NexPoint Residential Trust, Inc. (NXRT) Q3 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us and welcome to the NextPoint Residential Trust Third Quarter 2026 Earnings Call. I will now hand the conference over to Carly Musser with Communications and Corporate Affairs. Carly, please go ahead.

Good morning, everyone, and welcome to NextPoint Residential Trust conference call to review the company's results for the third quarter, ended September 30, 2026. On the call today are Paul Richards, Executive Vice President and Chief Financial Officer, Matt McGriner, Executive Vice President and Chief Investment Officer, and Bonner McDermott, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the company's website at nxrt.nextpoint.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 reveal the company's most recent annual report on Form 10-K and the company's other filings with the SEC for more complete discussion of risks and other factors that could affect any forward-looking statements. The statements made during this conference call speak only of today's date and accept 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 Paul Richards. Please go ahead, Paul.

Thank you, Carly, and good morning, everyone. I'll walk through our third quarter and year-to-date same-store results, expenses, interests, the Midtown Crossing acquisition, the balance sheet, NAS, the dividend, and changes to our full-year outlook, including how we think about 2027. Then Matt will cover operations and market fundamentals looking forward. I'll start with the headlines. Q3 came in below expectations. Core FFO was 52 cents a share, 7 cents below consensus. We're lowering our full-year core FFO midpoint to 220. Thank you. That compares to a net loss of $7.8 million, or $0.31 a share a year ago. Total revenue was $64.5 million, up from $62.8 million, with Sedona in the numbers. Total NOI was $36.6 million, across our 36 properties. On a same-store basis, 35 properties in about 98% of our units, revenue was down 70 basis points. Expenses were up 11.2%, and NOI was down 8.2% to $35.6 million. Occupancy ended the quarter at 92.9%, down And average effective rent was $1,487, down 0.7%. Year today, core info is $1.87 a share against $2.14 last year. Expenses drove most of the quarter's NOI declined. About $2.7 million of the $3.2 million. Three specific items explain the decrease. First, Nashville real estate taxes. Last year's third quarter carried one-time real estate tax refunds at residences at Glenview Reserve, which equates to a swing of about $850,000. 4,000 and does not reoccur. Excluding Nashville, real estate taxes were up less than 1%. Second, resident amenity services, which is mostly our bulk fiber internet rollout. That line was up about $640,000 this quarter as we brought fiber online at about a dozen properties in Atlanta, Nashville, Phoenix, and South Florida. Residents pay for that services, so most of that cost comes back to us. Amenity fees rose about $387,000, and in Las Vegas, the equivalent fees now sit in rent-under, all-in pricing. Net, the program cost roughly $100,000 more than last year, which is immaterial. And looking at the full program, including the smart connection fees residents pay, our amenity services brought in about $400,000 more than they cost this past quarter. But the net contributes to NOI, not a cost center. Third, controllable expenses, usually a reliable strength for us, ran higher through the quarter. Interior and turnover repairs were up 14.9%, exterior and amenity repairs 13.8%, and landscaping 13.7%. Marketing was up more than 30%, and office operations 14.2%, as properties below target occupancy spent to drive traffic. Lastly, utilities rose 11.8%. Some of what was deliberate choice. Given how soft this year has been, we pulled a lot of work for it into 2026 and spent capital where we think it attracts new residents. Unit turns in readiness, move-in gifts, exterior and amenity projects such as pressure washing, vent and gutter cleaning, and in-unit upgrades like washer and dryers, we'd rather put that money in front of prospects now, even if it keeps expenses elevated for a quarter or two. Other spending didn't earn its keep, and we're cutting it. Net and national real estate tax swing expenses grew about 7.3%, struck out resident amenity services as well, and it's about 5.1%. Part of that is by design and part of it is noise in a seasonally heavy quarter, but it's more than this revenue environment supports over time. Matt will walk through the specific actions we're taking. The bright spot is insurance, down 11.8% on our April renewal. Moving on to year-to-date, same store. A single quarter can carry a lot of noise, so the nine-month view is the better read on the run rate on the portfolio. Year-to-date, same-store revenue was down 1.2%. Expenses were up 3.9%, and NOI was down 4.6% to $109.3 million. That 3.9% includes fiber rollout and the marketing to quit in front of prospects. Excluding resident amenity services year-to-date, same-store expenses were up 1.6%, normalizing for last year's Lend-View tax refund as well. Thanks to our expenses, we're up just 40 basis points year-to-date. Underneath that, the core cost-based holding. Year-to-date, insurance was down 16.3%. Real estate taxes were down 0.7%. Payroll down 0.6%. And property management fees down 1.6%. The pressure is concentrated in repairs and maintenance It's up 16.4%, including FIRA program, utilities, up 7.2%, and marketing, up 39.4%. It's important to state clearly that the third quarter's negative 8.2% is not our runway. It carries a prior tax refund that won't reoccur, a FIRA rollout that pays for itself upon penetration and expense work we choose to pull forward. Our fourth quarter guidance implies SafeStore NOI down about 3.3%, better than year-to-date pays, and well under half of the third quarter decline. Now, interest expense, which we've played since initial guidance. The step-down landed in September on the schedule. Swaps tagged to about $717.5 million of debt at a fixed rate near 1.14% read their schedule runoff. Today, we have about $192.5 million of swaps at a weighted average of 2.68%, which fixes about 13% of our floating rate mortgage debt. That's $92.5 million with KeyBank that runs through January 1st next year, and the $100 million JPMorgan swap at 3.49% that runs 2030. Swap settlements contributed $5.2 million in the second quarter and $3.4 million in the third, and we expect about $0.6 million in the fourth. Third quarter interest expense was $18.1 million, up from $15.8 million in the second quarter. Full-year interest expense is now projected at about $71.8 million, close to the $71.2 million we discussed in August. Our adjusted weighted average interest rate was 4.75% in quarter rent against 3.58% in June 30th. The rate's backdrop hasn't helped, The Fed raised rates in September to a range of 3.75% to 4.4% held last week, with two members voting for another hike. The 10-year Treasury touched 5.3% early October and sits near 4.9% today. On maturities, our first mortgage maturity is October of 2028, and the rest of our mortgages run to 2031 and beyond. Total indebtedness was about $1.6 billion in quarter-end. On October 2nd, we acquired Midtown Crossing, a 228-unit 1997 vintage community in Raleigh, for $32 million, or about $140,000 a unit. Our all-in-cash basis, including $1.9 million in CapEx funding, is about $152,600 a unit. We bought it from an REO lender book, and the seller had already put about $3.1 million of capital into the property, so the upside is operational. Raleigh is a market we all know well. It's our strongest renewal market this quarter at positive 4.2% with the smallest new lease decline in the portfolio at negative 0.9%. Midtown takes our Raleigh exposure from 625 to 853 units. We are starting at a lower occupancy and getting to 93% occupancy takes about 27 net leases and in-place rents set about 10% below the Raleigh 2 to 4 star average, $1,325 versus $1,481. Render rights to grow rents to 1,403 by month 36, which grows NOI from 1.44 million to 2.15 million by year three, stabilizing north of a 7% cap rate. On returns, we project a 7% NOI CAGR, a mid-teams levered IRR, and a 2.1 times multiple uninvested capital over a seven-year hold. Balance sheet of leveraging. Our leverage is too high for the rate environment, and bringing it down is our first capital priority. Here's the order. Disposition proceeds to go to debt reduction first. Shared repurchases are funded from sale proceeds with no new borrowing, and we'll measure progress against our leverage targets. We're planning to pair Midtown with a disposition or two. The proceeds are expected to retire the borrowings we use for Midtown, which keeps that trade roughly leverage neutral, and any incremental amount creates capacity for buyback. This position guidance stays at $0 to $200 million with $100 million midpoint. Each sale at private market prices also supports our NAV. During the third quarter, we completed value-add initiatives of 708 units and at least 425 upgraded units at an average monthly premium of $42.54 and a 21.1% return. The premium continues to run lower because the mix of targeted scope has shifted. Most of the quarter's work was lighter bespoke upgrades, plus washer-dryer installs at lower These upgrades cost less, reduce vacancy time related to the work being completed, and allow for a more targeted approach relative to individual competitive sets at each property. Since inception for properties currently in the portfolio, we've completed 11,010 interior upgrades, 5,302 kitchen and laundry packages, and 11,520 tech packages. They've earned average monthly premiums of $147, $51, and $43, and returns of 20.7%, 62.7%. Our estimated net asset value at quarter end is $38.33 per share at the midpoint, using a cap rate range of 5.5% to 6% across the portfolio. That's down $8.43 from $46.76 last quarter, and I want to take some time to explain the change. We moved our cap rate range up 25 basis points to reflect higher long-term rates and wider pricing on older assets. That accounts for $4.45 of the decline. The rest comes from lower NOI expectations and other balance sheet changes. Net leverage on our admin point is now 62% up to 57%. We think the range is grounded. Walker & Dunlap's third quarter average cap rates in our markets range from 4.6 to 5.5%, and UDR's recent joint venture with Apollo valued Our range sits at or above those markets and in line with the UDR mark on older products. At a price of $1,804, the stock trades about 53% below our midpoint and well below our low end of the range. And that will cover how we're using the tools we have to help close that gap. On the dividends, the Board declared a fourth quarter dividend of $0.53 per share, payable December 31st. Third quarter, 4FFO covered it almost one time. With the swap repricing now in our run rate, fourth quarter, 4FFO at about $0.35 implied will fall short of it. In setting the fourth quarter dividends, the board weighed a lot of moving pieces, including the macro backdrop and the Fed path. It will decide by the next meeting whether to reset the dividend at an appropriately covered level and will announce that decision when it's made. We're lowering full year core fulfill guidance at a range of $2.17 to $2.27 per diluted share, with a midpoint of $2.22, down from $2.45. Same sort of NOI guidance moved to a range of negative 5.1% to negative 3.6%, with a midpoint of negative 4.3%. Here's a bridge from $2.45 to $2.22 in five pieces. Same store revenue, down 10 cents. Vacancy is the largest piece at 8 cents, then bad debt at 4 cents, and concessions at a penny, partly offset by a penny from each rent, fiber, and revenue and other income. Same store expense, down 10 cents. Seven cents is controllable, led by repairs and maintenance at five cents, three cents is utility and real estate taxes, and we're seeing fewer appeal settlements. Interest expense, down two cents, from additional quartering of borrowings, including the financing of midtown crossings. Interest income, down a penny, on a quicker repayment schedule on the DST loan that we had initially modeled, and lastly, corporate GNA abruptly slide. About 9 cents of that is third quarter actuals, and about 11 cents is the lower fourth quarter forecast. The rest is interest. We'll get 2027 guidance and fourth quarter results, but the pieces are visible today. Financing line is visible in the contractual obligations table in our supplement, and it moves with SOFR because most of our debt now flows. Each 25 basis point move in SOFR is worth about 14 cents a share once the key bank swap ends. NOI is the swing And that's our operating plan. Our expense work and disposition program are built to move. Here's a full set of revised ranges. Earning loss per diluted share on the low end $1.72, midpoint $1.68, high end $1.63, with a prior midpoint of above $54. Core FFO per diluted share at a low end of $2.17, midpoint $2.22, the high end $2.27, and prior midpoint $2.25.

Thank you. Thank you, Paul. On the revenue side, operations are still moving sideways, as you noted, and we're grinding through it, and work is starting to show in renewals, retention, and conversion. In August, our guidance assumed new lease pricing slightly negative in the third quarter and slightly positive in the fourth. We ran the summer to that plan. We held asking rents and set minimum renewal increases of 1 to 3% from June through August for a significant portion of our assets. Turnover suffered, and anticipated demand did not sustain our previously strong occupancies. Occupancies slipped from 93.6% at the end of June to 92.5% at the end of August. In September, we cut price and added concessions to win it back. New lease tradeouts went from negative 3.3% in July to negative 6% in September, and concessions for the quarter were $634,000, up 74% from last year. Occupancy recovered to 92.9% by the end of the quarter, but came at a cost and effective rent. RealPage puts occupancy in our submarkets at 94.3%. We ended the quarter about 140 basis points below that. The good news is our same-store portfolio is 94.6% leased today, and we expect physical occupancy to improve throughout the fourth quarter. Ultimately, the supply picture keeps improving. In the third quarter, our submarkets absorbed 3,650 units against 3,234 units delivered. For the full year, RealPage has our submarkets roughly balanced. Deliveries in our submarkets are 42% below the 2024 peak, and new starts are running 54% below last year's pace. Taking an even closer look, 28 of our 36 properties have fewer than 500 units delivering in 2027, and 2028 deliveries are on track to be the lowest of the cycle. Deliveries are well off the peak, but there are still about twice as many apartments in lease-up as normal, roughly 1.2 million units nationally in August. We believe that as interest rates moved up this summer and into the fall, developers accelerated the depth of their concessions. Modestly fewer properties are offering concessions, but the ones that do are offering the most in 15 years. Real Page has the average discount on stabilized units at 11.1% in September, close to six weeks free, and it's reached to older buildings like ours. About a quarter of units in 1990s vintage buildings now offer concessions, up from 18% three years ago. Positives for the quarter were – there were many. Renewals were a bright spot for the quarter. Every market posted positive renewal growth. Outside of Las Vegas, we're all in pricing inflates the comparison. Raleigh led at 4.2%. And Phoenix followed at 3.5%, both encouraging signs. In October, we lowered renewal increases on purpose to protect occupancy and retention rose to 57.5% from 54.9% in September. We also saw same-store blended lease tradeouts rise quarter over quarter by 100 basis points and reach basically equilibrium for the quarter, another positive sign. Conversion improved. Tour-to-application conversion was 39.3%, up from 34.2% a year ago, and 41% in October. Self-guided tours were almost half of all tours. Fewer people are touring, but more of the ones who tour are signing leases. Credit held steady. Bad debt was 80 basis points of gross potential revenue, flat with last year. Rent-to-income across the portfolio is about 21% on average household income of about $86,500. Atlanta's operations are stabilizing and provide a useful roadmap. NOI grew 5% there with vacancy loss down 43% and concessions down 50% from last year. Regional fundamentals can't be replicated overnight, but the trends in this belt weather sunbelt market are encouraging for the remainder of our portfolio. Insurance, as Paul said, savings suck, and other income grew 29% in most of the fiber fees that offset the new amenity cost. In October, lease occupancy was 95.3% against 92.3% physical, and that gap is signed leases we expect to move in over the coming weeks. Today, we are at 94.6% lease. On the go-forward plan at this point in the year, we're prioritizing We've reset renewal pricing and October retention of 57.5% is the early result. New lease pricing continues to target recovery of the 140 basis point gap to submarket occupancies ahead of the spring leasing season. Our fourth quarter guidance assumes average financial occupancy of 92.8% and concessions of 1.9% of gross potential rent. We'd rather spend that now and start 2027 off with positive We decided to pull a lot of expenses forward, as Paul said, into 2026 also. And that spending is aimed at winning new residents, turns, exterior, and amenity work, and in-unit upgrades. It will keep expenses elevated for the final months of 2026, and we think that's the right trade in a year this soft. Regarding capital allocation, first, we'll pair Midtown Crossing with a couple of dispositions, as Paul mentioned, and are expected to retire the Midtown borrowings, and the incremental amount thereafter creates buyback capacity. Second, we'll buy back stock with sale proceeds while we trade at roughly 7% north of a 7% implied cap rate on our NOI guidance. October 26th, our board authorized up to $150 million of repurchases over the next two years. Our disposition guidance is zero to 200 million. We're working the market to execute on one or two rifle shot dispos and assets where we've made a lot of money and can transact at a healthy spread to our implied cap rate. On the dividend, as Paul said, the board had weighed a lot this fall, including the macro backdrop, recent Fed moves, midterm elections, and real estate fundamentals. By its first meeting in 2027, the board will decide whether to reset the dividend to a level that's appropriately covered. The fourth quarter dividend of $0.53 already declared in payables by December 31st is not affected. In closing, operations remain challenged in Q3 as we digest, again, 50-year highs in supply and a 30-year high in interest rates. Lease ops discounted hard this summer, and we held Ray a little too long into that tape. On expenses, we chose to spend this year to win residence, and you'll see that for another quarter or two. But we're not panicking. We're not going to chase occupancy at any price, sell assets into a week bid, or make a decision we'd regret when this cycle inevitably turns, which it will. We'll continue to grind through the supply, operate the properties well, and protect their equity value. After all, the portfolio still throws off enormous cash flow. On capital, we'll be methodical. We'll sell assets one or two at a time when the price reflects private market value and put the proceeds to work in order, fund midtown, reduce debt, and buy back stock at a discount. Each sale is sized and timed on its own merits. That's because we still believe this is a great business and our portfolio is impossible to replicate at scale. Deliveries in our submarkets are, again, down 42% from the peak. Starts are down about half. In 2028, it's said to be the lightest year of the cycle. Once the lease up backlog clears, price and power comes back to well-located workforce housing and Sunbelt job markets. And the real estate's worth far more than the stock. Our NAV midpoint, $38.33 a share, and the stock trades around $18. We believe our largest asset, Avon at Pembroke Pines alone, is worth $8 to $9 per share, about half of our market cap today. We now like to open the call up and take your questions. Operator?

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Peter Abramowitz with Deutsche Bank. Your line is now open. Please go ahead.

Yeah, thanks for taking the question, and I appreciate all the color and the prepared remarks. Just wanted to ask, I guess as you kind of approach your end and do your 2027 budgeting process, you know, it's been a very challenging year. So, you know, as you kind of look across your markets and your footprint, not only from a supply-demand perspective, but also an operational perspective, you know, what kind of gives you confidence that things can potentially get better in 2027, and how are you sort of thinking about that as you prepare for your budget process?

Yeah, hey, Peter, thanks for the question. I think the math gives us confidence. You know, we were doing a little work about the supply coming out of the GFC, and, you know, it's almost the same story coming out of GFC that I think we're seeing, you know, coming out of this latest cycle. And what happened after that is we had pricing power for a number of years, and, you know, I think we see that same trend today. You know, we've been probably a little bit too optimistic in 2026 as I think the rest of the, you know, the Sunbelt peers have also. We also didn't, you know, forecast the Iranian war, the AI trade becoming what it is today, and then, you know, a lot of the other macro factors that I don't think will replicate in 2027. So I think, you know, as we're not done with the budgets, but we're reviewing them now. And I think we see, you know, reasons for optimism just from the supply picture alone. We think that migration into the Sunbelt markets will continue. You know, there's certainly still a robust job growth in our markets. And so, you know, the macro backdrop for us is, I think, as good as it has been in five years going into next year. And then, you know, hopefully the units and the markets will be absorbed. I think, you know, the midterm elections will maybe portend some new net international immigration, which will be, you know, helpful demand driver. And then I also think affordability continues to be another, you know, demand driver for our portfolio that hasn't really mattered. And I think it will. I think it will in 2027. You know, our units have, you know, we have great places. We have great assets and places to live, and we've amenitized the assets and now offer a great product at an affordable price, and I think we'll see that next year show up to our benefit.

Okay. I appreciate that, Matt. And then you mentioned the fiber optic rollout had somewhat of an impact on the expense miss in the quarter. But I think you said, you know, it should come back to you in the form of revenue in the future. Could you just sort of quantify, you know, how much the uplift could be and how should we think about that from a timing perspective?

Yeah, I think if you strip out, it's a net neutral effect on NOI because, you know, but if you strip out the expenses, I don't know, Vaughn, what did we say the expense was after 1.9 percent?

So the noise in terms of the rollout, and we're rolling it out in several of our major markets, so the expense growth is offset, and it's actually captured in two revenue lines, so it's a little bit more challenging. It's in other revenue, and it's also in resident amenity fee income. So, the net effect, and we spoke to it on call, you know, our resident mini service platform provides a margin, I believe, for the third quarter of some, you know, $400,000 operating profit on those expenses. The noise of it is just getting through, you know, the volume of, you know, new lease charges that we're, you know, applying for the resident base. So the typical structure is a one gig fiber program at about a $60 to $65, you know, resident charge. So you're seeing that, you're seeing that growth in both revenue and expense. There's some noise in the same store year over year comparison because of that. But ultimately, you know, a resident amenity service package does drive revenue growth and NOI growth.

All right. I appreciate that. And then a question on the dividend. You know, I think you said you may revisit that, you know, next quarter. But I guess just curious kind of why not reduce it now? You know, put yourself in sort of a more conservative position. And just kind of curious how you're thinking about that.

Yeah, well, ultimately, again, it's a board decision. Management, you know, we have a view. I think why not now is because, you know, just literally the last kind of 30, 45 days have been incredibly volatile. You saw SOFR take up 100 basis points, a 10-year up, 116 basis points in 60 days or something like that, something material. You got midterm elections today, and I think there's a lot of good views on the board that study this for a living, and they appropriately, in my view, wanted to get through this period of time. You know, on an annualized basis, the dividends covered, you know, won't be in the fourth quarter on a one-quarter spot in time, but, you know, I think that we'll have a clearer view in the first of the year in January to make a better decision. We're already seeing, you know, with the core, we bond, you know, issues and all the AI trade and demand and, you know, that whole story, you know, play out. We're back, you know, the 10 years off 40 basis points in a week. So, yeah, again, I think it goes back to where we're panicking. We're not panicking. And I think that if you look at, you know, the appropriate time to make that decision is when we have more information. And I think that that's why they're not saying, you know, let's do something today. But we are focused on it. Like I said, the portfolio generates a tremendous amount of cash flow, and it's a tool that we'll use. To buy us time and not, you know, degrade the portfolio by selling assets at a discount that don't make sense in this environment. Because, again, you know, we think that we think this is going to be a really good business still, and 2027 is going to be better in 2026, at least for us.

Right. And so I guess that leads me into the next question. You mentioned, I think, Yvonne at Pembroke Pines, I believe you said you think it's worth $8 or $9 a share in the private market. So, I'm just curious, like, you know, what consideration have you given to exploring selling, especially some of those larger assets where, you know, there could be more liquidity and more demand in the private market, particularly to address, you know, either capital needs or bring down leverage? You know, just kind of curious if you've given consideration if that discount is so wide, you know, is that something that you're actively considering in terms of kind of addressing that discount near term?

Yeah, 100%. I mean, we're looking at every asset every day, you know, getting BOVs from, you know, the East Dills, the New Marks, the JLLs, the CBREs, and trying to figure out, you know, what the assets are worth. I think right now, as we sit here today, spot cap rates are elevated because you have, you know, negative leverage across most value-add deals. Yeah, but I think at the first of the year, we can rifle shot, as I said in my prepared remarks, a couple deals where we've made a ton of money and generate enough cash flow to pay off that debt. It won't be a bond. That thing is a unicorn, so we'll keep that and operate it well. But I think there's two or three deals of some size and markets that are doing well, that we're actively getting BOVs on and trailing processes that are already in the market. For example, in Atlanta, there's a deal that's pretty similar to Terrell Mill. Terrell Mill we've owned forever and have made a bunch of money there and can sell and generate a lot of cash and feel good about where that could possibly trade in the near term. So we're not worried about paying down this stub of debt on the facility. And then to the extent that we can generate excess cash, we'll buy the stock aggressively like we have in the past. What we're not doing is trying to do something weird like merge, do an off-stock deal or something down here because we protect the equity. Keep in mind, we own 20% of the company as management and a board, so we're highly aligned to do the right thing.

Right. Okay, that's helpful. And then last one for me, you know, on that point, I guess, could you speak to kind of interest in the private market, you know, at the portfolio level? I know it's something you've kind of talked about. If you don't get the cost of capital and, you know, the equity performance you're looking for, it's something you'd consider. So, just curious on your latest thoughts on that and, you know, any conversations or interest that you're fielding from potential parties.

Yeah, I think we have to, you know, again, give ourselves the grace of getting through this 50-year high of supply. I think we've largely done that. And I think once you see, you know, new lease growth inflect and you get blended lease growth that's positive sequentially for a few quarters, not even a few, just maybe one or two, enough to where the breadth is across the market and everyone's saying the same thing. Real Page is saying the same thing. Witten is saying the same thing. Parsons is saying the same thing. Burns is saying the same thing. Then I think that that's when you would look to monetize, I think, a portfolio like ours that, again, is hard to replicate and scale. I don't think we're too far off of that period. I think, again, call me optimistic or hopeful or whatever, but I think the math in our markets points to absorption and points to You know, better lease pricing in 27 and 28. It was better than 26 and it wasn't 25. So I think, you know, it will happen. And we want to give ourselves a few quarters to bring the buyers back to market. There's not enough depth in the market as I sit here today to recommend doing anything in scale, especially given the volatility in the macro backdrop. A Fed hiking into You know, I think, you know, I think interest rates are likely to be, you know, potentially broken, you know, if we continue this path. So that's something else we're watching. You know, if you get any more retracement back in the risk-free rate, then that'll help our pricing in the private market and the public market. So, yeah, I'd say we're, again, not doing anything right now, but looking forward to the back half of 2027. If something, you know, is attractive, we'll consider it.

All right. That's all for me. I appreciate the filler, and thank you for the time.

You got it, Peter. You covered a lot. Appreciate you.

Your next question comes from the line of Michael Lewis with Truist Securities. Your line is now open. Please go ahead. Thank you.

My first question is a clarifying question on the operating expenses in the quarter and kind of what it means for the run rate going forward. So it sounds like you underestimated real estate taxes, but that number won't carry through into the future. And likewise, it sounded like the repairs and maintenance might not carry through more than a quarter or two either. Am I characterizing that right, that expenses should ease, or are they structurally higher now?

Yeah, I think that's right, and I'll hit both. The first is a little easier. So, there's really two components that drive if you just look at the Q3 real estate tax number. So, one is that pretty significant real estate tax refund we realized in Nashville last year, right? It was great news then. It's a terrible comp today. So if you exclude that overall, I would say, you know, our real estate tax control has been really good. I think year-to-date, you know, excluding that, our real estate taxes are about 1% growth year-over-year. In terms of the full-year outlook, you know, there is a little bit of an impact, I think Paul mentioned, and kind of the, you know, the bridge to a full-year core. There's about a fourth sense that I would say we were, in August, a little bit more optimistic for settlement of some appeals, right, Dallas County, Tarrant County, and Texas, a couple others. We got, since then, our trim notices for our Florida valuations as well. And so all of that has really informed what we think that the full-year expectation is for tax settlement. We're historically very aggressive in terms of fighting the counties with kind of the softness in the market. We feel like we have even more ammunition to go and really drive some better outcomes on taxes. But I think a couple things we think are either slipping into Q1, particularly in Texas, right? We're not getting to settlement as quickly as we would like. There could be a little bit of upside maybe in the higher end of our range. But I think that we took down a couple refund expectations in the Q4. That probably moves into Q1. So it's not a structurally higher, you know, tax outlook. If anything, we feel better about, you know, this year and next year's taxes. And then in terms of the repairs and maintenance, so, you know, it kind of balances with what we're seeing with occupancy, right? We've talked about the amount of information we're collecting in terms of the NextPoint intelligence platform, the AI data points, the funnel. Everything that we're gathering today is really informing. So when we are touring a prospect, we're surveying, we're getting that feedback. And some of what we've seen that we need to be doing a little bit better is building hygiene, maintenance, right? So we've spent a little bit more heavily on contracted pressure washings, making sure that the landscaping is top-notch. As we compete more directly against some of these A-, and new construction deals, we've got to make sure that our seasonal flowers are top-notch, our buildings are fully maintained. We're not encountering cobwebs, things like that. So I do think that, you know, as we look to push pricing, we took some of that feedback and, you know, spent a little bit more on repair and maintenance. You know, it's largely, you know, building and improvements landscape. And it's kind of, you know, chunky in terms of the Q3 timing of it. I don't think that it's necessarily structural, but something that, you know, we're focused on, you know, resident and prospect satisfaction, and that goes to address those.

Okay, thanks. And then, you know, what should we read into the October portfolio trends, right? So the blended rent spread was 20 bps lower than in 3Q. Occupancy fell 50 or 60 bps in the month. You know, maybe some seasonality there as well. But, you know, at one time you had been talking about kind of a hockey stick, same-store revenue recovery in 27. And I understand your comments about supply and such, but, you know, it seems like we should I

think we're going to be incrementally positive on, you know, on the revenue side and these numbers. We're all pleased with the occupancy numbers and the new lease numbers. And, you know, we were pleased with renewals. But, yeah, I think it's fair to say perhaps that, you know, the analyst community was right, but maybe for the wrong reasons. And what I mean by that is the increase in interest rates that we saw over the last 60 days, we did feel, you know, concessions start to create You know, creep up right as we were, you know, basically reporting in Q2, you know, that the short term and the login both rallied, and we saw the development community and the ownership community in our markets, particularly in Sunbelt, starting to get really defensive. So, maybe you could say that, you know, we didn't anticipate that. Not sure that, you know, anyone did, but I don't think that's going to be the case in 2027. So, I do think not putting a number on, you know, what revenue will be right now, but I don't see that happening again. If anything, I think I see the opposite. And, you know, we're very, very pleased with the job growth numbers in our markets, and, you know, that's to our benefit. And, you know, hopefully we can start getting some of the, you know, some of the supply demand imbalance back in our favor, finally.

Okay, thanks. And then lastly from me, I just feel like this needs to be asked, and it's really kind of a, you know, how did this happen kind of question. And what I mean is, you know, how were you so exposed to interest rates and so naked to this increase in rates? I think you said every 25 BIFs in rates is now 14 cents on an FFO number that's, you know, expected to be 222. And SOFR is already higher than what you used when you projected your interest expense in the supplemental and forecasted to go higher. So, you know, what can you do now? You know, it sounds like maybe some asset sales. And, you know, how do you manage leverage, you know, going forward now?

Yeah, it's a good kind of like, you know, I guess, you know, armchair quarterback question. When we, the truth is, is we were focused on swapping a third to half of the portfolio in February and March, and didn't hit our targets. Perhaps we're, you know, penny-wise at the time, but we were ready to swap out a lot in the range of, you know, kind of 3-3 on the SOFR swap rate, which would be basically equilibrium on, you know, on a 53-cent dividend. So that's what happened. And then we weren't going to chase it along the way up and kept getting away from our target. I don't think that we believe the short term is stronger than the market believes. And what I mean by that is, you know, rates have been negative for several years, and it's not showing up in the data yet. So, you know, I think we have a lot of, you know, intelligent people around the company and around the firm, but we did miss a target that we internally set, and that has led to, you know, some unfortunate pain, and we feel it, you know, as much as anyone. What can we do? Well, I don't think we're going to hedge here. You know, again, given our outlook that I think it's more likely if the Fed continues to hike into, you know, this economy and ignoring the effects on the commercial real estate universe and the credit markets and regional banks, you know, I think credit conditions will continue to get tight. And, you know, I think that something is liable to break there. So that's kind of our near term view. I don't think that there's any appetite to hedge at this point. So, the tools in our toolbox are sell assets or reduce the dividend. You know, I don't think we would preferentially take selling assets at a wide discount right now against a backdrop that we think is going to get better for a lot of reasons, even though, you know, some are still bearish. So then, yeah, the source of funds is the dividend. And like I said, we still throw off a lot of cash flow. So, yeah, I think the plan is to actively monitor the swap market, do a disposition here or there that makes sense, and not panic and throw our arms up and say, you know, well, we lost. We don't think we lost. We think that, you know, this is a spot in time, you know, kind of had a bad quarter, you know, bad quarter or two. But, you know, we also think the windshield is larger than the rear-view mirror for a reason. So, you know, we're still optimistic, and that'll be the plan.

Thank you. Really appreciate you answering the question.

You got it.

Reminder, if you would like to ask a question, please press star 1 to raise your hand. To withdraw a question, press star 1 again. Your next question comes from the line of Buck Horn with Raymond James. Your line is now open. Please go ahead.

Hey, guys. Good morning. Appreciate all the color so far. I kind of want to also follow up on those October trends just to clarify a little bit further. And in terms of, correct me if I'm wrong, I think you guys mentioned that your 4Q assumptions are basically that occupancy will stabilize around a 92.8. But it looks like the occupancy trend through October has already trended through that number, at least by 50 basis points. And maybe it's trending lower. Correct me if that's incorrect. But how do you intend to rebuild occupancy into the seasonally slower period? And, you know, what kind of, you know, levers do you need to pull in order to stabilize that number?

Yeah, I'll start, and Bonner, you can add to this. So, October is better sequentially on September, obviously, from new leases, occupancy, ending occupancy, down 50 basis points, but the trend and the renewal retention both are up. And so I think, you know, I think my comment was that the fourth quarter portends 91 point, 92.8% physical occupancy and maybe 91.8% financial occupancy. But I think we feel good about the conversion rates on the lease trend going into the fourth quarter. It took a lot of pain, you know, in August and September. So I think we like the last few months. I don't know if you have anything.

Yeah, I think, you know, that's prepared to mark. So the full quarter, you know, average financial occupancy, 92.8, you know, this is up a little bit. Obviously, you know, have some work to do from the 930 number to fill that out. As we've mentioned, you know, the portfolio today is about 94, 94.55, 94.6, lease. You know, there's a spread there, right? That's the forward-looking lease assumptions. There are, you know, some move outs. I think that, you know, in terms of what we're doing, so, you know, closing the back door, right, I think we feel really good about, you know, retention, trying to get back up to, you know, high 50 to 60%, you know, retention in Q4, really focused on, you know, just moving kind of the low payers there and the opportunity, taking a little bit off in a lower demand season on some of the higher payers in that, you know, subset. And then in terms of the front door, we've been heavily focused really for the last 90 days on making sure every asset manager is part of 2027 budgeting, obviously, but also making sure that we really get back to basics in terms of fundamentals as much as we've highlighted and discussed the implementation and utilization of AI and the chat functions, right? You know, immediate response on an inbound call, what I think we're recognizing and recognized over the last, you know, 120 days is that, you know, just getting a chat response, right, you may get an instantaneous response that might not be the warmest touch, right? It's kind of like, you know, every political, you know, donation text you're getting right now, right? So we have to be really thoughtful about, you know, what that messaging is and making sure that it's followed up by a warm body in our office. So working, you know, working on really the fundamentals on the front end to make sure that we can close. You know, we feel like the lead to lead to tour, tour to app conversion ratios are healthy. We've done, you know, some incremental things, some special pricing on some units. That's, you know, there's certainly more concession activity in some of our lower end, and that was, I think, reflected in the public commentary. And then, you know, really just focusing on moving the needle. I think that, you know, it's our goal certainly to finish the year at a much better cliff than 92.8, but, you know, starting from the base at 9.30, I think that we work up to, you know, probably peak occupancy around the end of the year is our goal. So that's what we're focused on. That's what our teams are focused on. You know, we also reference a little bit of additional, you know, ad spend, marketing, right? That's kind of the other side of the, you know, concession and pricing, right? We've got to make sure in the shifting landscape where, you know, Google search was, you know, the leading driver of so much traffic over the course of the last, you know, 15, 20 years, right? That's really shifting a lot where, you know, some of our younger tenants are going to, you know, ChatGPT and asking, you know, I want this, this, this, and that in, you know, this sub-market Phoenix, right? We're having to kind of reevaluate really everything that we're doing and making sure that, you know, we're top-notch, our, you know, our websites are AI-friendly, right? The photos on the website are, you know, attractive. We're capturing that exposure. So there's a little bit of a shift that we're focused on in the marketing side as well. I think that we can certainly do better there, but we're focused really, you know, across the board on driving off and seeing into what we think will be a better year next year.

We took revenue down 10 cents to Buck, just to state it. Like, you know, it's not like we're, like, you know, maintaining an equilibrium. So, revenue guidance, as Paul bridged you from $2.45 at the midpoint to $2.22, had 10 cents in that number.

Got it. Okay, that's helpful. Appreciate the caller. And just for clarification, just on this Wi-Fi expense or added Wi-Fi, which line item in SameStore expenses? Is that going into utilities or is that in the R&M expense line? Kind of where and, you know, how much of the year of year increases in either of those lines is driven by the Wi-Fi rollout?

Yeah, so it's in the R&M, and we're looking at it. As it continues to grow, I think it's now about 20% of the total R&M spend for the year. It's getting to be significant and noisy, so it may be something that we look at as we go into, you know, 10K annual audit season that we might want to break out contract services because it's getting a lot of scrutiny, right? We're continuing to do it. We think that there's a lot of value in being able to provide one gig fiber for 65 bucks. We think that's fair value. And so we've done it across a significant chunk of the portfolio, but there's still a lot of opportunity left. And so we'll have some visibility there. But again, it's something as we're rolling those contracts on from an expense side, we're also rolling in tenants that are paying for it. So, it is a, you know, net positive for the property and the P&L.

Gotcha. So, of that, you know, roughly 20% year-over-year increase in R&M, is like half of that driven by the Wi-Fi?

Yeah. So, our resident services line specifically is up about 37% year-over-year. So, you know, the full year is about $2.4 million of added, you know, The significant majority of that is the bulk fiber. Got it.

Okay. Very helpful. Thanks, guys. Appreciate it. Thanks, Bob.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.