Hello, and welcome to the NexPoint Residential Trust Q3 2022 Conference Call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, Kristen Thomas, to begin today's conference. Thank you.
Thank you. Good day, everyone, and welcome to NexPoint Residential Trust Conference Call to review the company's results for the third quarter, September 30, 2022. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer, and Matt McGraner, Executive Vice President and Chief Investment Officer. 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 in the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect 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.
Thank you, Kristen. Welcome to everyone joining us this morning. Really appreciate your time, and apologize for any technical issues you may have had dialing in. I'll kick off the call and cover our Q3 year-to-date results, update our NAV calculation, and then provide revised guidance. I'll then turn it over to Matt to discuss specifics on the leasing environment and metrics driving our performance and guidance. Results for Q3 are as follows. Net loss for the third quarter was $0.6 million, or $0.02 per diluted share on total revenue of $68.1 million. That's compared to the net loss of $5.4 million, or a $0.21 loss per diluted share in the same period in 2021 on total revenue of $56.4 million, which represents a 21% increase in revenue.
For the third quarter, NOI was $39.9 million on 41 properties, compared to $33.6 million for the third quarter of 2021 on 40 properties, 19% increase in NOI. For the quarter, year-over-year rent growth on renewals averaged 12% across the portfolio, and year-over-year rent growth on new leases averaged 14.5%. Given where rental rates are in our markets for class B apartments and equivalent single-family rental product, we believe there's ample room for future outsized rent growth. The quarter same-store rent increased 19.4%, and same-store occupancy was down 130 basis points to 94% as we continue to focus more on rate than occupancy during the quarter.
This, coupled with an increase in same-store expenses of 16.9%, which was accentuated by higher year-over-year R&M and turn costs, led to an increase in same-store NOI of 13.1% as compared to Q3 2021. Rents for the third quarter of 2022 on the same-store portfolio were up 4.5% quarter-over-quarter. We reported Q3 core FFO of $21.8 million, or $0.85 per diluted share, compared to $0.65 per diluted share in the same quarter of 2021, for an increase of 31% on a per-share basis.
For the quarter, we completed 649 full and partial interior renovations and leased 592 upgraded units, achieving an average monthly rent premium of $163 and a 24.3% ROI, which is 2 basis points to 3 basis points higher than our long-term average ROI on renovations.
Subject to date, in the current portfolio, we've completed 7,354 full or partial upgrades, or 48% of the total units, 4,853 kitchen upgrades and washer/dryer installs, and 10,451 technology package installations, achieving an average monthly rent premium of $146, $49, and $44 respectively, and an ROI of 22%, 69.3%, and 37.3% respectively, each of which helped to drive our NOI year-over-year higher by 19%. Results for the year as follows. Our net loss for the year was $13 million or $0.51 loss per diluted share on total revenue of $194.6 million.
That's compared to the net loss of $15.7 million or $0.62 loss per diluted share in the same period in 2021 on total revenue of $160.7 million for an increase in revenue of 21%. Year to date, NOI was $115.3 million on 41 properties as compared to $93.6 million on 40 properties for the same period in 2021, or an increase of 23%. For the year, same-store rent increased 19.9%. Same-store occupancy was down 140 basis points to 94%. This, coupled with an increase in same-store expenses of 10.3%, led to an increase in same-store NOI of 15.8% as compared to the same period in 2021.
To report a year-to-date Core FFO of $62.3 million or $2.43 per diluted share compared to $1.78 per diluted share in the nine months ended September 30, 2021, or an increase of 37%. For the year, we completed 1,830 full and partial renovations, an increase of 101% from the prior period in 2021. Moving to NAV per share, based on our current estimate of cap rates in our markets and forward NOI, we're reporting NAV per share range as follows. $70.04 per share on the low end, $83.47 per share on the high end, and $76.75 per share at the midpoint.
These are based on average cap rates ranging from 4.3% on the low end to 4.7% on the high end, which has increased approximately 44 basis points from last quarter and 92 basis points year-to-date to reflect the rise in interest rates and observable increases in cap rates in our markets. For the quarter, we paid a dividend of $0.38 per share on September 30. This morning, we announced that the board of directors has approved an increase in the quarterly dividend of $0.04 per share, or a 10.5% increase to $0.42 per share. This marks the company's seventh consecutive annual increase. Since inception, we've increased our dividend by 103.9%.
Year to date, our dividend was 2.13 x covered by Core FFO with a payout ratio of 47% of Core FFO. Finally, before we discuss guidance, today, we're pleased to announce some favorable improvements we are undertaking to de-risk our balance sheet, increase liquidity, and improve our financial outlook. First, we've executed a loan application and are in the process of refinancing 19 property-level mortgages through KeyBank and Freddie Mac. In aggregate, this transaction will refinance 46.7% of the company's total outstanding debt at improved spread pricing of 150 basis points over one-month SOFR and push these maturities out to 2032. Additionally, NXRT has executed a 12-month extension option on the revolving credit facility, extending that maturity to June 30th, 2025.
The company expects to use approximately $217 million of cash-out mortgage refinancing proceeds to pay down the outstanding principal balance on the credit facility, the most expensive debt on our balance sheet today. These maneuvers will increase the company's weighted average maturity to 6.4 years, up from 3.3 years as of September 30. Additionally, this refinancing is expected to reduce NXRT's weighted average interest rate on total debt by 39 basis points to 4.33% before factoring in the impact of interest rate swap contracts. Accounting for the hedging impact of the swaps and caps, NXRT's adjusted weighted average interest rate is expected to be reduced from 3.29% to 2.78%.
With the completion of this refinancing, the company has no meaningful debt maturities until 2025, which is the revolving credit facility. As mentioned, we're using excess proceeds to pay down 65% of that facility this year, reducing that maturity obligation. Turning to guidance, we're revising guidance as follows. Same-store NOI, we're estimating 14.9% on the low end, 16.1% on the high end, with a midpoint of 15.5%, which is a 30 basis point reduction from the prior guidance of 15.8% due to higher turn costs.
For our Core FFO guidance, we're estimating $3.05 per share on the low end, $3.11 per share on the high end, with a midpoint of $3.08, which is a $0.07 per share increase over the prior midpoint. At $3.08 per share, that represents a 27% increase over 2021 Core FFO of $2.43 per share. With that, let me turn it over to Matt for his commentary.
Thanks, Brian. Let me start by going over our third quarter same-store operational results. For the quarter, we achieved a 58.3% same-store NOI margin, down 100 basis points year-over-year, driven by lower retention and higher turn costs, but still near historical highs for our company. Rental revenue showed 11.3% or greater growth in all markets except Houston, whose performance lagged a bit as we shifted focus to promote occupancy during the disposition, marketing process. While same-store average effective rent growth achieved 19.4%, eclipsing our recent high-water mark of 19.3% last quarter. Every market achieved effective rent growth of 12.4% or higher, with Houston once again lagging the field. Excluding Houston, the weighted average would have topped 20% for the quarter.
Charlotte registered the second lowest growth at 13.6%. We saw Las Vegas jump to 16.9%, Dallas to 18.8%, all the way up to 26.2% growth in Tampa. Our three-quarter markets, Phoenix and Nashville, all saw effective rent growth of 20% or more year-over-year for the third quarter. Third quarter same-store NOI growth was again special across the board, with the portfolio averaging 13.1%, driven by continued acceleration in total revenues, which hit 15% growth for the period, up 80 basis points sequentially over Q2. Seven out of ten same-store markets achieved year-over-year NOI growth of 14.7% or greater.
Operating expense growth ticked up again in the seasonally active third quarter, registering 16.9% growth overall, largely driven by increases in R&M and turnover. Retention for the third quarter came down year over year to 48.8%, which led to the spike in turns to make ready. While we did see elevated overall turnover expenses, our turn costs registered $525 per unit, largely in line with budgeted expectations. Operationally, the portfolio experienced continued positive growth in Q3 2022, with nine out of our 10 markets achieving a growth of at least 11.3% or better. Again, Houston lagged as a result of the divergent operating strategy, promoting high occupancy and stable cash flow ahead of the anticipated disposition of those assets.
Our top five markets were South Florida, 18.7%; Tampa, 18.4%; Nashville at 17.2%; Phoenix at 16.8%; Atlanta at 16.5%. Q3 renewal conversions were again 49% for the quarter, with eight out of the eleven markets executing renewal rate growth of at least 10% and no markets were under 7%. The leaders were again Tampa at 18.7, South Florida at 16.4, Orlando at 15.7, and Dallas-Fort Worth at 12.4%. On the occupancy front, we're pleased to report Q3 same-store occupancy closed at over 94% despite a robust renovation output. As of this morning, the portfolio is 97% leased with a healthy sixty-day trend of 92%.
The occupancy strategy for Q3 was again more like our pre-pandemic strategy of pushing rents to force turnover in order to achieve primarily two goals. The first, close the gap on loss to lease, which narrowed to 7.6% from 12.5% in Q2. Two, renovate more interiors. As Brian mentioned, our occupancy strategy also led to 649 completed rehabs during the quarter, generating an average 24% on return on investment and our second-highest rehab output since the inception of the company. As we round out the year, we'll continue to place more emphasis on occupancy, and we'll likely see some moderation in rents, but do expect continued strength in the low- to mid-teens for the rest of this year and high single-digit growth into 2023.
To give some insight into October to date, we continue to see healthy leasing activity across our markets with a blended 9% growth on new leases and renewals on roughly 800 leases. Turning to 2022 guidance. The strength in rent rolls, GPRs, total revenues allowed us to increase same-store revenue guidance again for the third time this year to a range of 12.7%-13.1% with a midpoint of 12.9%. That's up ninety basis points from 12% in Q2. Elevated move-outs and the resulting turn costs did lead to an upward revision to same-store expense growth, though overall, we were able to tighten our full-year same-store NOI guidance to a range of 14.9%-16.1% with a midpoint of 15.5%.
Turning to investment activity, no surprise here, but the transaction market has cooled significantly due to market volatility and current negative leverage in most commercial real estate property types. Deals under contract pre-May have seen 10%-15% retrades on valuation and sending spot cap rates to 4% , 4.5% in our markets. That said, we've marketed our Houston portfolio for sale with the intention to generate approximately $100 million of net proceeds to pay down our credit facility and/or buy back our stock. We've obtained competitive bids from roughly 30 interested parties and are working to select a buyer to begin contract negotiation with a target sale timeline of year-end or early Q1.
Pricing from real groups is coming in around a 4.3% tax-adjusted in-place cap rate, which solves to an estimated 23% levered IRR at a 2.75x multiple on invested capital. Obviously, this level of execution, coupled with our balance sheet maneuvering, will provide greater strategic flexibility, increased liquidity, and a further de-risking of our balance sheet. To that point, on the balance sheet, you'll note that we've highlighted several pages in the supplemental detailing balance sheet moves and sensitivities based on the forward curves of SOFR and LIBOR as applicable. Obviously, in this interest rate shock environment, renewed emphasis and focus on rebalancing balance sheets are of utmost importance to our investors, us being one of them. Viewed in isolation or with misinformation, our earnings profile could be and has been misinterpreted.
Thus, we wanted to publish a few slides on the exact hedges that are currently in place, coupled with the impact of the impending financing with Freddie Mac, which is locked in and scheduled to close at the end of November. In our view, analyses of our company that we have seen obviously don't take into account these balance sheet maneuvers and extension of maturities now pushed out six plus years because, of course, only we have that information. They also largely don't account for EBITDA growth during a period of rapid inflation, with the Fed not making housing affordability any easier to obtain. Indeed, our latest analysis continues to show a widening delta between class A and SFR rents at $400 and $650, respectively, per unit.
Recall, over the last two and a half years, our rents did not trough negatively on a year-over-year basis. In fact, from Q1 of 2020 to Q3 of 2022, on 8,564 same-store units, we have not had one quarter of decreasing rent growth in the pool over time. In fact, cumulatively, we have increased rents by 27.6% on those units. If your preferred metric as an investor is a debt-to-EBITDA ratio rather than an LTV test of our hard-to-replicate portfolio of value-add workforce housing assets in the fastest-growing job markets in the U.S., then we believe investors should at least account for the EBITDA growth. Under our current projections through 2024, we see net debt-to-EBITDA organically narrowing to high single digits through 2025 before any dispositions.
Further, after this planned refinancing and Houston dispositions, the only two assets with debt maturities through 2024 are Cornerstone in Orlando and Venue on Camelback in Phoenix, both of which are slated to be refinanced in Q1 as part of this larger refinancing effort, further pushing out $50 million of low LTV debt on highly performing assets. In closing, we do appreciate the balance sheet concerns, are focused on them, and firmly believe we're addressing them in this unusual environment while continuing to focus on our core tenets, peer-leading same-store NOI growth, earnings growth, and dividend growth. Thanks to our teams here for executing in this difficult environment. That's all I have for prepared remarks. Yeah. Let's turn it over for questions, please.
Sure. Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We'll now take our first question from Buck Horne of Raymond James. Your line is open. Please go ahead.
Hey, thanks, guys. Good morning. Appreciate all that extra color. That's extremely helpful. Question about understanding the language of you guys saying you've executed a loan application, I guess with your lenders and Fannie. I'm curious, I mean, rates have been changing so rapidly here. Is there any risk that the application gets revised or that, you know, this planned refinancing, you know, needs additional modification?
No, that's a good question, Buck. No, it's locked in and committed. We're just working through the loan docs, which are pretty customary for us at this point, given our relationship with Freddie. We've closed about $6 billion with them, have great relationships. Sat down face-to-face with them in Washington earlier this summer and pounded this out. We have a great deal of confidence here.
Okay. Okay, that's helpful. Just in terms of like, you know, rent growth seems to be decelerating everywhere, across a lot of markets. Can you provide a little, you know, additional color in terms of, you know, even your new lease and renewal rate growth to be decelerating, you know, through October so far? You know, what is it like in terms of the competitive landscape right now? Are you still seeing the same flow of new lease applications coming in, or how are you planning on managing occupancy through the end of the year?
As we stated, we're gonna put more heads in beds. You know, that's planned through the seasonally less active traffic season. We are still seeing great demand. We do think that there's a little bit of hit to consumer confidence across the board, you know, with all the recession fears and talk. You know, I think that could be accounting for some of the lower demand in our numbers. Recall our numbers are against pretty tough comps. You know, our rents really started to accelerate in Q2 and Q3 of last year.
I was trying to make that point on the cumulative growth, you know, being almost 30%, it didn't trough, you know, to kind of still account for some of that tougher comp. Overall, the leasing activity is really strong. I'd say at this point in time, the inflation that we're seeing across, you know, contract labor, for example, and other trades is really kind of helping our. It's hurting on the one hand on our expenses, but these, you know, these jobs are primarily our renter types, so they're. It's kind of the time for blue collar to shine a little bit. We're seeing, you know, we're seeing the ability to keep, you know, pushing those rents in the double digits. I've... You know, like I said, I feel pretty good about double digits in the next year.
Appreciate that. If I can sneak one last one. There's just a striking disconnect right now between public market perception of where cap rates are headed or maybe where they're at currently versus kind of the numbers you guys are quoting and maybe even what you're seeing in the bidding process for your assets right now. What do you think's explaining that disconnect? You know, does it make sense, you know, if you have a high degree of confidence that your NAV is correct, does it make sense to further accelerate stock repurchases with some of the refinancing proceeds?
Yeah, that's a great question. I think if you look at all the long-term analyses of cap rates, it's really driven by capital flows and GDP growth and less on long-term interest rates. In the short term, interest rates, you know, do affect transaction activity, and especially with the velocity with which we've seen the Fed raise here, causing really just a shock in transaction activity. It's really down. There's not a true transaction environment, although we have our Houston process going on, where people are wanting to sell. If they don't have to sell, they're not selling, so they're pushing off sales to next year unless there's a fund to life or a maturity issue.
You know, for us, I think that the disconnect is a little bit more pronounced through the leverage profile, which we're trying to remediate here, and think we have. That being said, with the proceeds from Houston, the first thing we're gonna do is pay off the revolver. If we wanted to lever back up or sell more, I think you'd probably see us sell more assets to buy back stock rather than, you know, levering up on the facility. It's kind of, you know, shooting ourselves again. I think that's the use of proceeds, the pay down of the credit facility.
Again, on the cap rate differential, I think we sit at a 6.3 or 6.4 implied cap rate. You know, the big institutional investors that we speak with, you know, the Blackstone, Starwood, Brookfield, they're now starting to get a little bit more, you know, into the unlevered return profile. They're starting to look at what level do we get back into the market and just don't even use leverage, because those groups have, you know, the ability to finance assets that others don't. I think that informs our NAV because our portfolio is really hard to replicate.
You know, we have the 10, 11 fastest job growth markets, scale in each of those markets at a affordable price point with value add potential. Our belief is that our NAV should gather that 4.3-4.7 right now on a spot cap rate basis, even in this environment.
Hey, Buck, it's Brian. I'd also note that the board increased our share buyback to $100 million.
Got it. Very helpful, guys. Appreciate the color.
Thanks, Buck.
Thank you. We'll now move on to our next question from Rob Stevenson of Janney. Your line is open. Please go ahead.
Good morning, guys. Have you seen any uptick in bad debt or delinquencies over the last few months?
Not realized bad debt. There are, I'd say over the past quarter or two, there's a little bit more slow payers, but no, ultimately they pay. I'd say it's not meaningful, though. It's, you know, 40-ish basis points, 25 basis points to 40 basis points.
Okay. Then we've been hearing from some of the smaller private operators that some third-party property managers have been trying to push up their fees given the inflationary cost pressures. Are you seeing this with your property management company? Is there any increase there gonna happen there going forward? You obviously are bigger in size.
Yeah. Yeah. We've maintained that.
Okay.
We don't see any increase.
Okay. The dividend increase, were you up against taxable earnings that sort of forced you to do that, or was that just something the board wanted to do?
It's something we've done every year during this quarter, and so we wanted to maintain that consistency.
Yeah.
Our coverage, you know, is fairly low, so.
Okay. How did you guys evaluate increasing the dividend versus using those funds to buy back stock?
Yeah. I think you know, given the dollar, the nominal dollar amount, and sort of the tenets of our company, we thought you know, the risk reward was to continue to show dividend growth. To the extent that we wanted to you know, buy back stock that the Houston and then further dispositions are gonna fuel that versus you know, a couple million here or there.
Okay. Thanks, guys. Appreciate it.
You got it.
Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We'll now take our next question from Michael Lewis of Truist Securities. Your line is open. Please go ahead.
Great. Thank you. I have some questions about interest expense and the refinancing. You know, first, in the third quarter, your interest expense was about $11.8 million. It looks like your guidance for 4Q is $18 million. I assume maybe that $18 million includes the cost of swaps or, you know, fees with the new loans. You know, how do I reconcile those two numbers?
Well, I think there's also the value of the swaps that's flowing through into FFO. Is that what you're getting at?
Yeah. I mean, I would guess, right, that the $11.8 million in 3Q, there's a benefit there from the swaps that's offsetting. You know, still that was, you know, considerably lower than you guys guided to. Then the $18 million for 4Q, you know, I don't think that's a run rate, but you know, what's in that $18 million for 4Q? Are there one-time costs in that?
Yeah. Let us look into that and come back to you. I don't wanna give a wrong answer.
Okay. Just on the, you know, the all-in cost of the refinancing after the swap. You're talking about getting your weighted average cost of debt down, you know, to something with a two handle. When I look at the refinancing rate, SOFR plus 155, that's, you know, that's all in above 5%. I don't know what swaps cost, but, you know, maybe help me out there because that sounds like a pretty low interest rate refinancing, especially in this environment.
Yeah. You recall the swaps that we have in place are not tied to any specific, you know, deal. They're just kind of corporate level swaps. We're paying a forward swap rate that we locked in, you know, years ago, at I think an average of 1-ish%. I can pull it up.
Yeah. I see that in your kids. Are you not putting a new swap on for the?
No.
-refi?
The swaps remain in place, and given the lack of financing going on, you know, in the second quarter and third quarter, you know, Freddie and Fannie are both behind their production caps. There's not a ton of borrowers out there, you know, looking for floating rate debt in a rising shorter term interest rate environment. The spreads we were able to negotiate down and still have the benefit of our swaps, which are, you know, germane to our company only. We were able to kinda arb the spread against the industry rate that we have in place to generate that sub-3% all-in interest rate for the next few years.
Okay, I see. I'll follow up on the 4Q interest expense. Then just lastly, I wanted to ask, you know, you mentioned about higher expenses, and you specifically noted repairs and maintenance. You know, I've had people ask me about insurance costs, you know, after the hurricane. You know, any other color you could add on, you know, just expense pressures?
Our biggest expense pressure right now is contract labor on the R&M and turnover side. Finding qualified trades you know when you need them is the hardest part that we see right now. Those you know that specific category is the leader in expense inflation for us at that 25 +%. That's driving a lot of those you know R&M and turnover costs. Our insurance I'll let Brian Mitts speak to, but I think it's fairly locked in.
Yeah. We just renewed earlier this year. We've got pretty favorable rates, all things considered. We're starting the renewal process for next year, and it doesn't look like it's gonna be out of control, so still working through that process for 2023.
Okay, great. Thank you, guys.
You bet.
Thank you. We have no further questions in the queue. As a final reminder, if you would like to ask a question, press star one on your telephone keypad. Thank you.
All right. Sounds like we're done. Again, apologize for the technical difficulties here. We switched companies and had a little hiccup but appreciate everyone joining.
Thank you very much. Ladies and gentlemen, this concludes today's call. Thank you for joining today's call. Stay safe. You may now disconnect.