Good day and welcome to the NexPoint Residential Trust Inc. Fourth Quarter 2019 Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to 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 and guidance for financial results for the first quarter and full-year 2020 expected acquisitions and dispositions the expected redevelopment of units the projected average rent change in rent and return on investment after redevelopment and new business metrics relating to the Las Vegas portfolio. 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 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 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, Jackie. I'd like to welcome everyone to the NXRT 2019 Fourth Quarter Conference Call. Today we'll discuss highlights for the year present our results for 2019 provide guidance for 2020 and discuss recent acquisitions, dispositions, our portfolio in general, markets and just what we see in the year ahead. I'm joined here with Matt McGraner, our Chief Investment Officer. So I'll start high level. 2019 was our most active year so far on acquisition and disposition front. We acquired a net of $587 million of properties. Same-store NOI increase for the year of 6.7% which was 20 basis points above our midpoint guidance. Consistent with the high-growth strategy for 2019 we're reporting a 19% increase in core FFO per share, which is $1.93 per share and 10 basis points above the midpoint of our guidance. During the year we acquired 11 properties for $877 million consisting of 4,583 units, an increase in our redevelopment pipeline by nearly 3,000 units. We sold six properties during the year consisting of 2,218 units for sale price of $290 million and rolled those net proceeds into a couple of new acquisitions. Total revenue for 2019 was $181 million and total NOI was $103 million which was an increase of 28.3% and 30.8% year-over-year respectively reflecting the large net acquisition activity during the year. NOI margin increased 200 basis points to 56.7% for the year from 54.7% in 2018. We continue to execute our value-add business plan by completing 2516 full and partial renovations during the year with 1671 of those units being leased achieving a 25.3% return on investment during the year. Inceptions to date within properties still in the portfolio as of 12/31 we've completed 6,927 full and partial upgrades achieving an average return on investment of 24.5%. Additionally for 2019…

Yes. Thanks Brian. I'm going to start by going over our Q4 2019 NOI performance. Let me start with our same-store NOI margin improving year-over-year by 250 basis points to 56.1%. Rents were also up at least 3% in every market except Houston which remained flat. We saw strength across the entirety of the portfolio as usual with seven out of our 10 markets growing NOI by at least 5.2% that includes Dallas Houston Atlanta Phoenix Orlando DC and Tampa. The notable same-store NOI growth markets for the fourth quarter were Dallas at 17.1% and continued acceleration in Atlanta delivering a robust 20% NOI growth largely driven by favorable real estate tax comps. Operationally, leasing activity and revenue growth showed continued strength in the fourth quarter. seven out of our 10 markets achieved revenue growth of at least 4.3% or better. Our top five markets were D.C. at 9.1% Atlanta at 7% Phoenix at 6.1% Charlotte at 5.8% and DFW at 4.5%. Renewal conversions for the quarter were a healthy book 54% with six out of our 10 markets delivering renewal rate growth of at least 3.5%. On the occupancy front I'm pleased to report that Q4 same-store occupancy improved 110 basis points from the third quarter to 94.4% positioning us well for 2020. For example as of this morning our portfolio sits at 96% leased with a healthy trend with a healthy 60-day trends of 91%. Turning to full-year 2019, same-store NOI performance the NOI margin also improved for the year by 126 basis points to 55.6%. Same-store average rent and revenues each increased 3.6% and 4.3% respectively. NOI was strong again across the entirety of the portfolio with nine out of our 10 markets growing NOI by at least 4.5%. The notable same-store NOI growth margins for the…

Thanks Matt. So before I turn it over to questions there's one question, we've seen in some of the notes early note this morning that I'll go ahead and address here. You've seen some changes within our rental income and other income from prior periods as a result of implementation of ASC 842 which is the new lease standard. So we did implement that in 2019 and restated those numbers on a retrospective basis. There'll be more detail in the 10-K on that when it's filed. So with that let me turn it over to the operator to take questions.

[Operator Instructions] We will take our first question from Buck Horne with Raymond James.

Thanks for taking the call. I want to dive into the updated NAV estimate maybe first of all? And the updated get tightened up cap rate ranges you see yourselves? Just maybe a little bit if you could provide any more color on where you're seeing the numbers coming in because like pricing has tightened up considerably. And if these are your projections on value-add Class B assets? Or is this do you have a source for this? Or is this kind of where you're getting the data from internally? Just any additional color on the pricing of assets in the market that's behind the new NAV estimates.

Yes Buck, it's Matt. So primarily the change was driven by a transaction that was announced in January which was the acquisition of Aragon Holdings portfolio. It's a national portfolio of roughly 14,000 units and the [indiscernible] Group two sophisticated parties. From our numbers and we looked at the transaction and then we confirmed brokers that went off at a 4.6% tax adjusted cap rate on T3 NOI over T12 expenses. So that largely drove I think a lot of the changes that their portfolio with the exception of a few assets in Denver basically overlay with ours pretty well. So that's kind of point number 1. Point number 2 is as you know CBRE and Green Street now for us every quarter. And from our experience in the market today in terms of just acquiring deals or chasing deals it's really tough to find anything north of a 5% cap rate and that's just a nominal basis. And then in markets such as Phoenix you can expect to pay 4.25% for value-add assets today. So it did come down quite a bit but I think it's still somewhat a conservative number especially given the appetite and financing available for the assets.

Yes, it makes sense. I appreciate the extra color there. Secondly on the property that had the tornado [indiscernible] I guess Cutter's Point. Could you provide any update on the damages there? Do you anticipate any business interruption recoveries as 2020 goes on? And how do you or should we anticipate any other drag or losses from the loss of the operations in that that property?

Yes. So that was the result of the tornado that came through in late October through the Dallas area. We've taken all the units offline there and are beginning the reconstruction process. We have full insurance coverage from total replacement cost of all the buildings as well as business interruption insurance. For example in the fourth quarter we basically had no difference from what we had budgeted on that property and we expect that to be the same thing in 2020. What you'll see in the fourth quarter is a casualty loss just the way GAAP accounting works. And given that we had to book that at the end of the year you'll see a flip in 2020 as we rebuild and get the insurance proceeds and ultimately you'll see accounting gain on that transaction. But economically there will be no loss to NXRT as a result of that. So we were fully covered.

Our next question comes from Drew Babin with Baird.

The Harbor Group transaction that you mentioned I think you mentioned that you've looked at it. Can you talk about what sort of held you back on that transaction? The opportunity talking about the initial yield but obviously longer-term unlevered IRR kind of where that stood relative to what an XRT looks for? And I guess kind of relaying that to the current environment do you see any deals out there right now larger in size that you see potentially closing not just for NXT but in general over the next year?

Yes. So thanks Sue it's Matt. The deal we chased it for quite some time is an attractive portfolio. One of the things about it that was compelling was the units were fairly untouched so there's a true value-add story to the interior program. A couple of things held us back. Number one there was a large in place a piece of amortizing loans that you had to assume. And so given the low LTV and just the nature of the fixed-rate debt it was an agency that you guys assume that the cash-on-cash returns weren't all that compelling. Number two, while we looked at it we're did not want to go out and double the size of the company in a way that just so transformational without there being a thoughtful approach to doing so. We were very active during the year anyway kind of to the tune of that $600 million and we think we can still move the needle as you'll see this year in our execution that still provides the same total return story for us. So we didn't think such a transformational asset and chasing it made a ton of sense. In terms of deals out there in size there's a few portfolios from ranging in kind of $175 million to $250 million that are out there. The two that I know of are in the Southeast and Southwestern United States our core markets. Both of those are expected to be kind of 4.5% type numbers on cap rates. So I'm still and we're not chasing either one of those but still as I said very very compelling or very aggressive markets out there.

Appreciate that color. And with the cap rate kind of convergence between suburban markets and urban markets value-add and core is there anything that that NXRT is looking at this year that might look a little more kind of urban-ish and/or core relative to the past? Or can we still expect the additions to the value-add renovation pipeline with each deal?

Yes, we're going to stay a workforce housing value-add company. There is convergence in cap rates. The good news is we set ourselves up pretty well in 2019 to have an execution year in 2020 first and foremost an internal growth story which we'll execute on and think that will drive double-digit returns for us this year. That being said there are instances where we can be one-off. And I think maybe not in the first half of the year when everyone has allocations and are eager to put money to work but I do think in the second half of the year which is the time period in which we've been historically more active that we can that we'll be on the lookout whether you have any kind of election drama or what have you in rates. So that's what we're going to try to hone in on in the second half of the year. By then we'll have some more ammo in the terms of our revolver which will pay down so we'll be opportunistic probably more in the second half but still in work force housing.

Okay. And just one more for me too. Just judging by the guidance assumptions themselves. Should we expect any real change to the net debt to EV ration by the end of the year? Will it still sort of be in that mid-50s range that it's been over the last few years?

Yes. I mean I think no material change unless we like our stock later in the year but I wouldn't expect any material change in the first half.

Our next question comes from Tayo Okusanya with Mizuho.

So just a quick question on guidance. [indiscernible] very strong assumptions being built in but I'm just kind of curious when I and a very strong year-over-year growth. But when I take a look at fourth quarter at $0.54 and annualize that that's really $216 million so I guess I'm a little bit surprised that you start-up at such a strong point at the end of the year but full-year guidance at the midpoint is at a 221 given just how much growth you're still expecting?

Yes, I mean I'll take the first stab at it. I think that we're we've kind of reloaded hot in the fourth quarter with all the deals online that we were expecting to sell to any way to kind of pay down some of the leverage we took on in the fourth quarter to buy the Las Vegas three portfolios. So we knew that kind of two or three deals were coming out of the system anyway. So that pulled those out of your numbers. And then I do think that we're fairly conservative on the real estate tax but the property tax side budgeting almost 9.5% growth there. So I think from my perspective those are the two factors but I'm sure I think.

Yes. In the fourth quarter of 2019 you had some tax refunds come back in that impacted that core FFO. So you're starting from a point that's probably a little higher than the run rate back. As Matt said with the conservative assumptions we've built in. We still plan to do everything we do always in regard to taxes which is fitted litigate them whatever we can do and it's proven successful in the past although it created some chunkiness in quarter-over-quarter results. So I think that's really what you're seeing in that $0.54

Great. That's helpful. And then just one other follow-up. The information you provided in regards to 2020 guidance around amount of readouts you expect to do the washer dryers program you expect of Smart tech you expect all very helpful. The question I have is how much of that of all those actions is actually do you actually expect to translate over into 2020 earnings? Should we be thinking you do all this stuff but only half of it is actually going to hit 2020 numbers based on timing? I'm just kind of curious.

Yes there is some bandwidth in those numbers to provide for seasonality or rent roll fluctuations but I would expect that call it 75% of those planned upgrades or any guidance.

Our next question comes from John Massocca with Ladenburg Thalmann.

Good morning. So just sticking on kind of the rehab. You guys kind of mentioned the bespoke upgrade program which seems like it was kind of a new addition to your redevelopment program. How is that going to essentially get rolled out? Is that kind of are there kind of in place plans for each asset you own? Or is that kind of a time to time thing as issues come up or as the desires of tenants kind of change? Just kind of how we should think about that program going forward would be helpful.

Yes. No there are specific the bespoke programs are specific two assets that we have gone in and audited each unit in each of the properties. So for example Eagle Crest, Silverbroke, Timberlake like all of these have specific targeted into your upgrades like for example on Eagle Crest we're putting in new lighting for $194 that we think will get $11 rent premium at 67% estimated ROI. So like we think that there's like I said probably 2 4 6 8 12 assets that are targeted for these programs.

And I guess maybe why not do kind of full unit upgrades? Is that because you're putting extra accessories into already upgraded units? Or is it just the market won't bear kind of the additional rent from a full unit upgrade?

No. It's honestly deals that we still like really well that have gone through a first generation and in some cases maybe even a second. And this is just an incremental value-add story that we can drill on. And like if deals are still growing 4% to 5% organically in market rent adding these can push it up above 5%. So deals that we still want to hold on to not sell but there's still a little bit of kind of differentiated [indiscernible].

And then thinking about kind of acquisitions and dispositions given the kind of counterbalance each other but are you expecting any kind of maybe if you think about 2020 numbers this dilution given maybe the differential in pricing between value-add units and units that are a little bit more kind of fully updated and also just timing?

Yes I mean all everything I just discussed is neutral. So you won't see any disruption in terms of earnings and there's no like material cap rate differential are there that would be unfavorable to us. So I don't, I wouldn't expect this to occur.

Our next question comes from Rob Stevenson with Janney.

Matt did I hear you correctly that the Nashville assets that you're selling are $63 million and $23.5 million for Fredricksburg?

That's right.

Okay. So if I do my math correctly the Nashville assets are basically almost being sold for double what you bought and rehab them for and creditexpert one is about a 25% increase?

Yes that's what I'm trying to export the Nashville's a little bit more unique as we refi those deals a few times. It's actually from what the basis of the equity is when we bought them in '14 almost like 4x a little over 4x.

Okay. And so once you sell the Frederick asset am I correct in assuming that that exit you from your DC market?

Yes sir.

Is that a market you plan to have a presence going forward? Or just not as compelling as the Sunbelt markets?

Yes. It's mean we just haven't had as good of an experience there as other markets. So we're not actively looking there. And I wouldn't expect us to do once we're on top line.

Okay. And then last one for me. You talked about the units that you guys plan to rehab. How many properties will you actually be sort of done within 2020 to the point to where if the pricing was right that you'd be in a position to sell them versus ones where you still got redevelopment work on it throughout 2021 and beyond?

Yes. So every single deal in the portfolio including the ones we're selling still have some rehab potential as part of the story believe me [ph] for the next guy. In terms of like what we could sell I think are another maybe one or two in Dallas and that's probably it. Largely we otherwise pretty comfortable and love the rest of the portfolio.

Okay. So to the extent that you guys see more acquisition opportunities is likely to not be funded by dramatic amounts of additional dispositions it's going to wind up being funded more on the equity side?

Correct. Yes, I never say never but you won't, you're not going to probably see us a drop of $300 million sale on year this year as we did last year.

Our next question comes from Barry Oxford with D.A. Davidson.

Real quick. On the 30 basis point decline in occupancy what was that? Was that a function of maybe one particular property? Or was it more a function of you guys were pressing rents and therefore achieved a higher NOI out of the property but you lost some tenants? Maybe kind of give me a little color?

Are you talking sequentially on the same-store basis?

Yes exactly.

Yes. I mean it's just, I think it's just timing just seasonality. I mean I think from the third quarter which was our stated goal on the third quarter call we made a lot of progress. 110 basis points from quarter-over-quarter in the same-store pool which quite frankly we weren't that pleased with our execution in the third quarter. Fourth quarter we did I'd say a fairly amiable job. And then what's really probably important about this in general is that our first quarter of 2020 set up to be pretty compelling in terms of the trends. So that's what we're excited about.

Okay. So as we move through 2020 we should see occupancy for lack of a better word notching upward?

Yes. It's one of the largest goals for the company in 2020.

Ladies and gentlemen this concludes today's question-and-answer session. I will now turn it back to Brian Mitts for closing remarks.

Yes thank you. Appreciate all the great questions and participation and look forward to a great year and thanks for everyone's time.

Ladies and gentlemen this concludes today's teleconference. Thank you for your participation and you may now disconnect.