Hello and welcome to the NexPoint Residential Trust, Q3 2022 Conference Call. My name is Laura and I will be a coordinator for today’s event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host Kristen Thomas to begin today’s conference. Thank you.

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust’s conference call to review the company’s results for the third quarter September 30, 2022. 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 nxrt.nexpoint.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. 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 forward-looking statements. The statements made during this conference call speak only as of today's date and 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 an analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures, 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, Kristen, and welcome to everyone joining us this morning. Really appreciate your time and apologize for the technical issues you may have had dialing in. I’ll kick off the call and cover our Q3 year-to-date results, update our NAV calculation and then provide guidance. I’ll then turn it over to Matt to discuss specifics on the leasing environment and metrics driving our performance and guidance. Results for Q3 are as followers: Net loss for the third quarter was $26 million or a $0.02 per diluted share and total revenue of $68.1 million, as compared with a net loss of $5.4 million or $0.21 loss per diluted share in the same period in 2021, and total revenue of $56.4 million, which is a 21% increase in revenue. For the third quarter, NOI was $39.9 million on 41 properties, compared to $33.6 million for the third quarter of 2021 on 40 properties, a 19% increase in NOI. For the quarter year-over-year rent growth on renewals averaged 12% across the portfolio and year-over-year rent growth on new leases averaged 14.5%. Given where rental rates are in our markets for Class B apartments and equivalent single family rental product, we believe there is ample room for future outsized rent growth. For the quarter same store rent reached 19.4% and same-store occupancy was down 130 basis points to 94% as we continue to focus more on rate than occupancy during the quarter. This coupled with an increase in same-store expenses of 16.9%, which was calculated by higher year-over-year [indiscernible] plus an increase in same-store NOI of 13.1%, which compared to Q3 2021. Rents for the third quarter of 2022 on the same store portfolio were up 4.5% quarter-over-quarter. We reported Q3 core FFO of $21.8 million or $0.85 per diluted share, compared to…

Thanks, Brian. Let me start by going over our third quarter same store operational results. For the quarter, we achieved a 58.3% same store NOI margin, down 100 basis points year-over-year driven by lower retention and higher turn costs, but still near historical highs for our company. Rental revenue showed 11.3% or greater growth in all markets except Houston, whose performance lagged a bit as we shifted focus to promote occupancy during the disposition marketing process. While same store average effective rent growth achieved 19.4%, eclipsing our recent high watermark of 19.3% last quarter. Every market achieved effective rent growth of 12.4% or higher with Houston once again lagging the field. Excluding Houston, the weighted average would have topped 20% for the quarter. Charlotte registered the second lowest growth at 13.6%. Then we saw Las Vegas jump with 16.9%, Dallas to 18.8% all the way up to 26.2% growth in Tampa. Our [three Florida] [ph] markets, Phoenix, and Nashville all saw effective rent growth of 20% or more year-over-year for the third quarter. Third quarter same store NOI growth was again special across the board with the portfolio averaging 13.1%, driven by continued acceleration in total revenues, which hit 15% growth for the period, up 80 basis points sequentially over Q2. 7 out of 10 same store markets achieved year-over-year NOI growth of 14.7% or greater. Operating expense growth picked up again in the seasonally active third quarter registering [16.9%]] growth overall, largely driven by increases in R&M and turnover. Retention for the third quarter came down year-over-year to 48.8%, which led to a spike in turns to make ready. While we did see elevated overall turnover expenses, our turn costs registered $525 per unit, largely in-line with budget expectations. Operationally, the portfolio experienced continued positive growth in Q3 2022…

Yes, let's turn it over for questions.

Thank you. [Operator Instructions] We'll now take our first question from Buck Horne of Raymond James. Your line is open. Please go ahead.

Hey, thanks guys. Good morning and appreciate all that extra color, that's extremely helpful. Question about, I mean, I'm just curious about understanding the language of you guys saying you've executed a loan application. I guess with your lenders and Fannie. So, I'm curious, I mean rates have been changing so rapidly here, is there any risk that the application gets revised or that this planned refinancing needs additional modification?

No, it's a good question, Buck. No, it's locked in an app and committed. So, we're just working through the loan docs, which are pretty customary for us at this point given our relationship with Freddie. And we've closed about 6 billion with them of great relationships, sat down face to face with them in Washington earlier this summer and pounded this out. So, we have we have a great deal of confidence here.

Okay, okay. That's helpful. And just in terms of like rent growth seems to be decelerating everywhere across a lot of markets. Can you provide a little additional color in terms of even your new lease and renewal rate growth to be decelerating through October so far, what is it like in terms of the competitive landscape right now? Are you still seeing the same flow of new lease applications coming in or how are you planning on managing occupancy through the end of the year?

Yes. As we stated, we're going to put more [indiscernible] that's planned through the seasonally less active traffic season. We are still seeing great demand. We do think that there's a little bit of hit to consumer confidence across the board with all the recession fears and talks. I think that can be accounting for some of the lower demand in our numbers. But recall our numbers are against pretty tough comps. Our rents really started to accelerate in Q2 and Q3 of last year. And so, I was trying to make that point on the cumulative growth being almost 30% that didn't trough to kind of still account for some of that tougher comp, but overall, the leasing activity is really strong. I'd say, at this point in time the inflation that we're seeing across contract labor, for example, and other and other trades is really, kind of helping our – it's hurting on the one hand on our expenses, but these jobs are primarily our renter type. So, there – it’s kind of the time for blue collar to shine a little bit. So, we're seeing the ability to keep pushing those rents in the double digits. And like I said, I feel pretty good about double-digits in the next year.

Appreciate that. If I can sneak one last one. There's just a striking disconnect right now between public market perception of where cap rates are headed or maybe where they're at currently versus, kind of the numbers you guys are quoting and maybe what you're seeing in the bidding process for your assets right now. What do you think explaining that disconnect and does it make sense, if you have a high degree of confidence that your NAV is correct, does it make sense to further accelerate stock repurchases with some of the refinancing proceeds?

Yes, that's a great question. I think if you look at all the long-term analyses of cap rates, it's really driven by capital flows and GDP growth, and less on long-term interest rates. In the short-term, interest rates do affect transaction activity and especially with the velocity with which we've seen the Fed raise here causing really just a shock in transaction activity. It's really, really down. So, there's not a true, although we have our Houston process going on, there's not really a true transaction environment where people are wanting to sell. If they don't have to sell, they're not selling, sort of pushing off sales to next year, unless there's a fund of life or maturity issue. For us, I think that the disconnect is a little bit more pronounced through the leverage profile, which we're trying to remediate here and think we have. That being said, with the proceeds from Houston, the first thing we're going to do is pay off the revolver. And then if we wanted to lever backup or sell more. I think you probably see us sell more assets to buy back stock rather than levering up on the facility. It's kind of shooting ourselves again. So, I think that's the use of proceeds that the pay down of the credit facility. Again, on the cap rate differential, I think we sit at a 6, [indiscernible] implied cap rate. The big institutional investors that we speak with, the [indiscernible], they're now starting to get a little bit more into the unlevered return profile. They're starting to look at what level do we get back into the market and just don't even use leverage because those groups have the ability to finance assets that others don't. And I think that informs our NAV because our portfolio is really, really hard to replicate. We have the 10, 11 fastest job growth markets, scale in each of those markets at an affordable price point with value add potential. So, our belief is that our NAV should gather at that [4:3 to 4:7] [ph] right now on a spot cap rate basis even in this environment.

Hey, Buck. It's Brian. I also note that the board increased our share buyback to 100 million.

Got it. Very helpful guys. Appreciate the color.

Thanks, Buck.

Thank you. We'll now move on to our next question from Rob Stevenson of Jeannie. Your line is open. Please go ahead.

Good morning, guys. Have you seen any uptick in bad debt or delinquencies over the last few months?

Not realized bad debt. There are, I'd say over the past quarter or two, there's a little bit more slow payers, but ultimately they pay. I'd say it's not meaningful though, it’s 40-ish basis point, 25 basis points to 40 basis points.

Okay. And then we've been hearing from some of the smaller private operators and some third party property managers have been trying to push up their fees given the inflationary cost pressures. Are you seeing this with your property management company? Is there any increase there going to happen there going forward? You obviously are bigger in size.

Yes. We maintain that. Yes, we don't see any increase.

Okay. And then the dividend increase, were you up against taxable earnings, that sort of forced you to do that or was that just something the Board wanted to do?

It’s something we've done every year during this quarter and so we want to maintain that consistency. And our coverage is fairly low. So…

Okay. How did you guys evaluate increasing the dividend versus using those funds to buy back stock?

Yes. I think given the dollar, the nominal dollar amount and sort of the tenants of our company, we thought the risk reward was to continue to show dividend growth and then to the extent that we wanted to buy back stock at the Houston and then further dispositions are going to fuel that versus couple million here and there.

Okay. Thanks guys. Appreciate it.

Thank you. [Operator Instructions] We'll now take our next question from Mike Lewis of Truist Securities. Your line is open. Please go ahead.

Great. Thank you. I have some questions about interest expense and the refinancing. So, first, in the third quarter, your interest expense was about $11.8 million. It looks like your guidance for 4Q is 18 million, I assume maybe that 18 million includes the cost swaps or fees with the new loans. How do I reconcile those two numbers?

Well, I think there's also the value for swaps that's flowing through into the FFO. Is that what you're getting at?

Yes. I mean, I would guess, right, that the 11.8 million in 3Q, there's a benefit there from the swaps that's offsetting. Still that was considerably lower than you guys guided to. And then the 18 million for 4Q, I don't think that's a run rate, but how much – what's in that 18 million for 4Q? Are there one-time costs in that?

Yes. Let us look into that and come back to it. I don't want to get the wrong answer.

Okay. And then just on the all-in cost of the refinancing after the swap, so you're talking about your weighted average cost of debt down to something with the two handle. When I look at the refinancing, right, SOFR plus 155, that's all-in above 5%. I don't know what swaps cost, but, you know, maybe help me out there because that sounded like a pretty low interest rate refinancing, especially in this environment?

Yes. So, you recall the swaps that we have in place are not really – they're not tied to any specific deal. They're just kind of corporate level swaps. So, they were paying a forward rate that we locked in years ago at, I think, an average of 1-ish percent, I can pull it up.

Yes, I'd say that in your [indiscernible]. So, you're not putting – are you not putting a new swap on for the…

No, the swaps, remain in place. And given the lack of financing going on in the second quarter and third quarter, Freddie and Fannie are both behind their production caps. And so, there's not a ton of borrowers out there looking for floating rate debt and a rising shorter-term interest rate environment, so the spreads, we were able to negotiate down and still have the benefit of our swaps, which are [indiscernible] to our company only. So, we were able to kind of – of the spread against the industry rate that we have in place to generate that sub 3% all-in interest rate for the next few years.

Okay. I'll follow-up on the 4Q interest expense. And then just lastly, I wanted to ask, you mentioned about higher expenses and you specifically noted repairs and maintenance, you know I've had people ask me about insurance costs after the hurricane, any other color you could add on just expense pressures?

Yes. Our biggest expense pressure right now is contract labor on the R&M and turnover side. Finding qualified trades, when you need them is the hardest part that we see right now. That specific category is the leader in expense inflation for us at [25% plus] [ph]. So, that's driving a lot of those R&M and turnover costs. Our insurance, I'll let Mitts speak to, but I think it’s fairly [locked in] [ph].

Yes. We just renewed earlier this year. We got pretty favorable rates. All things considered; we're starting new renewal process for next year. And it doesn't look like it's going to be out of control. So, still work to do that process for 2023.

Okay, great. Thank you, guys.

You bet.

Thank you. [Operator Instructions] Thank you.

Sounds like we're done. Again, I apologize for the technical difficulties here to switch companies and a little hiccup, but appreciate everyone joining.

Thank you very much. Ladies and gentlemen, this concludes today's call. Thank you for joining today's call. Stay safe. You may now disconnect.