Ladies and gentlemen, thank you for standing by, and welcome to the NexPoint Residential Trust Q2 2023 Conference Call. I would now like to turn the call over to Kristen Thomas. Please go ahead.

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust conference call to review the company's results for the second quarter ended June 30, 2023. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermett, Vice President, Asset and Investment Management. As a reminder, this call is being webcast to 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 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 an analysis of non-GAAP financial measures. For a more complete discussion of this 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.

Thanks, Kristen. Welcome to everyone joining us. Appreciate you participating. I'm going to kick off the call and cover our Q2 and year-to-date results. I'll talk about our updated NAV and then revise guidance before I turn it over to Matt to discuss some of our results and forward guidance in detail. Our results for second quarter are as follows. Net loss for the second quarter was $4 million or $0.15 per loss -- per share loss and that's per diluted share on total revenue of $69.6 million as compared to a net loss of $7.8 million or a $0.30 loss per diluted share in the same period in 2022. That's on total -- that was on total revenue of $65.8 million, which is a 6% increase in revenue. The second quarter NOI was $42 million on 40 properties, compared to $39 million for the second quarter of 2022 on 41 properties, which is an 8% increase in NOI. For the quarter, same-store rent increased 7.9% and same-store occupancy was down 60 basis points to 93.8%. This coupled with an increase in same-store expenses of 7.7% led to an increase in same-store NOI of 7.6% as compared to Q2 2022. As compared to Q1 2023, rents for the second quarter on the same-store portfolio were up 0.7% quarter-over-quarter. We reported second quarter core FFO of $20.4 million or $0.77 per diluted share compared to $0.78 per diluted share in the second quarter of 2022. For the quarter, we completed 505 full and partial renovations, which is an increase of 2.2% from the prior quarter and leased 517 renovated units, achieving an average monthly rent premium of $224 and a 20.9% return on investment during the year, which is in line with our long-term average ROI and renovations. Inception to date,…

Thanks, Brian. Let me start by going over our second quarter same-store operational results. Same-store effective rents ended the quarter at $1,510 per month per unit, up 7.9% year-over-year, with 9 out of our 10 markets averaging at least 5.1% growth. While our Florida markets led the way with Tampa at 12.9%, South Florida at 11.7% and Orlando at 11.5%. Our national assets just missed 10% growth, registering 9.8% over the prior year quarter. Same-store rental revenue growth was 7.6% for the period with a healthy 5.9% earn-in benefit from prior periods. Our Florida markets again paced the field at 12.8%, 12.2% and 11.1%, respectively, for South Florida, Tampa and Orlando. Again, 9 out of our 10 markets achieved at least 5.2% rental growth over the prior period. Renewal conversions were 60% for the quarter, with 7 out of our 11 markets, executing renewal rate growth of at least 3.5%. Raleigh is 6.4%, Orlando was 4.8%, Dallas-Fort Worth was 4.7%, Tampa at 4.3% and Atlanta at 3.99%. We're also pleased to report some moderating expense growth for the quarter. Second quarter same-store operating expenses were 7.7% higher year-over-year, a significant reduction from the 15.1% growth reported in Q1. Payroll growth was down from 15.3% in Q1 to 6.9% in Q2. R&M expense growth was more than half from 22.4% down to 10% this quarter and real estate taxes were down to 8.1% from 15.7%. After that, insurance expense saw some relief as well after our April 1 renewal, realizing only 4% growth over the prior year period. 7 out of our 10 same-store markets achieved year-over-year NOI growth of 7.6% or greater, while South Florida setting the tone at 14.4%. Our Q2 same-store NOI margin registered a healthy 6.4% while rent-to-income ratios continue to hold steady at a healthy 22%…

The floor is now open for your questions. [Operator Instructions] Our first question comes from the line of Rob Stevenson from Janney Montgomery Scott. Please go ahead.

Good morning, guys. It's Kyle [indiscernible] on for Rob today. So how are you thinking about the uses of any disposition proceeds today? So I saw you reduced your acquisition guidance by $50 million. But it's going to be more to reduce debt, repurchase common stock from the value-add program going forward?

Yes. It's Matt, Kyle. We're primarily focused on retiring the $57 million of the credit facility first and foremost with the first disposition proceeds that we get in. And then the second, as I mentioned to retire, I think, roughly it's high-6 or mid- to high-6s debt on Hudson House. So those two uses will be the primary first two uses of any disposition proceeds. To the extent that there's that $25 million left over after I mentioned from the Charlotte assets, depending on where our stock trades, we would probably look to buy buyback at these levels where we are today. And then to the extent we sell any more assets, which potentially we're thinking about maybe some Dallas assets in the latter half of the year as well. We've looked at 1031 those in the early half of next year.

Okay. Thank you for that. And then are you guys -- how much price sensitivity are you seeing with residents today, any meaningful uptick in move-outs due to price increases across the portfolio?

I wouldn't say it's any more meaningful than normal. There are a massive amount of supply deliveries hitting in the second and third quarter and in the fourth quarter this year, after which it kind of falls off a cliff or moderate significantly. But I'd say from -- it's just -- it feels fine. Everything is -- we're not really getting that much pushback. Just there's a little bit of competition from -- from concessions from new supply in like a Phoenix. But other than that, we feel pretty good about where our residents rent-to-income ratios are and the traffic we're seeing.

Thank you. That's all for me.

Our next question comes from the line of Michael Lewis from Truist Securities. Please go ahead.

Great. Thank you. So you guys did 8.5% same-store revenue growth in the first half of the year and your full year guidance is 8.9%. So we've talked about this before. That still seems aggressive to me to expect a little bit of acceleration in year-over-year same-store revenue growth in the back half of the year. I'm just curious what gives you kind of confidence to guide to that to my knowledge, nobody else is?

Yes. I mean, we think that notwithstanding the fact that revenue growth was 7.9%. The latter half of the year, really, in the fourth quarter, we see an uptick and also a pretty compelling comp there. A lot of the earn-in benefit is going to hit in the third quarter -- second quarter and then in the third quarter, and then we'll have a pretty good comp in the fourth quarter on the revenue side. So we're starting from a place of strength, I'd say, for the second half of the year. And then we think that the moderation of inventories that we're seeing hit in the first, second and third quarter will lead to more demand for our assets.

Okay. And then kind of a follow-up on that. I noticed you had 14,100 same-store units this quarter versus 13,500 in the first quarter. I think the other apartment REITs generally keep the same-store pool static for the calendar year unless there's a disposition. Are you maybe -- is there going to be an uplift in the back half that's kind of just related to properties coming in and out of the same-store pool that might be difficult for me to model.

Yes, the inclusion of Charlotte probably will attribute some upward tick in the same-store pool. So, yes, that's probably the difference.

Okay. Got you. And then just lastly for me, kind of following up on the first question you were asked about the disposition proceeds. You listed off kind of three sort of near term uses for those. I know this is far out in the future, and I keep kind of harping on it. I look at those 2026 hedges burning off, is there a thought to maybe start working on that now to kind of get the leverage down before you have to deal with those. None of us know what rates will be when that time comes. But maybe it can never be too early to kind of take a look at those because it does look like it could be a significant headwind. So should we expect more dispositions and try to attack that over the next couple of years?

Yes, that's a good thought. And again, yes, we're not -- the curve is pretty indecisive as well as our policymakers decision-making, I think, at the time. As we -- as I mentioned, we will take the proceeds from Charlotte work to retire one of our first mortgages on one of our assets, which will lead that asset unencumbered. And then there is a plan for the -- either the second half of the year, early next year to look to dispose of three additional assets located in Dallas. That will generate, we think, somewhere in the $180 million range. And if we did that, as I alluded to on the call in the prepared remarks, 2024 would set up to be a really strong year in core FFO growth and then even get our net debt to EBITDA down in the high single-digits from where it is today. So that will be a focus. And we think that we can achieve both deleveraging while also increasing earnings. And then obviously, we'll look to delever while also to the extent we can take advantage of rolling out extended out year swaps, we'll do that as well.

Great. Thank you.

Our final question comes from the line of Buck Horne from Raymond James. Please go ahead.

Hey. Good morning, guys. You mentioned as part of the revenue guidance reduction, things like bad debt expense as well as the occupancy pressure. I was wondering if you can just add a little color in terms of what you're seeing in terms of bad debt trends and how you expect the back half of the year to play out?

Yeah. Due to the revision in rental income Buck kind of $1 million of bad debt, couple of million bucks of GPR reduction from just moderating market rents and then a buffer of some vacancy loss of $1.5 million, largely the bad debt, I think, is a function of a couple of markets, most notably Vegas and Atlanta. Atlanta, just kind of reopened their courts, and we saw a flood of skips and evictions in the second quarter. It was kind of a unique experience, caught us a little off guard. But nonetheless, we'll move them out and kind of re-tenant the assets. So that was -- that's the primary driver, I would say are those two markets.

Okay. Okay. That makes a little bit of sense, given the court systems there. And just in terms of the occupancy pressure that you may be feeling from new supply. I guess part of the thesis here was that your average price points were so far below kind of the incoming level of new supply, it's a little surprising to hear you guys comment that there's new assets that are offering concessions that are maybe pulling away some demand from you guys. Can you characterize that a little bit further, or how are you seeing the new supply in your markets compete against your properties specifically?

Yeah. I mean it's not across the board, right? So some average effective rents are $1,100, $1,200 with headroom of $400, $500. I was more kind of isolating it to the couple of markets where we're seeing massive deliveries right now in some markets that compete. So we're at an average effective rent, for example, at one of our nicer assets and B plus assets in Phoenix at $1,400, $1,500 in rent and you have a new lease-up deal that should have a $2,300, $2,400 effective rent but they're giving away 8 to 12 months free, that's going to push that down to $1,800 effect, $1,800, $1,900 effective, which will put a little bit of pressure on a spot time on that asset. That's the example I'm seeing. Otherwise, we're not -- we feel pretty good about our price point relative to the market and our continued thesis. But I didn't mean to suggest that this was like a big tide of fear for our company, in particular. I would expect that the other, yes, our other peer group with new assets would feel more than we are.

Okay. That's helpful. And one last one, if I can sneak in on the expense side of the equation. Just looking at your expectations for property taxes, as well as -- I guess you got insurance renewal locked up at this point with the April 1 renewal. But congrats on that. But I'm also just, I guess, maybe more curious about, what kind of initial assessments you're seeing coming through on 2023 taxes? And particularly curious what you're seeing for the Texas markets and the Texas counties there. But any other places and kind of how you think the rest of the year shapes up in terms of those assessments?

I think we're guiding to 8% growth. Brian, do you want to take anything on Texas and where you're seeing?

Yes. So we took taxes down. I think we were low teens to start the year with some conservatism in budgeting. Given what we know today, that number at the midpoint is 10. So we're seeing about 300 basis points. We saw some settlements. We had a long-standing, outstanding litigation for Houston assets from '21 and '22. We recognized a little over $700,000 on those litigations. So that's a little bit of a pickup there. In terms of what we're seeing for Texas market specifically, we're into the appraisal of review boards for the protest there. It's a fight like it is every year. I think that we started the year with a pretty conservative budget expectation, and we're going to continue to fight that. I don't know that we will have everything settled by the end of the year. But I think it is shaping up to be a little bit more favorable for us. Obviously, we've seen cap rates expand from where they were. So the argument that values as of January 1, 2023, are down year-over-year is pretty compelling, and we're trying to use that with our consultants to really realize that release.

Okay. All right. Appreciate the color. Thanks for the time guys.

I would now like to turn the call over to the management team for closing remarks.

I don't think we have any additional remarks. I appreciate everyone's time, and we'll be in touch and talk to you next quarter. Thank you.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.