NexPoint Real Estate Finance, Inc.

Good day and welcome to the NextPoint Real Estate Finance second quarter conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jackie Graham, Director of Investor Relations and Capital Markets. 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 second quarter ended June 30th. On the call today are Brian Mitz, Executive Vice President and Chief Financial Officer, Matt McGrainer, Executive Vice President and Chief Investment Officer, Matt Goetz, Senior Vice President, Investments and Asset Management, and Paul Richards, Vice President for 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 management's current assumptions, expectations, 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. 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 Mitts. Please go ahead, Brian.

Thank you, Jackie, and thank you to everyone joining us today. On the call, we're going to cover next for the second quarter of 2021, as well as discuss our portfolios and the acquisitions we've made this quarter and year to date and talk about our pilot.

Brian, you are cutting up a little bit.

This is the operator. I'm going to try to reconnect. Brian, please stand by.

Operator, since Brian's have- Hey guys, sorry about that.

Okay, no problem.

Go ahead, Brian. So we purchased approximately 90% of a fixed rate Freddie Mac K-Series principal only BPs. We purchased five CMBS IO strips. We sold three CMBS IO strips. We had one preferred investment that paid off and one of the single family rental loans that paid off. For the The investments we sold redeployed those net proceeds from the sales and payoffs to acquire the new CMBS IO strips and the Freddie Mac BPs. For the results, net income for the quarter was 58 cents per diluted share compared to net income of $1 per diluted share for Q2 of 2020. Core earnings for the quarter were 59 cents per diluted share compared to 37 cents per diluted share in Q2 of 2020 and 53 cents per diluted share in Q1 of 2021. Book value per share increased 0.2% quarter over quarter to $20.38. Year-over-year core earnings has increased 59%. Cash available for distribution has increased 41%. And book value per share of common stock has increased 19.3% on a per diluted share basis. We recognize the mark-to-market gain of 2.5 million in the second quarter on the company's investment in NextPoint Storage Partners, which is formerly Jcap, and 3.2 million on the company's CMBS and IOS Strip portfolio. Just a note, mark-to-market gains are a component of net income and earnings per share, but are excluded from our reported core earnings. We ended the quarter with 64 investments totaling approximately 1.6 billion. As of June 30, our capital stack consists of the following, $765 million senior secured facility on the SFR loan pool, a $60 million senior secured facility on the mezzanine pool, $177 million of repurchase agreements, $111.5 million of unsecured notes, $37.5 million preferred equity, $108 million of common equity at the June 30 closing price, and $286 million of redeemable mine controlling interest. As of June 30, our debt has a weighted average remaining term of 5.7 years and a weighted average rate of 2.62% and approximately 16% of our financing is subject to mark-to-market through the repos. Our debt equity ratio is 2.54 times as of June 30. During the quarter, and actually inception to date, through our ATE, ATM program. We have issued approximately 408,000 shares of common stock and an average price per share of $20.61, which represents approximately 1.1 premium to book value. And we netted gross proceeds of 8.4 million through those issuances. And year to date, we have deployed 191 million of capital into new investments. A quick overview here of the results for the second quarter as compared to last year. Net income attributable to common shareholders is $12.3 million or $0.58 a share as compared to $19.3 million or $1 per share for Q2 last year. Core earnings are $3.4 million or $0.59 per share as compared to $1.9 million or $0.37 per share. CAD or cash available for distributions was 3.4 million and 59 cents per diluted share compared to 2.2 million and 42 cents per diluted share. Book value on a consolidated basis was $20.38 versus $18.33 at the end of Q2 2020. We paid a dividend of 47.5 cents per share in the second quarter. The board has declared a dividend of 47.5 cents per share payable on September 30th to shareholders record as of September 15th. Our dividend is currently 1.24 times covered by core earnings. Let me update our guidance for the third quarter before I turn it over to Matt Goetz. Core earnings per diluted share on the low end is 61 cents, on the high end 65 cents for a midpoint of 63 cents. and our cash available for distributions per diluted share, 51 cents on the low end, 55 cents on the high end, and 53 cents on the midpoint. So I apologize for the technical difficulties, but let me turn over now to Matt Goetz.

Thanks, Brian. The portfolio continued to perform strongly in the second quarter, and we were able to capitalize on a few opportunities. The current investment portfolio, as Brian said, is comprised of 64 individual investments with approximately $1.58 billion of total outstanding principal. The portfolio is still 100% residential with 57% invested in senior loans and 43% invested in multifamily via agency CMBS preferred equity and mezzanine debt. The portfolio's average remaining term is 7.3 years. It's 92% stabilized. It has a weighted average loan-to-value of 66.9 and an average debt service coverage ratio of 2.07 times. The portfolio is geographically diverse with bias towards the 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 first quarter of 2021. For reference to the As of the forbearance report published by Freddie Mac on June 25th, roughly 5.4 billion or 1.5% of the total Freddie Mac securitized unpaid principal balance has injured forbearance, both metrics improving dramatically since the first quarter. We realized a 15.25% IRR and 2.12 times multiple on an invested capital on the redemption of a $3.8 million preferred equity investment. And we had one $15.3 million single family rental loan that was repaid in full. Moving to opportunities we're able to take advantage of during the second quarter. As discussed on our first quarter earnings call, we closed another floating rate for any MACK K-Series VPs for approximately $76 million. That investment has a current yield of average 30-day SOFR plus 625 bps. The collateral pool is made up of 37 loans and has an appraised value of approximately $1.4 billion. We were also able to take advantage of cycling out of some K-series I.O. strips that we purchased in the depths of the COVID downturn and redeployed that capital into higher yielding small balance I.O. strips. We closed on approximately 90% of a Freddie Mac fixed rate BPs with a bond equivalent yield of 6.88%. The investment has five and a half years of remaining term. is 67.3% LTV and has a current debt service coverage ratio of 1.94 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 would 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 second quarter, the company was highly active in the secondary bond market as well as new issue agency CMBS. As previously discussed, we deployed approximately $76 million on a new issue floating rate Freddie Mac VPs and $89 million in a combined basis for Freddie Mac IO strips and a seasoned Freddie Mac VPs in Q2. New issue agency bond pricing was relatively muted when compared to the previous quarter, with bonds pricing close to pre-COVID levels. Our CMES portfolio has greatly benefited as a direct result of the yield compression experienced since the mid-2020s, and yet saw a meaningful increase in value this past quarter. We continue to be prudently levered on our repo at roughly 45% LTV at quarter end, which includes an additional $43.7 million of repo financing to close the season BPs as previously discussed. We were also able to negotiate and achieve lower cost of financing on our repo financing to the tune of approximately 50 basis points on a weighted average basis, when compared to the previous quarter's all-in rate. Lastly, we want to briefly touch on the continued performance of the SFR loan pool. All loans are current and performing as the demand and enormous tailwinds for single-family rental in general continues to accelerate. We fully expect this trend to persist as tenant retention occupancies are at all-time highs. To finalize our prepared remarks, before we turn it over for questions, I'd like to turn it over to Matt McGrainer.

Thank you, Paul. As you heard from Matt and Paul, our multifamily and SFR verticals and their underlying fundamentals are performing extremely well. Revenue and NOI growth are reaching double digits and have further accelerated into July. Our storage platform is no exception. In Q2, the NSP partners saw strong performance as well. As a reminder, most of the NSP portfolio remains in the lease-up phase, but given the strong tailwinds in the sector, We believe the portfolio is well ahead of our pro forma expectations when we acquired Jernigan Capital back in Q4 of 2020. Across the entire portfolio, our properties gained nearly 700 basis points in occupancy in Q2 over Q1 and saw same-store NOI growth more than double as it was up 101% versus Q1. For the quarter, we outperformed our 2021 budgets by 15%, bolstered by 14.8% growth in in-place rents quarter over quarter. We continue to evaluate options to monetize this investment, but also believe that once stabilized, the NSP position could be worth another $3.50 to $5 per in-REF share. That's all I have for prepared remarks. Thanks to the team for continuing to execute, and now we'd like to turn the call over to the operator for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you were using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll take our first question from Stephen Laws of Raymond James.

Hi, good morning.

I appreciate the comments and the prepared remarks. Can you guys touch on, you know, the new investment pipeline and then how you You think about the investment opportunities relative to prepayments. What kind of visibility do you have in prepayments coming in? Kind of like to get some thoughts on how you're able to match those up.

Yeah, I see this, McGrainer. I think the two that we saw in this quarter were largely made up the bulk of the investments that can be prepaid that we're unaware of. The rest of it or the B pieces that either amortize off as the floating rate loans are working their way through the securitization, and then the single family pool that's fixed and has enlarged the fees. We don't expect a material amount going forward of repayments. Certainly, we're not on the same treadmill as most of our peers that get capital back every two or three years. Our expectation is that this is, again, sort of the bulk of it, and going forward, we'll be looking to invest probably mostly in the BP space.

Thanks. And kind of to follow up on the pipeline, I guess first, a big investment on the last day of the quarter, so certainly maybe you could talk to what quantified the impact you think you'll see sequentially that really wasn't there last quarter, and You know, what do you see on the MES side? I don't think you guys have done a new MES loan maybe since January, looking at the table and the deck. So kind of what's that pipeline, and is it just not as attractive relative to the securities investments at this point?

Yeah, so the B piece is going to add about $0.10 per share to core. But because it's a fixed rate and zero coupon, it doesn't add anything to CAD. So that's why there's a large difference between CORE and CAD in our guidance for next quarter.

On the MESS side, there are opportunities that we're currently underwriting between The private preferred multifamily was kind of where we made our name, layering capital behind Freddie and Fannie. Given where cap rates are, 3.5% to 4.25% in debt so cheap right now, the high kind of current coupon opportunities are gone, but you can still find opportunities that can get you a double-digit return, but most of that's going to be in a pick to the sponsor. So you might do a 4% or 5% current and another 4% or 5% accruing. We are underwriting, I'd say, kind of $25 million-ish of that right now. And so we could do that, but it's, I think, less attractive than like a floating rate B piece or a K deal that we could execute on in the third or the fourth quarter. I appreciate the comparison there.

Last question for me, as you've You know, you have a preferred from a year or two ago. A year ago, you've got the unsecured notes. Now, obviously, you've been able to use the ATM for about $8 million so far. As you think about your need for capital and outlook for growth and how you'd like to see the mix of your capital stack come together, what are your thoughts around that?

I think to the extent we can – you know, issue equity above book value, we'll do that first. To the extent we're kind of at or at parity with book value, then we like the preferred market probably, you know, incrementally more than the secure note market or unsecure note market. I think that our cost of cap, I don't think, I know our cost of capital in the preferred, you know, perpetual markets come down. So, you know, we'll continue to, I guess evaluate that in order to fund the Q3 and Q4 investments that we have visibility into, which is probably in the neighborhood of 75 to 100 million. Great.

Thanks for the color there, and it's good that you have all those options at your disposal. Thanks for the time today. Thanks, too.

Thank you. Once again, to ask a question, please press star 1. We'll take our next question from Jade Romani with KBW.

Thanks very much. Core EPS came in at 59 cents, and I believe the prior guidance midpoint for the second quarter was 64 cents. Was the main difference between your guidance and core earnings due to timing of capital deployment, or were there any other factors that you would note?

Yeah, it's timing. It's basically $0.04 for the repayments and then another kind of $0.02 for ATM issuances. And then we did redeploy that capital back into some accretive investments that, Paul, if you want to elaborate on, we can.

Yeah, hey, Jay. It's kind of what Getz discussed recently was we redeployed capital into some Fresby X1s. as well as some just normal KDLX ones. And then the big purchase was the roughly $67 million season B piece that we purchased at the last day of the quarter.

Okay. So in your prior guidance, you contemplated that purchase taking place earlier?

No, I think it's more of the fact that we got 30-day notices on the repayments from the preferreds and that we didn't necessarily anticipate. Okay.

Okay. and you're not expecting something similar in the third quarter.

No.

And what was the aggregate dollar amount of 2Q investments?

It was about $170 million. Okay. In terms of the yield compression numbers,

Are you seeing it broadly across that space, and does that change what you think the business's ultimate levered ROEs are going to be?

I think it's McGranner. The yields are for sure compressing. I don't think that they're going to get necessarily that much tighter in the B-piece market, and I think that that's or in the K deal market. And that's largely where we're focused in terms of generating, at least in the near term, new investments. We think that in sort of niche areas, self-storage and life sciences, we can get some outsized returns to bolster the ROEs and still maintain what we said when we went public. And so that would be the goal. And then Just as a reminder, we don't have to do anything new. The current book has over seven years of duration, and the earnings visibility and transparency of these earnings that bolster our ability to pay an outsized dividend with a superior credit profile are in place from here through the next four or five years.

And just to add one thing to Matt's comment too, our financing has gone down dramatically as well. As mentioned before, repo financing has decreased roughly 50 basis points over the past quarter. And as Matt mentioned, we think we could get a better cost of capital on the preferred side as well as the unsecured note side.

Okay. Is the expectation for the dividend to be maintained? Or is there room for a potential increase?

Yeah, I mean, we're having healthy coverage and we have to pay out almost all of it, so there's certainly room for increase.

Okay. Could you remind us what the basis in NSP is?

44 million.

Okay. What is the timing of any potential realization event?

Yeah, it's a good question. So, like, you know, we've looked at and constantly are looking at the cap stack of the company itself. And, you know, like we've been talking about, financing rates have come in. We can right-size that company's balance sheet and we'll do that probably in the fourth quarter of 2021. The portfolio we thought would be stabilized kind of 2024. It's probably, you know, probably 2023 now. And, um, you know, we're, we're, we can certainly monetize the investment now, but we're also excited about the storage, the underlying storage fundamentals, um, believe that the NSP portfolio represents probably a best in class, you know, urban infill, um, high density storage, um, in the, in the, you know, some of the best sub markets in the country and, you know, we want to be cognizant of the ability to add that $3.50 to $5 per share, per in-ref share, you know, creation to book value that I think is a differentiator amongst our peers. So we're kind of weighing all of those considerations, but, you know, I think it's a good problem to have at this point.

Okay. And so if the capital structure was, you know, rationalized, streamlined, the preferred would be paid off and it would be, you said that there would be a gain of $3 to $5 a share potentially?

No, if you recall, the current position was preferred that was contributed or that was converted into common. So the $44 million is a common special situations investment and a preferred that was converted into a common investment of the company. So we could go sell that common to a third party right now. We could sell it to our funds or we could wait for it to stabilize and then re-IPO or sell it at that point. The $350 to $5 per share is a stabilized range based upon a pro forma, a discounted pro forma cap rate range that's conservative. And I think that we can If we wanted to sell it today, we could probably get a couple bucks per in-ref share for sure. But I do think that that's not going anywhere in the foreseeable future.

Got it. So if the company was recapitalized, the capital structure streamlined, that wouldn't necessarily mean that you guys were selling down the position or anything?

Yeah. That's right. I mean, we could convert it if we wanted to, for example, into a preferred, you know, but that would be a yield closer to 6% or 7%. Whereas, you know, if we took the capital, you know, waited a year and a half, and then, you know, monetized it then, and then, you know, that 44 turns into 90, we relever that, and then we're juicing the book value and the ability to reinvest and drive earnings. So, Yeah, that's an attractive option.

Okay, and lastly, on the single-family rental side, could you give an update on Progress Residential, formerly Front Yard? Given where rates are today, does the potential for that loan to be prepaid increase?

Hey, Jay. No, it still has so much term left on the actual loan that the yield maintenance still is well over $100 million, which, you know, of course, it just doesn't make sense for them to prepay or pay any yield maintenance and, you know, refinance that loan. So it's the same story as last quarter.

Thanks for taking the questions.

Thanks, Jay.

Once again, to ask a question, please press star 1. We'll take our next question from Amanda Schweitzer with Bayard.

Thanks. Good morning, guys. Can you talk more about the potential timing for some of those mezzanine investments into either life science or self-storage? Are there any near-term opportunities you expect to pursue, or is this something where you're thinking about timing it upon the recycling of that J-CAP investment?

Yeah, I think the life science – hey, I mean, it's Matt McGrainer. I think the life science is – investments will occur in the second half of the year for sure. We're hopefully to get one or two done. We thought we might be able to get one done in the second quarter and it's been pushed into the, probably into the third quarter, the end of the third quarter. But I will, I do think we'll get some of those life sciences done this year. Self-storage is a little bit harder. We're still working on some opportunities, aggregating enough size. You know, we're doing some one-off, you know, on like 10, $12 million underwritings on single assets that won't really move the needle. But the life sciences, I think, will be a bigger splash in the second half of the year.

Okay, that's helpful. And then are those investments on life science development projects? And how do you think about an exposure level that you're willing to go to with life science and self-storage?

Yeah, I mean, as you may know, we made... We made a nine-figure investment as a platform in one of Alan Gold's companies, IQHQ, and have worked alongside him for the last few years. And we've gotten a familiarity with certain types of life science facilities that we're comfortable investing in. I'd say the near-term opportunities are sale leasebacks of either some small cell manufacturing or or other smaller kind of logistical type deals that are anywhere from 30 to 50 to 75 million a piece that we could do some measure preferred on. And those are the types of opportunities that we're looking at and think it's a space that's largely pretty interesting right now.

Yeah, that is interesting. That was all I had. I appreciate the time.

Thanks, Amanda.

Thank you. And at this time, we have no further questions in queue. I'll turn it back to management for closing remarks.

Yeah, thanks. It's Matt McGrainer. We appreciate everyone's time and availability this morning and look forward to speaking to you during our third quarter conference call. Thanks again. This concludes today's call.

Thank you for your participation. You may now disconnect.