Good day, and welcome to the NexPoint Residential Trust, Inc. Third Quarter 2020 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's 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, estimate, may, should, 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 business and industry in general, the COVID-19 pandemic and its effects on the company, NXRT's 2020 adjusted NOI estimate and the related assumptions, NXRT's strategy for the fourth quarter and full year 2020, NXRT's net asset value and its related components and assumptions, planned value-add programs, including projected average rents, rent change and return on investment and expected acquisitions and dispositions. They are not guarantees of future results, and forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual statements -- actual results to differ materially from those expressed in any forward-looking statements, including the ultimate geographic spread, duration and severity of the COVID-19 pandemic and the effectiveness of actions taken or actions that may be taken by governmental authorities to contain the outbreak or creative impact as well as those described in greater detail in our filings with the Securities and Exchange Commission, particularly those specifically described in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. 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 any 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 analysis of funds from operations, or FFO, core funds from operations or Core FFO, adjusted funds from operations, or AFFO, net operating income or NOI and net debt, all of which are non-GAAP financial measures of performance or total debt. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss and total debt computed in accordance with GAAP. For a more complete discussion of FFO, Core FFO, AFFO, NOI and net debt, 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, and welcome to everyone joining us for the NXRT 2020 third quarter conference call. I'm joined by Matt McGraner. I'll get us started with highlights from the third quarter and year-to-date. Net income for the quarter was $29.6 million or $1.19 per diluted share as compared to $119.1 million or $4.84 per diluted share for the third quarter of 2019. Same-store NOI increase was $800,000 or an increase of 4.5% as compared to Q3 2019, and year-to-date 2020 same-store NOI was $51.5 million compared to $49.2 million for the same period last year or a 4.7% year-over-year increase. Reported Q3 2020 Core FFO of $13.3 million or $0.53 per diluted share, which is an increase of 12.8% as compared to Q3 2019. Total revenue for Q3 was $51 million, and total NOI was $28.8 million, which was an increase of 9% and 10.3% year-over-year, respectively. NOI margins of 57% for the nine months ended 09/30/20 was an improvement over the same period in 2019 at 56.4%. We continue to execute our value-add business plan by completing 425 full and partial renovations during the quarter with 276 upgraded units leased, achieving an average monthly rent premium of $141 and a 22.5% return on investment during the quarter. Conception to date in the portfolio as of September 30, we've completed 7,584 full and partial upgrades, achieving an average monthly rent premium of $97 and a return on investment of 24.4%. During the nine months ended September, we issued 800,000 shares for approximately $38.1 million of gross proceeds on our ATM through our equity repurchase program for the year -- sorry, inception-to-date, we've repurchased approximately 2.4 million shares of stock through the third quarter of 2020 at an average repurchase price of $25.70 per share. For our NAV per share,…

Thanks, Brian. NXRT's operational leasing performance continued to prove resilient during the third quarter. Rent growth for new leases and renewals was positive portfolio-wide for the quarter exceeding our expectations and largely nearing with Green Street reported in their October 23 note, namely identifying a shallower trough in rents for suburban Sunbelt Class B assets and apartment assets and gateway markets. For example, our new lease and renewal rates improved quarter-over-quarter by 105 basis points for our blended positive rate change of 1.6%. In particular, six out of our 10 markets achieved new lease growth of at least 2% or better, with our top five markets being Phoenix at number one at 6.3%; Tampa at 4.6%, Charlotte at 3.3%, Dallas-Fort Worth at 2.9%; and even our Las Vegas assets, we signed 131 new leases at a positive 2.6% change. Houston and Orlando were the only markets in the red for asking rent each down approximately 2%, but still improved quarter-over-quarter. Effective renewals registered 1.4% growth and resident retention remains strong at 52.5%. Leasing activity for the month of October, on 900-plus new leases and renewals, also has been positive up a blended 1.4%. As Brian mentioned, our same-store NOI came in at a positive 4.5% for the quarter, with our NOI margin improving year-over-year by 65 basis points to 57%. Notable same-store NOI growth markets were Dallas, Phoenix and Tampa, each at 8.5% or better for the quarter. Turning to occupancy collections and net migration. Our overall occupancy for the portfolio improved 170 basis points year-over-year and finished up Q3 for us at a historically high 95.1%. Today, the portfolio sits at 94.6% occupied, 97% leased with a 60-day trend of a healthy 92.1%. Obviously, the strategy here is to keep heads and beds remain moderately defensive through the remainder…

Yes. Thank you. That concludes our prepared remarks. We'll turn it over for questions.

[Operator Instructions] Our first question will come from Amanda Sweitzer with Baird.

Great. Thank you for taking my question. I was hoping we could start on bad debt. I believe you mentioned that year-to-date bad debt is running at about a 1.5%, 1.6%, was that consistent during the third quarter? And then can you just provide some additional color on what the breakdown of bad debt that recognizes between the total portfolio and the same-store pool? As it looks like there are no Las Vegas properties that you seem to pull currently?

Yes. So total bad debt for this quarter was about consistent 1.5% during the third quarter. As we get into, I guess, a quarter behind us, like Q2, we've collected now almost 99% of Q2. So it is decreasing over time. In terms of the same-store pool, we don't -- I don't think we break it out for you, but I can tell you that Las Vegas for -- I guess, for the for the third quarter as it sits today is roughly 92% -- I guess, 93%, Charlotte 95%, Atlanta 96%. Those are kind of the weakest of the markets where the rest of the average is above 97.2%.

That's helpful. And then have you guys done an updated analysis on job loss in your portfolio? I believe, last quarter and you previously did it in June. You said it was about 2.5% of your resident.

Yes. No, we haven't -- we're trying to get that data together for NAREIT, the November NAREIT to present has been our target.

Okay. Perfect. And then kind of switching gears to capital allocation. I know you guys mentioned Eagle Crest could be a 1031 asset. But beyond that, how are you guys rank ordering just your potential sources of acquisition capital between opportunistic positions and then ATM issuances today, just given your improved cost of capital?

Yes. I think we like the ATM usage in general coming at the high end to the northern end of our NAV, largely just to continue to have flexibility on the revolver, so we'll continue to utilize that opportunistically to retire some debt. But we do have cash, obviously, with the Eagle Crest, $25 million change to opportunistically 1031. We still like Phoenix, frankly, that's our favorite market now. And we've been looking opportunistically at some 1031 opportunities there. But other than that, we don't have any plans for new acquisitions or dispositions.

Very helpful. That's all for me. Thanks for your time.

Thanks too.

Thank you. Our next question will come from Rob Stevenson with Janney.

Hi. Good morning guys. Matt, just a follow-up on that. I mean, are you seeing more or less product for sale today? And are sellers' pricing expectations versus -- pretty much stable versus pre pandemic? Or is it changing?

Definitely less product in the market for sure. You can catch. And on the deal, I was speaking of -- or a couple of deals we're speaking of in Phoenix were deals that fell out that were under contract pre-COVID, fell out during the COVID and then the seller -- the brokers kind of take them to people that know that they can close at even 95%, 97% of their prior BOV range. So you see a little bit of that. In terms of pricing, it's still tremendously competitive and almost stupid in Florida. Dallas, we just sold one at 4.6% nominal cap rate. So, cap rates are kind of flat to even down in some markets. I mean the deals that we looked at during the quarter in Florida, we're in the 4.25% range on real cap rates. So still competitive pricing and hard to find good opportunities.

Okay. And did I hear you correctly in saying that the fourth quarter implies like a 3.2% bad debt expense number?

That's right. On the $2.10 Core FFO estimate.

Okay. Is that -- you guys just being conservative as to what might happen? Or is that indicative of what you're seeing on the ground, and that's really where you guys are expecting it to fall out versus just potentially?

I think that's a worst-case scenario and something we don't expect to happen. So, we hope to achieve a better result.

Okay. And then last one for me. How much incremental demand for vacant units are you seeing out there today? I mean is it -- how long is it taking to lease a vacancy today versus pre pandemic? And are you seeing people trading up, trading down, price point-wise, any type of color there within the markets?

So, our total days vacant have come down by about five days from Q2 to Q3, now almost sub -- for vacant units sub-40 days, which is a little bit higher than our normal, but still improving. So that's been a good sign. Definitely, as Brian mentioned, we're seeing a trade down effect, and that's borne out by the applications, the incremental higher household income that we're seeing from new leases. So, we think that, that's evidence of the trade down effect. So it is happening. We can't quantify, but it is happening, and especially given our new lease activity and historically high occupancy right now, we feel pretty good about where we are.

Okay. Thanks guys. I appreciate it.

Thanks.

Thank you. Our next question will come from Barry Oxford with D.A. Davidson.

Great. Thanks guys. First question, when we look at the rehab, you guys have gotten very nice rental increases on those and gotten very nice returns on those. But going forward, do you feel you can still kind of get those numbers? Or do you feel like you might have to dial back on the rehabs?

We have dialed back. We were set to do, I think, 2,500 units this year. We've reduced that to kind of 2,000 and reduced it again to 1,800. But out of the 1,800 that we've done, we've gotten the same consistent 20-plus percent ROIs, and we expect to do the -- kind of do, I guess, 300, 300-plus in the fourth quarter, that's going to be largely in the markets that are the healthiest, right? So the Phoenixes, the Tampas, South Floridas, where we'll get that ROI. And then hopefully, first or second quarter in 2021, we can resume portfolio-wide and continue to hit our pre-COVID pace of 2,500 a year.

Right. Right. Looking up at the macro, just kind of following on that. So do you guys feel that we might be through most of the pain or sometimes when I'm looking at some stats and stuff that I feel like we may not be through most of the pain when it comes to the apartment sector as far as people that will be moving out as they fail to make great -- as they fail to make rent payments, and there is no extra unemployment benefits kind of coming at least here in the short term.

I mean my personal view, I'll let Brian weigh in what he believes.

I know you guys are in the Southeast and Southwest, which are clearly the better market. So, I'm willing to concede that point.

Well, that's where I was headed because...

Okay. Sorry.

No, no. The -- really every city in North America -- since COVID, every major city, including Midwestern cities and gateway cities. And -- but I can tell you, just on the ground, there's a different feeling in Texas and in Phoenix and Florida. There are people moving around versus some of the other cities. So I think that our macro might be a little bit different, I guess micro for the Sunbelt. And we're seeing positive six plus percent rents in Phoenix. We had 300-plus applicants from California during the quarter to Phoenix and Nevada. So we think that continues. That's incremental demand. It's not, it's not what it was pre-COVID, but we think those trends continue.

Yes. I think the only thing I'd add to that is that I would say that the inability to really push evictions right now it's skewing the numbers from what you typically see. There's definitely demand for the product that we can access because tenants are staying in there. It's a pretty small amount in our portfolio. The other thing I'd add is that we report results as of a certain date, but we continue to try to collect and we've done a good job of post quarter end collecting outstanding amounts. And for example, through the second quarter, we were almost fully collected on all of that rent and then continuing to make big strides from Q3. So we expect that overall, bad debt will not be as large as it may seem just at quarter end. But people are trying to find ways to make payments. So macro, it doesn't seem to have really impacted us as much as we feared in March, April, May.

Okay. Now, that's reasonable. I appreciate the comments guys. Thanks.

Thank you. Our next question will come from Buck Horne with Raymond James.

Hey. Thanks. Good morning guys. A quick question on repairs and maintenance expenses and also maybe capex as well. Just noticing that same-store R&M was down nicely year-over-year. And -- but also, your capex is -- per unit seems to be trending down year-over-year as well. I'm just wondering if that's a -- is that something that's intentional, sustainable? Or is there some -- maybe some deferred spending coming up in the fourth quarter or into 2021 that you need to spend for some maintenance and/or capex items?

Yes, Buck, it's Matt. The 7% number was good and appropriate, just given the low returns that we're seeing with more retention, higher occupancy. I would expect that to continue into -- for the rest of the year, don't foresee any large capex increases for turn or otherwise, at least for the next -- for the end of the year. We think it's pretty consistent and sustainable.

Okay. That's helpful. And on real estate taxes, it looks like you kind of normalize the rate of increase in real estate taxes. How is that -- how are those assessments looking going into year-end? Are you getting any new assessments coming in that may change the trajectory of your tax accruals?

No, nothing material that would sway us heavily one way or another. So we feel pretty good about where the full year number will reside.

Okay. All right. Thank you. That's good.

Thanks Buck.

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

Good morning. So maybe touching on kind of the internal rehabs again. How much of the change this year from 2,500 to 2,000 to 1,800 potential rehabs is driven by your view of the market and the ability to get the rents you want on that? And how much is maybe more just the retention and the occupancy? And I guess, maybe how would occupancy and retention kind of trend to get back to that 2,500 number.

Yes. I think it's both. I mean I think that in markets where we basically halted or had done any rehabs are the same markets that are kind of organically trending downward, like Orlando, Houston and, to a lesser extent, Las Vegas as we've been able to achieve interior rehabs there. But those are the two that I'd say that we've driven by our view of the market. I think going forward, there's no markets other than Orlando, and I think even Houston, we can pick the rehabs back up that I would say that we would shy away from doing more. But I think that the 400 a quarter, which is 450, I think, has always been our sort of run rate. But we're also adding kind of bespoke washer and dryers here and there. So, I think that we'll continue to push them where we can. And I think kind of eight out of our 10 markets or so are available even today and will be for the foreseeable future.

And I guess maybe what would you kind of need to see in the macro to move to a less of kind of a heads and bed strategy and more of a pushing rental rate strategy around the rehabs? And I guess, just organically as well.

I think we're -- I mean, I think we're kind of at the trend. We're at a healthy trend right now. If we could start -- I think one, we see -- we have to see the eviction moratoriums lifted and a solid retention ratio following those moratoriums. If folks just start leaving unmap, and we want to still remain defensive. But if the eviction moratoriums are lifted, folks stay, and we're still in the mid-90s with a strong trend where we can start sending out renewal increases in the 3%, 4%, 5%, 6% range, then that gives us sort of the green light in our view to take advantage of maybe going after a five plus percent renewal increase on the off chance that the tenant might leave, then we can go ahead and get in there and rehab that unit.

Okay. And then the net migration, how is it that comparing on a year-over-year basis? Obviously, a lot of migration from California, Illinois, New York, but I'd also think even pre-COVID that probably would have been kind of a theme? I mean is it accelerated significantly from what you were seeing before? Or has that just not been a focus in prior years?

Yes. I mean we've just started really tracking the data this year. So I think anecdotally, we can tell you that it's there because we're walking around in Dallas and meet people from California, New York on a daily basis that are moving here. And here, corporate relo stories almost weekly right now for Dallas, Atlanta and Phoenix and South Florida itself, but we haven't tracked it since this year.

Okay. And then one last quick one. On the balance sheet. If I heard that correctly, you extended out the credit facility to January 2022.

Correct.

And any thoughts maybe unlocking that debt in -- on a longer-term basis?

Yes. We'll start the process of trying to recast that for a longer term. But wanted to get it extended now, just to have that available.

Okay. That's all for me. Thank you very much.

Thank you. Our next question will come from Jon Petersen with Jefferies.

Okay, thanks. You talked about a number of people. You like Phoenix because there's a lot of people moving in from California. I'm sorry in the southeast, just people moving from the Northeast. I'm curious if you're seeing a difference in credit quality of the new move-ins that you're seeing kind of in the last six months versus what you normally see?

Yes. I think it's improving, Jon. I think the folks that are moving from gateway markets are -- that are moving now are more productive people. I think they're in search of economic activity or opportunity, and they want to work. And so, we're seeing that come through in lease up data, and it makes sense.

Got it. I guess, I know it's kind of hard to always know this, but do you have any sense of the people moving from gateway markets, whether they're viewing this as kind of a temporary location and then they either move off to buy a home or they move back to the gateway markets they came from? Or do you think there's a little more staying power to this group of people? Or do you think they end up being more transient?

I mean, I think it's age, probably age-dependent. What we saw -- we were just talking about this internally the other day. What we saw in the global financial crisis as folks from New York kept their houses and didn't sell them immediately in the global financial crisis, even though they moved to Connecticut, right? And then they would sell them later when New York rebounded. I think we're seeing some of that now in Florida, and if you're older and you can maintain the mortgage. But otherwise, I'm pretty sure that if you're younger than your -- or middle age, looking for opportunity or jobs and moving here, you can work from home. Most of the folks we see stay. So our view is as population increases doubtful or 15,000 people a month move here, that hasn't decreased. So it has to -- there's some staying power here, and it's for now not only in our range, but it's just a single-family bid right now, and these markets are equally strong.

Got it. And just, maybe one last question for me. Curious you've given COVID, if you've made any changes or thought about redevelopment of common areas to kind of, I guess, adjust for the current environment, is that something that's necessary?

We're already doing it. We are already creating kind of work-from-home leasing centers with tech communities and creating more open spaces where people can block and have outdoor activities and outdoor grills and amenitizing the assets prior to this. Net-net, we'll continue to do it on new acquisitions, probably have a little bit more of a thoughtful approach to what some of the other folks are doing out there post-COVID is that that's new. But I guess the short answer is we're already trying to create those environments.

Okay. All right. That's all for me. Thank you.

Thank you. Our next question will come from Gaurav Mehta with National Securities.

I was hoping if you could touch upon what you guys are seeing in terms of free rents and concessions in your markets?

Free rent concessions. So, we use a daily pricing revenue management system. So, we don't largely offer concessions. In some markets, like Orlando, for example, we do offer $200, $300, $400, $500 off some deals depending on where the trend is. But largely, we don't give concessions.

Okay. And I think in your prepared remarks, you talked about trade down from Class A to Class B. Can you remind us what's sort of average rent differential between a Class A and Class B product in new markets?

Yes. So, we always think of -- maybe not Class A, but sort of what's the next best option for a renter that's one of an NXRT's communities and typically, that's a new garden-style asset or single-family rental. And so our average effective rents, call it $1,150 today. Those newer options or single-family rent or usually $200 to $300 north of where we are.

Okay. Thank you. Good luck.

Thank you.

Thank you. Our next question will come from Michael Lewis with Truist Securities.

I wanted to ask about trends in new and renewal lease spreads. I think you said it was -- you had a positive 1.6% blended in 3Q. Should we expect that, that's still softening given the environment we're in? Are you starting to see that balance out? And then I guess the same question in concessions, I realize you don't issue. But are you seeing a lot of free rent from competitors in your markets?

Michael, it's Matt. We are seeing free rent in new lease-up deals in our markets. So, if you're in a -- you're coming out of the ground and you're in a Class A, lease-up property, you are giving two to three months in free rent. I think you can see that through some of the larger gateway apartment REITs that own in the South in Dallas and Atlanta and so forth. In terms of trends, the quarter was up -- quarter-over-quarter was up about 1%. July -- July turned positive. New leases were 1.4%. Renewals were 1. 3%. August was 1.2%, renewals were 1.4%. September new leases were up 2%, renewals were up 1.7%. So it feels like it's getting a little better and then October has been strong. And largely, we've been defensive a little bit to make sure we've got a good trend, and we're 97% leased today. So, it feels like the trough that's behind us in Q2, but we're still being conservative.

Okay. Sounds good. And then my second question, I wanted to dig into the October rent collection a little bit, right? So 95% collected. You've got 2.1% and on payment plans. I was wondering a little -- maybe you could -- at the danger of generalizing, talk a little bit about what makes you comfortable with those people that are on payment plans, why they can't pay today, but they will be able to. And then, the 2.9% that's left that haven't paid and are on a plan, are those likely -- is that what's informing your bad debt expense or likely reductions?

Yes. So, the payment plans started out in April at 960, bottoms in kind of August at 170. These are the numbers. And then went up September to 300, now back down to, call it, low 200 to 240. So they're kind of steady kind of 150 to 250 a month, really for the last four or five months. And we feel good about those payment plans are, I would say, 90% of those payment plans because 99% -- roughly 99%. There's only five basis points that aren't -- that we haven't received anything that are dosing up. So we feel like we, we'll continue to collect something from those. And then the folks that we just haven't heard from we've went the applicable notices where we can and plan to pursue eviction that they that they were able to. So that's not representing a total -- a huge number of physical occupancy that we're afraid of kind of today.

Yes, Michael, it's Brian. As far as the bad debt expense, we've been monitoring that very closely, and we bucket it and do a kind of a tiered write off. We've seen over the past few months that just because some of these 30 or 60 days plate. That doesn't mean that they haven't paid anything, but they've not paid in full, but we've seen a lot of that come eventually. So, we're trying to be conservative with the bad debt, but at the same time, not be overly punitive just given what we've seen here historically, and it continue -- that trend continues. So we are watching it closely and the 3.2% we discussed, as Matt said, is pretty draconian, and we don't expect it, but we want to stress the numbers just to see where it put us. But we expect it to come inside of that, and the trends continue to go that way.

Okay. And then just lastly for me. Oh, I'm sorry.

I would just say that -- adding a little bit more color for you and maybe just illustrates and why we feel good about this. But we had 959 total payment plans in April, and we've collected all but $9,000 of that rent. In May, we had 289, and we've collected all but $3,000. And so if you fast forward to August, it was still low, it's still kind of $9,000. So these are all manageable numbers that we think we can work through.

Okay. Got it. And then just lastly for me. I probably asked about this before, but could you just remind me, what's the proportion of resident income that they're spending on rent?

It's about 22%, 23%.

Okay, great. Okay. That's it for me. Thanks a lot guys.

Thank you.

[Operator Instructions] Okay. And I'm not showing any questions at this time. This will conclude today's question-and-answer session. Ms. Graham, at this time, I would like to turn the conference back to you for any additional or closing remarks.

Yes, we're good. Thank you for joining the call, and we'll speak next quarter or at NAREIT.

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.