Good day, and welcome to the NexPoint Residential Trust, Inc. Second Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marilynn Meek. Ms. Meek, you may begin.

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 at www.nexpointliving.com. Additionally, a copy of the company's second quarter 2018 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 often be identified by words such as expect, anticipate, intend and similar expressions and variations or negatives of these words. These forward-looking statements include but are not limited to statements regarding NXRT's strategy and guidance for financial results for the full year 2018. They are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially for those expressed in any forward-looking statements. 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 these forward-looking statements. Except as required by law, NexPoint does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes analysis of funds from operations, or FFO; core funds from operations, or core FFO; adjusted funds from operations, or AFFO; and net operating income, or NOI, all of 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 was filed earlier today. I would now like to turn the call over to Brian Mitts. Please go ahead, Brian.

Thanks, Marilynn. I would like to welcome everyone to the second quarter NXRT conference call. As Marilynn mentioned, you got myself, Brian Mitts, and Matt McGraner here. We're going to walk through the results for the second quarter, discuss some of the details in the portfolio and some of our markets and then give revised guidance for 2018. So jumping right into it. We felt like it was a very strong quarter, led by our Q2 same-store NOI growth of 11%. That was driven by really two factors. First is new rental growth at 5.5% across the portfolio. Markets of note were Tampa and Orlando, those are our top 2 markets. I'd also note that our kind of better-off market of Dallas, Atlanta were also strong. So very good overall from a new rental growth perspective. Matt will go into some more detail in his comments. It's also driven by expenses. So we had some nice expense reductions this quarter led by our real estate taxes. These are down 12.2% across the portfolio, primarily Houston, Nashville and Atlanta. We - Of course, we test all the assessments we get [indiscernible], and we got some good settlements in the second quarter. So that was good news. And then also expenses were driven lower by utilities, 9.6% lower year-over-year from the second quarter of '17. That was driven primarily by our green program that we're implementing in conjunction with Freddie Mac. It's kind of a twofold savings. We get a tighter spread. But once we implement these changes, we're seeing some pretty big reductions in utilities. So Matt will go through that in more detail as well. On the rehab front, we rehabed 379 units for the second quarter, so it kind of back up to our historical average versus lower first…

Thanks, Brian. Same-store results by market briefly here. As Brian mentioned, it's 11%, in total NOI growth for the quarter. That was led by income growth of 4.7%, expense reductions of 2.2%. By market, it's really strong and healthy across each of our markets. Dallas improved 11.9% on a same-store basis. Houston was better by 18%, giving us the Texas total of 13.8% better same-store. Our one property in D.C. Metro was down 4%, but land was at 10.7% better; Nashville, 17.1%; Charlotte was 7% better; Phoenix, 6.8%; West Palm, 8.9%; Orlando, 8.7%; and Tampa, 7.2%. Our same-store NOI margin ticked up by 316 basis points to 55.2%. Our same-store effective rent also ticked up by 3.6% to $944 a unit from $912 a unit a year earlier. As Brian mentioned, our occupancy also improved, up 160 basis points. Leasing activity across the portfolio continues to be robust. Eight out of our 10 markets achieved 4.3% or better on new lease growth. Our top markets - our top 5 markets were Tampa at 12%, Orlando at 9.5%, Atlanta at 8.5%, Phoenix at 7.3%, West Palm Beach at 5.8%. And on the renewal front, what was also a strong, averaging 3.9%. Top 5 markets there were Orlando at 6.9%; Nashville at 4.9%; West Palm Beach at 4.5%; Atlanta at 4.4%; and Charlotte at 4.1%. While still positive pulling down the average on a renewal front where the Houston assets that averaged 2.6% for the quarter, as we stated on prior calls, we largely expect Houston to improve in the second half of '18. It would be one of our strongest markets. Turning over in occupancy, we're also strong. We achieved a renewal conversion rate for the second quarter of 53.5%. That was up 80 basis points year-over-year. On the transaction activity…

Thank you. So let me moved to revised guidance for 2018. This is full year guidance based on results from Q1 and Q2. With that, we are increasing core FFO and our same-store NOI, lowering our same-store expenses across the board. Net income per share just were low end $0.04 a share; high end, $0.14 per share; or a midpoint of $0.09. That's $0.02 higher than our prior guidance. Core FFO per share, $1.62 on the low end. We're increasing the low end $0.02; $1.70 on the high end, we're keeping that the same; the midpoint at $1.66, that's an increase of a $0.01 from our prior guidance. Same-store rental income, we're keeping the same 4.8% on the low end; 5.8% on the high end; for the midpoint of 5.3%. Same-store revenue, we were also keeping the same 5% on the low end, 6% on the high end with the midpoint of 5.5%. Same-store expenses, we were lowering based on our success with the real estate taxes and the savings from the green program, 2% on the low end; 3% on the high end; the midpoint of 2.5%, that's 150 basis point decrease from - at the midpoint from our prior guidance. Culminating in same-store NOI increase 6% on the low end; 8% on the high end; and midpoint of 7%, that's a 50 basis point increase from the 6.5% of our prior guidance. So with that, before we turn it over, there's, obviously, some of the analysts putting notes out already this morning. One of the questions we got or one of the discussions that was in there, I'll just go ahead and address, because it has come up time and again through various meetings that we do on roadshows in NAREITs et cetera, which is kind of how…

[Operator Instructions]. Our first question will come from Rob Stevenson, Janney.

How much is 150-basis-point decline in the same-store expense guidance that was due to the property tax savings or the appeals versus the green stuff and other miscellaneous expense savings along the way?

Well, let me start on the tax side. We didn't adjust our accruals going forward on taxes. That's probably the process you're going to start over with some of these accounting and assessment districts. So obviously, it helped us in this quarter as we got those refunds and booked them, but there's nothing really baked in going forward. On utilities, there's just kind of minimal change going forward. We plan to implement this, as Matt said, across some of the properties in the next few quarters but hard to assess what those savings will be until we kind of do it. That's largely what drove the decrease. Matt, is there any - anything else?

Yes. I mentioned same-store excluding tax as well it's still 8.2% for the quarter. I think if you strip out or how much is the 150 I think it's about 70, 80 basis points, or about half of that, I think, is the number.

Okay because I guess the question winds up being - I mean getting down to 2%, 3% same-store expense growth is, obviously, great, and that's probably going to wind up being one of the best in the apartment space. But the other side of that winds up being - post and awfully difficult comparison next year for you guys. And so eventually these things wind up sort of flushing out one way or the other from an expense standpoint, and you would have incredibly difficult comps for - you have to keep with the pressure on to eliminate expenses. So that's helpful. In terms of your comments on acquisitions and the difficulty out there, how are you guys feeling about dispositions if you don't have anything on top to buy? Are you going to pull the trigger on those regardless inventory to cash and/or buyback stock or basically at this point, wait until you have some identifiable acquisitions to really do anything of size on the disposition side?

Let me address that first. I made the comments. I don't want to suggest that we're not initially buying anything just that we're being thoughtful and prudent. We're not looking to go out and just buy for the sake of buying. We underwrite deals. We see tons of deals and we see something we like that makes sense, where we think we can be competitive or aggressive, so I wouldn't take that comment in the beginning that there's no acquisition on the horizon. Just that it's not like it was 3 years ago. And we think our job is to be very thoughtful about it and make sure that it's the type of property we want, appropriate discount replacement cost, a reasonable cap rate et cetera, plenty of value-add opportunities just sitting in our bucket. So I just cleared from my remarks. I'm sure Matt got some more.

Yes. the good news for us is - just into your last point, first, is that we also - we might a get tougher comp I think relative to our peer group, they have sort of an outsized opportunity to grow rent that other people don't. And they go into this question, we don't really have to choose. So we have enough cash flow to buy back stock on a relatively material basis, have enough cash flow to acquire kind of one-off deals and to drive internal growth vis-à-vis rehab. So we can still grow the company without having to figure out and just buy for the sake of buying. There are - there is a reason too, in our view, over the course of the next 6 to 12 months, balance out the portfolio concentration, well, Dallas is our favorite market. We could lighten up here. So there is probably a few to sell - a few deals in Dallas and swap into some of the other markets that we like as much but are lighter on from an NOI concentration standpoint like a Nashville or South Florida. So that'll be a focus and something we're actively looking to do.

Okay. And then last one for me. When you take a look at the strengths of your markets, a lot of these markets are 95%, 96%, 90%, 97% occupied across the market. I mean when you look at your portfolio, is the reason why you're not theoretically 100 basis points higher in occupancy, is that the friction from the redevelopments in and out? Is that you guys consciously pushing rents more aggressively? When you take a look at the occupancy, what's the underlying factors that you guys look at as to why you're not even higher than where you are today on an occupancy side?

Yes. We have more in natural light I think rent growth in the market, but we also try to push it with our revenue management system to a point that's probably, I would say, a little more aggressive than most of the REIT peers. But if you look at it from a private marketing operating standpoint, the private equity funds and that style of trying to drive revenue growth, most of those guys are in the 93% to 95% range as well. Once we've completed our updates and our upgrades in the - mainly upgrading rehab are 50%, 60% of planned interiors, we do try to make a concerted effort to be 95% or more. But at any given time, there's 2/3 of portfolio that's undergoing some type of renovation, which while might hurt as one point on two on occupancy we're still allowed - or still allows us to achieve these types of 10% to 12% rental increases which it's the trade-off and we think is worth the trade-off.

[Operator Instructions]. Our next question will come from Craig Kucera, B. Riley FBR.

I just wanted to get your read on your expectations regarding third quarter upgrades and sort of what your total outlook is for - through the amount of units left to work on over the next several years?

Yes. So Q3, we're going to try to hit 400. We just sorted that for Q2, obviously, 379, but that 400 number is kind of the magic number. Across the portfolio at least for the cash that we have on the balance sheet to spend, we think in the next kind of 4 to 6 quarters are approximately kind of 1,800 to 2,000 units for the - what we consider to be the gen-1 full interior 5000-ish per unit upgrade. And then we're also, as we mentioned in prior calls, doing kind of bespoke upgrades across the portfolio with respect to tech packages and some showers, some new appliances here and there.

Got it. And you completed 14 properties this quarter with the green program, looking to do another seven. Is that something you think you can complete here in the third quarter? Or is that going to take a couple of quarters as you think about it?

Yes. It's going to take more than just the third quarter. They'll probably push through the third and the fourth quarter, which we think will help probably the numbers in both of those quarters. But I think also to - one thing to mention is with respect to just the green program, in and of itself, we're taking advantage of it across the portfolio over the next, I would say, 6 to 12 months. There's been a couple of deals where we think we can refinance it at a lowest spread and a tighter spread and also get the green program benefits. So I think that, that's - when I mentioned, that's kind of 4 to 6 more deals, that's what we're actually looking at right now.

Yes. I see. And then finally, on Stoney Point [ph]. I think we had thought maybe you would get that closed last quarter. Is there anything slowing that down? Are you guys sort of just waiting to possibly match that up with a new acquisition?

Yes. I think it's more of the latter. From a trailing 12-month basis, from T3 over T12 basis that there's two things that are happening. Number one is the NOI is continuing to go up and we don't need to sell it. And then the second piece is the markets we think are getting a little bit stronger. One thing to mention too is to the extent - and this is not like a kind of theory thing, but to the extent that we can have a good announcement or people living in Amazon is going to D.C., it's probably - you probably want to sell around that announcement versus before. So I think it's probably worth waiting a quarter or two.

[Operator Instructions]. Our next question will come from John Massocca Ladenburg Thalmann.

So just kind of a quick detail one. There's big occupancy decline in Parc500 quarter-over-quarter at West Palm. What drove that?

Parc500, yes I think it wasn't - it was just kind of a timing, at the end of the quarter. I mean today, it's 95% occupied. So there's nothing material.

Okay. Makes sense. And then what caused the extra $5 million draw on the line of credit there? Was there some specific transaction that you need the money for? Or was it just to fund some kind of - something on refinancing at Belmont? Just any color there would be helpful.

Yes. We saw an opportunity to potentially take advantage of the disconnect in the stock to buy some back. When REITs got hit earlier this month, we ended up not using and obviously, probably just paid it down but it was just kind of opportunistic to have cash available.

And then the rest of it was taken out with the extra cash from Belmont?

Correct.

And then maybe on Belmont, kind of more long term, you took it from fixed to variable. What's kind of your philosophy on taking that the other direction and moving it from variable to fixed? Is that something that has any appeal to you as maybe assets become a little more mature and there's less rehab potential there? And what kind of whole period would you expect upon an asset before you'd want to put fixed rate debt on it?

Yes. I think it is still fixed because it's included in our swap basket. So our swap's covered this asset. So we didn't view it as necessarily a swap or a change from fixed rate debt instrument to a variable rate debt instrument. It was fixed to lower fixed, if you will. Now it's not a 10-year fixed. It's through whatever the material swaps are in, call it, 2022. But that's enough time for us to feel safe and still maintain the flexibility. Obviously, it's pulling rate debt [indiscernible]. I think that's clearly and will continue to be our philosophy. I think we like using the swaps versus long-term kind of fixed rate Fannie or Freddie if it isn't zero maintenance debt. So as long as we have the ability to take advantage of the swap market, we will.

So like long term, you would expect to use variable rate debt swap out as kind of...

Yes.

Ladies and gentlemen, at this time, we have no further questions in the queue. So I'd like to turn the conference back over to management for closing remarks.

Great. We appreciate everyone's time, and we'll see you next quarter. Thank you.