Good day, and welcome to the NexPoint Residential Trust, Inc. Third Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I would 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 third quarter ended September 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. 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 NexPoint’s strategy and guidance for financial results for the fourth quarter and full year 2018, expected acquisitions and dispositions and the expected redevelopment of units. They are not guarantees of future results and are subject to risks, uncertainties and 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 discussions of risks and other factors that could affect the forward-looking statement. 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.

Thank you, Marilynn, and thank you to everyone joining us today for NXRT's 2018 third quarter conference call. Today, we will discuss highlights of the quarter, present our Q3 2018 and year-to-date results, revised guidance for the remainder of 2018 and discuss the portfolio in the markets. I'm Brian Mitts, Chief Financial Officer, and I'm joined as always by Matt McGraner, Executive Vice President and Chief Investment Officer. We reported another very solid quarter with a same-store NOI increase of 8.3% in the third quarter 2018, this compared to third quarter 2017 and year-to-date same store NOI increase of 9%, this compared to the same period in 2017. We are reporting same-store revenue increases of 4.7% for the quarter and 4.3% for the year and core FFO for 2018 through September 30 is $0.20 higher than the same period of 2017 or a 20% increase. Total revenues year-to-date were down 1.9% versus the same period in 2017, but despite that, NOI increased by 2.8% and we achieved an NOI margin of 55% year-to-date through September 30 versus 52% for the same period last year. We continue to execute our business plan by renovating 439 units during the quarter, and has completed 1,116 renovations for the year through September 30. After being quiet this year on the acquisition front through July, we had a busy quarter closing three acquisitions in the last six weeks of the quarter and completing six refinancings that lowered our spread and provided proceeds to partially fund the acquisitions. Yesterday, our stock closed at $35.03 per share, which was at 4% premium over our newly disclosed NAV midpoint of $33.75 per share. With that, let me take you through some of the highlights and details of our activity results for the third quarter and year-to-date. As mentioned,…

Thanks, Brian. I'll begin with a review of our same-store results by market, as I usually do on the call. Our same-store results for Dallas came in at 11.9%, our same-store results for Houston came in at 23.3%, our D.C. Metro grew at 6.3%, Atlanta was down 3.8%, primarily due to a tax reassessment from Rockledge acquisition, which we'll discuss later. Nashville grew by 10.1%, Charlotte grew by 70 basis points, Phoenix grew by 9.7%, West Palm Beach grew by 9.3%, Orlando was up 14.4% and Tampa was up 10.5%. As Brian mentioned, leasing activity in revenue growth continues to outperform, six of our 10 markets achieving new lease growth of at least 6.7% or better. Our top five markets are Orlando at 13.2%, Phoenix at 9.5%, West Palm Beach at 7.5% and DFW and Tampa each delivered 6.8%. Effective renewal rent accelerated from Q2 was up 80 basis points to 4.7% with nine out of 10 markets delivering growth of 4.1% or better. Renewal conversions also remained steady from Q2 at 53.2%. As Brian mentioned, we're busy this quarter on the transaction front. In late August, we acquired Cedar Pointe, a 210-unit property built in 1998 that is directly adjacent to Beechwood Terrace and Nashville, another property that we own. Cedar Pointe has 1000 square-foot units. And as Brian mentioned, we paid $26.5 million for it and that equates to a 5.5 year one economic cap rate. The plan is to operate, immediately operate Beechwood and Cedar together, which we think we can pick up 200,000 in annual NOI synergies. We also plan to upgrade approximately 110 units over the next three years and achieving average annual rent growth of 12.3% on those rehab units. In late September, we acquired Brandywine I & II in the Brentwood submarket of…

Thanks, Matt. That concludes our prepared remarks, and we'll turn it over for questions.

Thank you. At this time, we’ll open the floor for questions. [Operator Instructions] Our first question comes from Omotayo Okusanya of Jefferies.

Hi, good morning everyone.

Good morning, Tayo.

Congrats, it’s a mic drop quarter. So that’s awesome.

Thank you.

Couple of questions from my end. The acquisitions for the quarter, the $119 million, I think, and you walked us through how you're funding it. Some of it, again, is proceeds from debt refis. Some of it is kind of going out to the line and term loans. But when we kind of think about longer-term financing and we kind of think about your leverage, how do you kind of think about equity being part of the mix?

I'll start on that and then Matt can jump in. I'd say we worked hard to create a good cost of capital, I think, where you see us trading today versus where we think NAV is, we have that cost of capital. We said kind of all along that we're looking to delever. We want to do it sort of naturally, not force it. I think clearly, as the value of the properties rise, we're delevering naturally that way. But I think going forward, to the extent that we can raise equity at or near NAV and have a good accretive use of the proceeds, then we'll continue to earn. And we will start doing that. And through that, I think, over time, start to delever and use less leverage.

No, I was just going to say, adding to that, we do – we will sell deals next year, particularly in Dallas where I mentioned, we had a strong bid and can sell assets at a 5% cap and achieve that ARV. So that will be some of the mix regardless.

Okay. I guess, that makes a lot of sense to me. Just again, it feels like you are at the point where you do have that corporate capital. I mean, we have you kind of at an implied capital size 5.4 or so. So you're kind of there where you're buying deals accretively. You can definitely issue equity well above NAV. Just it kind of feels like it's the right time to kind of deleverage, just kind of given some investor concerns about high leverage ratios.

Yes, which we appreciate and acknowledge. We're with you.

Okay, that makes sense. Then you also seem to indicate that you were still looking at – pretty closely at Phoenix and Florida for potential new deals. I mean, are we meant to assume that you do expect more acquisition activity over the next few quarters?

Yes. I think, in particular, Phoenix is probably more likely than Florida, but we still are trying to purchase some assets in Florida. If you look at the markets that are outperforming, I mean, Orlando at 13.2% and 14.4% in same-store NOI growth is on fire. And so we obviously want more exposure there. Phoenix is kind of a tale of a number of factors that are all positive. It's incredibly difficult to build affordable housing. You have job growth and wage inflation. And then, more helpful on the expense side, that's a state that mandated – or there's actually a law that caps real estate tax at 5% annually, which we would love to have in Dallas, believe me. So I think, all of these factors, at least for the next couple of years, point to Phoenix being a very constructive B apartment market that we're focused on. Obviously, we already own there.

Okay. Last one from me. I mean, you seem to be getting a lot of benefits from the Freddie Mac Green project. And you kind of talked a little bit about rolling it out into more assets. Can you just kind of help us quantify at the end of the day, how much in regards to expense savings you do expect from this program? You talked about $16 a unit. Is that a fair number to kind of use going forward as the amount of operating expenses that may end up getting reduced over the course of 2019 and 2020 on a per-unit basis?

Yes. I mean, it's such a new program that it's hard to have any real data that goes back to material amount. But I think, that's a good run rate, number one. Number two is that we – our average, according to the studies that we've done and the numbers that bears out is 32% savings from what it was before. So if you look at the utility spend and kind of apply maybe a little bit lower, 25% to 30% on those utility spend – and this is obviously just on water, which we're looking to break out for investors and show more in granularity what that can actually deliver to the bottom line. But I think, that's a fair characterization.

Got you. All right, congrats again. Very well done.

Thanks Tayo.

Our next question comes from John Massocca of Ladenburg Thalmann.

Hi, John.

Good morning, gentlemen.

Good morning.

Just looking at – clearly, the utilities was kind of a big driver of the kind of muted same-store operating expense increase. And was that all tied to the Freddie Mac program and kind of the water savings? Or was there something else rolling to that as well?

Yes. I mean, the significant – the vast significant majority is tied to the water savings.

Okay. And then looking at the acquisitions, the two ones that were completed kind of adjacent to the existing properties, are those deals where, if they had not had the savings associated with those – with being adjacent to existing properties, you would complete it? Or was that kind of a necessary part of those transactions? And how many other opportunities potentially are there out there like that?

Yes. It's a good question. I think we would have purchased Crestmont irrespective of the adjacency of Versailles. Versailles is one of our best-performing deals and has been for quite some time. Obviously being in Plano, that school district is a great value-add. And Cedar, we've had a lot of success in that submarket of Nashville. And it actually helps, I think, both deals. I mean, they're – just anecdotally, people get confused. Prospective renters have gotten confused over the years and actually went to Cedar Pointe's clubhouse when they were trying to rent a unit at Beechwood. So those just make a lot of sense and we're probably more naturally – we were more aggressive for Cedar because of the adjacent nature of it.

Makes sense. And then kind of on the financing side – and apologies if I missed this, I hopped on a little late. This reduction in spreads on the mortgages, was any of that tied to this Freddie Mac Green program? Or was that just driven by a loser kind of – or maybe lenders being a little bit more willing to post lower spreads?

Yes. It was – they were all Green. So when – two things about the Green program. Number one is, you get a reduced spread. Typically, it's anywhere from 10 to 20 basis points. That business is then considered uncapped from the agency perspective, from the FHA cap. So it's kind of a win-win, both for borrowers – win-win-win both for borrowers, renters and the agencies. So they're all green and we'll continue to utilize that program.

And then one last one. I know – I think I remember you saying on the call that Brandywine didn't have a ton of bidders for it. I mean, was there some potential reason why or was it just fortuitous?

I mean, recall that our bread and butter over the years has been equity checked in between kind of $25 million and $50 million, where below $25 million, you have a number of folks that can participate and do that. And then above $50 million, you run into larger private equity firms. So having $80 million gross purchase price check kind of falls in between there, so that was – this just left people under the tent.

Okay, that’s it from me. Thank you very much.

Thank you.

Our next question comes from Rob Stevenson of Janney.

Good morning guys. The same-store real estate taxes and insurance line was down 5.3% year-to-date and 3.6% if my math is correct. How much of that's insurance versus the property taxes? Because most of your peers that have market overlap are seeing 5% to 6% increases in property taxes. Seems like you guys are moving in the other direction.

Yes, I think Rob some of that driven by -- we've been buying more actively in those markets, and we've seen some pretty aggressive reassessments from the counties and cities. And so we've been protesting those, and it takes a little while to go through the process there. And when we win -- and we do often or we get the city to come down. That flows through that current quarter and then in that current year. So you end up kind of getting a, call it, delayed reaction to it. I think that's why you see us getting those – the negative numbers or lower tax increases than some of the – our peers.

On the taxes front, just to add to that, for example, with respect to Rockledge, which was an Atlanta property, we thought that we would get some savings. We didn't, but we've set up next year in our comp pretty well, we think. But in terms of where we saw the most savings were in the states like as Brian mentioned Arizona or Tennessee, where there's kind of a full year reassessment. We're just in between those periods where we're getting some benefit of that. And then on insurance, we're excited about this renewal because we think we got hosed a little bit last year. And so we're looking forward to having some savings in 2019, because I think, our insurance was a little bit elevated relative to some of our larger peers.

When does that renewal hit?

We think probably February.

What was the cost per unit on the 439 units renovated during the quarter. I didn’t see that in the release, just the program to date number. Do you have that?

I think it is right around 5,100.

Okay, and then how much cost pressure are you seeing in that program on materials and especially labor on these renovations? Is that going to start to cut into returns? Or are you just able to pass that on to residents given the current market conditions?

I think the latter. If you look at our ROI this quarter, it was as high as it's ever been. And our expense was a little -- was up couple of hundred bucks. So we're pleased to see that. The materials aren't really that big of an issue because they are bulk purchased by BH, and they do a great job with that. It's really a function of the labor and then the timing. But I think, we feel like we can pass it on, and that's evidenced by our numbers this quarter.

Okay, last one for me. Matt, given your comments about potentially selling some assets, what – how big of a collection do you have in Dallas and elsewhere, where the value- creation opportunities are passed and they might be better owned by someone going forward that you might elect to sell? Are we talking about two or three properties, are we talking five or ten. How material is that number of stuff that you might want to sell?

I think it is two or three in Dallas, which have run the gamut, and where we think that we've implemented the program and then can recycle the capital and diversify the NOI exposure. It's not five or ten. I mean, Dallas grew at 11.9% same-store basis and it is still growing, growing like crazy. So we don't want to sell material now. But I think, two or three in Dallas is likely for next year.

And then what about outside of Dallas within the portfolio, anything that's there?

Yeah, we will exit D.C. at some point. That – for the Southpoint deal. But that's the only other thing I can think of now. Operator

Okay, thanks guys appreciate it.

Thank you.

Our next question comes from Craig Kucera of B. Riley FBR.

Hey good morning guys. I wanted to circle back to the acquisitions that you closed in the quarter and the cap rates you cited. Was that – were those before those expected synergies? Or was that inclusive of those synergies and your economic cap rate?

Before.

Okay, great. And as far as the incremental, the potential value-add units that you identified, is it reasonable to assume that those are probably somewhere in the $5,000 per unit level? Or could they be materially higher? Kind of what are your thoughts?

No, it is. Yes, we have active value-add programs going on in both Dallas and Nashville. And we've kind of mastered that cost per unit, so to speak. So it will be around $5,000. May be a little bit higher at Cedar, just because they're 1,000 square-foot units, but not materially so.

Okay, that’s fair. And as far as the bridge loan, I believe it has a March 2019 maturity. Are there any extension opportunities on that? And kind of, I guess, are you thinking you're probably going to sell assets to pay that?

That has actually been recast, so it just turned into a revolver. So that will – we'll get an update out there on that. But it's a nonissue.

Okay. I feel like you've been trying to sell Stoney Point for a few quarters. Have you had any – I felt like you had some nibbles in the past but kind of – look, the asset's performing well, and I think it's probably increased in value since you first started marketing it. But kind of what are you looking for potentially selling that asset for? And kind of what's the current marketing looking like?

I think we have waited this long, and not that tried to explore areas in D.C., but to the extent Amazon does announce that they'll go to D.C. or Northern Virginia, I think, we'll just – we'll give it the rest of the year and then see where we go. But either way, we have active bids from adjacent guys that are on, whatever, in the market for $22 million, $23 million. So we're happy with that number. I mean, we'll make money. But it's one of -- I think a levered at 22% or 22% IRR but we think we’ll give Amazon the opportunity to announce D.C., and we'll see where that goes.

Got it. And as you think about this next four or five quarters, you know you completed the 440 rehabs this past quarter. I imagine we'll see maybe a bit of a slowdown just given the season in fourth and first quarter. But is something in the range of maybe 1,500 in 2019, is that a good number as far as getting rehabs completed.

Yeah, I think that is really reasonable.

Alright, thanks guys.

Thank you.

And a follow-up question from Omotayo Okusanya from Jefferies.

Yes, just two quick ones there from me. The acquisition this quarter, I think you talked about yields on the redevelopment of about 11%. So just kind of curious why it's so much lower versus the kind of 20%-plus ROEs you are currently getting at this point.

That's just a quoted average rental increase. So it's not the ROI on the CapEx.

Gotcha. Then in 3Q there was a slight drop in same-store occupancy. Could you just talk a little bit about what you think is driving that? Is some of that seasonality, some of that you're aggressively pushing prices, so you kind of expected a slight decline in occupancy?

Yes. One was -- the biggest markets that come to mind are Charlotte and Nashville. So Charlotte was really seasonality with respect to hurricanes and everything else. Just -- it was a tougher operating environment at our deals, of those two deals. And then for Nashville, we were just trying to really push rate and see how far we could push it.

Thank you.

A this time, we have no further questions in the queue.

Great. We appreciate everyone's time, and we'll talk to you after the new year. Thank you.