NexPoint Real Estate Finance, Inc.

And ladies and gentlemen, please stand by. Good day and welcome to the NextPoint Residential Trust Q2 2022 conference call. Today's conference is being recorded. Now at this time, I would like to turn the conference over to Jackie Graham, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good day, everyone, and welcome to NextPoint Residential Trust conference call to review the company's results for the second quarter, June 30th, 2022. On the call today are Brian Mitz, Executive Vice President and Chief Financial Officer, and Matt McGrainer, Executive Vice President and Chief Investment Officer. 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 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, NSRC 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 Mintz. Please go ahead, Brian.

Thank you, Jackie, and welcome to everyone joining us this morning. I really appreciate your time. Just a quick heads up, I'm not in the room with the rest of the team. I'm dialed in, so hoping slash praying that we get a connection here. I apologize in advance if there's any disruptions to the backup contingency plan. But as Jackie mentioned, I'm Brian Mitz, and Matt McGrain, our CIO, is joining me today. I'll kick off the call and cover our Q2 and year-to-date results, update our NAV calculation, and then provide guidance. I'll then turn it over to Matt to discuss specifics on the leasing environment and metrics driving our performance and guidance and details on the portfolio. Results for Q2 are as follows. Net loss for the second quarter was $7.8 million. or a 30 cent loss per diluted share on total revenue of 65.8 million as compared to a net loss of 3.4 million or 14 cent loss per diluted share in the same period in 2021 on total revenue of 52.6 million, which is a 25% increase in revenue. For the second quarter, NOI was 38.8 million on 41 properties compared to 30.2 million for the second quarter of 2021 on 39 properties. a 29% increase in NOI. For the quarter, year-over-year rent growth on renewals averaged 16.9% across the portfolio, and year-over-year rent growth on new lease has averaged 21.1%. Given where rental rates are in our markets for Class B apartments and equivalent single-family rental product, we believe there is ample room for future outsized rent growth. For the quarter, same-store rent increased 19.2%, and same-store occupancy was down 150 basis points to 94.5%, as we focused more on rate than occupancy during the quarter. This, coupled with an increase in same-store expenses of 10.9%, led to an increase in same-store NOI of 16.4% as compared to Q2 of 2021. Rents for the second quarter of 2022 on the same-store portfolio were up 5.6% quarter-over-quarter. We reported Q2 core FFO of $20.3 million, or $0.79 per diluted share, compared to $0.56 per diluted share in the same quarter of 2021 for an increase of 40% on a per share basis. In the quarter, we completed 650 full and partial renovations, an increase of 22% from the prior quarter, and leased 609 renovated units, achieving an average monthly rent premium of $150.

It looks like Brian has lost connection.

This is David Wilmore. I'll hop in and conclude Brian's prepared remarks. During the quarter, we completed 650 full and partial renovations, an increase of 22% from the prior quarter, and leased 609 renovated units, achieving an average monthly rent premium of $138 and 24% ROI during the year, which is 310 bps higher than our long-term average ROI in renovations. Inception to date in the current portfolio, We've completed 6,834 full and partial upgrades, or 44% of the total units, 4,724 kitchen upgrades and washer-dryer installs, and 9,624 technology package installations, achieving an average monthly rent premium of $142, $48, and $42, respectively, and an ROI of 21.8%, 69.7%, and 33.5%, respectively. each of which helped to drive our NOI year-over-year higher by 28.5%. On April 1st, we acquired two properties, one located in Sandy Springs, Georgia, and the other in Phoenix, for a combined 143.4 million, comprising 562 units in total. Our net loss for the year was 12.5 million, or 48 cents per diluted share on total revenue of 126.6 million, as compared to net loss of 10.3 million, or $0.41 per diluted share in the same period in 2021 on total revenue of $104.4 million, or an increase in revenue of 21%. Year-to-date, NOI was $75.4 million on 41 properties, as compared to $60 million on 39 properties for the same period in 2021, or an increase of 26%. For the year, same-store rent increased 19.2%, and same-store occupancy was down 150 basis points to 94.5%. This, coupled with an increase in same-store expenses of 7.8%, led to an increase in same-store NOI of 16.4%, as compared to the same period in 2021. We reported year-to-date core FFO of $40.4 million, or $1.58 per diluted share, compared to $1.13 per diluted share in the six months ended June 30, 2021, or an increase of 40%. For the year, we completed 1,181 full and partial renovations, an increase of 90% from the prior period in 2021. Based on our current estimate of cap rates in our markets and forward NOI, we are reporting a NAV per share range as follows, $80.70 per share on the low end, $96.27 per share on the high end, and $88.48 per share at the midpoint. These are based on average cap rates ranging from 3.9% on the low end to 4.2% on the high end. which has increased approximately 40 basis points from last quarter to reflect the rise in interest rates and observable increases in cap rates in our markets. For the quarter, we paid a dividend of 38 cents per share on June 30th. Since inception, we have increased our dividend 84.5%. Year-to-date, our dividend was 2.08 times covered by core FFO with a payout ratio of 48% of core FFO. Turning to guidance, we are reiterating core FFO and revising our same-store NOI guidance upwards. For SAMHSA or NOI, we're estimating 14.7% on the low end and 17% on the high end. The midpoint at 15.8% is a 150 basis point increase from our prior guidance of 14.3%. At the midpoint, 2022 Core FFO guidance represents a 24% increase over 2021 Core FFO of $2.43 per share. With that, I'll turn it over to Matt for commentary on the portfolio. Thank you, Dave.

Let me start by going over our second quarter same store operational results. Our Q2 same store NOI margin improved to 58.4% of 118 basis points over the prior year period. Rental revenue showed 8.8% or greater growth in nine out of our 10 markets while same store average effective rent growth reached a record 19.3%. Eight out of our 10 markets achieved year-over-year growth of 10.4% or higher with Tampa leading the pack with 21.7% total rental revenue growth. Second quarter same store NOI growth was special across the board with the portfolio averaging 16.4% holding in line with Q1, driven by an accelerating 14.2% growth in total revenues. Eight out of our 10 same store markets achieved year-over-year NOI growth of 13.2% or greater. Operationally, as I mentioned, the portfolio experienced continued positive revenue growth in Q2, with 9 out of our 10 markets achieving growth of at least 8.8% or better. Our top five markets were Tampa at 21.5%, South Florida at 18.3%, Nashville at 18%, Orlando at 17.8%, and Atlanta and Phoenix were tied at 15.4%. Q2 renewal conversions were 49.3% for the quarter, with 6 out of 11 markets executing renewal rate growth of at least 15%, and no markets were under 10%. Our leaders were Tampa at 26.2%, Orlando at 24.1%, South Florida at 22.5%, Phoenix at 16.9%. And on the occupancy front, we were pleased to report that Q2 same-store occupancy closed at over 94%, Despite a robust renovation output, and as of this morning, the portfolio is 97.6% leased with a healthy 60-day trend of 91.4%. The occupancy strategy for Q2 was more akin to our pre-pandemic strategy of pushing rents to force turnover in order to achieve primarily two goals, close the gap on lost lease and renovate more interiors. Our 2Q same-store loss-to-lease was 12.7%. This is about 5% percentage points ahead of RealPage's national average in the 8% range because our Class B rents continue to outpace growth, more growth in the overall market. Our initial base case for the second half of the year saw rent growth and loss-to-lease moderating, but the actual market fundamentals have outperformed expectations to start this year, and our outlook remains constructive. We now expect to see lost lease decline into the high single digits in the second half, with the most significant reductions coming in Q4 as we shift priority to higher occupancy over max rate during the slower traffic and demand season. As Dave mentioned, our occupancy strategy also led to 650 completed rehabs during the quarter, generating an average of 25% return on investment and our second highest rehab output since the inception of the company. As we enter the second half of the year, place more emphasis on occupancy and will likely see some moderation in rents, but do expect continued strength in rents in the mid to upper teens for the rest of this year and high single to low double-digit growth going into 2023. July rents so far are showing continued strength and strong traffic despite record high temperatures in most of our markets, with a blended 16% growth on new leases and renewals on roughly 1,100 leases. Turning to the 2022 guidance, the strength in in rent rolls and GPRs and total revenues allowed us to increase same-store NOI guidance again for the second time this year, as Dave said, to a range of 14.7% to 17% with a midpoint of 15.8%. I'll quickly share a few data points that have informed our guidance and underlined the strength that we're seeing in our markets. First, our resident incomes continue to see healthy growth. Both ours and RealPage's data show renter average annual incomes are up 24% from January of 2020. Rent-to-income ratios in our markets as of July are roughly 23%, as our tenants' average household incomes continue to increase to now over $70,000 annually. The gap between Class A and Class B rents also remain elevated at nearly $500 per unit, leaving little room to trade up to Class A or out to SFR. Two factors, dearth of construction financing due to credit market volatility and banking system stress tests, plus elevated hard costs are likely to keep this rent delta between Class B and other trade-up options at historically wide levels. These factors keep us constructive on our portfolio growth over the near to intermediate term. Turning to transaction activity. No surprise here, but the transaction market has cooled significantly. due to credit market volatility and negative leverage in most commercial real estate property types. Most institutional owners have put off disposition plans until later this year, unless there is a fund of life issue or pending loan maturity. Deals under contract pre-May have seen 10% to 15% retrays on valuation, sending spot cap rates to 3.75% to 4% in our markets. We've recently seen some capitulation from sellers at 4% cap rates, as well as buyers being able to underwrite growth to positive leverage in years two or three. Thus, as has been the case since our first earnings call, we've been transparent on our view of cap rates and NAB, as Dave said, have adjusted our NAB downward to a new midpoint of $88 per share. At today's prices, our implied cap rate is north of 5%. And as we've routinely done in the past and to the extent we stay at these levels, we will look to sell assets, namely our Houston portfolio and buy back our stock. In closing, the first half of 2022 has been exceptionally strong for the company. We're expecting to see further strength in fundamentals for middle market rental housing, particularly in our Sunbelt markets. And we maintain optimism that 2022 will be one of our best internal growth years ever. And that's all I have for prepared remarks. Thanks to our teams here at NextPoint and BH for continuing to execute. And now I'd like to turn the call over to the operator for questions.

Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Do keep in mind if you are using a speakerphone, please make sure your mute function is released to allow your signal to reach our equipment. Once again, if you have a question, please press star one. We'll pause for just a moment to assemble the queue. And we'll hear first from Toyo Okasanya with Credit Suisse.

Hi, yes. Good morning, everyone. Congrats on the quarter. From our end, I guess the first question is kind of guidance-related. Again, a good, solid beat in 2Q is, versus the street of about five, six cents. But you guys didn't raise the midpoint of your guidance. So just curious about what that implies about the back half of 22.

Nothing operationally. It's a great question, Todd. But nothing operationally. It's more of timing around the Houston dispositions on the assets and holding those on a little bit longer than we otherwise would have. As you recall, we were attempting to take them out right as the downturn in the credit markets, and like I said, put those off until probably after Labor Day. So that's the quote-unquote hesitation, if you will, but again, nothing operational. It's just that delay, sort of a timing issue.

Yeah, but if there's a delay, shouldn't that kind of help the numbers because you still have that NOI coming in?

Yeah, you have the NOI, but you also have, you know, they're being held when we increase the revolver on the interest expense. It's going to basically offset the NOI.

Okay, gotcha. Okay, so that's number one. And then number two, again, just again, with the backdrop of rising interest rates, again, you guys, a little bit more leverage, have a lot of swaps in place. Could you just kind of help us think through that and the potential impact of your rates keep rising? you know, how that ends up impacting numbers, not just in back half of 22, but kind of going into 23 given a lot of the swap maturities?

Yeah, I mean, the swaps don't mature until another kind of, quote, you know, four years or so. So, you know, the near term is favorable. What we're really talking about is the revolver. Some things we're looking to, you know, to address the revolver with is, you know, we're in talks with the agencies to potentially lower spreads on the impending maturities in 24. That, we think the spread differential could be about 50 basis points and, you know, largely offset any, you know, I guess any increased interest expense and actually, you know, fundamentally save us anywhere from a million to $2 million a year starting next year. If we're able to get that done, we feel pretty good about it. So that's, That's kind of an active balance sheet maneuver that we're in talks with now to mitigate the unhedged piece of the book.

Gotcha. And then one more, if you could indulge me again, just the NAV recast, again, with the kind of higher interest rate, higher cap rates you guys are using. Again, it sounds like, again, you are actually seeing that in the transaction markets right now. You're kind of confirming that cap rates are moving for kind of, again, the affordable housing type multifamily. Could you talk a little bit about on the Class A side, if you're kind of seeing a similar change? Even though, again, it's not stuff you're trafficking, but just giving it to your market.

Yeah, sure. No, we definitely are. I mean, the reason why you're going to have lower cap rates in B is because you can underwrite growth. And the even at the lower levered class A core type buyer, they're still basically at parity or negative leverage on a going in cap rate with less growth. So we've seen really class A, unless it's of course some irreplaceable location or something special with the asset, but those cap rates are moving also into the four range as well.

Gotcha. All right. I'll get back into the queue. Thank you. Thanks, Tom.

We'll now hear next from Michael Lewis with Truth Securities.

Thank you. First, I just wanted to follow up on the question about the guidance. It sounds like it's really interest expense that's keeping you from raising that because you did $1.58 in the first half of the year core FFO. That would imply at the midpoint just $1.43. in the back half, and it sounds like you're going to hold Houston longer. Maybe that's a wash because of the financing on it. But is it fair to say it's really just the threat of interest expense that's keeping you from raising the range?

Yeah, it's really the curve is what we're trying to monitor on the revolver. And then, like I said, we're doing a couple of things to mitigate those items, as well as if we're able to sell Houston you know, earlier. So those are, those are some mitigants. And I, I'd like to remind everyone that we've, we've raised guidance twice to, from, you know, initial guidance of, you know, $2 and change. Yeah. $2 and 90 cents and change. And then the 301. And so, yeah, I think we're, I think we still feel pretty, pretty comfortable with the strength in the portfolio.

Yeah. I understand. You already put the bar up there, right? 24% growth isn't too shabby. Yeah. Thanks for that. And then, I wanted to ask a question a little different. I noticed you had quite a few communities that had, you know, a handful of units that are down due to casualty events. I was just wondering if that, you know, was that like one weather event? Is that sort of a, you know, is that normal to have, you know, units out of service that you're, you know, you're not earning on? I guess you're collecting casualty. Anything to talk about on that? Anything notable?

Yeah, happy to. No, I mean, unfortunately, from time to time, you know, the portfolio and communities experience fires, and that's what you're seeing. We've had, you know, some kitchen fires and a couple of the assets that have taken down units, and so we're actively, you know, remediating and trying to get those back up as soon as possible. But any operator or landlord that's over on the garden, you know, bee-style deal will we'll kind of, you know, feel our pain, so to speak. But that's what that is.

Okay, thanks. And then last for me, you know, I saw the same store expenses were up quite a bit in the second quarter. You raised the guidance, but not too much. You know, what's kind of the outlook or what, I guess, what drove that increase in the second quarter? And then, you know, the guidance kind of implies that'll come back in a little bit in the second half.

Yeah, that's a great question. You know, most of that is R&M in turn. So repairs and maintenance expense that we don't capitalize because, you know, it's not a capital item with ROI components. So a lot of that is, you know, quite honestly during the second quarter was HVAC and contract labor where we had to, you know, fix and cool the properties during the heat. So That was a spike. We don't expect that to continue or to accelerate, but that's what it was during the second quarter. Plus, we were churning, like I said, to capture or close the gap on loss to lease and renovate.

Okay, thank you.

You bet.

Moving on to our next question, which will come from Buckhorn with Raymond James.

Hey, good morning, guys. Question about supply in your markets and kind of what you're looking at coming to the market over the next few quarters. I know a lot of that product may not be directly competitive to your price points, but I'm curious how you're thinking about how that may affect cap rates or asset pricing as investors kind of digest that product and or do you think it could get to a level where it does begin to pull renters potentially away from your properties?

Yeah, good question. There is some supply coming online. I would say that those were existing deals in motion. If you're trying to start something today, like I said on the prepared remarks, it's hard to generate a yield on cost north of 5% to justify the development. But Markets like Phoenix, for example, are seeing some high supply. Obviously, Dallas is always blowing it going, but I still don't think it's going to have a dramatic impact on our portfolios, so to speak, because I think the new developments need to achieve $1,900, $2,000, $2,100 in rent to justify that new build, and that's roughly $700, $800 of headroom from our unit. So while we're continuing to push rent in the teens to low 20%, the end of the year effective rent for us is, I think, $1,420 or so. So still enough headroom in our estimation to still be competitive. Add to that some move-outs, moving expenses, et cetera. It kind of addresses our underlying fundamentals and thesis. So um, we think we're okay.

Got it. Got it. Appreciate that. Um, and just, you know, in terms of like leasing traffic, you know, just as kind of fears of, you know, recession seems the drumbeat of, of economic concerns seem to be building out there. Have you seen any sort of change in, in, uh, renter traffic or behavior around, uh, current leasing in terms of interest per available unit? I don't know if it's web traffic or walk-in traffic. Any other indicators that might suggest the demand level is starting to taper off?

No, not for the Bs. We are seeing some of that in Class C where renters, not that we own Class C, but just observing you know, Class C assets. Renters are more on a fixed income basis. You know, rents are growing at 8 plus percent in Class C. You know, obviously, That wage growth is hard to sustain those types of renter increases. So you might see some bad debt and some delinquency tick up in that space. But as far as Class B, we haven't seen any demand abatement yet and obviously still pushing through great new leases and renewals. So traffic is still healthy. Obviously, during the summer months in Phoenix or Dallas or something, it's fantastic. A little bit difficult, but everything still feels good. Great. I appreciate the color. Thanks, guys. Thanks, Bob.

And now we'll move to our next caller, and that will be Rob Stevenson with Genie.

Good morning, guys. Matt, how has pricing been for any similar quality Houston assets to yours that you've seen traded recently?

Four and a quarter, I would say. We softly got unsolicited bids. on Old Farm in Stone Creek before the market fall. And they were just bids. We couldn't transact during the timing. But that was kind of 3.75, 3.8. And then those buyers have come back and they're in the four and a quarter range. So that's the best kind of apples to apples comparison that I can give you. So we could transact at that level today if we wanted to.

Okay. And from your standpoint, when you look forward, is there any urgency with oil prices where they are to transact Houston in the near term? Or if the pricing isn't where you want it, do you guys hold that into 2023? How are you guys thinking about that? Or is there never going to be a better time to really sell?

Yeah, I agree with you. And we, you know, we share that. Absolutely. We think, you know, it's a good year to do it. Oil demand, as you said, is strong. And that's helpful for the investor kind of optimism within the market. And it's also, you know, Houston, we want to do a lot of things with Houston. We want to sell the assets to buy back our stock, de-lever, et cetera. But those are the assets that are also the slower, same story in oil growth assets within the portfolio. So there's a multitude of reasons to sell them.

Okay. And I guess how active are you guys in the acquisition market? I mean, you bought stock at just under 74 in the quarter. Stock's down in the low 60s versus a high 80s NAV. Are there any acquisitions that you guys could see out there that would make sense versus your own stock at this point? So the stock's price is much higher? No, not at all. All right, and then last one for me. So if I look at the same store revenue growth, you guys were 11-3 in the first quarter and then surprisingly jumped up to 14-2 in the second quarter. Is the third quarter really when your year-over-year comps get their toughest and so you start to see the aggregate growth come down? Because you're at 12-7 in the first half, and then the midpoint of guidance is 12, and even the high end of the guidance is only 12-4. So it's suggesting coming down, but is there any likelihood – that you can maintain, you know, 14-ish, high 13s, same sort of revenue growth in the third quarter, or is just the law of big numbers on the year-over-year comps going to get in the way of that?

No, that's, again, a good question. You're right. The third quarter comp is going to be the first kind of tougher one that we see. But, you know, right now, our revenue, I mean, it's one month, but July, we're, you know, we're in that high team. So, I think it's sustainable as I sit here today and obviously things could change, but I do think we could push through teams through the third quarter and as we build occupancy, maybe 10 to 12%, 13, 14% in Q4. So that's what we're forecasting at least. We think that we can do, let's see, kind of 14% to 15% really is kind of our income forecast for Q3 and Q4. Okay.

And I guess last one for me then. Are you seeing any material incremental pressure or release on material and labor costs to do the upgrades?

Not on the material costs. In terms of costs, we are – having greater accessibility to the durable goods like washer and dryers. The supply chain there has loosened a little bit. That has caused us to be able to reduce the turn time on renovations from 35, 40 days, which was pandemic, to less than 30. That's where we're seeing, I guess, the best improvement. But still, contract labor and goods pricing is still elevated. Okay. Thanks, guys. Appreciate the time. You bet. Thanks, Mark.

We'll now hear from Michael Gorman, BTIG.

Yeah, thanks, Matt. Could you just spend a minute and talk about Vegas and kind of what you're seeing in the market there? I noticed quarter over quarter. It was the only market with a negative rental income. But it seems like, I don't know what happened there, the 50 basis points occupancy declined up against a pretty decent quarter-over-quarter rent growth. Can you just walk us through kind of what happened there and what you're seeing in the Vegas market?

Yeah, thanks, Michael. It's really isolated to one asset, which is Bloom. And we've had kind of notorious late payers and delinquents um, delinquent renters there, um, throughout the pandemic area. And, uh, you know, we're able to clear out, um, quite a bit evictions, you know, in the 75 to a hundred, um, you know, resident range and, and renovate as many of those and try to turn the demographic profile, um, of that asset. Um, but largely it was, it was the washout, um, of, of those evictions where the courts open and we were able to push through, you know, a lot of these, um, a lot of these late payers and skips. and hopefully that you won't see that again going forward.

Okay. And then I guess just were those higher rental units? Because I'm just trying to figure out if I compare the Vegas numbers with like the Atlanta numbers, and they're in the same ballpark for effective rent growth, same ballpark for occupancy change, but Atlanta saw a 5% increase in rental income quarter over quarter, and Vegas saw a 1.5% decline. I guess I'm just, I'm not quite clear what drove that, but anything you could add there would be helpful.

Yeah, I mean, I think your apples to oranges there because the Atlanta job market's a little bit more diversified, less leisure, and while it might be the same whole dollar rent, It's a different market, different tenant. This asset in particular doesn't have as much of a diversified job basis as an Atlanta asset or the other Las Vegas assets. Like I said, I think it's just attributable to this one asset and changing the demographic profile.

Okay, great. That's helpful. And then Maybe just more holistically as you look at the portfolio and we get deeper into the housing cycle, obviously there's pressure kind of across the board with rents going up in almost every product type. Have you seen any change in terms of where the move-outs or the non-conversion renewals, where they're going when they leave your properties?

Yeah, I mean, I think it's for another kind of competitive market. garden deal most likely. We haven't. We spent a lot of time with RealPage yesterday, and the good news for our markets is that while Gateway, and maybe this is what you're getting at, While gateway traffic and rents are accelerating in San Francisco, New York, and other places like that, it's not coming at the expense of the Sunbelt market. So we're not seeing a flight back to New York, so to speak. What we're seeing is that people are just moving for personal reasons. Obviously not to buy a home, but they either had a job, like a new job relocation, Or in some cases, doubling up with a roommate now is kind of the more likely option that we're seeing. So that's really where it's going. We're still seeing net migration data very positive, 20-plus percent inflows from California and Illinois. So that's a trend that we're continuing to see also. But otherwise, I think that's the story.

Yeah, that's helpful. And we noticed the same trend, the improvements on the coast not coming at the expense of the sunbelt. Last question for me. I think you touched on it briefly, but when you're thinking about the cap rate shifts, how much of that do you think you can attribute just to the disruption in the capital markets versus are you seeing buyers change assets they're underwriting for future rent growth. Is that having an impact on pricing as well, or is it almost entirely just due to the cost of capital?

Yeah, I think it's the cost of capital. We had good meetings yesterday with some of the large brokerage houses as well, and it's largely just the shock to the system that was so quick. And quite frankly, the lender's whether it's banks that are, you know, charging more for balance sheet warehousing or the agencies that can't seem to find, you know, they're beholden to the credit market too with the Freddie K securitizations and spreads and demand from bond investors. So, you know, all of that is trying to find a place and a calm place to sit and settle for a while. And it just hasn't happened yet. So that's, You know, we know where kind of floating rate spreads are, you know, kind of for normal, highly leveraged, you know, buyers. It's, you know, 200. You throw the SOFR on top of that plus cap costs, you're a negative leverage. So, you know, unless you have a growth story, you know, in underwriting, you know, 10 plus percent, then it just doesn't work right now. Fixed rate is The buy and hold long-term fixed rate buyers, that's at 4.5% to 4.75% all in. Obviously, that doesn't work unless you can pair a cap rate in the 4.25% to 4.5% range and have growth. Everyone seems to be liking the same assets and it's constructive, but I think they're waiting to have a credit market you know, settle down a little bit. And hopefully, you know, hopefully it does.

Great. Thanks for the time. Thanks, Michael.

And as a reminder, if you'd like to ask a question, please press star one. We have a follow-up from Toyo Okasana. Yeah. With credit to you.

Yes. Thank you. The NOI margin improvement during the quarter, let's just talk a little bit about it and what drove that And again, longer term, where we can expect NOI margins to be, you know, as you guys start to do more with PropTech and just, again, relative to, you know, comping you guys or such a peer group where your peer group tends to have NOI margins in the low to mid 60% range?

Yeah, I mean, that's been our aspiration, right? And we're continuing to do it. I think, you know, I think largely the improvements This quarter, and really the first half of the year, was on the non-controllable side. If you recall, over the past few years, we've just gotten hammered on property taxes and insurance. We've changed consultants on both of those fronts, and we've honed in better control on the non-controllable expenses, if you will. Those are a couple of the categories that we see. I'd also say on the payroll and leasing front, we're taking the lead of some of the gateway and other REITs and operators in terms of virtual leasing and having maybe a call center leasing agent instead of having onsite employees at the sites. I think you'll continue to see that. you know, that cost come down and be more efficient on the property management staffing side. And so I'd say those are the primary two, you know, category drivers of same-story and OI margin improvement that we hope to continue to execute on.

Gotcha. Thank you.

You bet.

Okay.

And at this time, there is no additional questions in our queue. I'll turn the call back over to your host for any additional or closing remarks.

Yeah, thank you. I appreciate everyone dialing in today and look forward to next quarter. And have a good rest of the day. Thank you. Bye-bye.

And with that, ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation, and you may now disconnect.