NexPoint Real Estate Finance, Inc.

and welcome to the NextPoint Real Estate Finance first quarter conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jackie Graham, Director of Investor Relations. Please go ahead.

Thank you. Good day, everyone, and welcome to NextPoint Real Estate Finance's conference call to review the company's results for the first quarter ended March 31st. On the call today are Brian Mitz, Executive Vice President and Chief Financial Officer at Matt McGrainer, Executive Vice President and Chief Investment Officer, Matt Goetz, Senior Vice President, Investments and Asset Management, and Paul Richards, Vice President, Originations 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 securities Litigation Reform Act of 1995 that are based on the 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 can affect forward-looking statements. except as required by law, and REF does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also contains 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 Mitz. Please go ahead, Brian.

Thank you, Jackie. Welcome to everyone joining us today. Today we'll cover the first quarter of 2021 for NREF. I'll begin with an overview of the quarter, discuss our results and guidance, and then turn it over to Matt Goetz and Paul Richards to discuss the portfolio, pipeline, and general market conditions. And then we'll wrap up our prepared commentary with some closing comments from Matt McGrainer before going to Q&A. So starting with an overview of the quarter, it's a pretty quiet quarter. We originated one loan, it was actually two separate loans, but same deal, mezzanine loans, but a multifamily redevelopment property for approximately 26 million as an unlevered IRR in the mid-teens. Net income was $1.26 per diluted share for Q1 compared to net income of $1.32 per diluted share for Q4. Core earnings were 53 cents per diluted share The quarter is compared to $0.55 for diluted share in the prior quarter. But value for share increased 4.4% quarter over quarter to $20.33. We ended the quarter with 63 investments, totaling approximately $1.47 billion. In subsequent quarter end, we added another investment, a $76 million frame-out BP with a 6.8% unloaded IRR, which Matt Getz and Paul will cover in detail in their commentary. As of March 31st, our capital stack consisted of 780 million senior secured facility on the SFR loans, 60 million senior secured facility on the multifamily mezzanine pool, 162 million of repurchase agreements, 36.5 million of unsecured notes, 37.5 million of preferred equity, 97 million of common equity, and 286 million of redeemable non-controlling interests. Subsequent to quarter end, we issued $75 million of unsecured 5.75% notes, insuring in 2026. Our debt has a weighted average remaining term of six years and a weighted average rate of 2.49%. As of March 31st, only 15.6% of our financing is subject to mark to market, and we continue to be low levered at 2.47 times debt to equity. We have $15 million of unrestricted cash on the balance sheet as of March 31st. As of April 28th, through our ATM, we've issued 260,000 shares of common stock, an average price per share of $20.27 for gross proceeds of $5.2 million. Also, as of April 28th, we're trading at a 1.7% premium to our March 31st book value and had an implied yield of 9.2 percent. Let me quickly go through the results for the quarter. High-level net income attributable to common shareholders is $8.4 million, or $1.26 per share, which compared to a $6.4 million loss in the first quarter of 2020, or a loss of $1.22 per share. Core earnings for this quarter was $2.9 million, or $0.53 per diluted share, as compared to $1.2 million and $0.23 per diluted share, Q1 of 2020. Our cash available for distribution was $2.8 million for Q1 of this year, or $0.52 per share, as compared to $1.5 million or $0.28 per diluted share last year. Book value on a consolidated basis was $20.33 versus $17.72 this time last year. First quarter recorded a loan loss provision of $124,000 as compared to a provision of $212,000 in the first quarter of 2020, reflecting the improved credit conditions now that we're a year plus into COVID. We paid a dividend of 47 cents per share on the first quarter, and the board has declared a dividend of 47.5 cents per share payable on June 30th to shareholder's record as of June 15th. Let me touch on our guidance here before we turn it over to the rest of the team. We are issuing core guidance for the second quarter 2021 as follows. 62 cents per diluted share on the low end, 60 cents sorry, 66 cents per diluted share on the high end for a midpoint of 64 cents per diluted share. Our CAD per diluted share, 57 cents per share on the low end, 61 cents per share on the high end for midpoint, 59 cents per share at midpoint. That's a dividend coverage ratio of 1.24 times. So with that, let me turn it over to Matt Goetz and then Paul Richards to discuss some of the details.

Thanks, Brian. The first quarter of 2021 results continue to show strong performance across each of our investments and asset classes. We continue to focus on investment verticals where we believe we have an advantage due to our experience in owning and operating commercial real estate. Our ability to leverage information from being both an owner and operator, as well as a lender to commercial real estate investments, allows us to find relative value throughout the capital stack with the goal of delivering higher than average risk-adjusted returns. We continue to believe our investment strategy, focusing on credit investments and stabilized residential and storage assets, conservative underwriting at low leverage with well-heeled sponsors, will provide consistent and stable value to our shareholders. The portfolio continues to perform strongly, and we were able to capitalize on a few opportunities during the first quarter and immediately thereafter. The current investment portfolio is comprised of 64 individual investments with approximately $1.5 billion of total outstanding principal. Loan portfolio is 100% residential, 57% invested in senior loans collateralized by single-family rental, and 43% invested in multifamily via agency CMBS preferred equity and mezzanine debt. The portfolio's average remaining term is seven and a half years, is 94% stabilized, has a weighted average loan-to-value of 66.8%, and an average debt service coverage ratio of 2.02 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, none of our underlying loans are currently in forbearance, no change from the fourth quarter of 2020. For reference, as of the forbearance report published by Freddie Mac on March 25th, roughly $7.4 billion, or 2.2% of the total Freddie Mac securitized unpaid principal balance has entered forbearance, both metrics improving slightly since the fourth quarter. Moving to the opportunities we were able to take advantage of during and immediately after the first quarter. As Brian mentioned, we made a $26.3 million mezzanine investment in multifamily redevelopment in Los Angeles, California, with great sponsorship. The mezzanine investment has a flooding rate yield of Wall Street Journal Prime plus 10%. On April 28th, we purchased a CMBS IO strip with approximately $50 million of Notional for $6.1 million. The investment was capitalized with cash and additional repo financing. The underlying portfolio consists of 50 fixed-rate multifamily mortgages with a weighted average LTV of 64.8%. Yield on the investment is higher than what we are seeing on the new issue pricing for the same tranche. We plan to close another floating rate, Freddie Mac K-Series B-Piece, tomorrow, April 29th. The B-Piece's purchase price and par value is approximately $76 million and pays the current yield of SOFR plus 625 BIPs. The collateral pool is made up of 37 loans with a total appraised value of approximately $1.4 billion. The total unpaid principal of violence is approximately $1 billion, representing the average loan to value of 70%. The underlying properties consist of 8,587 units and are 95% occupied. The investment has 9.8 years of remaining term and a debt service coverage ratio of 2.3 times. In summary, we continue to find attractive investment opportunities throughout our target markets and asset classes. and 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 the SFR portfolio.

Thanks, Matt. During the first quarter, the company was not active in the secondary bond market or an issue agency CMBS market, but as previously discussed, we deployed approximately $76 million on a new issue of living rate Freddie Mac VPs and $6 million on a Freddie Mac X1 IO strip in Q2. New issue agency bond pricing leveled off some this past month, and bonds are now pricing at near pre-COVID levels. Our CMBS portfolio has greatly benefited as a direct result of the yield compression experience since mid-2020 and have seen a healthy increase in value. We continue to be prudently levered on our repo at roughly 50% LTV at quarter end and even lower after purchasing the latest BPs. Discussed in previous earnings calls, It would take downward market value movement of approximately 25% on current CMBS portfolio before our LTV increase to 65%. Lastly, we wanted to briefly touch on the continued performance of the SFR loan pool. All loans are current and performing as the demand and massive tailwinds for single-family rental in general continue to accelerate. We fully expect this trend to persist as tenant retention occupancies are at all-time highs. To finalize and prepare remarks before we turn it over for questions, I'd like to turn it over to Matt McGregor.

Thanks, Paul. In closing, I'd just like to say briefly that we're excited about the credit quality and durability of the existing portfolio, as well as our team's ability to consistently generate attractive investment opportunities, such as KF-108 that closes today. We're also extremely pleased with our latest notes offering, generating $75 million of proceeds and dramatically reducing our debt cost to capital from our prior 2020 notes offerings. This capital will help fuel growth in the coming quarters as we look to deploy capital in our core verticals, including several potential new SASBP piece opportunities in the self-storage sector. That's all we have for prepared remarks today. Great thanks to the team, and now we'd like to turn it over to the operator for questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, you may press star 1 to ask a question. Our first question comes from Jade Romani with KBW.

Thank you very much. Wondering what you're seeing in terms of production volume from Fannie Mae and Freddie Mac. Has there been any slowdown in their pace of acquiring loans from seller-servicers? Seems like with slightly higher rates and competitiveness from debt funds that there's likely to have been some moderation in their volumes.

Hey, Jay, it's Matt. I actually was on the phone with them yesterday. They're actually seeing a pickup in obviously the floating rate loans that they're purchasing and quoting right now. Obviously, the caps have been lowered, but with the amount that they can do that is uncapped via you know, loans to affordable housing that hit certain AMI metrics, they're still seeing plenty of flow. So we don't see any reason why they can't, you know, securitize at the same levels that they've been doing in the past few years.

Okay. Thanks for that. Secondly, could you give any color on what is driving the really strong growth for the second quarter in core EPS and CADs?

It's because we're purchasing additional OP units with the cash raised from the unsecured notice offering.

Jay, that's basically a reduction of the fund's existing investment in the company, which will just generate higher earnings per share.

So that's equivalent to buying back stock and a reduction in share count? Yeah, slightly. Okay. Did you quantify, I forgot, I apologize if I missed it. Did you quantify the amount of that?

Quantify the amount of what?

How many OP units were being repurchased with cash.

Yeah, we do. I mean, we can. It's just that the book value that we issued, $20.33. or divided by the 75 million. What would calculate your report?

So the 75 million is all being used to repurchase OP units?

Essentially, yes.

Which will then be used to make investment that we're closing this morning, which is that $76 million BPs.

So I'm getting confused now. You issued 75 million of debts. And you're using how much of it to fund new investments and how much of it to purchase additional OP units?

So we're, the REIT is using the proceeds to purchase OP units, which will then be used to fund the BEP's investment. Okay, got it.

Thank you very much for taking the questions. Thanks, Shane.

Thank you. Again, that's star one. If you'd like to ask a question, our next question comes from Amanda Schweitzer with Baird. Thanks.

Good morning guys. Um, with the improved cost of equity capital today, do you have any update on where you think you could reasonably take your acquisition volume this year, given the opportunity set of deals you see today?

I think it's still, yeah, I think it's still the same. Um, uh, as I said today, I mean, it's Matt McGrainer. I think that the, um, The volume of the stock still is what it is, but we continue to use the ATM and we'll issue it a premium to the extent we can fund new investments. As I mentioned, we have probably a little bit higher growth in the self-storage sector. I think we can do anywhere from $15 to $30 million in new additional investments there. So coupled with a few B pieces, probably looking anywhere from $150 to $200 million now. which I think, you know, prior we were, we're, you know, one, one to one 50.

Makes sense. Um, and then just with some of the meaningful increase in institutional investment into the SFR space this year, which you've mentioned, are you finding any increased opportunities to increase your investments in that space specifically?

Hey, Amanda. It's Paul. Yeah, we've been actively searching for investments in either the MES or the BP's portion of the SAC for SFR. It is a little difficult, and it's definitely the demand's high. So we are searching, sourcing. We've underwritten deals, just nothing that we've pulled the trigger on yet, but that's definitely in the hopper.

Okay. That's helpful. Finally, just following up on kind of the acquisition of OP units that you mentioned, is that changing the amount of OP units that you plan to exchange for equity if the vote passes at the annual meeting or no change to that plan?

Yeah, no, it's totally separate. Once we get the vote, assuming that we do, we'll assess sort of how much of that we want to convert and when.

All very helpful. Thanks for the time.

Thanks, Amanda.

Thank you. There are no additional questions at this time.

Okay, great. Appreciate everyone's time. Thank you.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.