NexPoint Residential Trust, Inc. (NYSE:NXRT) announced its financial results for the fourth quarter and full year of 2023, showcasing a solid performance with net income and operational efficiency improvements. The real estate investment trust reported a net income of $18.4M for the quarter and $44.3M for the year. The company also highlighted its renovation strategy and leasing achievements, alongside its guidance for 2024, which includes a projected Core FFO per diluted share and anticipated revenue growth.
Key Takeaways
- Fourth quarter net income stood at $18.4M, with full-year net income reaching $44.3M.
- Core FFO for the quarter was reported at $17.4M, and $73.5M for the year.
- The company completed 113 renovations and leased 132 units at an average rent premium of $214.
- NexPoint Residential Trust forecasts a Core FFO per diluted share of $2.60 to $2.85 for 2024.
- Same-store revenue is expected to rise by 1.1% to 2.9% in 2024.
- Dispositions are planned to repay the corporate credit facility, and the company remains optimistic about long-term growth.
Company Outlook
- Guidance for 2024 includes flat same-store NOI growth and rental income growth ranging from 1.4% to 3.2%.
- Value-add programs will continue, focusing on interior upgrades and washer/dryer installations.
- The company anticipates acquisitions between $0-$200M and dispositions between $150-$300M.
Bearish Highlights
- New lease rental rates turned negative in the second half of the year, affecting revenue growth.
- New lease spreads decreased by 7.8% in Q4, and concessions were made in markets with supply pressure.
Bullish Highlights
- Implementation of AI and other initiatives successfully reduced turnover costs, especially in Q4 2023.
- Same-store NOI margin improved by 65 basis points to 61.6%.
- Dispositions of properties like Silverbrook and Timber Creek generated $44M in net proceeds.
Misses
- The company is scaling back on full upgrades to 235 in 2023 from over 1,000 in 2022 due to market supply.
- ROI is expected to be slightly lower at 17.5% compared to the previous year.
Q&A Highlights
- The company's leverage strategy is flexible and property-specific, with a goal to deleverage incrementally.
- Management is focused on maintaining liquidity and balance sheet health through asset recycling.
- Job growth forecasts are integrated into the company's guidance, with the expectation to maintain absorption rates despite high supply levels.
NexPoint Residential Trust aims to navigate the challenges posed by market supply by focusing on occupancy, which reached 96.9% leased, and by maintaining a prudent approach to leverage and capital recycling. The company's strategic dispositions and value-add programs are designed to enhance asset quality and financial flexibility. Management expressed a positive outlook for the coming years, anticipating higher pricing power in 2025 and 2026, and concluded the call with a note of thanks and anticipation for continued progress in the next quarter.
InvestingPro Insights
NexPoint Residential Trust, Inc. (NXRT) has shown resilience and strategic agility in its financial results for the fourth quarter and full year of 2023. The company's commitment to a strong renovation strategy and leasing achievements is evident, and its outlook for 2024 remains cautiously optimistic. Here are some insights from InvestingPro that may provide additional context for investors:
InvestingPro Data indicates a market capitalization of $753.72 million, which reflects the company's size and market presence. The P/E ratio stands at 25.5, suggesting that investors are willing to pay a higher price for NXRT's earnings. This could be attributed to the company's consistent dividend growth, as noted by an InvestingPro Tip, which highlights that NXRT has raised its dividend for 9 consecutive years. The revenue growth over the last twelve months as of Q3 2023 was 9.9%, indicating the company's ability to increase its earnings over time.
Another InvestingPro Tip to consider is that NXRT is trading at a high EBIT valuation multiple, which may be worth noting for investors looking at the company's earning potential relative to its market value. Additionally, while analysts do not anticipate the company to be profitable this year, it's important to note that the company has been profitable over the last twelve months.
For investors interested in deeper analysis, there are additional InvestingPro Tips available that could provide more nuanced insights into NXRT's financial health and market position. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, which includes these valuable tips. Visit https://www.investing.com/pro/NXRT to explore these exclusive tips and make more informed investment decisions.
Full transcript - Nexpoint Residential Trust Inc (NXRT) Q4 2023:
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.
Operator: Thank you. [Operator Instructions] And the first question comes from the line of Kyle Katorincek with Janney. Please go ahead.
Kyle Katorincek: Hi, good morning guys. Given your provided NAV range, how do you consider the trade-off of closing the value gap between your stock price and NAV via buybacks versus purchasing assets with long-term appreciation?
Matt McGraner: Kyle, it's Matt. It's a good question. I think the way we're thinking about it currently is, we can't find any assets that we like better in the market than our own portfolio at - again, at north of a 7% implied cap rate. Assets that are being launched, so to speak, are for sale, which are still few and far between are way south of that pricing, south of a 7% implied cap rate. So as that cap rate range continues to compress, I think you'll see us start continuing to or start being more active on the acquisition cycle and utilizing sort of reverse 1031s where we use our portfolio as currency like we've done in the past - over the past 10 years, buying a deal and then selling something in our portfolio to finance it.
Kyle Katorincek: Okay. And then in terms of disposition guidance, considering the sale of Old Farm, Radbourne Lake and then Stone Creek at Old Farm, assuming price similar to Old Farm gets you to around $170 million with the midpoint of guidance for '24 being to '25 million. Our incremental sales likely to be assets with near-term expiring caps and higher rates of interest.
Matt McGraner: No, not necessarily. I think the assets that we'll prioritize for disposition will be those that are requiring a heavier CapEx lift and/or in the more of a supply concentrated submarket because I think we're - given where we are at peak rates or at least we believe we're peak rates, then we think that the greater risk to the portfolio health is again heavier CapEx or submarkets that have oversized supply.
Kyle Katorincek: Okay. And then one last for me. What are the maximum amount of sales you can do in our REIT growth for '24?
Matt McGraner: Off the top of my head, I'm not positive. I think to the extent that we utilize 1031s, it's a nonissue for 2024, that I do know for sure, but we can get back to you on the specific number.
Kyle Katorincek: Okay, thanks guys.
Matt McGraner: You bet.
Operator: Your next question comes from the line of Linda Tsai with Jefferies. Please go ahead. And Linda your line may be on mute.
Linda Tsai: Thank you. In terms of dispose, how much of your portfolio would you expect to recycle to help delever over the next few years?
Matt McGraner: I think as we look into 2024 and 2025, the more likely scenario would be probably a greater portfolio of sales in sort of individually delevering. Once we get through the old farm sales, as I mentioned, we're fully paid off on our credit facility and feel pretty good about where the capital stack sits in terms of being hedged with over - mid-90s percent of our debt still being hedged. So yes, again, the more likely scenario, I think, is just an outright disposition of the portfolio. But yes, in terms of incremental delevering, I think we're at equilibrium.
Linda Tsai: Got it. And then when you say modest growth in the second half, which markets might you see return first?
Matt McGraner: Yes, good question. So I think as it relates to the markets that are going to be tougher are Atlanta, Las Vegas, Tampa in the first half of the year. We do see those picking up in the latter half of the year, kind of stronger markets throughout for us, we think are obviously South Florida and then Orlando and Nashville. We think are going to get better to the second half of the year.
Linda Tsai: Thanks. Last question. Just on Atlanta, any updates there on kind of fraudulent activity? And what's your bad debt expectation for year-end?
Matt McGraner: Yes, it's improved. In terms of where it was last year, it was over - almost 3%. We're seeing it down at the end of January at 1.7%, 1.8%. And in underwriting basically, call it, a 2% expectation for the year in Atlanta, and that we expect to be one of the higher bad debt markets obviously, but it has incrementally improved over the past couple of months. And the trend in January is encouraging because given the holiday season. And at the start of the year, sometimes you have a little bit of a lag of bad debt. So not out of the woods yet, but do feel better about it.
Linda Tsai: Thank you.
Matt McGraner: Thanks.
Operator: Your next question is from the line of Conor Peaks with Deutsche Bank. Please go ahead.
Conor Peaks: Hi, thank you. On the value-add program, and you touched on in your opening remarks, could you compare redevelopment activity you're expecting in 2024 versus 2023? And if there's any expected difference in ROI or redevelopment mix? Thanks.
Matt McGraner: Yes. I'll turn the specifics of 2023 over to Bonner to compare year-over-year. My recollection is roughly over 1,000 units of full upgrades last year versus a couple of hundred or so this year. Do you have it Bonner?
Bonner McDermett: Yes, that's right. So as we look at the portfolio, understanding the softness, the supply in the market, when we're pushing $200 to $250 premiums in a market where new supply is $400 to $500 above. We're getting a little bit of a difficult - more difficult time getting that demand. So for now, as Matt mentioned on the call, we prioritized a shift to occupancy for the year and are really focused on achieving those occupancy holds. We've downsized the full and the base case for full upgrade to 235 units, hundreds of those are number of times. The demand in that asset individually is special. We're getting $300 premium there easily, and it's more a function of just the workflow over the demand across the rest of the portfolio, we're asset by asset. So in a market where we're not getting a trade out, we're not doing a full run now. We're finding areas of those properties where we can drive value. So in a market where we may have had a first-generation upgrade. We can go back through, add stainless steel appliance package, add a backsplash, add a private patio and things like that, we're adding value there. But overall, year-over-year, we were forecasted to do about 1,300 units in 2023, 235 fold this year, shipping that focus, and we're pretty proud to report that we're 96.9% leased today. So I think you're seeing that come to fruition and work out in the numbers.
Matt McGraner: Expecting this on the - just to add expecting the 17.5% ROI, I think compares just modestly down from last year, I believe it's 19% or 20%. So still getting the higher ROIs.
Conor Peaks: Got it. Thank you. That's it from me.
Operator: Your next question is from the line of Buck Horne with Raymond James. Please go ahead.
Buck Horne: Hi, good morning guys. Thanks. Just wondered if maybe I missed it, if you could specifically break down what the new lease with the average new lease spread was during the fourth quarter and maybe as of January and kind of what renewal spreads were and just kind of break down all of that as it blends together.
Matt McGraner: Yes. Sure, Buck. Thanks for the question. New leases were down blended for the quarter, 7.8%. And then renewals were just 21 basis points for blended. The average of blended is negative 4-point - or excuse me, negative 4.14%. January has looked better. So the new leases were down 6.25%, renewals are 40 basis points for a blended negative 2.69% and so we are seeing a little bit better as we filled up the assets and have a strong occupancy base, which was the goal.
Buck Horne: Got it. That's helpful. Appreciate the color there. Are you guys using concessions in the market? Or what are average concessions right now for competitive Class B properties? Or what's the - what are the market conditions out there right now?
Matt McGraner: Yes, I'll start and I'll kick it to Bonner to add to that. I'd say that for our assets, in particular, in the submarkets, we really bought occupancy in the fourth quarter. That was a priority of ours. And so we were roughly giving a blended. I mean, call it a blended concession in the market that we were seeing is about a month as a yield star rate as shown. And then I think as we sit here today, we still think that we're - we need to be defensive through the first and second quarter as supply delivers as they're giving new assets are giving sometimes two or three months, but we again expect that to wane during the third quarter. Bonner, if you have anything to add to that?
Bonner McDermett: Yes. I think as we look at whatever we did in the fourth quarter, we had to give some concessions in a couple of markets. We're feeling more supply pressure, Charlotte comes to mind, Las Vegas. And a lot of those concessions are a month free for us. When the new supply is offering a couple of months free, the renter, the prospect is looking for a little bit of a discount. So in some of those markets where we were a little light on occupancy in Q3, we utilized concessions in Q4 to help build that churn. As we look here at 2024, the bulk of the concessions, I think - and it's not a big number, let's call it, 20 basis points on GPR. We typically utilize the dynamic pricing model and folks more than that. But the concessions are more heavy in the first quarter. Overall, this year, I think our concession usage is probably going to come down based on - we're 97.5% leased today. I think our folks on retention. You see that in the renewal trade-out would be more definitive there. And I think that should prove out and we should not need as many concessions towards the back half.
Buck Horne: Thanks guys.
Operator: Your next question is from the line of Michael Lewis with Truist Securities. Please go ahead.
Michael Lewis: Great, thank you. You know, I think there's kind of a consensus about peak new supply sometime around midyear, and you talked about that a little bit in some of your markets. I think it's a little tougher to forecast the demand side. I was just wondering if you had a job growth forecast built into your guidance and what you kind of think on the demand side when you were putting together those ranges?
Matt McGraner: Yes. I mean, we do. We utilize largely RealPage as a consultant to walk through quarterly demand and job growth prospects in all of our submarkets. And one thing that was a little bit encouraging this year is that they do expect to see absorption kind of be maintained across our submarkets, not enough to outstrip the four decade high of supply that's peaking this year, but it's still - but yes, the job growth forecasts are factored into - are factored into those numbers, and we'd be happy to share those with you.
Michael Lewis: And then just lastly for me. It's part of your strategy to use the variable rate property debt and hedge it and that's helpful with the renovation strategy. It kind of all fits together. When you talked about selling assets and delevering should we expect - we're calculating net EBITDA that's still around 10 times, so maybe a little bit north of that. I don't know how - maybe talk a little bit about how you look at the leverage and kind of what the end game is here, right? So I'm trying to think about forecasting our dispositions and how much you wanted to delever and what the leverage should be for this strategy, right? I think it makes sense, you might have elevated leverage because your strategy is a little bit different than some of your peers, but do you have a target leverage or kind of an end game with the dispositions and paying down debt?
Matt McGraner: Yes. It's a great question, one that we consider or talk about it often. So I think my overall view on this is more notwithstanding last year because everything that could go wrong last year went wrong. Just rapid hiking cycle, supply, bad debt, fraud, everything, it's just kitchen sink. And so as we look into 2024, 2025 at a more normalized, hopefully more normalized capital markets environment. A lot of us think that we're at peak rates. So we consider, for example, putting more swaps on this year. But if we did that, it would be a great. So I think the better way that we think about it is making sure that our portfolio is as liquid as possible at any given time in any given year, given the GSE financings, the Class B liquidity in the market, these portfolios will trade again, will trade again at competitive cap rates. And the worst - in our view, one of the worst things we can do is to go out and fix debt or fixed debt today at potentially peak rates because a new buyer or a buyer of our portfolio at some point, we'll likely have a better cost of capital or a different cost of capital so that our - that's the way we think about it. Get in improve the asset, sell it, recycle the capital and continue to do that. Our hope is this year, we'll be able to potentially find a couple of assets later in the year to recycle capital into and putting less leverage on that replacement asset is a strategy that we've employed in the past to incrementally delever. And then as that going to '25 and '26, if things play out the way they are in supply wanes, and there's no new starts, starts down 40% year-over-year. We think our pricing power will be higher. I think demand for our units will be higher and that could potentially translate into either more value for assets when we sell them or return to being able to raise equity ourselves. And so at that point, I think that we'll look to delever.
Michael Lewis: Okay. Is it fair to say - I mean, it sounds like it's kind of a property-by-property fluid situation. You're not looking at this and saying, the right leverage for this strategy is eight times or the right strategy is maybe you look at debt to gross asset value or something, it sounds - it's more kind of a moving target depending on the market. Is that fair?
Matt McGraner: Yes. I mean, look, before we were - before we got it with the 500 basis point increases of interest rates in 12, 14 months, we were - we took the portfolio down from 14x, 15x when we went public in 2015 down to kind of where it is today and that was intentional, and it is intentional. We still want to delever incrementally. But excluding last year, our investors who we speak to often didn't want to see us go raise equity to pay down 2%, 3% debt at that time. So again, everything that could go wrong went wrong last year, and we're - our balance sheet is about as healthy as it's ever been, especially after we close Old Farm last week, and have fresh capital on the balance sheet to go buy back stock or pay down debt. We'll make that decision. There's a couple of properties that we can just take the leverage off and have an unencumbered property or two. But that's - it isn't - we do want to delever but to do it wholesale right now is not what we think is best.
Michael Lewis: Yes, that makes sense. Thank you.
Matt McGraner: Thanks Matt.
Operator: And at this time, there appear to be no further questions. I will now turn the call back to management for closing remarks.
Brian Mitts: Yes, I don't know anything further. Do you, Matt?
Matt McGraner: No. Then I appreciate everyone's time today. And again, thanks to our team here and at BH. With that, we'll end the call and look to talk to you after the first quarter.
Operator: Thank you all for joining today's conference call. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.