NexPoint Residential Trust Inc 2026 Q2 Earnings Call

Good day, everyone, and welcome to NexPoint Residential Trust conference call to review the company's results for the second quarter ended June 30th, 2026. 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 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 statement. 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 Paul Richards.

Please go ahead, Paul. Thank you, Kristen, and welcome everyone.

We appreciate you joining us this morning. I'll take you through our second quarter results and the changes we're making for a full-year outlook, and then Matt will cover the operating environment, our leasing trajectory, the technology platform, and how the portfolio is positioned. In April, we affirmed our full-year guidance. This morning, we are lowering it to a core FFO midpoint of $2.45 per share, down $0.12 from $2.57. I'll explain what drove the change and what has, and has not changed. In short, most of the reduction is from higher interest rate expense, reflecting an upward shift in the forward curve since our last update. A smaller portion reflects a slower same-store revenue rebound, which affects the full year. Importantly, our operating trajectory continues to improve month by month.

Given recent macro shifts and clear visibility into Q3 operating performance, we believe this is the right time to update our forecast. Q2 2026 results. Second quarter core FFO was $16.9 million, or $0.66 per diluted share, a penny ahead of consensus. That compared to $18 million, or $0.71 a year ago. FFO was $15.2 million or $0.60 per share, and AFFO was $19.7 million or $0.77 per share. Total NOI was $37.9 million across our 36 properties, essentially flat with last year. Net loss for the quarter was $8.6 million or $0.34 per diluted share, which includes $23.9 million of depreciation amortization. That compares to a net loss of $7 million or $0.28 per share in the second quarter of 2025. Total revenue was $64.6 million, up from $63.1 million a year ago as Sedona came online and into the numbers.

On a same-store basis, 35 properties, which is about 98% of our units, total revenue was $62.4 million, down 0.6%, and same-store NOI was $36.9 million, down 2.9%. Same-store occupancy closed the quarter at 93.6%, up 30 basis points from a year ago, and the average effective rent was $1,487, down 80 basis points. One point on the first half of the year before I get into guidance. It came in about where we expected on net. The company earned $0.68 in the first quarter and $0.66 in the second, which equates to $1.34 through June. Each quarter, a little ahead of the street. The revision today is almost entirely about the back half, and is driven mostly by interest expense as our swap protection steps down, which I'll run through now. Interest expense and hedging. We've mentioned since our initial guidance that 2026 carries a real interest expense headwind as certain swap positions roll off, and the step-down lands in the second half.

Q2 interest expense was $15.8 million versus $15.2 million a year ago. What's changed since April is the rate curve. The forward SOFR has moved higher roughly 30 basis points in the third quarter and 72 basis points in the fourth relative to our assumptions. In practical terms, that's about $14.6 million fewer projected swap inflows over the rest of the year, or roughly $0.16 per share of additional interest expense. It's the single largest piece of today's revision. Full-year 2026 interest expense is now projected at approximately $71.2 million, up from a roughly $69 million discussed last quarter and $67 million in the original model. One timing note. The Federal Reserve met last week and held its benchmark rate at 3.5%-3.75%, with a few members dissenting in favor of a hike.

Interest rate swaps currently fix the rate on $817.5 million, or approximately 51.5% of our floating-rate mortgage debt, and we have full visibility into the maturity schedule. The bulk of that protection, approximately $717.5 million at a weighted average fixed rate near 1.1392%, rolls off in September. We have the ability to layer in more protection, and will do it when the risk-adjusted economics make sense. Second, on the affirmation. In April, we mentioned the offsets we identified neutralize this headwind, and we affirmed. The curve moved against us more than we assumed, and a handful of markets' revenue production came in softer than we modeled.

Rather than lean on offsets to hold that number, we're resetting to a level we're confident we can deliver. I'll walk through the bridge in a minute. Moving on to expense detail. The expense side is where we're picking up real ground. We're lowering our full-year same-store expense growth outlook by 140 basis points to about 2.1% at the midpoint from 3.5% originally. It's broad based. Every market in the portfolio is now guiding to lower expense growth than we assumed at the start of the year, led by real estate taxes, insurance, and continued payroll discipline from the centralized operating model Matt will describe. Our April insurance renewal, which came in more than 30% year-over-year, is now fully in the run rate. Let me put some numbers on the quarter itself.

Same-store operating expenses were up 2.4% year-over-year. The mix is favorable where it counts most. Real estate taxes were down 3.5%, insurance was down 11.7% on the April renewal, and payroll was down 1%, with property management fees and office operations each down about 1%. The pressure sat in two lines, repair and maintenance of 13.9% and marketing up 38.2% off a small base where we've leaned into lead generation at properties below target occupancy. Utilities were up 6.1%. The repair and maintenance increase is concentrated rather than broad. We treat that as episodic rather than a change in our underlying cost base. Net controllables held roughly in line, while our two largest non-controllables, real estate taxes, insurance came down, which is what underpins the improved full-year expense outlook. One important note regarding the elevated R&M cost.

We aggregate resident amenity services, including bulk fiber, into total here. The resident amenity services subcategory drives 83% of total R&M growth and is concentrated in the four markets undergoing a fiber build-out: Atlanta, Nashville, Phoenix, and South Florida. We see a corresponding offset to these expense increases within the resident amenity fee subcategory of other income, which is a significant driver of the 29.2 other income growth for the quarter. A value add update. During the second quarter, we completed 459 full and partial upgrades and leased 258 upgraded units at an average monthly rent premium of $89 and a 23% return.

Since inception, for the properties currently in the portfolio, we've completed 10,474 full and partial interior upgrades, over 5,100 kitchen and laundry packages, and roughly 11,200 tech packages, generating average monthly rent increases of $152, $50, and $43 per unit at returns of 20.7%, 63.4%, and 37.2% respectively. This is still one of the most reliable capital-efficient sources of growth we have. Moving on to the dividend. For the second quarter, we declared a dividend of $0.53 per share, payable September 30th. Since inception, we've raised the dividend 157.3%. As of June 30th, total indebtedness was approximately $1.6 billion at an adjusted weighted average interest rate of approximately 3.58%. We held approximately $14.6 million of unrestricted cash on $118.9 million of undrawn capacity on the credit facility for a total available liquidity of approximately $133.5 million.

We have no scheduled debt maturities until 2028, which consists of only a small $33 million fixed rate loan. Net leverage is about 57% of our internal NAV estimate, and de-leveraging over the medium term, funded mainly through disposition proceeds, remains a priority. Our estimated net asset value as the quarter ended is $46.76 per diluted share at the midpoint, using a cap rate range of 5.25%-5.75% across the portfolio. The range runs $40.35 at the high end and $53.16 at the low end. At a recent price of $25.91, the stock trades at more of a 40% discount to that midpoint. Even at the most conservative end of our range, it's a meaningful discount to estimated liquidation value.