NexPoint Real Estate Finance - Q1 2024

Transcript

Operator (participant)

Good morning. My name is Dee, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Real Estate Finance first quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Kristen Thomas, Investor Relations. Please go ahead.

Kristen Thomas (Head of Investor Relations)

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance conference call to review the company's results for the first quarter ended March 31st, 2024. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer, Matt McGraner, Executive Vice President and Chief Investment Officer, and Paul Richards, Vice President, Originations and Investments. As a reminder, this call is being webcast through the company's website at nref.nexpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements with 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 annual report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risk and other factors that could affect the forward-looking statement. The statements made during this conference call speak only as of today's date, and except as required by law, NREF 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 presentation that was filed earlier today. I would now like to turn the call over to Brian. Please go ahead, Brian.

Brian Mitts (EVP and CFO)

Thanks, Kristen. I appreciate everyone joining us today. It's Brian Mitts here. I'm going to start by briefly going through our quarterly results and then provide guidance for the next quarter. And then I will turn it over to Matt and Paul to give commentary on the portfolio and the macro lending environment. So, to start it off, Q1 results are as follows: For the first quarter, we reported a net loss of $0.83 per diluted share, compared to net income of $0.37 per diluted share for the first quarter of 2023. The decrease in net income was largely driven by accelerated premium amortization on $508.7 million of SFR loan that was prepaid on January 25th.

Net interest income decreased to -$12.8 million in the first quarter of 2024, from $3.9 million in the first quarter of 2023. The decrease was driven primarily by the $25 million of premium that was amortized in Q1 due to the SFR loan prepayment I just mentioned. Earnings available for distribution was -$0.46 per diluted share in Q1, compared to $0.52 per diluted share in the same period of 2023, and $0.44 per diluted share in Q4 2023. Again, the negative result was due to the acceleration of premium on the prepaid SFR loan. Cash available for distribution was $0.60 per diluted share in Q1, compared to $0.55 per diluted share in the same period, 2023.

The increase in cash available for distribution from the prior year was partially driven by the prepayment penalties from the SFR loan paydown. We paid a regular dividend of $0.50 per share in the first quarter, and the board has declared a dividend of $0.50 per share payable for the second quarter of 2024. Our regular dividend in the first quarter was 1.2 times covered by cash available for distribution. Book value per share decreased 14.8% from the first quarter of 2023, and decreased 6.9% from the fourth quarter of 2023 to $16.69 per diluted share, with the decrease being primarily due to the SFR loan prepayment.

During the quarter, we contributed to six preferred equity investments with $11.5 million of outstanding principal and a weighted average yield of 10.8%, and originated one loan, $44.6 million of outstanding principal at a rate of 900 basis points over SOFR. We sold 1.2 million shares of our Series B Cumulative Redeemable Preferred Stock for net proceeds of $27.7 million. We had one senior loan redeemed for $508.7 million of outstanding principal and received $8.9 million in prepayment penalties. Our portfolio is comprised of 90 investments, with total outstanding balance of $1.2 billion.

Our investments are allocated across sectors as follows: 47.2% multifamily, 46% single-family rental, 5.2% life sciences, and 1.5% storage. Our portfolio is allocated across the following investments: 43.3% CMBS B pieces, 18.3% preferred equity investments, 15.2% mezzanine loans, 11.6% senior loans, 6.3% mortgage-backed securities, 4.4% IO strips, and 0.9% MSCR notes. The assets collateralized in our investments are allocated geographically as follows: 19% Texas, 9% Florida, 8% California, 6% Georgia, 5% Maryland, 4% Washington, and 3% Colorado with the remainder across states of less than 2.5% exposure. This reflecting our heavy preference for Sunbelt investments.

The collateral on our portfolio is 86.6% stabilized, with a 68.5% loan-to-value and a weighted average DSCR of 1.72x. We have $843 million of debt outstanding. Of this, $342 million or 41% is short-term debt. Our weighted average cost of debt is 5.9%, and has a weighted average maturity of 1.7 years. Our debt is collateralized by $1.2 billion of collateral, with a weighted average maturity of 5.3 years, and our debt-to-equity ratio is 2.04x. Moving to guidance, earnings available for distribution of $0.45 per diluted share at the midpoint, with a range of $0.40-$0.50 per share on the low end and high end.

Cash available for distribution of $0.40 per diluted share at the midpoint, with a range of $0.35 per share on the low end and $0.45 per share on the high end. So with that, I'll turn it over to the team for a detailed discussion.

Paul Richards (VP of Originations and Investments)

Thanks, Brian. The first quarter results demonstrated robust performance across all of our investment sectors, particularly in our CMBS B pieces portfolio. Our approach focuses on areas where our dual expertise in owning and operating commercial real estate provides a distinct advantage. This dual role as both owner and lender allows us to effectively leverage information to assess and identify value across the entire capital stack, aiming to deliver risk-adjusted returns that surpass the norm. Our investment strategy continues to focus on credit investments and assets that are stable or nearly stabilized, prioritizing careful underwriting, minimal leverage, and a moderate debt basis. We also emphasize lending to reputable sponsors and consistently provide dependable value to our shareholders. In the first quarter, despite tough conditions in the commercial real estate market, our loan portfolio remained stable, comprising of 90 individual assets with approximately $1.2 billion in total outstanding principal.

The portfolio is geographically diverse, with a bias towards the Sunbelt markets. From the beginning of the first quarter through today, the company has been very active in underwriting and deploying capital. We completed the purchase of two new issue, five-year fixed, with the latest one closing this past Tuesday, Freddie Mac B-Piece opportunities with extremely attractive metrics. Both securitizations have high 50% LTVs, 1.30x+ DSCR, and a diverse geographical footprint with great sponsorships. These B pieces will pay an all-in unlevered fixed rate yield of 9.75% and 9.5%, respectively. With modest leverage, we expect to generate a mid-teen levered return on very desirable collateral pools.

The company also purchased a new issue, SFR ABS paper, in the gross amount of approximately $44 million, and prudently leveraged to achieve low to mid-double-digit returns, and high cash flowing stabilized SFR collateral pool. On the disposition loan repayment side, as mentioned, we received approximately $508 million gross of financing and around $50 million net of financing, as the portfolio's largest SFR loan was repaid in full. At the end of the quarter, we continued to maintain a cautious approach to our repo financing, with leverage standing in the 60% loan-to-value range and fortifying the CMBS book by acquiring accretive triple-A new issue CMBS paper. We consistently engage in communication with our repo lenders, discussing the market conditions and the status of our finance CMBS portfolio. In summary, we are consistently identifying appealing investment opportunities across our target markets and asset classes.

We are committed to meticulously evaluating these opportunities to enhance shareholder value. We have strong confidence in the resilience of the residential sector, particularly given the current interest rate climate. Our investments in multifamily and single-family verticals are considered secure, as evidenced by the historical performance and the current rent-to-own dynamic, providing long-term sector tailwinds. Additionally, we continue to be very enthusiastic about our investment pipeline in the life science CDMO sector. To finalize our prepared remarks, before we turn it over to questions, I'd like to turn it over to Matt McGraner.

Matt McGraner (EVP and Chief Investment Officer)

Thank you, Paul. As he just mentioned, we remain pleased with our solid Q1 results, especially on a relative basis. Our portfolio continues to perform very well, and despite short-term challenges in supply and multifamily, the underlying performance in multifamily, SFR, storage, and life sciences remain relatively stable. From a capital markets perspective, we are seeing improved liquidity led by the CMBS market with a risk-on signal from spreads. Continuous material inflows of cash to fixed income investors should further support spread tightening over the near term, and should offset some of the higher for longer shocks. The distress we do see in housing mostly lies in the 2021 to 2022 vintage non-agency floating rate bridge loan market.

We believe these loans and the underlying properties will be challenging over the next 12 months or so, but afterwards, deliveries do start to rapidly dissipate and should create a more favorable supply and demand balance in the landlord's favor. And that said, capital for residential assets continues to be plentiful in real time. Over the last 60 days, private equity investors have aggressively priced over $15 billion of housing product in the low five cap rate range, and meanwhile, over $240 billion of private equity dry powder still remains on the sidelines. We continue to successfully ramp our Series B preferred raise and expect that that pace will be $15 million-$20 million per month in the second quarter.

Proceeds will continue to be deployed into the $220 million life science loan in Cambridge, as well as additional Freddie K B pieces. In addition, we are currently underwriting over $250 million worth of special situation opportunities across the residential and life science sectors. To the extent any of these do hit, we would look to modestly relever the balance sheet via notes offering to match fund the near term or the term, and lock in accretive spreads for the company. Given all this positive activity, we expect our current capital base, including the SFR loan repayment, to be redeployed in the second quarter and continue on our normal CAD run rate range and growing throughout the second half of the year.

To close, we're excited about these opportunities in the coming quarters and pleased with the company's continued stability and the opportunity to go on offense in this environment. As always, thanks to the team here for the hard work, and now I would like to turn the call over to the operator for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is star one to join the queue. Your first question comes from the line of Stephen Laws from Raymond James. Please go ahead.

Stephen Laws (Managing Director and Senior Equity Research Analyst)

Hi, good morning.

Matt McGraner (EVP and Chief Investment Officer)

Good morning.

Stephen Laws (Managing Director and Senior Equity Research Analyst)

Matt, you may have mentioned this, or you did mention it kind of towards the end of it, at the very end of your comments. You know, I wanted to, you know, get your outlook, you know, CAD versus dividend. You know, obviously some noise, or not noise, but some turnover here in the first half of the year with regards to recycling capital into new investments. You know, you still have comfort with the dividend level that, that CAD and EAD can kind of continue supporting the $0.50 level, and, and what's your outlook as, as you get this capital redeployed as, as far as the earnings power of a fully deployed portfolio?

Matt McGraner (EVP and Chief Investment Officer)

Yeah, of course. You know, we ended the year, I guess, $0.51 of CAD run rate in 2023. With the Series B and the pipeline investments that we know we have to deploy throughout the 2024 year, you know, we thought we could grow that range from 15%-20%. The kind of what we didn't see was the big loan repayment on the Front Yard loan, which was $510 million, roughly. That detracted from CAD on an annual run rate of about $0.35, on an annual or a little bit more, $0.40 on an annual basis.

So, you know, our job is to redeploy that capital here in the second quarter and get us back on that $0.51 run rate, and then increase vis-a-vis the Series B and the, you know, the new investments to match. So feel pretty good about, you know, the run rate post this redeployment of the capital, and so that's why we're, yeah, sticking with the dividend.

Stephen Laws (Managing Director and Senior Equity Research Analyst)

Great. I appreciate the color there. And, you know, you also provided some return numbers on the new B pieces, and I believe it was some loans you did. I appreciate that. But kind of generally, as you look at your pipeline, you know, when you look at achievable returns from securities versus mezz or pref investments, you know, can you talk about what you're seeing, relative attractiveness across those different options?

Matt McGraner (EVP and Chief Investment Officer)

Yeah. Really everything we're underwriting and whether, you know, whether it's a Freddie K B piece, you know, with modest leverage in the mid-teens, you know, on the construction loan side, originations, we think we can do, you know, mid-teens as well. So I wouldn't say I necessarily favor securities over, you know, originating a private investment at, you know, I think we can price each pretty well, and have, you know, enough opportunities to do both in spades. I don't know, Paul, if you have any other thing to add?

Paul Richards (VP of Originations and Investments)

No, I think that's exactly right.

Stephen Laws (Managing Director and Senior Equity Research Analyst)

One final, and if I may, operating expenses, you know, we'll get more color when the Q comes out, but, you know, any one-time OpEx that was a result of the events in Q1, or can you talk about, you know, your expectations for run rate operating expenses moving forward?

Brian Mitts (EVP and CFO)

Yeah. Hey, Stephen, it's Brian. There, there's a couple of things that contributed to that, from kind of audit overruns and some legal expenses, debt yield costs, as well as the way the stock compensation gets amortized in. We think—and one of the, you know, with my guests leaving some of the forfeitures, kind of gets flushed through all at once. So we think that returns to normal run rate throughout the rest of the year. We've increased our pools on, you know, various things where we're needed, so it should be more stable and kind of back to the run rate that we've seen before.

Stephen Laws (Managing Director and Senior Equity Research Analyst)

I think we'll move back to that kind of, you know, 6.5, give or take, number on the OpEx.

Brian Mitts (EVP and CFO)

Yeah, that's right.

Stephen Laws (Managing Director and Senior Equity Research Analyst)

Awesome. Appreciate that, Brian. Thanks for the comments this morning.

Brian Mitts (EVP and CFO)

Thanks, Stephen.

Operator (participant)

Our next question comes from the line of Jade Rahmani from KBW. Please go ahead.

Jason Sabshon (Assistant VP and Equity Research Analyst)

Hi, this is actually Jason Sabshon on for Jade. It would be helpful if you could speak to credit trends within your mezz and pref investments and, you know, generally what you're seeing broadly in the market in terms of multifamily credit trends.

Matt McGraner (EVP and Chief Investment Officer)

Yeah, I think, you know, in our, in our mezz and pref books, you know, the, the, I'd say we have one, one loan or, or one pref investment in, an asset in Atlanta, where, you know, the sponsor's trying, to decide whether they want to defend the asset. Again, we're working with them to, you know, to, to resolve, you know, certain issues in that market. Especially given just Atlanta, it was, you know, kind of challenging on the second half of last year anyway, with, you know, some fraud issues and some, eviction issues with, with respect to the courts. But, you know, outside of that, everything else, it doesn't, doesn't scare us.

More broadly, as I mentioned, the biggest distress we are seeing relates to the 2021 and 2022, you know, bridge loans and CRE, CRE CLOs that were all floating, floating rate nature. Yeah, those largely have been extended, and those lenders are working through extensions and issues. The near-term problem that we see developing in some submarkets is these deals are becoming zombie deals.

So, you know, their cash flow constrained, because all the, you know, the, the interest rates have, have more than doubled, and the, you know, the, the operators, to the extent that they're still in control of the assets, are don't have any money to, you know, keep, keep operations up, rehab units, and so the occupancy in some of these, submarkets are dipping, and causing some, you know, submarket distress. And that's, that's somewhat isolated, again, in the CRE CLO market. More broadly, the agency books are, experiencing, you know, very little distress. In, in our, in our, in our K-series, you know, there's, there's still really good performance and solid performance, so I think it depends on where you look, both geographically and then what, you know, what, uh, what wrapper the loans are in.

But, you know, multifamily is an asset class that you can underwrite, and people are underwriting with respect to, you know, the transaction market being so robust. They're, they're looking through the supply, because they know it'll, it'll wane here pretty aggressively in 25 and, and 26, after which there's basically no deliveries. And so, I think multifamily, you know, more broadly, over the next, yeah, next six to nine months will be a little bit challenging, but, but after that, I think, yeah, I think it'll be much improved.

Jason Sabshon (Assistant VP and Equity Research Analyst)

Great. Thank you. So in terms of capital deployment and investment opportunities that you find compelling, you talked about the B-Piece purchases and life science, but I guess overall, for deployment into mezz, pref or direct loans, are there any geographic markets that you find more interesting? Just would be helpful to just hear broadly your thoughts.

Matt McGraner (EVP and Chief Investment Officer)

Yeah, I mean, I think we're—we have a penchant, depending on, you know, the property type for, you know, certain geographical areas. You know, our bread and butter over the past decade has been Sunbelt multifamily residential. So, you know, that's where we're—we feel most comfortable. And even though there's supply issues over the long term, that, you know, these markets lead the country in job growth and household formation. Which is interesting because right now it's like—it's somewhat on sale, right? The multifamily residential opportunities in the Sunbelt are, you know, more... The operating performance is weaker in the Sunbelt right now for sure. So that creates a little bit more opportunity.

So that's good for our underwriting, because that's where we're most comfortable. You know, life sciences, it depends if you're talking GMP or you're or lab. You know, lab, well, you know, we're concentrating our investment there in Cambridge, you know, in, in, in a site that, you know, we, we like and know really well. So, you know, we still have another $160 million to fund on that, and, and that, that gives us a good, you know, earnings runway. But, you know, GMP or, you know, most of those opportunities are, you know, in Vacaville, where we have a loan or, you know, the Research Triangle or Houston.

So, yeah, I think those markets will continue to see growth and certainly with nearshoring and reshoring, you know, the advanced manufacturing and pharmaceutical manufacturing industries have a pretty strong secular tailwind behind it. So we're excited about both of those places in the market.

Jason Sabshon (Assistant VP and Equity Research Analyst)

Great. Thank you.

Matt McGraner (EVP and Chief Investment Officer)

You bet.

Operator (participant)

Our next question comes from the line of Crispin Love from Piper Sandler. Please go ahead.

Crispin Love (Senior Research Analyst)

Thanks. Good morning. I appreciate you taking my question. I'm just looking at your asset type exposure on slide nine. It's shifted materially, now 65% multifamily, 22% SFR. I assume that's driven by that prepay you talked about. But would you expect to get closer to a more even split on multifamily and SFR longer term? Or over the near term, could you expect to trend more towards multifamily, with that prepayment potentially going to bridge multifamily opportunities, where you've said you've seen stress and could provide gap financing there? And do you have any exposure right now in that bridge space?

Matt McGraner (EVP and Chief Investment Officer)

Yeah, I think to tackle your first question, you know, the pie chart, you know, I think we're predominantly gonna be residential, and whether that's multifamily or SFR will depend on the opportunities. You know, there's just more multifamily paper out there, and our flow is more active there. There's more distress there at the moment, so that's probably where we'll be focusing a lot more of our efforts. That said, to the extent that we find, you know, an ABS transaction or, you know, a B-piece in an ABS transaction that looks attractive, you know, we'll take to it. But I think largely the pie chart being somewhat, you know, 80%-ish residential will continue. Sorry, what was your second part of your question?

Crispin Love (Senior Research Analyst)

Do you have some of the kind of the bridge multifamily, exposure right now, either from kind of an organic basis or kind of a gap financing?

Matt McGraner (EVP and Chief Investment Officer)

Yeah. So, we have no direct, you know, senior bridge loan exposure. The one Atlanta asset that I mentioned was behind a CRE CLO bridge loan, that, you know, that would be, you know, kind of our one of our loan kind of preferred mezz deals in that space. But, you know, again, the beauty of the platform and what, you know, what I like about the business is, to the extent that we have to take that take over and wipe out the common equity in a mezz position. You know, we're big owners in Atlanta, you know, with 3,000 units owned, and we have, you know, operating verticals in multifamily.

So yeah, that's a situation where, you know, we may wind up, you know, making more money than our actual investment over time, once the market heals. But beyond that, no.

Crispin Love (Senior Research Analyst)

Okay, great. That's what I thought. I just wanted to make sure. And then can you talk about the deployment of the continuous preferred and how that's been? What's the monthly cadence, and would you expect that to take a back seat for a little bit, just given the prepay and redeploying that capital?

Paul Richards (VP of Originations and Investments)

Hey, Crispin, it's Paul. I think, you know, what's the beauty about the Series B preferred raise, that there's this constant run rate of, as Matt mentioned, call it $15 million-$25 million a month, which we're able to and will continue to match fund with that, with that Cambridge life science asset, as, you know, that has monthly draws. So we'll be able to match fund those as long as well as continuously deploying capital into additional B pieces, you know, other types of paper or structured paper, in the future. So I think we'll be able to match fund pretty, pretty well throughout the remainder of the year with the Series B preferred.

Crispin Love (Senior Research Analyst)

Great. Thank you. Appreciate you all taking my questions.

Paul Richards (VP of Originations and Investments)

Thanks, Crispin.

Operator (participant)

I'm showing there are no more questions. I'll now turn the call back over to the management team for closing remarks.

Matt McGraner (EVP and Chief Investment Officer)

Yeah, appreciate it. Nothing further from us. Appreciate everyone's time, and we'll talk again next quarter. Thank you.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.