NexPoint Residential Trust, Inc. (NYSE:NXRT) Q4 2022 Earnings Call Transcript

NexPoint Residential Trust, Inc. (NYSE:NXRT) Q4 2022 Earnings Call Transcript February 21, 2023

Operator: Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Residential Trust, Inc. Fourth Quarter 2022 Earnings Conference Call. I would now like to turn the conference over to Kristen Thomas. Please go ahead.

Kristen Thomas: Thank you. Good day, everyone and welcome to NexPoint Residential Trust conference call to review the company’s results for the fourth quarter December 31, 2022. 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 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.

Brian Mitts: Thank you, Kristen and welcome to everyone joining us today. We appreciate your time this morning. I’m Brian Mitts and I’m joined with — by Matt McGraner and Bonner McDermett. I’ll kick off the call and cover our Q4 and full year results and highlights, update our NAV calculation and then provide our initial 2023 guidance. I’ll then turn it over to Matt to discuss specifics on the leasing environment metrics driving our performance for the last year as well as our guidance into the new year and the details on the portfolio. Results for Q4 were as follows. Net income for the fourth quarter was $3.8 million or $0.15 per diluted share on total revenue of $69.3 million as compared to net income of $38.8 million or $1.50 per diluted share in the same period in 2021 on total revenue of $58.5 million.

The fourth quarter NOI was $41.8 million on 40 properties compared to $34.9 million for the fourth quarter of 2021 on 39 properties which represents a 19.8% increase in NOI. For the quarter, same-store rent increased 17.3% and same-store occupancy was down 20 basis points to 94.1%. This, coupled with an increase in same-store expenses of 15.3% which was accentuated by high year-over-year comps on R&M and turnover costs increase, led to an increase in same-store NOI of 14.4% as compared to Q4 2021. Rents for the fourth quarter of 2022 on the same-store portfolio were up 2.1% quarter-over-quarter. We reported core — Q4 core FFO of $19.5 million or $0.75 per diluted share compared to $0.69 per diluted share in Q4 2021 and or an increase of 9% on a per share basis year-over-year.

We continue to execute our value-add business plan by completing 481 full and partial renovations during the quarter and leased 442 renovated units, achieving an average monthly rent premium of $184 which represents a 23.1% ROI during the year. Inception today, in the current portfolio as of 12/31, we have completed 7,633 full and partial upgrades, 4,718 kitchen laundry appliance installations and 10,191 technology package installations, resulting in $149, $47 and $45 average monthly rental increase per unit which represents 22%, 66.9% and 37.2% ROI, respectively. Results for the full year 2022 were as follows: net loss for the year ended December 31 was negative $9.3 million or a loss of $0.36 per diluted share which included a gain on sales of real estate of $14.7 million and $97.6 million of depreciation and amortization expense.

This compared to net income of $23 million or income of $0.89 per diluted share for full year 2021. which included a gain on sales of real estate of $46.2 million and $86.9 million of depreciation and amortization expense. For the year, NOI was $157.4 million in 40 properties as compared to $128.8 million on 39 properties for the same period in 2021, representing an increase of 22.3%. For the year, same-store rate increased 17.8% and same-store occupancy was down 20 basis points to 94.1%. This, coupled with an increase in same-store expenses of 11.1%, led to an increase in same-store NOI of 16.2% as compared to full year 2021. We reported core FFO in 2022 of $81.8 million or $3.13 per diluted share compared to $2.43 per diluted share for 2021 which is an increase of 28.9% on a per share basis.

Since inception, on a diluted CAGR basis, core FFO increased 11% annually. For our NAV, based on our current estimate of cap rates in our markets and forward NOI, we reported NAV per share range as follows: $67.46 on the low end, $78.15 on the high end and $72.80 at the midpoint. These are based on average cap rates ranging from 5% to low end to 5.3% on the high end which has increased approximately 65 basis points last quarter and 148 basis points year-to-date to reflect the rise in interest rates and considerable cap rates in our markets. For the fourth quarter, we paid a dividend of $0.42 per share on December 30. And since inception, we’ve increased our dividend 103.9%. For 2022, our dividend was 2x covered by core FFO, with a payout ratio of 49.8% of core FFO.

Finally, before we get to guidance, I’d like to touch on some of our recent activity with dispositions, refinancings and some subsequent events after year-end. On December 29, we completed the sale of Hollister Place in Houston for gross proceeds of $36.8 million, representing a cap rate of 4.37%. The gain on sale was $14.7 million and the net proceeds of $36.5 million were used to pay down the corporate credit facility. During the fourth quarter, the company completed a cash out refinance on 19 of its properties to refinance decrease to spread on 17 of the refinance properties that were previously variable rates, by an average spread of approximately 14 basis points and transitioned 2 properties that were previously fixed rate mortgages to floating rate mortgages with a spread of 1.55%.

Upon completion of refinancing, the company paid down approximately $260.5 million on the corporate credit facility in the fourth quarter. Additionally, on January 31, 2023, we refinanced the venue on camelback which effectively pushed the maturity date of mortgage from July 1, 2024, to February 1, 2033. Two days later, on February 2, the company paid down $17.5 million on the corporate credit facility. These moves strengthened our balance sheet, lowered our financing costs, increased the maturity of our portfolio and paid down our corporate credit facility which represents our most expensive capital. Today, the average spread on floating rate debt is 1.56% over . Our average maturity of the portfolio is 6.5 years. And as of today, the balance on our corporate credit facility is $57 million.

We currently have 2 properties: Old Farm and Stone Creek Old Farm, both located in Houston under contract, that we expect to close in the first half of the year. Estimated net proceeds of $63.4 million will be used to pay down the corporate credit facility to 0. Turning to guidance. For 2023, we’re issuing initial guidance as follows: core FFO per diluted share of $3.27 on the high end, $2.92 in the low end, $3.09 at the midpoint. Same-store revenues are 11.9% on the high end, 9.9% on the low end and 10.9% at the midpoint. Same-store expenses, we estimate 10.3% on high end, 11.2% on the low end, the midpoint of 10.7%. And for same-store NOI, we are guiding to 13% on the high end, 9% on the low end and 11% at the midpoint. So with that, let me turn it over to Matt.

Matt McGraner: Thank you, Brian. Let me start by going over our fourth quarter same-store operational results. Q4 same-store NOI margin improved to 61.6%. That’s up 46 basis points over the prior year period. Effective rents showed 11.5% or greater growth in all markets, while same-store average effective rent growth reached 11.5%. Raleigh, Charlotte, Las Vegas and Atlanta showed somewhat more modest rent growth in the 11.6% to 13.2% range, while we saw stronger year-over-year growth in Phoenix, Dallas, Nashville and our Florida markets with average effective rent growth in these markets achieving a combined 19.7%. Tampa was our effective rent growth leader for the quarter at 23.3%. Fourth quarter same-store NOI growth was again outstanding, with the portfolio averaging 14.4%, driven by 13.8% growth in rental revenue and 13.5% growth in total revenues, even though we experienced expense inflation across the board.

Operationally, leasing activity and revenue growth showed sustained momentum in the fourth quarter, with 9 out of our 10 same-store markets achieving revenue growth of 8.2% or better. The top 5 being Tampa at 18.8%, South Florida at 17.6%, Atlanta, 16.2%; Phoenix, 14.9% and Nashville, 14.4%. Renewal conversions were 47% for the quarter, 49.6% for the year, with 7 out of 11 markets executing renewal rate growth of at least 5% and no markets were under 2. The leaders were Tampa at 10.1, Orlando at 9.9, South Florida 8.8. DFW 8.3 and Raleigh derm at 7.6. On the occupancy front, we’re pleased to report that Q4 same-store occupancy remained over 94%, positioning us well for 2023. And as of this morning, the portfolio is 96.3% leased with a healthy 60-day trend of 92%.

For the full year, same-store NOI margin improved by 112 basis points to 60%. Same-store average effective rents and revenues each increased by 17.9% and 14%, respectively and NOI held strong across most of the portfolio in ’22, with 8 out of our 9 same-store markets growing by at least 11.2%. Notable same-store NOI growth markets were South Florida, Nashville and Tampa at 23.8%, 21.2% and 20.4%, respectively. Operationally, the portfolio experienced exceptional revenue growth in ’22, with all our markets achieving growth of at least 8% or better. The top 5 were Tampa at 18.4%; South Florida, 16.8%; Nashville at 15.9%; Phoenix at 15 4%; and Orlando at 14.7%. Turning to our acquisition activity for 2022. On the buy-side, we acquired 2 assets in April last year, the Idera and Sandy Springs, Georgia and estates on Maryland and Phoenix, Arizona.

These purchases added 562 units to our portfolio for a total purchase price of $143.4 million and provided a further opportunity for our rehab pipeline in 2 of our best-performing markets, further enhancing our next 4 years of growth and earnings profile. On the disposition front, as Brian said, we sold Hollister on December 30 of last year, generating a 13.5% levered IRR, a 2x multiple on investment and approximately $21 million of net proceeds used to pay down the balance on the credit facility. And as previously reported as Brian just mentioned, we’re under contract to sold Old Farm and Stone Creek for $135 million. These sales will generate a 24.8% levered IRR, a 2.9% multiple on investment and proceeds of $63.4 million to pay the remaining balance on this credit facility down to zero.

Turning to 2023 guidance. As Brian said, we’re excited to guide to 9% to 13% in same-store with a midpoint of 11%. Across our same-store properties, we’re forecasting a 10.5% to 12.6% rental income growth comprised of the following components: a 93.5% to 95.1% physical occupancy, with peak occupancy model for Q3 and Q4; a 5.9% earn-in benefit from the outstanding growth in trade-outs we achieved in 2022; a 4% to 5% market rent growth in 2023 with 2.3% realized this year; and an additional 1.4% top line growth attributable to value-add CapEx spending. This equates to 9.9% to 11.9% total revenue growth. On the expense side, we’re forecasting a 7.5% increase in controllable expenses comprised of a 3.8% increase in R&M and turnover costs, a 10.7% increase in labor, a 3.9% increase in advertising, a 4.9% increase in G&A.

And for non-controllables, we’re forecasting an increase of 10.3% to 11.2%, comprised of a 3.2% increase in utilities, a 17.7% increase in insurance and a 12.1% increase in real estate taxes. From a geographical perspective, we’re experiencing — we’re expecting particular strength across the following markets: notwithstanding real estate tax headwinds in most of them. We expect Raleigh to grow same-store NOI by 16.5% to 18.5% due to 13% to 15% budgeted revenue growth and an interior renovation plan for 132 units, targeting $240 rent premiums and a low 20s ROI. We expect South Florida to grow same-store NOI by roughly 16% to 18%, driven by 12% to 14% budgeted revenue growth and a continued value-add execution with 242 full interior unit upgrades planned targeting $260 rent premiums and a mid- to high teens ROI.

We expect Tampa to grow same-store NOI by roughly 15.5% to 17.5%, driven by 13% to 15% budgeted revenue growth, a continued value-add execution with 112 full and partial interior unit upgrades planned targeting $62 rent premiums here in the low 30s ROI on predominantly lower spin partial rental. We expect Orlando to grow same-store NOI by roughly 15% to 17%, driven by 13% to 15% budgeted revenue growth and a continued value-add execution with 107 upgrades planned average, $215 average rent premium and a 20% ROI. And finally, we expect Las Vegas to grow same-store NOI by roughly 14% to 16%, driven by 11% to 13% budgeted revenue growth, a continued value-add execution on 162 unit upgrades planned, generating $140 average rent premium in the high-teen ROI.

All of our other markets are expected to see NOI growth between 7.5% to 11.5% and we see the same economic tailwinds described in our top-performing markets. As you know, we continue to be an internal growth business at our core. And to that end, our guidance includes the following assumptions regarding our value-add programs. We expect to complete 1,370 full interior upgrades at an average cost of $13,150 per unit, generating $214 average monthly premium or approximately a 19.5% return on investment. We expect to complete 871 partial and 2-year upgrades at an average cost of $5,250 per unit, generating a $91 average monthly premium or 18.6% ROI. We expect to complete 844 washer dryer installs at an average cost of $1,030 per unit, generating a $51 average monthly premium or 47% return on investment.

We expect to complete 3,150 additional Smart Home Technology packages generating a $40 to $45 average monthly premium and a 48.8% return on investment. Now for a brief overview of our 2023 acquisition and disposition guidance. We’re assuming 0 to over $250 million in acquisitions. Obviously, is widely reported with institutional capital largely remaining on the sidelines. There’s not been many attractive buying opportunities. Plus given our cost of capital, we’ve prioritized balance sheet cleanup, stock repurchases and internal growth over external growth pursuits. On the disposition front, that we said a few times here, with the Houston market exit well on its way. again, we expect to complete the disposition of Old Farm and Stone Creek for $135 million of gross proceeds in early Q2.

Disposition activity could reach the higher end of our range later in the year, if we’re able to identify assets that can be accretively added via a tax-efficient capital recycling strategy that you guys have seen us do over the past few years. As Brian mentioned, we remain transparent on our NAV. We have adjusted NAV downward to a midpoint of $72.83 per share. That’s using a 5.15% cap rate on 2023 NOI at the midpoint. So in closing, so far in 2023, we’re off to a good start. We are expecting to see continued strength and resilience in the middle market rental housing. And as we enter this year, we’re optimistic that 2023 will be another year of strong performance. We feel we’re positioned to both withstand a downturn and yet still poised to grow.

That’s all I have for prepared remarks. I appreciate our team to work here at NexPoint and BH for the execution.

Brian Mitts: Great. Thanks, Matt. Let’s go ahead and turn it over for questions. I think we got a couple already queue up.

Q&A Session

Operator: Our first question will come from the line of Sam with Credit Suisse.

Unidentified Analyst: I’m on for Tile today. Just wondering if you could share your thoughts on how — when you guys framed out the guidance, how you think about the economic outlook and the leasing environment that went into the high end and low end of the guidance range?

Matt McGraner: Yes, I’ll take it. Sam, the economic environment is largely the NOI assumption. So we think that the range of 9% to 13% is fairly tight. It represents our view of the strength in the middle market housing and any weaknesses we’ll see will be on the lower end. The variability that you see in the core FFO numbers are largely based on interest expense. And the wide range is due to the fact that we shocked each side by 50 basis points on the surfer curve. And we just felt, given the volatility in the current environment, that we’ll have over the next quarter or so with the Fed meeting that, that was appropriate. Now as we go forward throughout the year, we’ll be able to tighten that. And we expect that we will be able to tighten it and then hopefully achieve the higher end.

Unidentified Analyst: Got it. Got it. Maybe switching gears to the leasing side. On the renewals, tell me, what have the conversations been like with the residents? Are you seeing more pushback from these people, some people are noting financial hardships. Just anything anecdotally that’s interesting might be? I mean I would love to hear that.

Matt McGraner: Yes. Not so much the conversations, I think, are fairly easier than they were in the second and third quarters of last year when you’re increasing residents in the teens and even low 20s. So we’re sending out notices in the mid- to high single digits on renewals today. and they’re largely being absorbed without any pushback.

Operator: Your next question will come from the line of Michael Lewis with Truist Securities.

Michael Lewis: The same-store growth guidance obviously is very high. I was just wondering if there was anything notable driving that such as changing composition of the pool, units coming back online that were maybe out of service, the impact of the unit upgrades? Or maybe a better question is how much your unit upgrade program is contributing to that same-store revenue growth?

Matt McGraner: Yes, it’s about 2%, Michael, from additional CapEx spend. And the other, I think, strength in the numbers comes from our earn-in and the strong increases throughout the year of last year. That number has been reported through our peer group to be in the 4% to 5% range. We’re just a little bit higher, just short of 6%. So with that benefit and tailwind behind us, throw some CapEx on it and then just the dearth of affordable housing, we feel like this is appropriate.

Michael Lewis: Got you. And then you talked about this a little bit but any color you could provide on January and February so far? So I think you said occupancy was up to 96.3% today. I think that was 94.1% in 4Q. So that’s a really big move. Any color on what’s happening there? And I think you talked about rent spreads a little bit; so we covered that.

Matt McGraner: Yes, you bet. So the 96.3% number was the lease percentage. The occupancy is still in the low 94s. Sorry if that wasn’t clear. the blended numbers for Q1 so far have been pretty strong, off a little bit from Q4 but in the mid-4% to 5% range — 4.5% to 5% range, excuse me for January .

Michael Lewis: I think you were are. I think you did say, at least. That’s my fault. And then just lastly, you’re probably not able to — I don’t know if you’re able to comment on cap rates on the two properties under contract to be sold. You already gave a lot of details on that. But my question, I guess, is more about — it sounds like there’s still strong investor demand for your assets, even though we’ve heard a lot about transaction market slowing due to this wide bid-ask spread. It sounds like you’re not seeing that weakness in pricing for your stuff. Anything you could comment on the transaction environment? I know you adjusted your cap rates in your NAV a little bit. But what are you seeing kind of on asset pricing?

Matt McGraner: Yes. I think that for — we can’t comment on the pricing for the final 2. Those were struck at about in place. I think that we caught a little bit of the oil revival and some interests when there is probably a scarcity premium. I don’t think that, that number hits today, we just don’t see any sort of transactions at all right now that are that are out there that are attractive. And the ones that are out there are — that are attractive, I often have 7, 8, 9 years of in-place assumable debt. It’s — that was put on in the lower times. And so to the extent we see one of those, we’ll check it out but there’s just not. I mean I would say that the volumes are down 60%, 70% year-over-year in the first quarter. So I think that we’ll see some capitulation from sellers at some point in Q2.

Hopefully, that comes in line with the Fed meeting and where they see interest rates going in a pivot or a pause. But I think until that time, you just want to be able to price debt we’ll be able to price that. And that’s what we need. We just need certainty of a range in the debt markets. And until we get that, I don’t think we’ll have a lot of activity.

Operator: Your next question will come from the line of Tayo Okusanya with Credit Suisse.

Tayo Okusanya: Yes. on your NAV, again, I appreciate all the transparency you give on that. The 515 cap rate that you’re applying, could you just walk us through a little bit of — as you mentioned, there’s not a lot of transaction activity but how do you kind of come up with Fab as kind of the appropriate cap rate because again? It does indicate some operate decompression versus the last time you provided us that number. But just curious how you get comfortable with that?

Matt McGraner: Yes, you bet. I think it’s best informed by the brokerage community even as imperfect as it is. We’re still getting BOBs on our assets. And so really, it’s a calculation, Tayo, of what a new buyer in the brokerage community in the brokerage communities view would need in terms of a return for either levered IRR or an unlevered IRR basis. And today, that’s probably 6.5% to 7% unlevered IRR. — which equates basically with cash flow and using a reasonable terminal cap rate exit in a 5-year hold it equates to about a 5% to 5.3%. And that’s — maybe that’s overly simplistic but these are coming from the tills, the CBREs, the JLLs of the world. They’re on the front lines of transactions, notwithstanding there’s not many of them but that’s their view and I tend to agree with it.

Tayo Okusanya: Got you. That’s helpful. And then — from a rent control perspective, again, a lot of conversations and a lot of CBD markets about this. I mean, on the margin, maybe there’s some stuff in Orlando, Florida. But just curious, in your markets, anything bubbling under any potential impact it could have on your portfolio?

Matt McGraner: Not really. We’re fairly — we think we’re fairly still insulated from most of it given the geographical footprint of the portfolio we are monitoring the Florida legislation or the Florida proposals pretty carefully but I think those have a long way to go in sort of an uphill battle. We also are aware of the White House’s proposals and what have you. Across all of our businesses, I think the lightning stick or the light rod, if you will, is more focused on single-family rental right now than multi. So it’s something we’re aware of and monitoring but we don’t see it impacting our portfolio as it sits right now.

Operator: Your next question will come from the line of Buck Horne with Raymond James.

Buck Horne: If you could talk a little bit about the CapEx budget for the coming year and also just the spending that was — particularly the maintenance CapEx side of things, you guys gave great detail on kind of the rehab expenditures. But as far as maintenance CapEx, the numbers were up pretty big this year. And just kind of wondering what you guys are thinking about for next year or this year, I’m sorry?

Matt McGraner: Brian, you take them.

Brian Mitts: Yes, I’ll take that. So as we look at this year, I think going in, year-over-year, we see roughly the same in terms of the ROI generating CapEx for the interiors. We’ve got an assumption on all of the 38 assets, ex the 2 Houston deals. So we have activity in each property in every market. In terms of where we see I think the year-over-year recurring CapEx, I think we see that number being pretty stable. I think really 2022 was a kind of return to normal post-COVID environment for R&M and turn cost. We’ve seen, as Matt mentioned, about 50% retention. So we had a little bit higher year-over-year term cost, then I believe 2021, we were more in the kind of 56% range return or for retention, sorry. So, I think that where we see things today, we’re doing what we can to control the expense side of the equation.

We’re also seeing given, I think, the elevation in construction costs, the kind of shut off of the supply pipeline there, given the cost of capital in the market, we are seeing a little bit more ability to negotiate price with vendors and that’s been helpful. There’s a larger availability at Workforce now to help us out. So we feel like the outlook is good. We have a healthy free cash flow number. I think that — as you look at the year, we’re targeting roughly 25% — or $25 million of free cash flow after all the CapEx and we expect to use that to the extent that there’s an opportunity to buy back stock to deleverage, etcetera. So we feel good about the outlook overall.

Buck Horne: Okay, that’s helpful. So in terms of the stable, just to clarify, when you’re talking about stable recurring CapEx. Does that include — I guess you guys have a category called nonrecurring maintenance CapEx. Do you think that’s stable as well or any other kind of nonrecurring items that we should be aware of?

Brian Mitts: We do. We do. We think that’s stable. As Matt also mentioned, talking about acquisition and disposition activity for the year as kind of tradition for us. We look at the bottom 10% of the portfolio that may have some of that greater kind of deferred maintenance and nonrecurring CapEx and those are typically the assets that we’ll look to — to the extent that they bid out in the market that we like take advantage of, so as to avoid that kind of 7- to 10-year deferred maintenance CapEx and the big ticket items. So we’re definitely conscious of that. We think that the majority of the portfolio has been through the kind of repositioning phase. And we’ve taken care of a lot of that deferred and we look to manage that effectively.

But yes, I think that the CapEx outlook for this year is pretty stable year-over-year and the ROI CapEx, we continue to hit those ROI targets and continue to get the premium. I know we’ve seen some elevation and the cost of full interior upgrades. But I think that, that really speaks to our ability to attract a higher demographic. So we’re spending more but we’re in Florida market generating a $300-plus premium on those upgrades. So the end justifies the means.

Matt McGraner: Bob, just to add to that, the R&M CapEx increase that we’re modeling for this year increased just the recurring number is 5.1% is our increase there.

Buck Horne: Got it. All right. Perfect. That’s very helpful. One other one for me, if I can sneak it in, is just thinking through the — again, going back to the same-store revenue guidance and the details you provided there but it sounds like blended lease rates, new and renewals, you’re still kind of seeing a sequential deceleration I guess you were kind of in the low 6% range. During the fourth quarter, it sounds like it’s down to kind of between 4% and 5% through February which is kind of now in line with what you’re thinking market rent growth for the year is going to be. So I’m kind of curious, do you think that — what’s giving you the confidence that market rates are going to stabilize in that 4% to 5% range and not continue to decelerate with obviously difficult year-over-year comps and potential supply pressure out there?

Matt McGraner: Yes. That’s a good question, one that I think we’re prepared for. The market — the submarkets that we’re in, notwithstanding the fact that the markets we’re in, you’re right, they do have a ton of supply. So the guys and the team dug down a little bit better and dug into the submarkets. And in our submarkets, whether it’s Atlanta that has 8% inventory growth and 23,000 deliveries, there’s only 286 in our submarkets in Marietta and San Springs. So that’s an example. And then there’s, let’s call it, take Dallas, for example which is historically high, 36,000, 40,000 deliveries, our submarkets are cumulatively seeing deliveries this year of 700. So we’re largely suburban, largely affordable. The recurring resident burden is still in a delta between Class A and SFR that’s $400, $500, $600 away from us. So I don’t think it’s too much to ask or too much to underwrite that 4% to 5%, 6%, 7%.

Operator: Your next question will come from the line of Michael Lewis with Truist Securities.

Michael Lewis: I jumped back in the queue because I was reiterated in our note this morning, I’ve been critical about your leverage or at least concerned about what it’s going to mean for your earnings growth and we’re seeing some of that in your 2023 guidance. So maybe this isn’t the right way to think about it but more than half of your 2023 FFO is going to be coming from interest rate swaps. — fortunately, a lot of those swaps don’t burn off until 2026 and you’re obviously doing a lot of work to address this drag that higher interest expense is going to be. But I guess, — do you think it’s going to be possible to grow earnings over the next handful of years when those hedges expire? And what, if anything else beyond what you’ve already done, are you looking at doing to kind of position yourself between now and then?

Matt McGraner: Yes. I think it’s a good question. We think about it a little bit differently and it’s the way we’ve always thought about it. And this isn’t the first run-up in interest rates that we’ve been through. And I think this is the fastest that it’s been potentially in history. So we should be a little bit of benefit of a doubt there. Our view has always been that we’re an internal growth and capital recycling company. we’re going to fix it, we’re going to buy it, fix it and we’re going to sell it and recycle the capital and grow NOI that way. And in our experience, the best way to do that is to put on flexible interest rate or flexible debt that allows us to sell and not have a bunch of transaction or defeasance or yield maintenance costs.

And our experience that having fixed-rate debt like that has eroded a lot more value or as much value as we seen elsewhere. So that’s just our philosophy. And to the extent that you’re in 2024, 2025, 2026, a new buyer, whether it’s an individual asset or the company or portfolio, they will dictate their own financing and we just think that that’s valuable. That’s just more valuable. It provides more flexibility, more optionality to the marketplace. And in the meantime, we’re going to do our best to continue to hedge the near-term interest rates, the best we can.

Operator: I will now hand the conference back over to management for any closing remarks.

Brian Mitts: Yes, I think a lot of good questions. I appreciate everybody’s participation and involvement and we’ll stay in touch. Thank you.

Matt McGraner: Thank you.

Operator: Ladies and gentlemen, that will conclude today’s meeting. Thank you all for joining. You may now disconnect.