NexPoint Real Estate Finance - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered strong distributable earnings: EAD per diluted common share was $0.83, above Q3’s $0.75 and ahead of the company’s Q4 guidance midpoint of $0.79; CAD per diluted share was $0.47, below Q3’s $0.67 and the Q4 guidance midpoint of $0.50.
• GAAP diluted EPS was $0.43 in Q4 (vs $0.75 in Q3 and $0.73 in Q4 2023), with quarter dynamics driven by fair value marks and lower leverage; book value per diluted common share edged up to $16.97 (from $16.95 in Q3).
• Balance sheet and credit metrics remained resilient: portfolio LTV/DSCR at 59.2%/1.32x; debt-to-equity fell to 1.39x (from 1.52x in Q3), and weighted average cost of debt held at ~6%.
• Q1 2025 guidance: EAD per diluted share $0.40–$0.50 (midpoint $0.45); CAD per diluted share $0.45–$0.55 (midpoint $0.50). Potential near-term catalysts include pre-leasing/milestones on the Cambridge life sciences loan, accretive redeployment into Freddie K and construction lending, and continued balance sheet optimization.

What Went Well and What Went Wrong

• What Went Well
  • EAD beat: EAD/share of $0.83 exceeded the prior Q4 guidance midpoint of $0.79, aided by core interest earnings and non-cash add-backs; management reiterated an active pipeline with accretive deployment channels (Freddie K, construction, mezz).
  • Credit and leverage: Portfolio metrics remained solid at 59.2% LTV and 1.32x DSCR, while debt-to-equity improved to 1.39x due to deleveraging; management highlighted stable performance and minimal watch-list concerns in CMBS K B-pieces (only ~2 loans 30–60 days delinquent across 7–8 B-pieces).
  • Strategic positioning and funding: $38.8mm raised via Series B preferred in Q4; management outlined multiple accretive funding avenues (A-note warehouses, potential rated bond), and sees low-to-mid teens returns on Freddie K with modest leverage.
• What Went Wrong
  • Cash coverage softness: CAD/share fell to $0.47 (0.94x coverage of the $0.50 dividend), down from 1.34x in Q3 and 1.28x in Q2; lower CAD creates less buffer for the distribution near term.
  • EPS down year-on-year: Q4 diluted EPS was $0.43 vs $0.73 in Q4 2023 on fair value and VIE impacts; management cited unrealized mark dynamics in reconciling EAD and CAD.
  • Spec life sciences exposure risk: Cambridge (spec) remains a focus; while management cites improving tour activity, low detachment points (25% LTC) and a strategic bid on the loan, investors may remain sensitive to sector leasing headlines until tangible leasing wins materialize.

Transcript

Operator (participant)

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 Q4 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, 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.

Kristen Griffith (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 fourth quarter ended December 31, 2024. 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 meanings 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 forward-looking statements.

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 Matt McGraner. Please go ahead, Matt.

Matt McGraner (EVP and CIO)

Thank you, Kristen. Before we dive into our prepared remarks, I want to take a moment to congratulate Brian Mitts on his well-earned retirement, which officially took effect on December 31, 2024. We're incredibly grateful for his years of dedication, the countless long days he put in, and the instrumental role he played in shaping NREF into what it is today. While Brian has stepped back from the day-to-day operations, we're fortunate that he remains a valued member of our board, continuing to provide guidance and insight as we move forward. At the same time, I'm pleased to officially welcome Paul Richards as our new CFO. While most of you on the phone already know of his capabilities, having worked closely with Brian and me for over a decade, Paul deeply understands our strategy and our approach to execution.

He's a strong leader, and I have full confidence in his ability to continue to drive sector-leading long-term results for NREF shareholders. With that, I'll turn the call over to Paul to walk us through our fourth quarter and full year 2024 financial results and to discuss the portfolio.

Paul Richards (EVP and CFO)

Thanks, Matt. Thank you, Kristen. Welcome to everyone joining us this morning. I'm going to briefly discuss our quarterly and year-to-date results, move to our balance sheet, and lastly, provide guidance for the next quarter before turning it over to Matt for a detailed commentary on the portfolio and the macro lending environment. Q4 results are as follows. For the fourth quarter, we reported a net income of $0.43 per diluted share compared to net income of $0.73 per diluted share for the fourth quarter of 2023. The decrease in net income for the quarter was due to unrealized loss on our common stock investments and a decrease in change in net assets on CMBS VIEs between the fourth quarter of 2024 and the fourth quarter of 2023.

Interest income decreased by $15.4 million to $32.3 million in the fourth quarter of 2024 from $16.9 million in the fourth quarter of 2023. The increase was driven by an increase in interest income driven by higher rates. Interest expense decreased $2.5 million in the fourth quarter of 2024 compared to the same period in the prior year from the deleveraging that occurred in the first quarter of this year. Earnings available for distribution were $0.83 per diluted common share in Q4 compared to $0.44 per diluted common share in the same period of 2023. Cash available for distribution was $0.47 per diluted common share in Q4 compared to $0.51 per diluted common share in the same period of 2023. 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 fourth quarter, and the board has declared a dividend of $0.50 per share payable for the first quarter of 2025. Our dividend in the fourth quarter was 0.94 times covered by cash available for distribution. Book value per share increased 12 basis points from Q3 2024 to $16.97 per diluted common share, with the increase being primarily due to unrealized gain on our preferred stock investments. During the quarter, we funded $16.7 million on a life science development property in Cambridge, Massachusetts, and we redeemed $9.5 million of mortgage-backed security. During the fourth quarter, we sold 1.7 million shares of our Series B cumulative redeemable preferred for net proceeds of $38.8 million. Full year results are as follows.

For the full year of 2024, we reported net income of $1.02 per diluted share compared to net income of $0.60 per diluted share for the year ended 2023. The increase in net income for the year was primarily due to an increase in net interest income. Interest income increased by $4.2 million to $72.5 million for the year ended 2024 from $68.4 million for the year ended 2023. The increase was driven by an increase in interest income driven by higher rates. Also, interest expense decreased during the year from the deleveraging event that occurred in the first quarter. Earnings available for distribution was $1.78 per diluted share year-to-date compared to $1.88 per diluted share in the same period of 2023 for a decrease of 5.3%.

Cash available for distribution was $2.42 per diluted share year-to-date compared to $2.05 per diluted share in the same period of 2023 for an increase of 18%. Moving to the portfolio and balance sheet. Our portfolio is comprised of 83 investments with an outstanding balance of $1.2 billion. Our investments are allocated across the sectors as follows: 15.5% single-family rental, 49.7% multifamily, 31% life sciences, 1.5% self-storage, 1.8% specialty manufacturing, and lastly, 60 basis points marina. Our fixed income portfolio is allocated across investments as follows: 10.5% senior loans, 29.3% CMBS B-pieces, 19.5% preferred equity investments, 23.7% mezzanine loans, 3.9% IO strips, 12.9% revolving credit facilities, and 30 basis points promissory notes.

The assets collateralizing our investments are allocated geographically as follows: 15% Texas, 25% Massachusetts, 8% California, 6% Georgia, 4% Florida, 4% Maryland, with the remaining across states less than 4% exposure, reflecting our heavy preference for Sunbelt markets, with the Massachusetts and California exposure heavily weighted towards the life science. The collateral on our portfolio is 76.5% stabilized, with a 59.2% loan-to-value and a weighted average DSCR of 1.32 times. We have $799.3 million of debt outstanding. Of this, $400.9 million, or 50.2%, is short-term. Our weighted average cost of debt is 6% and has a weighted average maturity of 1.4 years. Our debt is collateralized by $862.8 million of collateral with a weighted average maturity of one year. Our debt-to-equity ratio is 1.39 times. Guidance.

Moving to guidance for the first quarter, we are guiding to earnings available for distribution and cash available for distribution as follows: earnings available for distribution of $0.45 per diluted common share at the midpoint, with a range of $0.40 on the low end and $0.50 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'd like to turn it over to Matt for a detailed discussion of the portfolio and markets.

Matt McGraner (EVP and CIO)

Thank you, Paul. We continue to be pleased with our differentiated results for the quarter and in a year in which there were many challenges in the commercial real estate sector. Our underlying credit profile of the portfolio remains very strong, and there is reason for more growth and optimism in 2025. For one, multifamily fundamentals continue to improve. Most industry participants, including us, are expecting an inflection as supply continues to wane. Q4 starts with just 37,000 units for the quarter, the lowest level since Q4 of 2011. We're expecting new lease growth to turn positive in the second half of the year, which should drive more transaction activity, liquidity, and opportunity to put capital to work. Indeed, you will likely see growth in our multifamily portfolio in the next couple of quarters across construction financing, Freddie Mac deals, and high-quality mezzanine opportunities.

Our storage exposure also remains very compelling, with same-store NOIs flat to slightly positive. Like the multifamily market, we expect more growth in rates in the back half of the year. Recently, we have built a quality pipeline of construction financing opportunities with attractive yields on costs and repeat sponsors from the Jernigan Capital days. We expect these opportunities to reach approximately $75 million over the next couple of quarters. Life science tour activity and capital planning have also picked up, and we're seeing a flurry of activity recently, especially on the advanced manufacturing and GMP sides. We are actively underwriting $300 million of opportunities across infrastructure and pharmaceutical manufacturing today. We've liked the reshoring of supply chain story for a while now, and the recent tariff threats that may have sparked billions of reshoring by Apple, Lilly, and others should exacerbate this trend going forward.

Finally, we're pleased with the capital options available to us to fund this growth. With where we are in the balance sheet and the success we're having with the Series B raise, we still have multiple creative avenues to fund growth, including A-Note warehouses and even a bond-rated deal. To close, we're excited about the company's prospects in 2025 and the continued stability of our portfolio and, of course, the opportunity to go on offense in this environment. As always, I want to thank the team here for their hard work, and now we'd like to turn the call over to the operator for questions.

Operator (participant)

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 Stephen Laws with Raymond James. Please go ahead.

Stephen Laws (Head of Real Estate Finance)

Hi, good morning.

Matt McGraner (EVP and CIO)

Good morning.

Stephen Laws (Head of Real Estate Finance)

Matt, you may have touched on this. You did touch on it a second ago with your comment on, you said construction, Freddie K are likely to be kind of new investments near term. Can you talk about the returns you're seeing on those new investments, how that compares to other things in your pipeline, and how you think about how accretive new investments are compared to the cost of the Series B capital as you raise more?

Matt McGraner (EVP and CIO)

Yeah, it's a good question. On the Freddie Mac, we're hearing from Freddie, we're most likely going to get a five-year fixed deal here in the second quarter, be anywhere from $30 million-$50 million in gross value. We would plan to lightly repo that, expect the yields to be in the 8%-9% range. Getting with a little bit of accretive leverage, we're kind of low to mid-teens type of return. That still remains attractive, especially given the credit profile of Freddie Mac deals and deals originated in 2025. The risk-reward there we view as very attractive. On the construction side, we're seeing really high-quality assets and developments with well-heeled developers that we can do a 60% loan-to-cost, three to four hundred spread, and then we have accretive A-Note lenders at the same time.

That capital takes longer to put out, but we do have some attractive A-Note opportunities against the Series B that we would use to fund. I like both of those investments.

Stephen Laws (Head of Real Estate Finance)

Great. Can you touch maybe a little bit on the life sciences investments and performance there? I mean, any key metrics or attachment points, performance? That's grown materially over the past year as a percentage or a mix of the portfolio. What's the best way for us to monitor that as we look at the metrics that you release in your public filings?

Matt McGraner (EVP and CIO)

Yeah, it's a good question. It's chunky in terms of the two main life science investments. Let me start with the Massachusetts loan in AOWISE. It's a $220 million commitment, of which we funded roughly $175 million. The detachment point on a loan-to-cost basis for that asset is roughly 25% loan-to-cost. A stabilized debt yield for rents in just the 80s for that deal would be 30-plus %. More importantly, though, the buildings, that development has three buildings, 395,000 sq ft today. All of them are topped out, skinned, and amenities and spec suites are going in. There's, like I said in the prepared comments, a flurry of activity on that asset in particular. Most importantly, I have a bid for that loan far south of where we have or where our interest rate is. It's over plus 900. Feel really good about that exposure.

Across the rest of the loan portfolio, we really have not seen the type of leasing activity in quite some time, past 18 months or so. The remainder of the facility are kind of detachment points in the, I would say, 40%-50% range, somewhere in the avenue of $800-$900 a sq ft detachment point where these assets are $1,600, $1,700, $1,800 a sq ft to build, and these assets are first to fill. I really think that what we are doing there is pretty smart, and I think will be proven right.

Stephen Laws (Head of Real Estate Finance)

Great. Finally, update on loan performance, any delinquent or defaulted loans or any watchlist loans? I know you guys have very few of those, if any, historically. Curious for update at your end.

Paul Richards (EVP and CFO)

Yeah. Hey, Steve, this is Paul. We have a few in our CMBS portfolio that we're keeping an eye on. As you know, with these Freddie K deals, we call them bulletproof paper, but we have our eye on a few watchlist loans. In terms of a few prep deals, there's refinancing activity for one of these package deals that we have in our backyard, and we're giving time for one of the sponsors to go through a refinancing. We expect that refinancing to happen, I would say Q2, maybe Q3, but I think it's probably going to be a Q2 event on a refinancing for a few of those pref deals. Overall, extremely strong portfolio performance and extremely happy with the results.

Stephen Laws (Head of Real Estate Finance)

Great. Appreciate the comments this morning. Thank you.

Paul Richards (EVP and CFO)

Thanks, Steve.

Operator (participant)

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

Jade Rahmani (Analyst)

Thank you. On the Cambridge deal, is that purely spec since it's so large? Wondering if there's an anchor tenant or any initial leasing. When do you expect to be able to provide an update as to how that's going?

Matt McGraner (EVP and CIO)

Yeah, we expect to have, or the developer expects to have, the CFO in Q3. There is pre-leasing activity right now. Like I said, I think I mentioned upwards of 300,000 sq ft on a total build of 395,000 sq ft. The developer is seeing both 25,000 sq ft-50,000 sq ft chunks, but there are a couple of larger requirements in the West and East Cambridge areas floating around right now that are actively touring the asset and are looking for a Q3 or Q4 movement. I would expect by then we'll have some pretty good traction and some good news to report.

Jade Rahmani (Analyst)

Just to clarify, is it a spec development?

Matt McGraner (EVP and CIO)

Yeah, it is spec.

Jade Rahmani (Analyst)

Okay. Because all the data from the brokerage firms and also some of the mortgage REITs that have life science exposure has not been good in terms of leasing. I mean, I think in aggregate, the sector seems to be entering the beginnings of a stabilization. VC funding is picking up, and you're seeing some of the large pharma companies make some leasing decisions. By and large, we're still missing a lot of the nascent players in the space that drove some of the leasing and spec development. I guess, what gives you confidence that this asset in particular will be able to buck the trend of oversupply that we're seeing?

Matt McGraner (EVP and CIO)

A couple of things, because most of the literature written as far as supply is wrong. I think ARE put out the true competitive supply to a new purpose-built life science facility in Boston. I think you would hear quotes, and maybe this is what you're referring to, of like 16 million sq ft of new supply coming online. The reality is in the core kind of three markets where you want to be, there's less than 2 million, and probably 50% of that isn't going to be delivered. At the same time, you're having, and I'm seeing it, multiple requirements and tours for this facility in particular. Notwithstanding any of the first two reasons that I think will be successful, again, I have a bid for the loan, and we're 25% loan-to-cost, which is less than land value and across 27.5 acres in Cambridge.

Pretty comfortable.

Jade Rahmani (Analyst)

Who's the bid for the loan from? I mean, you don't have to name who, of course, but the type of entity, is that private credit, like a debt fund or some other entity of that kind?

Matt McGraner (EVP and CIO)

It's a strategic REIT.

Jade Rahmani (Analyst)

Okay. Got it. The language that says you always say no loans in forbearance, I guess that's not true because of Paul's comment that there's a couple of deals on the watchlist right now?

Matt McGraner (EVP and CIO)

Yeah. It's not necessarily they're on the watchlist. It's the borrower is refinancing into a recap loan, and we're just giving him a 90-day period in which we'll PIK the interest so he doesn't have to pay current, so we can get paid off.

Jade Rahmani (Analyst)

Do you happen to know what the delinquency rate is in the Freddie Mac K-Series portfolio?

Paul Richards (EVP and CFO)

Overall, the delinquency rate is extremely small. Off the top of my head, I couldn't tell you, but I'll tell you that there's probably out of the seven B-pieces that we have or eight B-pieces, there's maybe two loans that are 30 days or 60 days delinquent. It is an extremely small subset.

Jade Rahmani (Analyst)

Okay. That's great. Thanks so much.

Matt McGraner (EVP and CIO)

Thanks, Jade.

Operator (participant)

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

Matt McGraner (EVP and CIO)

Yeah. Thank you very much for dialing in, and appreciate the opportunity to report our results. I'm looking forward to the second quarter or the first quarter results here in a few months. Thank you very much.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all, and have a great day.