NexPoint Real Estate Finance - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered mixed results: GAAP EPS was $0.54 (up y/y from $0.40; down q/q from $0.70) with EAD/share of $0.43; revenue was $31.67M, a large top-line beat vs consensus but EAD/share modestly missed Street expectations. Revenue and EPS consensus from S&P Global shown below.*
• Book value per diluted share increased ~1% q/q to $17.40, supported by unrealized gains on preferred stock; the dividend was maintained at $0.50/share, with Q2 CAD coverage at 0.92x.
• Management guided Q3 2025 to EAD/share $0.42 (midpoint) and CAD/share $0.50 (midpoint); also disclosed a robust $235M origination pipeline largely in residential that is expected to lift CAD run-rate high single digits as deployed.
• A potential near-term catalyst: a 245k sq ft, 15-year lease at a key life science project (AI biologics tenant), which management expects to announce in early Q3; post-lease, the first phase would be ~two-thirds leased, improving financing options.

What Went Well and What Went Wrong

What Went Well

• Robust portfolio/credit profile and lower leverage: 86 investments, $1.1B outstanding; weighted-average LTV 58.5%, DSCR 1.44x; debt-to-equity 1.14x and WACD 5.9%.
• Book value resilience and dividend held: BVPS rose to $17.40 (+1% q/q), driven by unrealized gains on preferreds; the board declared a $0.50 dividend for Q3.
• Pipeline and life sciences progress: >$235M active origination pipeline, expected to increase CAD run-rate high single digits; approaching a 245k sq ft, 15-year AI biologics lease at the LY project that could catalyze back-leverage/takeout.
  • Quote: “We’re closing in on a 245,000 sq ft lease with an AI biologics company on a 15-year deal… We expect the formal announcement to occur in the first half of Q3”.

What Went Wrong

• Modest EAD/share shortfall and thinner CAD coverage: EAD/share of $0.43 missed Street and covered the dividend by 0.86x on EAD and 0.92x on CAD (Q2 level), underscoring the need for deployment to bolster distributable earnings.
• YoY distributable decline: EAD/share fell from $0.68 in Q2 2024 to $0.43, and CAD/share fell from $0.64 to $0.46, reflecting mix and non-GAAP adjustments; though GAAP EPS improved y/y, core distributables were down.
• Pockets of credit vigilance and sector headwinds: management is monitoring a few loans in floating-rate 2021 vintages; self-storage and life sciences remain mixed amid sluggish housing activity and broader leasing uncertainty (tariffs/NIH funding).

Transcript

Speaker 3

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Real Estate Finance Q2 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Kristen Griffith, Investor Relations. Please go ahead.

Speaker 1

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance conference call to review the company's results for the second quarter ending June 30, 2025. On the call today are Paul Richards, Executive Vice President and Chief Financial Officer, and Matt McGraner, Executive Vice President and Chief Investment Officer. 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 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 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 the forward-looking statements.

The statements made during this conference call speak only as of today's date 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 Paul Richards. Please go ahead, Paul.

Speaker 4

Thank you, Kristen, and welcome everyone joining us this morning. I'm going to briefly discuss our quarterly results, move to our balance sheet, and lastly, provide guidance for the next quarter before turning it over to Matt for detailed commentary on the portfolio and the macro lending environment. Q2 results are as follows: for the second quarter, we reported a net income of $0.54 per diluted share compared to a net income of $0.40 per diluted share for the second quarter of 2024. The increase in net income for the quarter was due to an increase in interest income between the second quarter of 2025 to the second quarter of 2024. Interest income increased by $4.6 million to $22.8 million in the second quarter of 2025, from $18.2 million in the second quarter of 2024.

The increase was driven by an uptick in interest income driven by increased income from investments. Interest expense decreased $700,000 in the second quarter of 2025 compared to the same period in the prior year from the deleveraging that occurred in the second quarter of 2024. Earnings available for distribution were $0.43 per diluted common share in Q2 compared to $0.68 per diluted common share in the same period of 2024. Cash available for distribution was $0.46 per diluted common share in Q2 compared to $0.64 per diluted common share in the same period of 2024. The increase in earnings available for distribution was driven by the increase in net income for the quarter. We paid a regular dividend of $0.50 per share in the second quarter, and the board has declared a dividend of $0.50 per share payable for the third quarter of 2025.

Our dividend in the second quarter was 0.92 times covered by cash available for distribution. Book value per share increased 1% from Q1 2025 to $17.40 per diluted common share, with the increase being primarily due to unrealized gain on the preferred stock investments. During the quarter, we funded $39.5 million on Life Science Preferred, and we purchased $15.3 million CNBS IO Strip with a bond equivalent yield of 7.24%. Moving to our balance sheet and portfolio, our portfolio is comprised of 86 investments with a total outstanding balance of $1.1 billion. Our investments are allocated across the sector as follows: 49.5% multifamily, 32.7% life science, 15.5% single-family rental, 1.6% storage, 0.7% marina, and 0.1% specialty manufacturing.

Our fixed income portfolio is allocated across investments as follows: 28.3% CNBS BPs, 24.9% mezzanine loans, 18.7% preferred equity investments, 12.9% revolving credit facilities, 10.4% senior loans, 4.5% IO strips, and 0.1% promissory notes. The assets collateralizing our investments are allocated geographically as follows: 27% Massachusetts, 15% Texas, 6% California, 6% Georgia, 4% Maryland, 4% Florida, with the remainder across states with less than 4% exposure, reflecting our heavy presence and preference for Sun Belt markets, with the Massachusetts and California exposure heavily weighted towards life science. The collateral on our portfolio is 74% stabilized with a 58.5% loan-to-value and a weighted average DSCR of 1.44 times. We have $815.6 million of debt outstanding with a weighted average cost of 5.9%. Our debt is collateralized by $865.4 million of collateral with a weighted average maturity of 3.8 years. Our debt-to-equity ratio is 1.14 times.

Moving to our guidance for the third quarter, we are guiding to earnings available for distribution and cash available for distribution as follows: earnings available for distribution of $0.42 per diluted common share at the midpoint, with a range of $0.37 on the low end and $0.47 on the high end. Cash available for distribution of $0.50 per diluted common share at the midpoint, with a range of $0.45 on the low end and $0.55 on the high end. Now I would like to turn over to Matt for a detailed discussion of the portfolio and markets. Matt?

Speaker 0

Thank you, Paul. As he just mentioned, we're pleased to report another strong quarter amidst a challenging macro backdrop. I'd like to spend a few minutes here discussing our verticals and what we're seeing before I turn over to talk about our pipeline. On the residential front, supply pressures have eased somewhat but continue to present concentrated challenges in Sun Belt markets in particular. According to RealPage, Q2 2025 marked the first quarterly drop of over 20 bps in inventory growth in over 15 years, as new deliveries tapered after peaking in late 2024. Despite the slowdown, over 400,000 units were delivered in the trailing 12 months, sustaining elevated competition and lease ups.

The upshot here is that after one more quarter of significant deliveries in Q3 of 2025, the national delivery outlook contracts to a GFC-level output of just 77,000 units per quarter, which supports our thesis on accelerating fundamentals in the multifamily sector in 2026, 2027, and 2028. More positive news: demand outperformed expectations in the first half of the year. Net absorption surged, and the national stabilized occupancy rate improved to 94.6% in July. New lease rates are still modestly negative in most of our markets as operators continue to be defensive. However, we are very constructive on rental rates continuing to inflect higher as the supply picture continues to improve. On the storage front, the REITs guided for flat to very low single-digit revenue growth and flat to negative 1.5% NOI growth in 2025. Q1 earnings were slightly better than expected, but guidance was maintained.

Post-NAREIT commentary in June indicated rising occupancies and improving rates. Still, the sluggish housing market continues to weigh on the self-storage demand. Home sales are at a multi-year low, and mortgage rates remain elevated, softening the 2025 peak leasing season. Still, the REITs are pushing street and web rates, which could support Q2 results and have so far. REITs with exposure to major markets are outperforming on the occupancy front, i.e., Extra Space and Public Storage. These exceed their 2025 projected averages, while operators in secondary and tertiary markets continue to underperform. On the supply outlook, new development remains below equilibrium, under 2.5% of existing supply, and with limited bank financing, high land and construction costs, and elevated interest rates, supply continues to be in check. This supply discipline should help restore pricing power as housing activity rebounds.

Finally, on the life science front, lab leasing continues to be challenging, particularly given the tariff and NIH funding uncertainty under the new administration. With that said, we're pleased to report some great momentum at our LY project. We're closing in on a 245,000 square foot lease with an AI biologics company on a 15-year deal, producing a debt yield of just over 8% for just the portion of this project. We expect the formal announcement to occur in the first half of Q3, and we're very excited about this upcoming event. As Paul also mentioned, we were able to accretively dispose of MOFR last week, creating even more liquidity to fuel our pipeline. Today, our active pipeline of origination stands at over $235 million and largely in the resi sector.

We expect this incremental pipeline activity to create an increase in our CAD run rate in the high single digits. In closing, our underlying credit profile of the portfolio remains very strong atop the commercial mortgage REIT sector. Moreover, we continue to have some of the lowest leverage profile of any commercial mortgage REIT, which allows us a variety of capital options to pursue accretive growth. Indeed, we're excited about our growth in particular and cautiously optimistic about the overall market dynamics going into the second half of the year. As always, I want to thank the team for their hard work, and now I'd like to turn the call over to the operator for questions.

Speaker 3

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jade Rahmani with KBW. Your line is open.

Speaker 2

Thank you very much. Can you comment on credit trends within the Freddie Mac B-Piece (BPs) portfolio? Both GSEs talked about a slight uptick in delinquency trends within their portfolio.

Speaker 4

Hey, Jay. This is Paul. Yes, our B-Piece (BPs) portfolio is still overall very solid when compared to other CRE CLO in that 2021, 2022 vintage. Our B-Piece (BPs) is again straddle 2018 through a 2025 vintage. We have some really good collateral, some really good deals that are both diversified, fixed, and floating. I would say, yeah, there's a few problem loans here and there, but overall, especially on the fixed side, it's been really sturdy and a really good credit profile. I would say in our floating-rate vintages in that 2021 pool, yeah, there are a few loans that we have our eye on, but nothing of complete concern as of right now. Matt, I don't know if you have anything to add to that.

Speaker 0

Yeah, I think, given the amount of liquidity in the market for resi in particular, we're optimistic that some of the troubled assets just broadly across all K deals and even in our portfolio are going to be able to catch a bid here in the second half of the year, and the borrowers will be able to have liquidity options available to them, whether it's more agency or the debt. The debt funds are getting more aggressive in particular on the multifamily sector. With the liquidity profile, I think everyone's waiting out the kind of the first half of 2025, looking forward to 2026, and expect the overall delinquency picture to improve going into the back half of the year, even though we're still in a challenging supply environment.

Speaker 2

Thanks. On the life science side, can you talk about pro forma for that lease that you mentioned, what the occupancy would be at that point?

Speaker 0

Yeah, that lease, of course. It's two-thirds of the first phase of the project, which is what our loan is. It'll be, like I said, two-thirds leased post-deal announcement.

Speaker 2

Once that happens, how much duration will there be remaining on this loan?

Speaker 4

On a fully extended basis, roughly two and a half years. Importantly, we're already seeing and in talks with back leverage and ADOT lenders, and with the lease, we have a lot more financing options to us to probably be taken out before that.

Speaker 2

This project seems quite different from or resistant to the pressures we're seeing in life science overall. Several of the mortgage REITs, for example, have downgraded to Risk 5 life science loans and booked reserves this quarter.

Speaker 0

Yeah, the good news for us is that we started, you know, we made this loan in the midst of 2024, early 2024, and not in 2020 or 2021 or 2022. That, coupled with the fact that the sponsor has $400 million of equity versus our $218 million mortgage, and then plus we were able to land the lease, puts us in a different spot than our peers, fortunately.

Speaker 2

Thanks. Wanted to ask your thoughts on the senior housing space. The thought is that COVID really outweighed the favorable demographic trend underpinning that sector because there were huge inflation in operating costs and a lot of delinquent tenants that remained in occupancy. The inflation rate has moderated and the delinquencies are being reversed. The fundamental outlook for that sector is much improved. Do you agree with that? Are you interested in adding exposure to that? What are your thoughts generally?

Speaker 0

Yeah, I 100% agree with that. You know, look no further than the outperformance of Welltower over the last couple of years. The proliferation, even, I think that they're doing in build-to-rent and specialized projects for an aging population. We're seeing a lot of capital in that space. We put to work on the build-to-rent side and highly amenitized senior housing projects are finding good capital and great cap rates. I do think that that is a good place to play. We looked at a couple of purpose-built senior build-to-rent deals, haven't hit on any thus far, but it is an attractive space. I agree with you. One with some legs and, you know, over the next, over the course of this decade, I think. Yeah, we're interested in it.

Speaker 2

Thanks. I'll stay tuned for that. You all have been pretty nimble at identifying those kinds of opportunities, so I imagine it's something you'll look at.

Speaker 0

Yep. I agree. Thank you, Jade.

Speaker 2

Thanks.

Speaker 3

I will now turn the call back to the management for closing remarks.

Speaker 0

Thank you very much for everyone's time today, and we look forward to speaking to you after the third quarter. Goodbye.

Speaker 3

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