NexPoint Real Estate Finance, Inc.

Good day, and welcome to the Next Point Real Estate Finance fourth quarter conference call. Today's conference is being recorded. At this time, I would like to turn the presentation over to Ms. Jackie Graham. Please go ahead, ma'am.

Thank you. Good day, everyone, and welcome to Next Point Real Estate Finance's conference call to review the company's results for the fourth quarter ended December 31st. On the call today are Brian Miss, Executive Vice President and Chief Financial Officer, and Matt McGrainer, Executive Vice President and Chief Investment Officer, Matt Guest, Senior Vice President, Investment and Asset Management, and Paul Richards, Vice President for Donations and Investments. As a reminder, this call is being webcast through the company's website at nref.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 security litigation or format of 1995 that are based on management's current expectations, assumptions, and beliefs. Forward-looking statements can often be identified by words such as expect, anticipate, intend, and similar expressions and variations or negatives of these words. These forward-looking statements include, but are not limited to, statements regarding the company's business and industry in general, investment activity, estimated IRRs, guidance for financial results for the first quarter of 2021, including the company's estimated net income, core earnings, dividends for common share, cash available for distribution, and dividend coverage ratios for the first quarter of 2021. They are not guarantees of future results and are subject to risks, uncertainties, assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's registration statement on form as selected in the company's other filings with the FDC for a more complete discussion of risks and other factors that could affect the forward-looking statement. Acceptance is required by law, and REF does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes analysis of core earnings and CAD, which are non-GAAP financial measures. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss computed in accordance with GAAP. For a more complete discussion of core earnings and CAD, see the company's presentation that was filed earlier today. I'd like to turn this call over to Brian. Please go ahead, Brian.

Thank you, Jackie. Welcome to everyone joining us for the fourth quarter 2020 Next Point Real Estate Finance Earnings Call. I'll give some quick highlights of our financial performance, capitalization, activity during the year, and guidance for T1 2021. And then turn the call over to Matt Gadsden and Paul Richards to discuss the portfolio and opportunities we see. We'll conclude our prepared remarks with some closing comments from Matt McGregor. Let me start with highlights for 2020. In February, we completed our IPO at $19 per share, raising approximately $102 million in gross proceeds. We used the net proceeds to pay down 100% of our repo financing. In mid-March, as a result of the pandemic, credit markets froze up, creating panic selling through margin calls on repo lines. This had an adverse effect on more degree stocks, including NREF, which dropped to a low of $6.34 per share. although Interop had no repo financing at the time. Book value dropped from $19.30 for shared IPO to a low of $17.72 at the end of the second quarter. In May, as markets began to recover, we drew on our repo lines to make attractive and highly accrued investments in Freddie Mac B pieces. In July, we launched a preferred equity offering, raising 46 million gross proceeds, using the net proceeds to acquire two more Freddie Mac B pieces. Ford Stock Trade, and then the ticker NREFPA. In October, we launched a private unsecured notes offering, raising gross proceeds of $36.5 million. And that proceeds were used to purchase a pool of multifamily mezzanine loans for Freddie Mac. As of December 31st, our capital stack consisted of a $781 million facility on the SFR loans, a $60 million facility on the mezzanine pool, $161 million of repo financing, $36.5 million of unsecured notes, $37.5 million of preferred equity, $90.7 million of common equity, and $276 million of redeemable non-controlling interests. The $781 million credit facility is collateralized by $854 million of SFR mortgages, and its max construction duration in the underlying SFR portfolio is both fixed rates, and each has a weighted average remaining term of 7.4 years. The rate on the facility at December 31st is fixed at a weighted average of 2.44% against the yield on underlying assets of a weighted average 4.9% or a tiered 46 basis points spreader in cost of debt. The $60 million facility is collateralized by $98 million of multifamily mezzanine loans. As of December 31st, the rate on the facility is fixed at a weighted average of 30 basis points against the yield on underlying assets of a weighted average 7.46% or 716 basis points spread over the cost of the debt. Both have a weighted average remaining term of 8.8 years. The $160 million repurchase or repo balance is finalized by $317 million CMDS securitizations for a 51% LTV and bears interest at L plus 2.9 annually. As of December 31st, only 15% of our financing is subject to market-to-market. We're low lever at 2.57 times debt-to-equity. The rate of average cost for our debt is 2.49%. The rate of average term is 6.4 years. The example equated to 30 million in unrestricted cash as of December 31st. For 2020, which was a short year since we went public in early February, we had net income attributable common shareholders of $2.6 million, or $0.47 per share, core earnings of $2.9 million, or $0.54 per share. We recorded a loan loss provision for the year of $320,000. As of December 31st, we repurchased 327,422 shares, an average price of $14.61 per share, representing a discount for our current book value of 25%. We paid a dividend of 40 cents per share in the fourth quarter. Monday, the board declared a dividend of 47.5 cents per share. Paid on March 31st, the shareholder's record as of March 15th. And this represents an 18.5% increase in dividends. For the first quarter, we are issuing quartering guidance of $2.9 million at the midpoint, $2.8 million on the low end, and $3 million on the high end. That equates to 54 cents per current alluded share at the midpoint, 52 cents per alluded share at the low, and 56 cents per share on the high end. And at the midpoint, that would give us a dividend coverage on 47.5 cents of 1.14 times coverage. With that, we'll turn it over to Matt Goetz and Paul Richards to discuss the portfolio.

Thanks, Frank. Our fourth quarter and four-year results continue to show growth and strength in what we believe are the most resilient commercial real estate property types throughout all market cycles. We believe this trend will continue into the near future as more and more gateway residents look to move to less densely populated markets, which will continue to strengthen our targeted and underlying asset classes. While we can't predict potential legislation, taxation, or the future path of COVID-19 and the effects each might have on the commercial real estate sector, We believe our defensive strategy, namely credit investments in stabilized residential and storage assets, conservative underwriting at low leverage with well-heeled sponsorship, should provide consistent and stable value to our shareholders. Signs of relative strength is evidenced by CreditMax's most recent pay series securitization, which has transacted a yield similar to pre-COVID levels in 250 to 275 basis points inside our last fixed and flooding rate VPs investments. That said, we'd like to spend a few minutes discussing the current portfolio's performance as well as discuss the opportunities we were able to take advantage of in the fourth quarter and immediately thereafter. The current investment portfolio is comprised of 62 individual investments with approximately $1.4 billion in total outstanding principal. The loan portfolio is 100% residential with 60% invested in senior loans. collateralized by single-family rental, and 40% invested in multifamily via agency CMBS preferred equity and mezzanine debt. The portfolio's average remaining term is 7.6 years, which we believe is atypical on the commercial mortgage week space. The portfolio is 96.1% stabilized with a weighted average loan value of 68.3% and a weighted average debt service coverage ratio of 2.04 times. The portfolio is geographically diverse with a bias towards southeast and southwest markets, and 100% of our investments are current. As mentioned in our earnings, some of our underlying bonds are currently in forbearance, similar to last quarter's report. For reference, as of the forbearance report published by Freddie Mac on October 25th, roughly $7.6 billion, or 2.4% of the total Freddie Mac-securitized unpaid principal balance has entered into forbearance. What metrics improving slightly since the third quarter's report? As you know, the new administration has extended the forbearance of foreclosure and moratorium for federally backed mortgages until June 30th of this year. As of now, we don't expect any material impact to our portfolio, evidenced by the strength of the portfolio's debt service coverage, and we have low leverage and strong sponsorships. One mezzanine investment located in Columbus, Georgia, for Dean, December 11th. The $10 million investment was outstanding for 65 months and achieved an IRR and MOIC of 11.6 times, or 11.6% and 1.63 times respectively. As a reminder, we have zero construction loans, no heavy transitional loans, no land loans, and no for sale loans. Moving to the opportunities we're able to take advantage of during and immediately after the fourth quarter, as Brian mentioned, we have been able to deploy proceeds from our unsecured senior notes offering and redemptions into accretive investments for all our stakeholders. On October 20th, we purchased a portfolio of 18 individual mezzanine loans collateralized by Stabilized Multifamily Property for $99 million plus accrued interest. We received approximately 60% seller financing and have underwritten the portfolio to provide an estimated above IRR of 17.3%. On January 21st, 2021, we posted 26.4 mezzanine investment with a multi-billion dollar sponsorship for a multifamily redevelopment in Los Angeles, California. In summary, we continue to find attractive investment opportunities throughout our target markets and asset classes. We'll continue to evaluate these opportunities with the goal of delivering value to our shareholders. I'd now like to hand the call over to Paul Richards to discuss what we are currently seeing in the bond market, repo financing, and SFR portfolio. Thanks, Matt.

During the fourth quarter, the company was not as active in the secondary or new issue agency CNBS market since we were able to deploy capital and purchase an accreted men's and women's book from Bring Back with equally as attractive seller financing as Brian and Matt previously mentioned. New issue agency bond pricing came even tighter originally. with both a floating rate and zero coupon, V pieces continue to grind up in value. As mentioned on the Q3 range call, management expected the spread to tighten as the world continues to normalize and the economy remains stability. This basis is held true as we have seen spreads on new issue bonds on both floating rate and fixed rate V pieces tighten 250 plus base points from pre-COVID new issue pricing. Though the application of these new issue pricing and marks have not been based into our Q4 2020 book value, we fully expect and have seen in January marks in our CMBS portfolio increase. We continue to be prudently levered on the repo at 51% LTV at quarter end, implying it would take an approximate downward market value movement of $75 million on our current $317 million CMBS portfolio before our LTV increases 65%. Taking it one step further, this one implies 29% decline in market value and spreads widening roughly 750 basis points on a repo book if it will market new issue pricing. Lastly, we wanted to briefly touch on recent news on Friday Night Residential entering into a definitive merger agreement with Aries and Brigham and how this transaction is closing January of this year. We still view this as a credit positive for the company and expect performance to be optimal, just as we do for the entire SFR loan pool. To finalize, I prepare remarks. Before we turn over for questions, I'd like to turn it over to Matt and Abraham. Thanks, Paul. I'd like to end with a couple of brief thoughts. First, I'm proud of the team and the results we generated in 2020 amid tough credit and operating conditions. The team's ability to capitalize on market dislocation last year is already bearing fruit, as you can see with the significant increase in book value this quarter. We're also proud to deliver on our expectations that for the year go to our ideal investors. We appreciate your trust. We're pleased and proud, as Brian mentioned, to substantially increase the dividend by double digits while maintaining it through COVID, delivering on yet another promise to our shareholders. As we begin 2021, we expect to continue to do what we've been doing, and that is leveraging NextPoint's core verticals to continue to source attractive opportunities in the self-storage and commercial residential asset classes. So that's all we have for prepared remarks, and I would like to turn the call over to the operator for questions.

And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question. And we'll take our first question from Stephen Loss with Raymond James.

Good morning. I guess first off, hopefully you're all doing well in Texas given the weather, but Congrats on a nice quarter and strong dividend increase. You know, Brian, can you maybe talk about the capacity for new investments, where you see leverage moving? And so I guess part of that discussion is also the portfolio mix changed a good bit sequentially. And let me get you to touch on maybe where you see that mix shifting over the course of 2021.

Yeah, I covered the capacity question, and I'll let Paul and Matt come in on sort of where the portfolio will go in the future. We had success last year in creating and raising capital through preferred equity, unsecured notes, and then using thoughtfully the repo once that market recovered. And it seems that there is a pretty big appetite for yield out there. So we think we could do any of those again and probably a higher price than we did in July for the before and October for the unsecured. So we have a number of things that we're looking at and I want to get out and talk about that. But I think we can fund those and we're being proactive about sourcing the ability to fund anything that comes down.

Yeah, it's Venus. It's Madre. I think that you'll see, because we're in the Freddie Mac flow, as you know, you'll see probably primarily our first few investments this year, or at least the significant ones, being multifamily and the commercial mortgage-backed security spaces. They're also, as you know, very creative, and we work closely with them on bespoke opportunities like the SFAR pool, like the mezzanine investment we made. So that's probably where we will focus next. resulting in an increase in the multifamily portion of the book. So that's primarily where we'll be spending most of our time.

Steve, Matt mentioned sort of what we had said during the IPO. We tried to stick to that, even despite what happened during COVID. One of the things that we talked about was being patient and thoughtful in trying to get the stock price up above book. We, after, you know, initially having a decline in book value, it's climbed up above the IPO book value. Paul indicated with what we've seen pricing on the CMBS book go in January and into February, we expect book value to continue to increase. But we think they can add percentage and increase and, you know, they're very helpful in getting the stock price up and continuing to to put up good earnings numbers and make a pretty good investment. So the only way of saying that ultimately I think we'd like to raise common equity to put in the new investments, but we won't do that if we're trading at a discounted book, which is still the case today.

Sure. I guess just to follow up, sourcing on those new investments, competition you're seeing in the market, I think Paul touched a little bit on spreads tightening recently. you know, where we see those today back to, I think, pre-COVID levels. Can you talk a little bit about returns on new investments on CMBS and also then competition you're seeing for new MES and other type investments you're looking to add?

Yeah, it's good. On the CMBS front, yeah, like I said, the spreads on the BPCs for the latest transactions, went off at 250 and 275 basis points inside of our last purchases, which are, I think, like 25 basis points above the low of the pre-COVID level. In terms of competition in the CMBS space for the Freddie Mac V pieces, it's still limited just because of the high bar that they set for becoming a select sponsor and a DTH. So I would say there's still probably about 20 active bidders in that space. And they usually do an auction maybe once or twice a quarter. And then after that, the securitization should be replaced. In the meds world, you're getting more debt funds, but in the state that we put in where we can make a $5 or $10 million investment on a multifamily asset in the southeast or southwest, we don't have a ton of competition. The bigger players are looking to put out a lot more money, and it's not really worth their time to spend it on $5 and $10 million loans.

Great. Appreciate the comments today. Thank you.

And we'll now take our next question from Amanda Switzer with Baird.

Thanks. Good morning, all. Do you have any update you can share on your plans for the self-storage common stock investment, and could that be a potential source of funds this year?

Yeah, it is. We've been working with a number of funds, actually working with a number of funds to recap that piece out. We think that, you know, that can be a 2021 source of funds, you know, highly likely that you can see that this year.

Okay, that's helpful. And then following up on the Meg investment you made in January, can you just talk a bit more about how you got comfortable with the Los Angeles exposure, a little bit different than where you've invested in the past, and then the slightly higher LTV for the largest portion of that investment?

Yeah, I think that for us, in terms of markets and gateway markets, we're not a huge gateway market fan, as you know from your coverage of NXRT. That being said, we do lump L.A. in a different bucket than San Francisco and New York. It's shown more resiliency across the multifamily spectrum during COVID. And then in terms of the underwriting, we have been – really watching this mezzanine pool, I think, for over a year. So we've been working with Freddie Mac. They kind of put it on hold, negotiating with us during COVID, and then we picked it back up. But we've monitored this book through COVID, like I said, for over a year. So we were comfortable enough through the course of 12 or 14 months watching the performance of the

That's helpful. And then it's small, but in your book value bridge, you noted a three cent per share realized loss in the fourth quarter. Is that just related to the Georgia preferred equity redemption or something else during the quarter?

That's due to pay down on the secure loan that you were buying a premium. So when you sell that premium, it's less than to realize a loss.

That makes sense. Thanks for all the comments.

And once again, that is star one if you would like to ask a question. We'll now take our next question from Jade Ramani with KBW.

Thank you very much. Given where credit spreads are in the CMBS space, you have a range of mark-to-market book value you might be able to provide should we be assuming the 1948 is up something around perhaps 4%.

Hey, Jay, it's Paul. Yeah, looking at January's numbers, I would say that a 3% to 4% increase would be correct. And given where new issue pricing is, Matt gets described before, it could be higher in February, March. That's still TBD on where brokers come out with the marks, but I think that's a fair assessment.

Thank you. What should we expect for the pace of capital deployment this year, either on an annual or quarterly basis in terms of how much equity capital and cash there is available to deploy into new investments?

Yeah, it's McGrainer. I think what we're targeting is $100 million this year. So $25 a quarter would be an optimistic goal for us and one that we think is doable based on the BP flow and other private prefers that Matt discussed earlier that are more one-off opportunities, both of which we're actively sourcing and have term sheets out on now.

Thank you. On the credit front, when I look at Freddie Mac versus Fannie Mae, it's clear that in Freddie Mac, there's a noticeable increase or greater proportion of loans in forbearance, about 2.4% of securitized UPB, which is about 1,200 loans or $7.7 billion of collateral as of November. Yet in February, NRF's portfolio, you cite that there are no loans in the portfolio that are currently in forbearance. Can you talk about what would explain the difference between the NRF portfolio and Freddie Mac's overall securitized book?

Yeah, so a portion of the NRF portfolio was purchased post-COVID, so I think we bought two or three B-pieces post-COVID, and then obviously the next book is a little bit different, but the three B-pieces had the additional interest reserves, so the credit underwriting was much stronger, you know, post-COVID securitizations.

It had the interest reserves tax and insurance accrual or reserves tax. are uncommon and never been implemented before throughout the program.

So even though there's about 2.4% of the Freddie Mac securitized loans in forbearance, they're still in the Freddie Mac BP portfolio, the portfolios that NREF owns. There's no loans within those pools that are in forbearance?

That's correct. Back in the second quarter, there were a number of loans in the BB's portfolio and in the SFR portfolio that were in forbearance. Those have exited forbearance. So at one point, we did have loans in forbearance, but we don't anymore.

Great. Thank you for that. On the REVI portfolio, I'm wondering if it's your expectation that ultimately Prefium and Aries, which bought the plan to refinance that debt either through securitization and some other means. Perhaps they could capitalize the prepayment penalty, which I believe is 10%. So it would be a high cost, but they'd be able to create probably a higher earning stream, a higher ROE on a go-forward basis. So if they eventually plan to exit that investment, they could capitalize the interest, they'd capitalize the cost, to exit that piece of debt, refinance it cheaper, show a higher earning stream, and then have a more graceful exit. So what's your expectation with respect to that investment?

Yeah, Jay, hey, it's Brian. I'll let Paul talk about the actual numbers here, but we've had discussions with Credit Union, and they've indicated they don't intend to refinance that. And then, Paul, once you get through the numbers, we'll see why.

Hey, Jake. Yeah, so when we calculated the actual decency penalties that they would have to use to break the loan, it's roughly 25% to 30% given where rates are right now, which would imply roughly $130 to $150 million of yield maintenance or decency. With that, even looking at where new issues to EBS or ABS, for example, were tri-contraded, it still wouldn't make sense on a break-even. It would be like a 12-year break-even period given those numbers.

And if that were to happen, I assume that you all would be viewing that as a huge, you know, gain to book value to get that prepayment penalty up, that the fee isn't up front and be able to deploy it elsewhere. So it would probably be a good news item if that did happen. That's exactly right. Thank you very much. Thanks, Jim.

And as a final reminder, that is star 1 if you would like to ask a question. And we'll pause for just a moment. And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Yeah, thank you for everybody who joined the call and reiterated some of Matt's closing comments. Very happy with 2020. Happy that we were able to perform as we said we would during the IPR Roadshow and hope to continue doing that in 2021. So thank you. We'll talk next time.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.