Good day, and welcome to the NexPoint Residential Trust, Incorporated Fourth Quarter 2018 Conference Call. Today's conference is being recorded. And at this time, I now would like to turn today's call over to Ms. Jackie Graham. Please, go ahead ma'am.

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust conference call to review the company's results for the fourth quarter and full year ended December 31. 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 NXRT's strategy, guidance for financial results for the full year 2018, expected acquisitions and dispositions, the expected redevelopment of units, the projected average rent, change in rent and return on investment after redevelopment and planned green improvements. 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 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 the forward-looking statements. 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 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 of 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, Jackie. I'd like to welcome everyone to the NXRT 2018 fourth quarter conference call. Today we'll discuss highlights for 2018, present our results for 2018, issue guidance for 2019 and discuss the portfolio, markets and what we see ahead in 2019 for NXRT. I'm Brian Mitts, Chief Financial Officer and I'm joined by Matt McGraner, Executive Vice President and Chief Investment Officer. We're reporting another very solid year with the year-to-date same-store NOI increase of 7.4% as compared to the same period in 2017. Same-store revenue increase of 4.3%; core FFO for 2018 of $1.62 which is $0.21 higher than 2017 or a 15% increase. Total revenues for 2018 were up slightly, 1.6% versus 2017 and NOI increased 4.7%. We continue to execute our business plan by renovating 1,432 units during the year, achieving a 25% ROI. We acquired three properties in 2018 for a total purchase price of $131 million and disposed one property for $30 million for net increase in 2018 of $101 million. We completed our first-ever equity issuance, selling 2.7 million shares at a public offering price of $33 per share in November using the proceeds to de-lever by paying down our corporate revolver in full which we drew on to fund the acquisitions in Q3. Subsequent to the end of the year, we executed two significant transactions. We completed an acquisition of a portfolio of three assets located in Phoenix on January 28, for $132.1 million with 656 units adding approximately 400 units to our renovation pipeline. We also executed a new $75 million corporate revolver with the syndicated banks led by SunTrust and Raymond James. We drew down $52.5 million immediately on the new revolver to fund the purchase of the -- a portion of purchase price of the Phoenix acquisitions. So with…

Thanks Brian. I'm very pleased to report another strong year in 2018, as Brian mentioned, finishing the year with 7.4% same-store NOI growth. Our NOI margin improved year-over-year by over 150 basis points to 54.9%. As he also mentioned average rents increased 4.1% with total revenues up 4.3%. And then notwithstanding the material real estate tax increases which I'll unpack in a minute, eight out of our 10 markets grew NOI by at least 6.6%. For example, our Texas market, the Dallas, and Houston combined grew 7.4%, Atlanta's NOI grew 6.9%, our national portfolio's NOI grew 7.5%, Phoenix grew 9.4%, and our Florida portfolio combined average NOI growth for 2018 was 7.8%. Our leasing activity for the fourth quarter and year also remained strong even while placing a greater emphasis on driving occupancy in Q4 which as Brian mentioned, improved 60 basis points on the same-store pool. We achieved strong effective new lease growth during the quarter with new leases of 3% on average. Our best markets were Tampa, Orlando, West Palm, Atlanta, and Phoenix all achieving new lease growth of at least 3.9% or better. Renewal growth outpaced new leases during the quarter at 4.8% and improved 90 basis points from a year ago with seven out of our 10 markets driving rents higher by 4.3% or more. Retention for the quarter and the year was steady at 53% which for the year was up 200 basis points on the same-store pool year-over-year. As I mentioned the key focus of ours in Q4 this year as opposed to years passed was driving occupancy into the new year that set us up for even stronger renewal and new lease growth in the first half of 2019. We improved occupancy 60 basis points in the same-store pool alone and have already…

Thanks, Matt. We'll turn it over now for any questions.

Thank you [Operator Instructions] Our first question will be from Tayo Okusanya with Jefferies.

Hi. Good morning, gentlemen. How are you?

Good morning.

Good. How are you?

Good. Couple from me. First of all, the property taxes, I understand your comments about appealing those taxes. But I'm just curious, I mean, it was such a big jump in 4Q that the absolute [Technical Difficulty] I'm just curious what they were doing to make the numbers jump so much and what you could potentially appeal? Were they just increasing the absolute tax rates? Were they actually increasing what they thought the value of the building was? And kind of how does the appeal process work on that?

Yeah. Maybe we take a second to kind of go through that process. And keep in mind it differs between the different municipalities. But in general we receive an assessment at some point in the year. It's different across different places. But at some point, we receive an assessment. Many times, we think that the assessment is too high or outrageously too high. So we try to guide into something based on our past experience, based on the information we get from the consultants in the various markets, to come up with a more realistic yet conservative assessment and then a tax from that point. So we're constantly throughout the year tweaking accruals and thinking about this process. And then, as we go through the process, if we don't get a favorable reassessment on appeal, we'll go to the next up. And typically, you see that, completed by the end of the year, particularly in Texas. As Matt mentioned, a lot of this has been delayed and pushed into 2019. And in most cases, we don't even have anything on the calendars as of now. So instead of – and really for GAAP, it's you have no basis to not book the full accrual at the end of the year instead of having all this settled, but we anticipate it got pushed out. So we ended up booking the whole accrual. We didn't attempt to make any estimates as to future recoveries just because it's such an unknown quantity. We thought it's more prudent to just book up the full accrual in the fourth quarter. That's why you saw such a big increase in Q4. We thought…

But that was for seven assets, right? It just seems that such a large increase just across seven assets?

Well, that's a process in general and the seven assets continue to be litigated. But as we go throughout the year, you continue to get more and more assessments for different municipalities and it's not on the same calendar everywhere. There's some due at the end of the year, so you don't know what you're accruing for, and we start accruing for the 2019-year in this case as we get those assessments.

Yes. I'll add two things to that real quickly. So the settlement conferences and these are D-FW and largely in Tarrant and Dallas County. We're supposed to have settlement conferences and they're voice to us in November and December and those have again been pushed into 2019. I think four of which were this week like two -- I think three of them are actually on Thursday. So what we didn't want to do is what got Brixmor more in trouble a couple of years ago if you recall, and trying to smooth out throughout the year tax increases to pattress the same-store NOI numbers. And instead we just -- what we thought was the appropriate thing was to take it all for the appropriate year. Now I do think there is opportunity in 2019 to recapture some of these refunds, and it's anywhere in our estimation from $250,000 on the low end to it could be upwards of $600,000. So we do think that we'll have an opportunity and ultimately some success at achieving refunds, but this is the prudent approach in our view.

Got you. Okay. That's helpful. Then let's kind of move on to my next question. The Freddie debt on the Phoenix portfolio, one, what interest rate is on that debt? And then two, why that approach to kind of put additional debt rather than just dealing without doing the dispositions to kind of fund that?

They were set up -- first to answer your first question is that 132 over the one month Freddie floating rate as we've traditionally done. And then there were all set up as reverse 1031s to facilitate capital recycling. So we still have that ability and plan on using it also with into the extent you'll see and it can be filed with our K, we'll have that tool as well. So I think it's not permanent surge in leverage, it's just a temporary capital recycling that we've done over the course of the last four years.

Got you. And the average duration of that debt is how long was the Freddie debt?

Seven years.

Seven years? Okay. All right. I’ll get off the line and let the next questioner ask question. Thank you.

Thanks, Tayo.

Our next question will be from Buck Horne with Raymond James.

Hey. Thanks. Good morning. Yes. So I guess, I think, you addressed the property tax issue there. I just got a little more curious. I mean, what exactly was the timing situation with regards to when you understood that the property tax bills coming in were going to require this full catch up on the accrual?

Late November or early December into this year. So just a little more color, we actually got three, so still seven outstanding. We had 10 as of the end of the year, three were settled. We ended up booking those in Q4 of 2018. So it's a fully ongoing process, but that's the kind of the timing as we start to realize that these settlement conferences weren't going to happen in Q4. And also keep in mind, what we're -- any time you talk in terms of percentages, you're comparing it to something and in this case Q4 of 2017, which was a little bit different situation. So the increase isn't as dramatic as it seems at 4% to 6% it's just a bad comparison point.

And you guys feel like you've adequately have -- what was the assumption for property tax increase in the 2019 guidance?

Go on.

6% on the same-store.

6% on…?

Yes. I think we're being conservative on the property tax guidance for 2016 -- excuse me, for 2019, certainly. And what I'd also say to add to Brian's comment was that, a lot of these deals, especially if they're in the same calendar year, being wrapped together. So they'll settle -- they may not settle two at the same time as the third and they may, like, say, okay, we won't settle these at this price unless you take this one as the third -- as well. And then you couple that with the fact that we haven't even had some of these settlement conferences. So that's sort of the fluid process end of 2019 that we're dealing with, especially in Texas.

And Buck, stepping back a little bit out of the kind of details of the taxes. For the year, we had same-store NOI growth of 7.4%. We had strong results across the board. Core FFO was up 15%. So it's unfortunate that the tax piece is unpredictable, hard to estimate. And one of the downsides of having a lot of the portfolio located in these "low-tax states" is that they get very, very aggressive on property taxes. That's where a lot of the revenue comes from. So we have to protect ourselves and be very aggressive. And instead of taking easy route and just taking what was on the table we thought we could get more and we could push it. But that pushes into 2019, which we're not baking this into our guidance. Because we just don't know, but there's a situation where in the first quarter or second quarter we could get pretty favorable results and that hits our 2019 numbers in a positive way.

Okay. That's very helpful. One last quick one. I actually also noticed a big surge in maintenance CapEx and specifically kind of the non-recurring maintenance CapEx, this is kind of up about double or more than double last year. I was wondering if you could help highlight what happened on the CapEx side, and what kind of level of maintenance CapEx you're budgeting for this year?

Yes. So the surge is, I think, largely offset by the income that we're getting as a benefit of what we refer to as a resident amenity service. So that's -- things like valet trash, security alarms that did have a corresponding solar screens, to have a corresponding benefit on the income side. So while the -- with I think 15% or so for 2019 over 2018 where we are seeing a corresponding double-digit increase in revenue on that CapEx. So it's an ROI item. In terms of the ongoing recurring CapEx which I think that's your question, excluding resident and managing services that's about $860 a unit, so call it $10 million on the same-store pool.

Okay. All right, great. Thank you.

Thank you. Our next question will be from John Massocca with Ladenburg Thalmann.

Good morning. As you look out into the tax -- maybe a break from the tax this year. As you look out into the pipeline of potential rehabs, are you kind of seeing opportunities to maybe do additional rehabs and kind of more of the legacy assets? I know you traditionally have in rehabs the entire amount of units outstanding in a property purchased. And is that maybe for some of the smaller partial upgrades and kind of the plants additions are going?

Yes the partial upgrade program is a huge opportunity and it's largely untapped. What we've been doing after we've gone through and renovated the full 5000 units suite of upgrades kind of on the second generation will add/upgrade the appliance and that we would consider that a partial. And it's a lower dollar amount spend in a lower dollar amount increase, but ROIs are phenomenal. So that's an opportunity that exists. I'm thinking about 3000 units in the portfolio; 2000 to 3000 units.

Okay. That's -- 30% percent of the portfolio you'd say then can be these kind of smaller dollar amounts?

Yes.

And then specifically with Southpoint, I mean have you seen any increase in reverse increase, given the Amazon announcement that they're moving to Northern Virginia and has expected pricing at all. I know it's one of the assets you've kind of put up there is disposition -- central disposition candidate?

Yes we have. The answer is yes. And we've seen some increased interest just generally after national multi-housing conference and in reverse increase. And it's one that we will sell this year for sure, given that everything is transpired with Amazon although it's not in Arlington per se. So it's still drafting off of the news. And one of the reasons why we lowered the cap rate range modestly by 10 basis points. So we do expect to transact that kind of $23 million to $24 million range this year.

And then kind of going back to the taxes and maybe other side of things, I mean are there any outside of kind of DFW in Houston? I know you had have been optimistic about giving some kind of positive assessments on appeal and some of the other municipalities I mean some of that's still outstanding? Or did some of that hit in 4Q and just completely wiped out by what was going on in DFW in Houston and the accrual from all that?

So I think the two opportunities are -- and we don't -- we haven't been able to quantify it yet but our -- in Marietta and Atlanta because we got hit pretty hard there last year. And then Nashville, I think we'll have a good comp set up for the same-store pool going into 2019, because we are – those don't reassess every year so we're drafting off of kind of a stay on tax number and think that – that will help bring Nashville same-store NOI numbers to the top of the heap this year. So those are I think the two opportunities outside of the potential for positive tax appeals in DFW.

Understood. That's it for me. Thanks very much.

Thanks.

Thank you.

Thank you. Our next question will be from Merrill Ross with Boenning Inc.

Good morning. Thank you. Looking at the acquisition in Phoenix, the amount of money that you plan to spend on value-add is roughly twice the average that you spent so far. And I'm wondering, if that means that the rental is more complex and they were therefore will take longer and regular occupancy will be more affected to the downside because of that?

I don't think so Merrill. I think that, the reason they've gone up modestly, I think is because number one, you have some inflation right in labor and in materials, but the assets that we've acquired recently are largely larger units. So, larger units just require more capital. And so the spend is a little bit more, but the ROIs are correspondingly the same or roughly the same. And then, the occupancy is – we just do these on turns. We don't see any hiccup there. We're still doing two or three weeks in-house as units naturally turn. So we had planned to continue to drive and maintain our occupancy goals in 2019.

Great. Thank you.

You bet.

Thank you. [Operator Instructions] And our next question will be from Tayo Okusanya with Jefferies.

Yes. Another quick one just around acquisitions and on the guidance range that you provided, when I kind of think about acquisitions, would you just talk a little bit about this year how you generally expect to fund acquisition? And based on that funding strategy whether transactions you expect them to be accretive right off the gate? Is the accretion going to be more driven by the value-add work you do over time? And how do you balance, again, your capital allocation to acquisitions relative to your need to possibly de-lever?

Yeah. So I think the acquisitions that we're targeting – first of all the acquisitions that we've done in the last six months, as you heard I went through Cedar, Brandywine, Crestmont and how we're doing compared to our NOI budgets and those have surprised to the upside quite potently and we're pleased with that. So we think those will be accretive not the same-store, but certainly going forward especially because in the way they were funded with equity through the equity raise. The acquisitions that we've done and – that we did in January we're hopeful that they'll be accretive year one, but we're certainly underwriting them to be accretive in year two or once they undergo full year renovations. Like I said we think we can grow that NOI 6.5% a year. And then balancing -- what we've always done is take a look -- taken a look at deals that we've liked and run through the model -- the corporate model of how do we best finance it? Do we dispo -- do we raise equity? Do we hit the ATM? Do we do a combination of both? And you can be sure that that exercise occurs for a $20 million deal or a $100 million deal. And so I think what'll see this year is it just depends on where we are in terms of our stock price and what the bid on the private market is. If we're lucky to continue to have a good bid here, we'll look to delever and maintain leverage and then delever. We can still do the same thing with selling assets. An upside to our core FFO guidance would be if we didn't have to sell assets. But nonetheless, it is currency to use. We can sell anything at any time right now for far more than what we -- what we're trading on an implied cap rate basis. So, I guess the long answer -- or the short answer from a long-winded answer is that we're looking at all the tools in the tool box and do think that we'll hit that acquisition guidance this year.

Okay. I've been -- and just to go back to real estate taxes for a quick second. I think again you mentioned this idea that on the successful appeal, you may get about $0.5 million back or so. But again even if I kind of back that out of your same-store 4Q 2018 versus 4Q 2017, you figure a fairly large kind of 30% quarter-over-quarter increase. And I guess when I think about that relative to your 6% forecast for next year, I'm just trying to understand that the differences and why real estate taxes would not go up even more than 6% next year?

Because we settled -- a part of the benefit last year are the comp rather since we had a lower tax number last year as we got some of the settlements that have been kicked out to February and April this year, we settled in Q4 last year. So, that was -- that's part of the benefit. And one of the -- I think or the issue -- one of the benefits though hopefully is at least from our consultants and mortgages perspective is that we can toggle 2018 and 2019 together. So, we can say all right we'll give a little bit more up in 2018 which we have certainly obviously from all these questions and -- but we can lock in a lower number of 2019, much lower than hopefully 6% increase. So, that's the horse trade that we'll look to make and we think it's possible we've already done it on several assets, three and we'll continue to try, but I think that -- I think that's the opportunity.

And again Tayo with that horse trade, we end 2018 at pretty strong number. So, we thought that's definitely worth the "cost here" because we saw a very good quarter. And this is all accrual-based. I mean in the end we think that our tax numbers are pretty strong because we don't just take the assessments, we don't just settle out of convenience for an easier path we look to truly maximize our bottom-line.

Thank you.

Thank you. Our next question will be from Jim Lykins with D.A. Davidson.

Hey, good morning guys.

Good morning, Jim.

So back to – good morning. So back to the Phoenix portfolio. First of all, I apologize, I missed this, but how many value-add units are there?

400.

400? Okay.

Yes.

And any additional commentary on that transaction, anything you can tell us about maybe occupancy, average rents? What the vintage is? How you'll be leveraging efficiencies?

Yeah, great questions. Average vintage is two assets were built in 1995 and one was built in 1994. They're all large units. Some have nine-foot ceilings, two of them have nine-foot ceilings. The other one is 8.5. Extremely well located. There I guess they're larger units and they're smaller size, so you can run occupancy pretty heavy and push rents there. The average rent, I think across the three of them are a little bit higher than our Phoenix average at about $1,200 a unit. They're also in more affluent areas than our other deals. So we think it's a great potential replacement -- four replacement assets for kind of Pointe at the Foothills when you're selling a not a lower quality location, but certainly a deal where we've harvested gains and made some money. So, that was a theory, stuff that we've done in the last three or four years.

Okay. And for value-add, you mentioned a number of full and partial upgrades. Should we be thinking about that weighted equally each quarter? What will be a good run way to use?

Yeah, I think this year we've always try to hit 400 a quarter. Yeah, I think 350 to 400 a quarter is still good number.

Okay. And as you look across the portfolio right now, how long do you think its sustainable to stay north of the 20% ROIs on value-add?

Yeah, certainly through this year and into next year. I mean, I think we ended it or the prepared remarks by saying the demand is still there and the gap between A and B is still 27%. I mean, that's our story, it has been forever. It will continue to be. We're not going to start buying new deals or see properties we just think the B space will continue to exhibit this nice little window of affordability with the ability to drive outsized returns by delivering CapEx solutions. I think that that story is going to continue as long as there is a need for affordable nice well located housing in the United States are in our markets.

And Jim for 2018, our ROI for renovations was 25%. So they were pretty -- we came into 2019 pretty well north of a 20% number. We think 22% or so for this year is very achievable.

Okay. Thanks, guys.

Thanks, Jim.

Thank you. I'm showing no further questions in the queue at this time.

All right.

All right. We'll wrap it up. Thank you to everybody for participating.