NexPoint Real Estate Finance, Inc.

Good day, and welcome to the NextPoint Real Estate Finance third quarter conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Jackie Graham. 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 third quarter ended September 30th. On the call today are Brian Miss, Executive Vice President and Chief Financial Officer, Matt McGranor, Executive Vice President and Chief Investment Officer, Matt Guest, Senior Vice President, Investments and Asset Management, Paul Richards, Vice President, Originations and Investments, and David Wilmore, Vice President of Finance. As a reminder, this call is being web tasked 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 management's 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 and accept as required by law, and REF does not take... 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 Mitz. Please go ahead, Brian.

Thank you, Jackie. I appreciate everyone joining us today. I'm going to jump right into our results for the quarter. And then I'll turn it over to the team to give some more detailed commentary on the portfolio and macro environment. Net income for the quarter was $1.17 per diluted share compared to net income of $0.52 per diluted share for the second quarter of 2020. Earnings available for distribution was $0.71 per diluted share in the third quarter compared to $0.42 per diluted share in the third quarter of 2020, or an increase of 69%. Cash available for distribution was $0.70 per diluted share in the third quarter compared to $0.42 per diluted share in the third quarter of 2020 for an increase of 55.6%. Book value per share increased 3.2% quarter over quarter to $21.04. We recognized a mark-to-market gain of $1.4 million on the company's investment in NextPoint Storage and $12.3 $8 million on the company's CMBS and I.O. Strip portfolio. During the quarter, we purchased six CMBS I.O. Strips with a notional value of $115.1 million for $13.1 million. During the quarter, two single-family rental loans were repaid, totaling 22.6 million in proceeds, plus yield maintenance penalties of $3.3 million. On September 17th, we originated a $32.8 million 4.58% bridge loan on a multifamily asset in Florida, the takeout to agency debt. The loan was repaid after a quarter end on November 1st. On September 29th, we originated a preferred equity investment for $3 million, yielding 10%. After quarter end, on October 26th, we originated a $9.75 million mezzanine loan, yielding 11%. We ended the quarter with 68 investments totaling approximately $1.6 billion. Across portfolio, our weighted average coupon is 5.99%. Our weighted average remaining term on investments is 6.9 years. Our weighted average loan-to-value is 66.8%. And our weighted average DSCR is two times. The value of the collateral used to calculate the 66.8% weighted average loan-to-value is outdated, as we know that the values for multifamily and single-family rental assets have moved pretty dramatically over the past few years and even the past few months. So Paul and Matt, during their comments, will talk about those revised numbers that we've calculated using estimates on the increases in that collateral value. Rich Kedzior, September 30 if our debt capital consisted of 745 million senior secured facilities on the single family rental loans 60 million senior secured facility on the mezzanine pool 223 million of repurchase agreements and 111.5 million of unsecured notes. Rich Kedzior, Our debt has a weighted average remaining term of 5.2 years in a way, the average rate of 2.59%. As of September 30th, 20 percent of our financing is subject to mark-to-market through the repurchase agreements. Our debt-to-equity ratio was 2.29 times at September 30th. On August 18th, we issued 2.1 million shares of common equity at 21 per share, raising gross proceeds of 43 million. We paid a dividend of 47.5 cents per share in the third quarter, and the Board has declared a dividend of 47.5 cents per share payable on December 30th. Our dividend is 1.49 times covered by earnings available for distribution and 1.47 times covered by CAD. Let me update our guidance here for the fourth quarter or give guidance for the fourth quarter and then I'll turn it over to the team. For the fourth quarter, we are issuing guidance for earnings available for distribution. as $0.50 on the low end, $0.60 on the high end, $0.55 at the midpoint. For cash available for distribution, we are issuing guidance of $0.46 on the low end, $0.56 on the high end, with $0.51 on the low end. So with that, let me turn it over to I think Matt Goetz. We'll start with Matt Goetz and then go to Paul Richards.

Thanks, Brian. The third 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 operator and 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. We are also excited to begin investing in the life sciences real estate sector on both a preferred and debt basis. The life sciences sector presents the opportunity to put capital to work in one of the most exciting and fastest-growing real estate sectors over the last 20 years. Compelling life science real estate fundamentals, mainly limited supply and or no availability in existing buildings and growing demand, are driven by demographic tailwinds and a requirement for continued innovation to solve evolving healthcare needs. Life science real estate plays a critical role as specialized space is required to support scientific research development and ultimately the manufacturing of novel drugs and therapeutics. The life sciences sector, as evidenced by Alexandria Real Estate's share price has outperformed the RMD by over 104 percent over the last 15 years. During the third quarter, the portfolio continued to perform strongly, and we were able to capitalize on a number of opportunities during the third quarter and immediately thereafter. The current investment portfolio is comprised of 68 individual investments with approximately $1.6 billion of total outstanding principal. The loan portfolio is 100 percent residential with 52 percent invested in senior loans collateralized by single-family rental and 48 percent invested in multifamily via agency CMBS preferred equity and mezzanine debt. The portfolio's average remaining term is 6.9 years, is 93 percent stabilized, and has a weighted average loan-to-value of 66.7 and an average debt service coverage ratio of 2.02 times. As Mitch said, Paul Richards will expound on the LTV metrics and what we believe appear to be high compared to the current market-level valuations. The portfolio is geographically diverse with the bias towards southeast and southwest markets. 100% of our investments are current. As mentioned in our earnings and of our underlying loans are currently in forbearance, no change from the second quarter of 2021. For reference, as of the forbearance report published by Freddie Mac on September 25th, roughly $7.5 billion or 2.4% of the total Freddie Mac securitized unpaid principal balance has entered forbearance. During the quarter, we realized 40% plus IRRs on two single-family rental loan repayments in the total amount of $22.6 million. Moving to the opportunities we were able to take advantage of during the quarter, we purchased 16 BSIO strips, as Mitt said, with an aggregate notional amount of $115.1 million for $13.1 million in net cash proceeds with estimated current yields of approximately 14%. On September 17th, we made a bridge loan in the amount of $32.8 million at a rate of roughly 4.5% with 50 basis points going in, which was subsequently repaid on November 1st. We also closed approximately $12.75 million in preferred and MES on multifamily in the Georgia market or in the Atlanta market at approximately 11% all-in rates. In summary, we continue to find attractive investments, 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 portfolio at large.

Thanks, Matt. During the third quarter, the company was highly active in the secondary bond market. As previously discussed, we deployed a combined $115.1 million notional value or $13.1 million in net cash on Freddie Mac I.O. strips in Q3. Again, this quarter, the company's CMBS portfolio has greatly benefited as a direct result of the yield compression experience since the mid-2000s and yet again saw a meaningful increase in value, especially in the bonds purchased during COVID-19. We continue to be sensibly levered on our repo at a roughly 54.6% LTV at quarter end. As mentioned previously, we undertook the project of applying adjustments to the underlying collateral value at our SFR, MES, and CMBS portfolios. In the case of our SFR portfolio, we applied the Case-Shiller National Home Price Index based on the first payment date on each loan through August 31st, 2021, which was the last date point available. And our multifamily, both MES and CMBS assets, we applied the U.S. national apartment price per unit index based on the securitization date on CMBS and loan origination date for the mezzanine portfolios through September 30, 2021, which is the last data point available on the original appraisal values. The combined results yielded a pro forma portfolio LTV of 51.9%, which is approximately 15% less than the stated LTV of 66.8%. These results demonstrate an even more robust credit profile backdrop and an even more attractive risk-return profile. Lastly, to briefly touch on the continued performance of the SFR loan pool, all loans are current and performing as the demand and immense tailwinds for single-family rental in general continue to accelerate. We fully expect this trend to persist as tenant retention occupancies are still at all-time highs. To finalize and prepare remarks, before we turn it over to questions, I'd like to turn it over to Matt McGrainer.

Thank you, Paul. We're making progress restructuring the capital stack for NextPoint Storage Partners, formerly J-CAP, and expect to have an update during the first quarter of 2022. We're optimistic that these capital allocation moves will produce higher returns for NSP and ultimately NREP. We're also excited, as Matt said, about entering the life sciences space on the credit side, making an inaugural approximately $35 million investment upcoming this quarter in a pharmaceutical manufacturing facility with a high-quality sponsor. We're currently underwriting a half a dozen more opportunities in the sector and expect to transact on several of them in the first half of 2022. Overall, as Paul mentioned, the underlying credit quality and fundamentals of multifamily self-storage and single-family rental continue to accelerate and perform remarkably well. NREF's business is doing exactly what it was designed to do, namely produce a consistent, durable cash flow stream for investors backed by the highest quality assets in the commercial mortgage REIT sector. I want to congratulate the team for continuing to source and monitor high-quality investments. And with that, I'd like to turn the call over to the operator for questions.

Thank you. If you would like to ask a question, you may 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. Once again, star 1 for questions. We'll take our first question from Amanda Switzer with Baird.

Thanks. Good morning.

Good morning.

I wanted to start on the guidance range. It was obviously a little bit wider than normal, given the equity issuance and redeploying those proceeds. But can you give an update on the near-term acquisition pipeline and the volume of potential opportunities that you could close into year-end?

Yeah. Hey, Amanda. It's Matt. The guidance is a little bit wider because we have received a potential smaller payoff in the SFR, which the timing of we don't know what that is. So we made it a little bit wider. Couple that with the pharmaceutical investment I was just mentioning hasn't closed yet, and the timing is sometime this quarter. We just don't know when. So we could potentially outperform that number, but we wanted to be appropriately conservative.

Okay. That's helpful. And then following up on that, comment on repayments. Beyond that SFR loan, as well as the bridge loan being repaid, any other near-term loan repayments that you expect to the fourth quarter? No. Okay. That's helpful. And then finally, it sounds like you'll have a more fulsome update early next year, but any updated thoughts on the potential book value per share upside from the self-storage common stock? I think last quarter you said three and a half to five dollars.

Yeah, it's still in that range. We're optimistic in the higher end of that range, but I think that's still a good range for it.

That's helpful. Appreciate the time.

Thanks, Amanda.

We'll take our next question from Stephen Laws with Raymond James.

Hey, good morning. Good morning. You know, just to follow up on the pipeline question, it looks like you had a couple of deals close here at the end of the year, Mezloan, I think, a bridge loan as well, close to another Mezloan in October. You know, I know the opportunities you mentioned in life science, but can you talk about just your pipeline of kind of these investments, you know, when you're looking to add any more CMBSB pieces, you know, how your pipeline of Mez is building and how you think about deploying capital across your different investment options?

Yeah, we think we'll have a K deal that will close in the fourth quarter. It's a 10% thickness deal for about $65 million, which we'll use some repo on, but roughly we'll call it $35 million or $30 million of equity. And then obviously the life sciences. Go ahead.

Yeah, no, I was just going to follow that up with, you know, given these opportunities, you know, how do you think about available capital, additional, sorry, available liquidity, additional capital needs? I know you've got the ATM, although I think you're probably a little limited given the trading volume. But can you talk about your outlook on liquidity having just come off the secondary and, you know, when you think fully deployed and look to, you know, to grow the balance sheet again?

Yeah, hey, Steve. It's Matt McGranor. I think the next kind of tool in the toolkit we would use is potentially reopening the notice offering that we did over the summer and pricing it tighter. We've gotten indications from our bankers that we could do that, and we think that that would be, over the near term, probably the most accretive, coupled with some repo financing. We just, you know, equitized the balance sheet a little bit more. But we think that with those two tools, really not even having to tap the unsecured notes, we can be fully deployed by the end of the fourth quarter this year.

Great. Appreciate the color there, Matt. know lastly uh operating expenses you guys have shown some really good uh expense control here uh largely flat through this year on quarterly basis can you talk about that look there is this a good run rate or how should we think about those expenses uh you know as you as you grow the platform yeah i mean i think that um

One of the benefits of the NextPoint platform is that this isn't the sole company and doesn't have to keep the lights on. And so we've created a fee structure that we think is helpful and conservative. And we don't think that expenses should carry too much higher. So this is, I think, a pretty good run rate. for the next 12 months or so and agree we focus on that a lot. One of the things too I think is helpful and differentiated about our portfolio is that we're not constantly getting that capital back. Yeah, we get a small repayment here or there, but largely the earnings stream is fixed, so we're not on that treadmill where we have to keep kind of repaying and eroding book value. Couple that with production offices. We have you know, one office here and great networks through owner-operator and the banks and commercial services company, commercial real estate services company. So, yeah, I think we're pretty pleased and we'll continue to monitor these expenses at this level. Great.

Well, congrats on another nice quarter and appreciate your time this morning. Thank you.

As a reminder, star one, if you would like to ask a question, we'll go next to Jade Romani with KBW.

Thank you. The main reason that 4Q guidance for earnings is below 3Q, the equity offering and timing of capital deployment? Yeah, that's right, Jay. Okay. In terms of doing the deploy capital into things like mezzanine loans and preferred equity, what's your comfort level with the competition in that market space?

Yeah, we feel pretty comfortable. I mean, a lot of the people that we're making investments with, they're repeat clients that we've had relationships with for 10 years. And we kind of pride ourselves on being easy to work with, creative, nimble, fast. So everything that a sponsor needs to get a deal closed We don't have to feed a big machine. And at this size that we're currently at, there still aren't a ton of people playing in that $9 million to $20 million equity check in terms of MES and preferred. So we don't run into a ton of competition. That said, there is competition at the higher levels and especially for the B pieces, but we have a robust pipeline on the smaller MES and preferred investments.

Thank you. And can you quantify the magnitude of yield compression that you're seeing maybe by product area?

Hey, Jay, it's Paul. On the CMBS side, on the BP side, yeah, from some of the COVID bonds that we bought back in 2020 in the May area, we were buying, we think we bought at roughly 11% bond equivalent yields. And we've seen prices on those compressed down to mid-sixes. So you see meaningful yield compression on those types of bonds. So we're quite pleased with that. And we think there's probably still room to run just given the demand out there for those types of bonds.

And on the preferred and MES side, just since we're still playing in the smaller dollar amount, we're still able to get 10%, 11%, 12% all-in rates on that paper.

Thanks for taking the questions. With no additional questions in queue at this time, I'd like to turn the call back over to our speakers for additional or closing remarks.

Yeah, I think we're good over here. Appreciate everyone's time, and we'll be back in touch. Thank you.

That will conclude today's call. We appreciate your participation.