NexPoint Residential Trust - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 was operationally soft: revenue fell to $63.8M, diluted EPS swung to a loss of ($1.06), and NOI declined to $38.9M; Core FFO per diluted share was $0.68 versus $0.75 in Q4 2023.
• Management executed major balance-sheet work: refinancing 34 loans extended weighted-average maturities to ~7 years and reduced the adjusted weighted-average interest rate to 2.96% (post-swaps), eliminating meaningful maturities until 2028.
• 2025 guidance initiated: Core FFO per diluted share $2.56–$2.83 (midpoint $2.70); Same Store NOI growth -3.5% to +0.5% (midpoint -1.5%); acquisitions/dispositions $0–$200M each, signaling a transition year before expected supply relief in 2H 2025–2026.
• Dividend sustained: Board approved $0.51 for Q1 2025; Q4 dividend was $0.51 (+10.3% q/q in October), with 2024 dividends 1.47x covered by Core FFO (68% payout).

What Went Well and What Went Wrong

What Went Well

• Significant refinancing reduced adjusted weighted-average interest cost to 2.96% and extended maturities, removing near-term debt cliffs; “with the completion of these refinancings, the company has no meaningful debt maturities until 2028”.
• NAV support and capital allocation: Management published NAV per share of $44.56–$58.52 (midpoint $51.54), continued repurchases at a ~36–37% discount to NAV midpoints earlier in 2024, and highlighted ongoing private/public arbitrage.
• Operating discipline: Bad debt improved to 0.9% in Q4 and averaged 1.3% for FY 2024 (vs. 2.7% in 2023), with retention starting 2025 above 53% Jan–Feb, supporting stabilized occupancy entering the year.

What Went Wrong

• Topline/margins softer: Q4 revenue fell to $63.8M (from $68.9M), NOI to $38.9M (from $42.2M), and Core FFO/share to $0.68 (from $0.75); Same Store NOI declined 0.4% y/y.
• One-offs impacted GAAP earnings: higher loss on extinguishment/modification (+$22.9M y/y) and lower gains on real estate sales (-$20.9M y/y) drove the GAAP net swing to ($26.9)M in Q4.
• Near-term headwinds in certain markets: Raleigh occupancy down due to elevated supply and staffing transitions; Atlanta rent pressure offset partly by bulk Wi-Fi revenues; management guides 2025 Same Store NOI midpoint to -1.5%.

Transcript

Speaker 6

Good morning, ladies and gentlemen, and thank you for standing by. My name is Calvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Residential Trust Q4 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press the pound key or star two. Thank you. I would now like to turn the call over to Kristen Griffith, Investor Relations. Please go ahead.

Speaker 0

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, 2024. On the call today are Paul Richards, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermott, 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 meanings 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 risk 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 Matt McGraner. Please go ahead, Matt.

Speaker 5

Thanks, Kristen. And before we dive into our prepared remarks, I want to take a moment to congratulate Brian Mitts on his well-earned retirement, which officially took effect on December 31, 2024. We're incredibly grateful for his years of dedication, the countless long days he put in, and the instrumental role he played in shaping NXRT into what it is today. While Brian has stepped back from day-to-day operations, we're fortunate that he remains a valued member of our board, continuing to provide guidance and insight as we move forward. At the same time, I'm pleased to officially welcome Paul Richards as our new CFO. And having worked closely with Brian and me for over a decade, Paul deeply understands our strategy and our approach to execution. He is a strong leader, and I have full confidence in his ability to drive sector-leading long-term results for our shareholders.

With that, I'll turn the call over to Paul to walk us through our fourth quarter and full year 2024 financial results.

Speaker 2

Thanks, Matt, and thanks, Kristen, and welcome to everyone joining this morning. I look forward to our conversation, and we appreciate your time. I'll kick off the call and cover our Q4 and full year results and highlights, update our NAV calculation, and then provide initial 2025 guidance. I'll then turn it over to Matt and Bonner to discuss specifics on the leasing environment and metrics driving our performance and guidance and details on the portfolio. Let me start with results from the fourth quarter, which are as follows. Net loss for the fourth quarter was $26.9 million, or $1.06 per diluted share, on total revenue of $63.8 million, as compared to net income of $18.4 million, or $0.70 per diluted share in the same period in 2023, on total revenue of $68.9 million.

For the fourth quarter, net operating income was $38.9 million on 35 properties, compared to $42.2 million on 38 properties for the fourth quarter of 2023, a 7.6% decrease in NOI. For the fourth quarter, same-store rental income increased 90 basis points, and same-store occupancy remained stable at 94.7%. This, coupled with an increase in same-store expenses of 2.2%, led to a decrease in same-store NOI of 40 basis points as compared to Q4 2023. Rental income for the fourth quarter of 2024 on the same-store portfolio was up 20 basis points quarter over quarter. We reported Q4 2024 core FFO of $17.7 million, or $0.68 per diluted share, compared to $0.75 per diluted share in Q4 2023.

We continued to execute our value-add business by completing 58 full and partial renovations during the quarter and leased 31 renovated units, achieving an average monthly rent premium of $150 and a 19.2% return on investment. Inception to date, in the current portfolio, as of year-end, we have completed 8,348 full and partial upgrades, 4,730 kitchen and laundry appliance installations, and 11,389 technology package installations, resulting in $175.50 and $43.00 average monthly rental increase per unit and 20.8%, 64.8%, and 37.2% return on investment, respectively. Moving to the full year, full year results are as follows. Net income for the year ended December 31 was $1.1 million, or income of $0.04 per diluted share, which included a gain on sales of real estate of $54.2 million and $97.8 million of depreciation and amortization expense.

This compared to net income of $44.3 million or income of $1.59 per diluted share for the full year 2023, which included gain on sales of real estate of $67.9 million and $95.2 million of depreciation and amortization expense. For the year, NOI was $157 million on 35 properties as compared to $167.4 million on 38 properties for the same period in 2023, or a decrease of 6.2%. For the year, same-store rental income increased 2.3%, and same-store occupancy remained stable at 94.7%. This, coupled with an increase in same-store expenses of 3.3%, led to an increase in same-store NOI of 90 basis points as compared to the full year in 2023. We reported core FFO in 2024 of $73.1 million, or $2.79 per diluted share, compared to $2.92 per diluted share for 2023.

Since inception of the business in 2015, NXRT has generated 10.8% compound annual growth in Core FFO. Turning to our NAV estimate, based on our current estimates of cap rates in our markets at forward NOI, we are reporting a NAV per share range as follows: $44.56 on the low end, $58.52 on the high end, and $51.54 at the midpoint. These are based on average cap rates ranging from 5.25%-5.75%, which remain the same as last quarter and have remained flat over the last year, roughly reflecting stability in capital markets and cap rates in our markets. For the fourth quarter, NXRT paid a dividend of $0.51 per share on December 31. Since inception, we have increased our dividend 147.6%. For 2024, our dividend was 1.47x covered by Core FFO, with a payout ratio of 68% of Core FFO.

Finally, before discussing guidance, I'd like to touch on our 2024 transaction activity and subsequent events. NXRT disposed of Old Farm on March 1, 2024, Bradbourne Lake on April 30, 2024, and Stone Creek at Old Farm on October 1, 2024. These sales generated 20.2 levered IRR, a 2.96 multiple on invested capital, and $92.4 million in net sales proceeds, which we used $24 million to pay down and draw on balance on the credit facility. In the first half of 2024, we retired $14.6 million of common stock at a weighted average price of $33.19, which represented a 37% discount to the midpoint of our Q1 2024 NAV range. In two closings on October 1, 2024, and November 29, 2024, the company entered into 34 loan agreements for total gross proceeds of $1.466 billion, which is in aggregate representative of 97.7% of the company's total outstanding debt.

Notably, NXRT agreed to refinance at an interest rate pricing improved from prior terms. This refinancing activity extended the company's weighted average debt maturity schedule to seven years. Holistically, these refinancings reduced NXRT's weighted average interest on the total debt by 48 basis points to 6.21% before the impact of interest rate swap contracts. Accounting for the hedging impact of the swaps, NXRT's adjusted weighted average interest rate was reduced from 3.64% to 2.96% as of December 31, 2024. With the completion of these refinancings, the company has no meaningful debt maturities until 2028. On February 24, 2025, the company's board of directors declared a quarterly dividend of $0.51 per share payable on March 31, 2025, to stockholders of record on March 14, 2025. Going to our guidance for 2025, we are issuing initial guidance as follows.

For Core FFO per diluted share, $2.83 at the high end, $2.56 at the low end, with a midpoint of $2.70. For same-store revenue, 1.3% increase on the high end, 20 basis points decrease on the low end, with a midpoint of 50 basis points increase. Same-store expenses, an increase of 2.4% on the high end, 4.9% on the low end, and 3.7% increase for the midpoint, which results in same-store NOI of a 50 basis point increase on the high end, a 3.5% decrease on the low end, and a negative 1.5% decrease at the midpoint. And with that, I'll turn it over to Matt for commentary on the portfolio.

Speaker 5

Thank you, Paul. Let me start by going over our fourth quarter same-store operational results. Occupancy ended 2024 at 94.7%, stable year-over-year. We saw sizable occupancy growth in DFW and Charlotte, finishing the year 96.3% and 97%, respectively. Orlando, Tampa, and South Florida remained strong, finishing the quarter at an average occupancy of 94.9%. Q4 same-store NOI growth was a negative 40 basis points, driven by 90 basis points of growth in rental revenue and 60 basis points growth in total revenues. Operating expense growth finished the quarter at 2.2%, maintaining the moderate growth we've seen over the last several quarters. Renewal conversions were 55.4% for the quarter. In 2025, retention has started off strong, with both January and February over 53.3%, and March is projected to finish at the same cliff. Bad debt continued to trend down, finishing Q4 at 90 basis points.

And for the full year, we averaged 1.3%, which was down from 2023's average of 2.7%. Operationally, for the quarter, payroll declined 30 basis points year-over-year. R&M expense growth was 4.3% in the quarter, continuing to moderate off of an elevated post-COVID comp in 2022 and 2023. Real estate taxes have also moderated, and true-ups booked in Q4 reflect a reduction to our overall real estate tax for the year, ending at a negative 6.5% growth. On the occupancy front, we're pleased to report that Q4 same-store occupancy was 94.7%, positioning us well for 2025. And as of this morning, the portfolio is still at 94.7%, occupied with a 60-day trend of 96.3%. Our full year 2024 same-store NOI margin was a healthy 61%. Same-store revenues for the year increased by 2%, while same-store NOI improved by 90 basis points, despite the impact of record deliveries in our markets.

Indeed, five of our 10 same-store markets grew NOI by at least 3%. Those notable growth markets for the year were Las Vegas at 8.6%, Orlando at 8.6%, Orlando at 6.6%, Raleigh at 5.2%, and Atlanta at 3.5%. Turning to 2025 guidance, as Paul said, we're guiding between a 3.5% decline and a 50 basis point increase in same-store NOI growth for 2025, with a midpoint projecting a 1.5% reduction year-over-year. Across the portfolio, we are forecasting a negative 0.5% to 1% rental income growth that assumes a 94% to 94.3% physical occupancy, with peak occupancy model for Q1 and moderating slightly as we focus on rent growth in the back half of the year. It also assumes a negative 90 basis point earnout from lease trade-outs and gain-to-lease inversion in 2024. Also includes a 1.5% market rent growth in 2025.

Also includes a 50 basis point top-line growth attributable to our value-add activities and ROI CapEx spending. We're also forecasting a negative 30 basis point reduction in financial occupancy from 92.3% to 92.7% at the midpoint. Finally, we're assuming a 30 basis point increase in bulk Wi-Fi and other rent charges. From a market perspective, we're expecting our top-performing revenue markets will be South Florida, Las Vegas, Raleigh, Nashville, and Atlanta, each expecting roughly 2% to 4% growth in these markets. On the expense front for the year, we're forecasting a 50 basis point controllable expense decline. Within that number is a negative 1% R&M and turn cost growth assumption, a 3% labor growth increase, a negative 3.8% growth in advertising, and a negative 2.6% growth in G&A expense. On the non-controllable front, we're forecasting a 2.4% to 4.9% total expense growth.

The components of this are a 4.1% utility expense growth, a 7% insurance growth, assuming a 5% target growth on our April 1 renewal, and an 8.6% real estate tax expense growth, which we're hoping to achieve better results. This all equates, as Paul mentioned, to a -3.5% to -5% same-store NOI 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, still aligned with our historical 15%-20% targets, in which we anticipate to accelerate as the year progresses amid declining supply. We expect to complete 425 full interior upgrades at an average cost of $18,000 per unit, generating a $269 average monthly premium. We expect to complete 36 partial interior upgrades at an average cost of $5,200 per unit, generating a roughly $86 average monthly premium.

These partial upgrades include varying bespoke additions such as new stainless steel appliances, hard surface countertops, updated tub enclosures, and private yards, among other aspects. These partial and bespoke rehab initiatives are strategically tailored by property to drive rent growth, where we see opportunities among competing properties. Finally, we also plan to install 661 washers and dryers at an average cost of $1,000 per unit, generating $53.00 in an average monthly premium or a 64% ROI. On the acquisition and disposition guidance, we will continue to underwrite the limited value-add pipeline of opportunities out there in the first half, but we do expect the volume of opportunities to potentially increase later in Q2 and into the second half of the year as prospective buyers can finally underwrite rent growth.

On the capital markets and balance sheet and liquidity front, NXRT today has $23.1 million of unrestricted cash and $350 million of excess capacity on our unsecured corporate credit facility, giving the company $373 million of available liquidity as we head into 2025. In June, we expect to finalize a recasting of the corporate credit facility, and we're well down the path to finalizing an agreement with a strong syndicate of banks to continue to provide liquidity and flexibility on our balance sheet. We appreciate that partnership and look forward to welcoming new relationships to the platform. So far in 2025, we're off to a good start, prioritizing margin expansion and increased resident satisfaction and retention.

We are excited to execute on our strategy this year and initiatives, and we expect to see a transition year leading to outsized growth in 2026 and 2027, specifically in the second half of the year as supply begins to wane. Indeed, Q4 saw another sharp pullback and starts to just 37,000 quarterly units in the quarter. That's the lowest level since Q4 of 2011. That's all I have for prepared remarks. Thanks to our teams here at NexPoint and BH for continuing to execute. With that, we'll turn the call over to the operator for questions.

Speaker 6

Thank you. Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone to ask a question, press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star two. One moment, please, for your first question. The first question comes from the line of Kyle Caterinsek of Janney. Please go ahead.

Speaker 4

Hey, good morning, guys. Total rental income for Atlanta was up 160 basis points quarter over quarter, but average effective rent was negative 10 basis points and occupancy was negative 160 basis points. So what drove the positive result there?

Speaker 3

Yeah, I think in Atlanta, we've had a little bit higher occupancy there. Pulling up exactly what you're looking at. See, I think, oh, the other benefit that we've added to total revenue in Atlanta here recently is Bulk Wi-Fi. We've rolled that out across the three assets over Q4 and Q1. So you see some total revenue growth there. That, I think, is a benefit. We're getting One Gig Fiber retrofit in units. And so that's offsetting some of the loss and downward pressure and both occupancy and rent.

Speaker 5

In 2025, just to add to Bonner's point, the bad debt and what we're expecting and have seen bad debt improvement in the market, underwriting a positive inversion this year of almost $250,000. That's improving to 1.8% in 2025 versus 2.6% in 2024. So that's a little another impact too.

Speaker 4

Okay, thank you. And then can you please provide some color on what drove the 290 basis points decrease in occupancy in the Raleigh-Durham market?

Speaker 3

Yeah, I think in Raleigh, it's one of the larger supply and expansion markets for us. We've seen some pressures, particularly in the Mooresville submarket. Our High House asset was under a little bit more pressure. We're better today after we stabilized rate. We also had a little bit of personnel change there, so I think it's something that we've dealt with and are moving forward on. We still love the Raleigh market, and I think that supply, that picture gets better, particularly toward the back half of the year.

Speaker 4

Okay, thank you. And then one more. I know you guys mentioned a little bit about the full interior upgrades, but early in 2024, you mentioned there was about 5,000-5,500 units left there. And that, like you mentioned in your prepared remarks, for Q24 and into 2025, you'd start to ramp up that. Supply started to dissipate. Any changes, material changes to that plan based on current market conditions and any markets you're focusing the upgrades on?

Speaker 5

Yeah, we're prioritizing the renovations largely in places where we can still push rates so that that's largely South Florida, Raleigh in the second half of the year, and then Vegas, the upgrades in Atlanta that Bonner just mentioned. I'd say that the revenue, or excuse me, the rehab output this year, we're pleased that it's double the output of last year, and it's still not at our 300-400 a quarter pace that we were historically done since 2015. Our goal and our hope is to reevaluate this output every quarter and hopefully, as the industry is expecting an inversion in rate in the second half of the year, that we can add additional output to the rehab pipeline and have some upside in this guidance. So that's the goal.

Speaker 4

Awesome. Thanks, guys. Appreciate it.

Speaker 5

Thank you.

Speaker 6

Your next question comes from the line of Omotayo Okusanya, Deutsche Bank. Please go ahead.

Speaker 1

Hi, yes. Good morning, everyone. Could you please walk us through how would you think about interest expenses in 2025 given, again, some of the soft maturities, the relatively higher level that you're able to get, and kind of what's the interest guidance with regards to the lower level of capital expenses? That's my line of ...

Speaker 5

Yeah, sorry, Tayo. It's Matt. I'm having a difficult time hearing you. I think one question or a part of the question was how the swap expiration plays in through the guidance. Is that fair?

Speaker 1

Yes, that's fair. Can you hear me?

Speaker 5

Yeah, I can hear you better now. Sorry.

Speaker 1

Okay.

Speaker 5

Yeah, so we have roughly 250,000 of our swaps expiring in June. And then we had a 50 basis point decline in our spread. So that, as a component of our guidance, is actually a $0.12 benefit for 2025. This is 160 basis points to 109 basis points, reduces the total interest expense. Now, we have to take some assumptions on higher for longer. And if we do see Fed cuts in the second half of the year or any more that's baked in, we do think there's upside in the core numbers. But we're being, I think, appropriately conservative at this juncture.

Speaker 1

Great. Thank you.

Speaker 5

Thank you.

Speaker 6

There are no further questions at this time. With that, I will now turn the call back over to the NexPoint management team for final closing remarks. Please go ahead.

Speaker 5

All right. Thanks, everyone, for calling in. And we look forward to speaking to you next quarter. Have a great day.

Speaker 6

Ladies and gentlemen, that concludes your conference call. We thank you for participating, and ask that you please disconnect your lines.