Good day, everyone and welcome to the NexPoint Residential Trust Inc., Second Quarter 2017 Conference Call. Today's conference is being recorded. At this time. I'd like to turn the conference over to Marilynn Meek. Please go ahead.

Thank you. Good day, everyone and welcome to NexPoint Residential Trust conference call to review the Company's results for the second quarter ended June 30. 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 site www.nexpointliving.com. Additionally a copy of the Company's second quarter 2017 supplemental information is available for your review on the Investor Relations section of the Company's website. 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. Forward-looking statements can also be identified by words such as expect, anticipate, intent and similar expressions and variations or negatives of these words. These forward-looking statements include, but are not limited to, statements regarding expected property acquisitions and dispositions and the use of proceeds therefrom, expected results from the buyout of BH Equities' minority interest, and NXRT's strategy and guidance for financial results for the full year 2017. They are not guarantees of future results and are subject to risks, uncertainties, assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. 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. Except as required by law, NXRT does not undertake any obligation to publicly update or revise any forward-looking statements. The conference call also includes analysis of funds from operations, or FFO, core funds from operations, or Core FFO, and adjusted funds from operations, or AFFO, and net operating income or NOI all which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss, computed in accordance with GAAP. For a more complete discussion of FFO, Core FFO, AFFO and NOI see the Company's earnings release that we filed earlier today. I would now like to turn the call over to Brian Mitts. Please go ahead Brian.

Thank you, Marilynn. I would like to welcome everyone to the NXRT 2017 second quarter conference call. I am Brian Mitts, who joined here with Matt McGraner. I going to kickoff our prepared remarks by reviewing some of significant transactions we completed in the second quarter, I will review the Q2 results, and then I will discuss our revised guidance for full-year 2017 and discuss the reasons behind this revision. Then turn it over to Matt for detailed discussion of portfolio and it’s more in-depth discussion around Q2 activity. So we start with the major transactions we completed in the second quarter. Keep in mind that three of the four that I am going to talk about, we closed them in the last day of quarter. That's an important point because there is some one-time cost of all these transactions which hit in the second quarter, but there is no positive impact in the second quarter from these transactions. Although, we think that they are – there is some significant upside in the future. Let’s start with – let me just say kind of in the late May, we embarked on some of these transactions in an effort to increase our now longer term in our FFO and Core FFO over the coming quarters. Doing this, we do a little bit of short-term – now as usual I will talk about here to effect these transactions, but we think that the long-term benefits far outweigh any one-time costs. I'm going to discuss these at a high level in the map. We will discuss in some more detail on this prepared remarks. First, we completed acquisition of the Rockledge property. It’s a 708-unit property in Atlanta for $113.5 million. This was part of the 1031 transaction or reverse 1031 which we've…

Thanks Brian. I'm going to begin by reviewing portfolio performance and then flesh out from the significant transactions that took place during the quarter. As Brian mentioned, starting off with a value-added result. We completed full in partial renovation on 401 units at an average cost of $5,459 per renovated unit. The SW was the largest MSA that we have a unit in at 122 upgrades. We achieved 22.1% ROI on those upgrades. Our second was Atlanta. We had 94 units and achieved 18.4% ROI on those units. Nashville was the third largest MSA with 37 units, upgraded during the quarter with 20.2% ROI achievement and Orlando was the fourth with 35 units upgraded and achieving in 19.4% increase on those units. On the same-store basis, the full for Q2 encompass 10,211 units or about 80% of our portfolio of the average rent increased to $884 per unit from $840 a year at the 5.2% increase. Total revenues increased 6.6%, expenses were up 7.1% largely driven by Brian mentioned 17.5% increase in real estate tax assessments that we had a chance to appeal later on this year and intent upon doing. We also have higher turn cost in R&D and the returned 400 more units during the quarter in 2017 in the second quarter of 2016. All this resulted in the same-store NOI being 6.2% for the quarter. Same-store by market, Dallas was 6.3%, the DC metro area, which is one property, was 30%, Atlanta was 5.3%, Nashville was 5.8%, Charlotte was 7.6%, Phoenix was 8.3%, West Palm Beach was 5.9%, Orlando was 4.5% and Tampa was 10.5%. On the leasing front, we achieved incredibly strong effective rent growth during the second quarter year-over-year coming in at 5.8% overall for the portfolio. There are small sample size DC and West…

Thanks Matt. So to wrap up and a piggyback of what Matt said. Again, this quarter we think we shown that the same-store NOI growth story is still intact. Our rehab, return on investment story is still intact. We're continuing to prudently manage the balance sheet and interest rate exposure. We've created a clear line of sight into our debt cost with the swaps while maintaining flexibility. To continue to improve the value creation story for disposition program where IRRs are averaging 40% or above in equity multiples or two times or above. We continue to focus on long-term results and increase in shareholder value. If I just reiterate Matt’s comments on BH. They've been a huge part of our passed success. We think it will be – continue to be a huge part of our future success. This buyout I think does all the things that we said it does and drives BH very closer into our organization. So we think given our structure in the way we're organized that having them involved and incentivized as critical. So again, I want to thank them and just point out the integral part of our success that they are. So with that, we will turn it over for questions.

[Operator Instructions] We’ll have our first question from Michael Kodesch, Canaccord Genuity.

Hey, thanks for taking my question guys. Just a couple for me. I guess starting with guidance. Can you talk a little bit about kind of what you're seeing seasonality wise? It seems like the $0.12, I guess of lowered Core FFO from the interest costs, or is it largely going to come in the third quarter and then maybe the $0.07 or so from real estate taxes, maybe throughout the year. Is that a good way to think about that?

I’d say the interest cost is more a historical kind of where we seen the rates go, I mean LIBOR. It’s up 45 basis points this year when we issue guidance, which we did in kind of early-March or mid-March. I think one month LIBOR is around 90 basis points, 75 basis points, so we’re kind of taking a swag there and making some guess as to what’s going to happen. But part of it is also as you flush out some of the deferred financing cost on dispositions that maybe you didn’t anticipate, when you originally issue guidance that hits interest costs. And then also the way that this refinancing was accounted for created not only the prepayment penalties that you saw especially there which we add back to get the Core FFO. But also had some fairly significant modification costs associated with it. So those are one-time costs that have already been incurred. So we think going forward with the swaps, essentially fixing a lot of our rates. There's not the seasonality or variability that will see from movements in LIBOR, and then a lot of these one-time costs were put into the guidance and they’ve already been incurred.

Specifically on a real estate taxes Michael, we got notified there be values during the quarter from Dallas and Tarrant County is that even when we underwrote and provided budgets and guidance earlier on the year, we didn’t anticipated an additional 12% to 13% move up. We will be obviously appealing those throughout the course of the year and expect to have some revisions to the lower in the coming quarters probably in the fourth quarter. So we do expect to recapture some of that. And then other piece that was sort of seasonality that you mention was the turn. We had an unusually amount of large expirations occurring in the second quarter. We don’t expect that to continue into the third and the fourth quarter, but they did impact the same-store pool.

Hey, Michael also to point out that would be the last three swaps we put on. The swap rates have moved, so we are paying a higher rate. Some of the older swaps we put on are now in the money so to speak, so their strike rates are below over LIBOR currently as we're getting inflows from those. But the new ones we're getting outflows that increased interest cost beyond what we had anticipating on organically issued guidance.

Thanks. That’s helpful. Just a quick follow-up on that. In terms of guidance you guys are not building any of those real estate recaptures into guidance correct?

Correct.

All right. Then I guess looking at the Atlanta portfolio sale, it sounds like you guys are kind of expecting that to be sold in the fourth quarter. Is there any chance that that moves up into the third quarter a little bit here is that nearing, a potential deal or is that pretty firmly built in the fourth quarter?

Yes, that the fourth quarter is the estimate. We feel really good about the marketing process. So we got 15 offers, 12 on the portfolio itself, three kind of one-off on individual assets. The highest synthetic offer is 118 that of course, if we took two different buyers, could push the timeline back and your dealing with a couple of different folks and different contracts. So there are portfolio purchasers, real portfolio purchasers five or six or so that have really quick fuses. So 15, 21-day looks 30-day closes. So that could push the time. So it’s close it into September, but I think the most likely outcome is – it closes in October.

Great. That's helpful. And then I guess looking at some of your NOI trends, revenue trends and over the past two quarters it's decelerated a time of bit. Can you talk a little bit about what you're seeing from a leasing perspective in the third quarter and kind of your expectations for the balance of the year?

I don't think the leasing activity per se is – has it impacted our same-store pool. To the extent it expense side, I mean if you look over Q1 and Q2, Q1 expenses were up 6.1% and then 7.1% a large portion of that is labor RM turn and in the non-controllable with tax and insurance. For the most part the market the topline growth has been great. When we can this look across whether folks are doing. We still feel really good about 6% new lease growth being achieved and then double-digit ROIs or 20% ROIs on the CapEx and then 10% plus rental increases. We don't see that dissipating anytime soon. So I think it's just incumbent upon us in the go forward in order to get back to the 8% to 10% same-store NOI growth that everyone used to make sure we drive occupancy but has in the beds and then whole expenses tighter, which were completely focused on and they will get back to I mean we think the Q3 and Q4 will be very strong.

Thanks. That’s good color. And then just one last one if I can. Can you mind us I guess what G&A you guys are capable of generating, but what you're expecting to see I guess for 2017 are you capping it?

Yes, I mean we're I think contractually able to take $8.6 million or so on an annualized basis and fees and we’ve got that its $7.4 million. So we don't instead upon taking any more than $7.4 million.

Yes. Our actual G&A or right on top our guidance we didn't talk about those in our revised guidance, but if you look and supplement we put it them there same and were run budget of that.

And then just moving past 2017, do you kind of expect to continue coming in a little under what you're contractually able to take?

Yes what our goal is Michael is to manage G&A to the point where you we’re trying to bring it in line with some of our larger competitors or peers. So that we're not viewed as typical external manager. We have the ability to do that we can certainly obviously manage our cost like any good business should and we can also toggle fees as needed to make sure that we're line. So we're trying to drive down our overall G&A percentage and keep in line below some of our externally managed peers and maybe more towards our internally managed peers.

Great. I appreciate all the color guys. I will hop back in queue with anything else. Thanks again.

Thank you.

[Operator Instructions] We’ll go next to Dan Donlan, Ladenburg Thalmann.

Yes, thank you. Just wanted to inquire about in terms of the guidance what is embedded in guidance in terms of you selling the Atlanta assets what's the timing on that?

In the fourth quarter.

Any in middle.

Yes, the 15th or beyond, it’s October 15 or 30.

Okay. And then what's your thought process on replacing that capital or that kind of that that sales essentially going to fund your performer your Atlanta transaction that you’ve already completed that how we should be thinking about it?

Yes. That’s how I think about it that the sale of this capital. And keep in mind it’s not going away, it sounds like we're making a special dividend or something, so the compound annual growth of the capital is still generating outsized returns, but we think about it as, if we sell it 150 for example, there's $65 million worth of capital coming out of the sale that goes to repay the bridge we took out acquired Rockledge which is in all respects to superior I think location and then partially from the acquisition of the BH minority interest. So two very accretive uses of capital. When that settles, we think we’ll be pretty happy with the run rate on a NOI basis and earnings basis.

Okay. And just moving to the AFFO, are there some type of one-time items in AFFO that you are including? I'm just trying to think about that the delta between kind of the reduction in FFO and the reduction in AFFO?

Yes. So a lot of the costs were through to both Core FFO and AFFO, real estate taxes and some of the net interest cost. And then there are really difference between AFFO and Core FFO as we add back our deferred financing cost on the longer-term debt as well as the equity compensation and income. That’s demonstrating Core FFO and AFFO, so you do have that add back of deferred financing cost which changes what this amount of portfolio.

Okay. And then as far as the interest expense savings is that you're anticipating, is that being kind of offset by the increase in LIBOR versus what you had expected when you provided guidance at the onset of the year or just trying to understand the outlook better as well?

Yes. It gets a little confusing because we originally set guidance, we only had 50% order versus 60% of our long-term debt fixed. Today it’s almost 100%. In the interim, you did see a quite dramatic move in LIBOR. Additional to get to that that bridge that gap between what was fixed when we originally issued guidance versus today. We incur some additional costs, but we fixed our debt. We think that’s worth of trade-off. So yes, it kind of circles back around and it’s a tough calculation to kind of graph just thinking about it directly, but over time you're seeing movement in both and we’ve increased the amount of debt as mentioned to Rockledge and BH. We’ve had a movement in LIBOR up and then we’ve increased our cost by putting more swaps in place.

For three months we are paying 180 to the swap counterparty on $250 million notional when LIBOR was 120, so that spread obviously does tickup our interest expense quite a bit. That being said, we feel comfortable. I go to our supplement and pull the outstanding debt detail tab and you won’t see a maturity for the next five years and that's completely fixed. So yes, it’s hurt, it’s little pain right now, but the longer-term earnings profile the companies vastly improved as a result.

And I think what we locked in is essentially 3.34% and that's going to drop as we pay-off some of the more expensive debt like the bridge in the revolver, but you locked in a pretty low LIBOR still maintained the flexibility from the full-year rate. We see in these asset sales, if you compare that to what would happen if we had fixed debt on it and had to put – we had incur a lot of decision in the yield maintenance costs. We wouldn’t be putting up our and equity multiples that we are.

Sure. And then just kind of moving to the G&A, is there any thought process behind having kind of a formalized kind of structure to that. What are your thoughts on internalization? Just kind of curious, how you're looking at that because that the original portfolio has a set fee, obviously that's changed over time. So just kind of curious if there's any intention to set some type of formalized numbers around it?

Yes, I mean other than guidance, which one of the numbers we don't really move is that G&A. We feel very comfortable with it. We should point out that we haven't taken any additional fees on either the H2 Portfolio that we closed at the end of 2016. The Hollister Place deal, we closed in February and there's no intension to take anything on this Rockledge portfolio for the time being as we flushed through some of these dispositions, we can kind of reassess. But the idea is to drive G&A lower on a percentage basis each year. But we haven’t talked about any sort of defined formalized process or metrics. And then maybe we can put that out next quarter, but as far as internalization, obviously it’s a conversion that comes up all the time. We think that as long as we are – still where we are, which we sub-grades in the equity, we’ve grown the market capital of the company, but still a small company. We think that there is still a lot of value that’s been drive from the association with NexPoint is an external adviser and we’re generating returns for shareholders and keeping our G&A costs at a reasonable level. So it's not something that we've talked a lot about as far as executing a plan or putting out a timeframe, but it's certainly something that's always brought out and discussed.

Okay, and then just kind of lastly on the acquisition front. Just curious what you're seeing now as it become, it seems to me that in every call it gets a little bit more competitive from the acquisition front. So just kind of curious how competitive it's becoming as your success as a public company kind of across some copycats that kind of come along and look at some of the asset you are buying. Just any clarity there would be helpful?

Yes, I mean I think that it certainly more competitive, but I wouldn't trade that because I wouldn't – we couldn’t recycle the capital, as well as we have been. I mean we've put $220 million into the company starting in 2013 and notwithstanding today, its worth $525 million. So I think we’ve done that pretty well and we do have a competitive cost of capital, we do have liquidity and financing available to us such that we can move quickly and do some of the deals in a way that we'd like to do them. So for example Rockledge is $113.5 million acquisition. There wasn't a ton of buyers for a value-add $113.5 million deal given this thin edge that’s in maintaining that $20 million to $50 million type of equity check whether just not the buyer pool that there are for $30 million individual transaction. So you'll continue to see as focus in that respect. We're also bidding on a fair amount of deals and we're active in South Florida for example, Nashville, Charlotte areas that we want to recycle some capital out of Dallas and Atlanta into those – to get bigger into those markets. And so if we find one of those deals we’ll buy them, but we're not going to overpay and we haven't been the highest bidder on any of them. .:

All right. Thank you, Matt. Appreciate it.

Yes. Thanks, Dan.

[Operator Instructions] We’ll have a follow-up from Michael Kodesch, Canaccord Genuity.

Hey, thanks for taking the follow-up. Just quick one, just I wanted to know how you guys thought maybe about potentially issuing equity rather than kind of have this mismatch and timing of acquisitions in dispositions how do you guys just kind of think about that?

Yes. We spent I want to say four days in a conference room, modeling out the various ways we could do all these things and the ingredients to the ultimate recipe to produce a $27 NAV that we think is real and very defensible. So we thought about issuing equity and we thought about issuing partial equity, we though about an ATM, we thought about dispositions and at the end of the day and each of the scenarios given the fact that we fixed our long-term debt and derisk the balance sheet we thought that we could execute on a sale that would replace the debt that we took out. And obviously owning 20% of our stock, we view as extremely valuable and we will continue to believe that is extremely valuable and should be treated as such and so, if we can generate for our current shareholder base $2 of NAV growth being smart with capital allocation and executing on that will lever up to do it. Because we've shown I think now three times that we can pay it off and an efficient manner. And yes, you might pickup the FFO a little bit learn some of that but at the end of the day our job was to create NAV growth and so yes we thought about it, believe me we have people asking about it all the time but under each of the scenarios that we took down and again we spent a lot of time on this. We thought this was the best way to do it.

Yes, Mike one of the things that we also discovered in that process was if we focus on the long-term and we do things based on that not the short-term, we can accomplish a lot of things without raising equity. Not opposed to it, but you’re ultimate with the process and some of the things we happens cost of that the discounts the current that you have to issue ad things like that to us just makes it more expensive endeavor than what we've done.

That's really helpful color Thanks being guys. Appreciate it.

Yes, you bet.

Thank you. End of Q&A

And with no further questions. I'll turn the conference back over to management for any additional or closing remarks.

Yes. That’s further from us. We think it was a good quarter obviously a lot of time to wait out there that hopefully we got there in this call on our supplement. We look forward to Q3 in the rest of the year was the income as Matt mentioned quite a positive things happen in the market and with the portfolio. So we will continue to try to achieve good results. Thanks for everyone's participation.

That does conclude today's conference. Thank you for your participation. You may now disconnect.