specifics on the leasing environment and metrics driving our performance and guidance as well as details on the portfolio. So let me start with the results from the fourth quarter, which are as follows. Net income for the fourth quarter was $18.4 million or $0.70 per diluted share on total revenue of $68.9 million as compared to net income of $3.8 million or $0.15 per diluted share in the same period in 2022 on total revenue of $69.3 million.
For the fourth quarter, NOI was $42.2 million on 38 properties as compared to $41.8 million for the fourth quarter of 2022 on 40 properties, a 0.9% increase in NOI. For the quarter, same-store rental income increased 3.8% and same-store occupancy was up 60 basis points to 94.7%. This coupled with an increase in same-store expenses of 2%, led to an increase in same-store NOI of 4.5% as compared to Q4 2022. Rental income for the fourth quarter of '23 on the same-store portfolio was up 1.3% quarter-over-quarter from the third quarter of '23. We reported Q4 Core FFO of $17.4 million or $0.66 per diluted share compared to $0.75 per diluted share in the fourth quarter of '22. We continue to execute our value-add business plan by completing 113 full and partial renovations during the quarter and leased 132 renovated units, achieving an average monthly rent premium of $214 and a 19.9% return on investment.
Inception to date in the current portfolio as of 12/31, we have completed 8,534 full and partial upgrades, 4,761 kitchen and laundry appliance installations and 12,348 technology package installations, resulting in $169, $49 and $43 average monthly rental increase per unit and 20.9%, 64.7% and 37.8% return on investment, respectively. Moving to the full year. Full year results are as follows. Net income for the year ended December 31 was $44.3 million or $1.69 per diluted share, which included a gain on sales of real estate of $67.9 million. This compared to a net loss of $9.3 million or negative $0.36 per diluted share for the full year 2022, which includes a gain on sale of real estate of $14.7 million. For the year, NOI was $167.4 million on 38 properties as compared to $157.4 million on 40 properties for the same period in 2022 for an increase of 6.3% in NOI.
For the year, same-store rental income increased 7.1% and same-store occupancy was up 60 basis points to 94.7%. This coupled with an increase in same-store expenses of 5.5% led to an increase in same-store NOI of 8.2% as compared to the full year 2022. We reported Core FFO in 2023 of $73.5 million or $2.80 per diluted share compared to $3.13 per diluted share for the full year 2022. Since inception of the business in 2015, NXRT has generated 10.92% compound annual growth in Core FFO. For the fourth quarter, we paid a dividend of $0.46 per share on December 29. Since inception, we have increased our dividend of 124.5%. For 2023, our dividend was 1.62 times covered by Core FFO with a payout ratio of 61.6% of Core FFO. Moving to our NAV. Based on our current estimates of cap rates in our markets and forward NOI, we're reporting a NAV per share range as follows.
$47.64 on the low end, $61.23 on the high end, $54.43 at the midpoint. These are based on average cap rates ranging from 5.5% from the low end to 6% on the high end, which remained the same as last quarter and increased 60 basis points year-to-date to reflect a rise in interest rates and absorbable increases in cap rates in our markets. Before we go to guidance, I'll touch on our 2023 dispositions and subsequent events since December 31. September 22, we completed the sale of Silverbrook in Dallas for gross proceeds of $70 million, representing a cap rate of 4.55%. The gain on sale was $43.1 million and $16 million of the $19.5 million net proceeds were used to pay down - partially paid down the corporate credit facility on September 25. On December 13, we completed the sale of Timber Creek in Charlotte for gross proceeds of $49 million, representing a cap rate of 5.01%.
The gain on sale was $24.8 million and $17 million of the $24.5 million net proceeds were used to pay down the corporate credit facility on December 15. We currently have two properties, Old Farm located in Houston, Radbourne Lake located in Charlotte under contract that we expect to close in the first half of the year. The estimated net proceeds of $66.1 million will be used to fully pay down the rest of the corporate credit facility. Going to guidance for 2024, we are issuing initial guidance as follows. For Core FFO per diluted share, $2.85 at the high end, $2.60 at the low end with the midpoint of $2.72. For same-store revenue, 2.9% increase on the high end, 1.1% increase on the low end with a midpoint 2% increase. Same-store expenses increase of 4.3% for the high end, 6% for the low end and 5.1% increase for the midpoint, which results in a same-store NOI of a 2% increase on the high end, a 2% decrease on the low end and a 0% or flat increase at the midpoint.
So with that, let me turn it over to Matt and Bonner for additional commentary.
Matt McGraner: Thanks, Brian. Let me start by going over our fourth quarter same-store operational results. Our Q4 same-store NOI margin improved to 62.5%, up 20 basis points over the prior year period. Same-store effective rents ended the quarter at $1,516 per month, up 20 basis points year-over-year. Occupancy ended in 2023 at 94.7%. That was up 60 basis points year-over-year. We saw sizable occupancy growth in some of our supply heavy markets as we implemented a more defensive strategy late in the year. Atlanta and Charlotte finished the year at 96.2% and 95.7%, respectively, while Phoenix, South Florida and Tampa all finished the year over 95% occupied. Fourth quarter same-store NOI growth was 4.5%, driven by 3.8% growth in rental revenue and 4.1% growth in total revenue.
We continue to see moderating expense growth with Q4 down 2 percentage points year-over-year. Bad debt also continued to trend down and finished Q4 at 1.9%, down from 2.7% earlier in the year. Payroll declined 180 basis points in Q4, continuing the downward trend in Q2 and Q3. Repairs and maintenance expense growth was 5.4% in the quarter, continuing to moderate as well from often elevated post-COVID comp in 2022. And real estate taxes also moderated and true-ups booked in Q4 reflect a reduction to our overall real estate taxes for the year, ending at 4.2% growth. In 2023, we shifted our operational focus to higher resident retention reducing turnover costs and furthering our efforts to implement AI and centralized labor. Additionally, we continue to focus on our capital efforts on reducing our overall debt.
As we entered the second half of the year, our market started to see the effects of delivering record high supply, indeed, almost four-decade high. Though positive for the year, new lease rental rates turned negative in the second half of the year, putting stress on top line revenue growth. Expenses continue to moderate and our efforts to reduce turnover costs help maximize growth. Implementing AI and centralization of labor has started to pay dividends, most notably in Q4 2023, which we will continue to improve in 2024. On the occupancy front, we're pleased to report the Q4 same-store occupancy remained over 94.7% positioning us well for 2024. And as of this morning, the portfolio is 94.8% occupied, 96.5% leased with a healthy 60-day trend of 93.5%.
2024 retention has also started off strong, with both January and February over 50%, February month-to-date is 59% and March is expected to finish at 60%-plus. Turning to full year 2023 same-store NOI performance. Our full year same-store NOI margin improved by 65 basis points to 61.6%. Same-store revenues increased, excuse me, 7.1%, while same-store NOI registered a strong 8.2% growth year-over-year. 6 of our 10 same-store markets grew NOI by at least 7%. Notable same-store NOI growth markets for the year were South Florida, Orlando, Nashville and Tampa as each grew NOI by 9% or more. Turning to 2023 acquisitions and dispositions. NXRT disposed Silverbrook on September 22, 2023 and Timber Creek on December 13, 2023. These sales generated a blended 30% levered IRR at 5.28 times multiple on invested capital and $44 million net proceeds, of which as Brian mentioned, it was used to pay $33 million to pay down the drawn balance on the credit facility.
We're excited to report that Old Farm will finally close by the end of February 2024, which will generate a 22% levered IRR with 2.92 times multiple on invested capital and $48 million of net sales proceeds. We will use $24 million of the net sales proceeds and pay off the remaining drawn amount on our credit facility. We will press release the closing to close the gap on the strategic disposition. As Brian mentioned, we're also under contract to sell Radbourne Lake, which will generate a 19 times - excuse me, 19% levered IRR at 3.5 times multiple on invested capital and $18 million in net sales proceeds. As Brian mentioned - turning to our 2024 guidance, as Brian said, at this time, we're expecting same-store NOI growth to be relatively flat for 2024 as we enter peak supply.
Across our same-store properties, we are forecasting 1.4% to 3.2% rental income growth. We're forecasting 1.1% to 2.8% total revenue growth, 2.7% controllable expense growth and 1.6% to 3.8% total expense growth. We continue to be an internal growth business at our core and to that end, our guidance includes the following assumptions regarding our value-add programs. We expect to complete 235 full interior upgrades on select assets. At an average cost of $17,150 per unit, generating $250 average monthly premiums or approximately 17.4% return on invested capital. We expect to complete 611 partial interior upgrades at an average cost of $3,910 per unit, generating $78 average monthly premiums or 24% return on investment - on invested capital.
This includes bespoke additions such as new stainless steel appliances, backsplashes, tub enclosures and private patios. We also expect to complete 661 washer dryer installs at an average cost $1,000 per unit generating $57 average monthly premiums or 70% return on invested capital. Our 2024 guidance also includes the following acquisition and disposition assumptions. $0 to $200 million of acquisition guidance, which given our current cost of capital. We have prioritized balance sheet cleanup and share buybacks, given our implied cap rate is north of 7% at the moment. And $150 million to $300 million of dispositions. Disposition activity could reach the higher end of the range if our team can identify additional assets that can be accretively added via tax-efficient capital recycling strategies that we've implemented in the past.
So in closing, so far in 2024, we're off to a good start prioritizing occupancy and increased resident satisfaction and retention. Our balance sheet is much healthier after materially delevering through last year's hiking cycle. Though our posture to start the year is defensive. We are expecting modest growth this year, specifically in the second half of the year as supply growth begins to wane. Our internal view is that we are in the high of the supply storm, so to speak, right now through the third quarter in our submarkets. In 2024, for example, we see 25,100 units delivering in our submarkets. In 2025, that number is more than half to 10,832 units. And then in 2026, there's just under 1,000 units of new supply delivering in our submarkets across the entire company.
So while we, again, will continue to have a defensive posture going - starting the year, we are optimistic about the portfolios, intermediate to long-term growth prospects for the foreseeable future. That's all I have for prepared remarks. Thanks for our teams here at NexPoint BH for continuing to execute. And I'd like to turn the call back over to Brian.
Brian Mitts: Thanks, Matt. We'll go to Q&A now.
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