NexPoint Real Estate Finance, Inc.

Good day and welcome to the Next Point Real Estate Finance Q4 2021 Quarterly Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference 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 and full year ended December 31st, 2021. On the call today are Brian Mitz, Executive Vice President and Chief Financial Officer, Matt McGrainer, Executive Vice President and Chief Investment Officer, Matt Guest, 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 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 the conference call speak only as of today's date and accept as required by law And REF 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 Mick. Please go ahead, Brian.

Thank you, Jackie. Appreciate everyone joining us today. I'm going to discuss our results for the quarter of the year and then turn it over to the team for detailed commentary. Net income for the year was $3.93 per diluted share compared to net income of $1.74 per diluted share for 2020. Earnings available for distribution was $1.89 per diluted share in 2021 as compared to $1.46 per diluted share in 2020. or an increase of 29.5%. Cash flow level for distributions was $2.21 per diluted share in 2021, compared to $1.67 per diluted share in 2020, or an increase of 32.7%. Net income for the quarter was $0.92 per diluted share, compared to net income of $1.32 per diluted share Q4 2020. Earnings available for distribution was 54 cents per diluted share in Q4 of 2021, compared to 44 cents per diluted share in Q4 of 2020, and 51 cents per share in Q3 of 2021, or an increase of 22.7 and 5.9% respectively. Cash left available for distribution was 63 cents per diluted share in the fourth quarter of 2021, compared to $0.47 per diluted share in the fourth quarter of 2020 and $0.62 per diluted share in third quarter of 2021 for an increase of 34% and 1.6% respectively. Foot value per share increased 2.2% quarter over quarter and 10.4% year over year to $21.51. We recognized a mark-to-market gain of $9.1 million on the company's investment in next-point storage and $900,000 on the company's CMDS and IO stroke portfolio. During the quarter, we originated or purchased the following investments. We purchased a $61.3 million floating rate Freddie Mac K-Series VPs with an estimated yield of 525 basis points over SOFR. We originated mezzanine convertible notes with an aggregate principal amount of $40.8 million. Matt McGrain will discuss this investment in his remarks. We originated a preferred equity investment for $30 million, yielding 10%. We originated another preferred equity investment of $3.8 million, yielding 10%. We originated a third preferred equity investment for $5 million, yielding 10.5%. After quarter end, we funded an additional $41.8 million to this investment. We ended the quarter with 74 investments totaling approximately $1.7 billion. During the quarter, two single-family rental loans were repaid, totaling $20.2 million with penalties of $3.6 million paid. With the gross proceeds received, $18.6 million was used to pay down the Freddie Mac Senior Facility. As of February 17, 2022, across the portfolio, weighted average coupon is 6.32%. Weighted average remaining term on investments is 6.5 years. Weighted average loans value is 67.9%. And weighted average DSCR is 1.99 times. The values used for the collateral that we use in the LTV calculations, the value at the time the loan was purchased originated The values for multifamilyness of our assets have moved dramatically over the past few years and months. Paul will talk about these revised weighted average loan values using our estimates of the changes and the underlying collateral value during his prepared remarks. As of December 31st, our debt capital consisted of the following. $726.3 million of senior secured facility on single family rental loans. $59.9 million of senior secured facility on the mezzanine pool. $286.3 million in repurchase agreements, $171.5 million of unsecured notes, and $32.5 million of mortgages payable. As of February 17, 2022, our debt has a weighted average remaining term of 4.8 years and a weighted average rate of 2.79%, which provides a 353 basis points spread on our investment income over the cost of our debt. is that December 31st, 23.9% of our financing is subject to mark to market. Our debt to equity ratio was 2.5 times at December 31st. We paid a dividend of 47.5 cents per share in the fourth quarter, and the board has declared a dividend of 50 cents per share payable on March 31st, the first quarter of 2022. Our dividend is 1.14 times covered by earnings available for distribution and 1.3 times covered by tax available for distribution. Today, we're going to see guidance for earnings available for distribution and tax available for distribution for the first quarter of 2022 as follows. Earnings available for distribution per diluted share of $1.22 and cash available for distribution per diluted share of $1.57. Large increases over the prior quarter and prior year are driven by prepayment penalties on the single family rental loans that we have received for this quarter. Now let me turn it over to the rest of the team to provide their commentary on that.

Thanks, Brian. The fourth quarter and full year 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 assets, conservative underwriting at low leverage with well-heeled sponsors, will provide consistent and stable value to our shareholders. During the fourth quarter, the loan portfolio continued to perform strongly and is currently composed of 69 individual investments with approximately $1.7 billion of total outstanding principal. The loan portfolio is 98% residential with 45% invested in senior loans collateralized by single-family rental homes and 53% invested in multifamily via agency CMBS preferred or MES. 2% of the loan book is in life sciences. The portfolio's average remaining term is six and a half years, is 91% stabilized, has a weighted average loan to value of 67.9 and an average debt service coverage ratio of almost two times. As Brian mentioned in his earlier remarks, and Paul will describe further later on, we believe the market value of the entire book is approximately 52%, as new appraisals have not been performed on a large portion of the assets since they were originated in 2018 or 2019. The portfolio is geographically diverse with the bias towards the Southeast and Southwest markets, Texas, Georgia, and Florida combined. for approximately 50% of our loan exposure on a geographic basis. 100% of our investments are current. As mentioned in our earnings, none of our underlying loans are currently in forbearance. For reference, as of the multifamily forbearance report published by Freddie Mac on a monthly basis, there are 243 foreborn loans totaling $2.1 billion of outstanding UPV. equating to 90 basis points of the total credit max securitized loan population by loan account and 60 basis points of securitized unpaid principal balance. Moving to the opportunities we were able to take advantage of during this quarter. During the quarter, we originated two mezzanine notes on stabilized multifamily assets located in Dallas, Texas, and Bentonville, Arkansas, with an aggregate principal amount of $20.4 million. The sponsors on the two transactions are repeat borrowers and have extensive experience in the value-add multifamily sector. The properties are 98% and 95% occupied and weighted average debt service coverage ratio of 1.92 times. Our mess investments have an average current yield of 6.5% and an all-in unlevered estimated yield of approximately 11%. On November 8th, we purchased $30 million of preferred equity collateralized by a single-tenant stabilized pharmaceutical manufacturing property with a current yield of 10%. On December 9th, we purchased $60.13 million of Freddie Mac's Floating Rate K-Series BPs with an estimated yield of SOFR plus 525. This BP originated at the tighter spread than our previous K-Series Floating Investments as it represents the bottom 10% versus 7.5% of the debt capital stack, has an underwritten debt service coverage ratio of over 2.3 times, with strong sponsorship on the underlying loans. During the quarter, we also originated a convertible note in the amount of $20.5 million for a well-heeled sponsor focused on ground leases with an estimated yield of 9% with future upside and a list through loan to value of 18%. Two of the single-family rental book were repaid with a total principal balance of $20.2 million. The combined IRR realized on these investments was 31.4%. Paul Richards will go into more detail on how the capital was accretively reinvested in his prepared remarks shortly. 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.

Thanks, Matt. During the fourth quarter, the company was again active in the primary bond market. As previously discussed, we deployed $61.3 million on the Freddie Mac floating rate VPs at SOFR plus 525. Even as the market has experienced inflation headwinds, which have caused the market to price in multiple rate hikes, there has been an insatiable demand for Freddie Mac BPCs bonds. We have continued to see pricing tighten, as evidenced by the last auction, with spreads on the small balance loan BPCs coming in higher than pre-pandemic levels. We continue to be sensibly levered on our repo at roughly 57.5 LPB at quarter end. Lastly, we wanted to briefly touch on the continued performance of the SFR loan pool in the Q1 2022 loan paydown. All loans are occurring and performing as the demand and immense tailwinds for single-family rental continues to pick up speed. We fully expect this trend to persist as tenant retention, new lease and re-lease growth rates, and occupancies are at all-time highs, creating a tremendous backdrop, especially for us as a lender to high-quality institutional SFR sponsors. The portfolio has had two SFR loan paydowns in the first quarter of 2022, which has generated a combined IRR of roughly 35%, versus the original underwritten IRR of only 9%. Due to the early free payment penalty, the investments were able to generate an additional $7 million of net proceeds than the originally underwritten and in approximately one-third of the original investment time horizon. To finalize our prepared remarks before we turn it over for questions, I'd like to turn it over to Matt McGrainer. Thanks, Paul.

We're obviously pleased with our fourth quarter and full year results for 2021 and look forward to another strong year in 2022. I wanted to quickly touch on a special situation investment we made late in the fourth quarter that Matt Guest just mentioned. A sophisticated groundless sponsor ran into some supply chain and COVID-related financing delays and needed a quick and efficient financing solution late in the year. We responded in the span of two weeks in late December and met the sponsor's needs, originating $75 million of convertible notes. Yolanda and Matt mentioned 9% with an ability to convert to common equity at a 12.5% discount. The attachment-detachment point of our investment in the company's assets is roughly 18% LTV and creates a profound risk-reward investment for NREF, both in terms of yield and total return potential. Finally, we're in the middle of refinancing NextPoint Storage Partners' capital stack as we speak. We've chosen a litter to refinance the senior debt portion at a more favorable rate than proceeds and expect these efforts, along with the strength in the self-storage sector generally, to be accretive to the common equity held by NREF. We expect to close this financing in Q2, and we'll provide an update during our next quarterly results. That's all we have for prepared remarks today, and now I'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're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, that is star 1 to ask a question. We'll go ahead and take our first question from Stephen Law with Raymond James.

Hi, good morning. You know, first of all, congrats on a nice quarter and certainly another dividend increase that you guys delivered to investors.

You know, can you talk maybe, Brian, a little bit about the guidance? You know, it looks like a big Q1. You know, what items are being pulled in? You know, I think your EAD is like 40%, 45% of next year's total guidance in Q1. So can you talk a little bit about what's going to drive the one-time items in Q1 that benefit earnings?

Yeah, most of that increase even relates to prepayment penalties. The prepayments are the SFR loans, and it's just a function of how that's calculated. The calculation of that metric is something that the SEC has been focused on across the sector. So with these prepayments that we're seeing, and we'll probably continue to see, just given the strength in the single-family sector, we may see more of that down the road. That's what's driving most of that increase for the first quarter. Obviously, the remainder is just the new investments that we've made that we discussed, and then, reinvesting the payments that we're getting, prepayments that we're getting on those SFR loans. It's currently structured those are some of our lowest yielding investments and we're clawing us back into higher yielding deals like the ground lease that Matt mentioned.

So piggybacking on that, Brian, when you think about the guidance you guys just issued for the full year, you know, how conservative or how did you go about thinking, you know, calculating, you know, expected contributions, you know, maybe not in the next three months, but say second half of this year into your guidance?

Yeah, we didn't make any assumptions around prepayments or one-time type of things. We try to give a more smoothed out, stabilized return profile just based on the investments that we have. Obviously, if people make those those prepayments, we generally view that as a positive and that we can clip a big penalty and recognize that immediately, but then redeploy that in higher yielding investments. And we've run those analysis and scenarios that show if the entire book repaid in 2022, what that would look like. what we could drive earnings, and it would be hugely created to both book value and our earnings available for distribution and cash available for distribution. Great.

You know, switching over to the portfolio, one item, common stock investment, looks like it appreciated nicely in Q4, but can you talk about your portfolio? intentions with that, you know, when you may look to, to say, you know, harvest those gains and recycle capital into, you know, cash flowing investments, uh, you know, any timing to that.

Uh, Stephen, are you talking about the, um, the storage storage?

Yeah.

Yeah. Um, so we, uh, we, we're probably going to close the refinancing of the senior debt, uh, I would say in May. And then, um, Following that, we're gonna restructure the preferred, the extra space preferred, and we expect to blend that down to creating kind of an enhanced profile of the common equity and the value, the yield to the common equity to make it as valuable as we can. And then once we do that, I think we'll either look to recap that out, or if we think it's better to hold, for an exit upon a re-IPO in 2023, which we think is viable, we'll do that. So look for an update in the second half of the year, probably in Q2, and we'll have better visibility into it. But either one of those outcomes, I think, would be greatly accreted for this company.

Great. Yeah, that's helpful, Matt. Appreciate you taking my questions this morning. Take care. Thanks, dude.

Once again, I just wanted to ask a question. We can go ahead and take our next question from Jade Ramani with PBW.

Thank you very much. Can you say more about the ground lease investment? What kind of entity this was and the capital structure this is? Is it shared by investment, by a portfolio, by some kind of equity interest? If you could elaborate, that would be helpful.

Yeah, sure, happy to. It's a private REIT that was formed in, I think, around early 2020. They went out, they raised capital in a 144A offering, raised about $110 million of equity. went and started originating deals through 2021, hit a sophisticated sponsor, hit this externally managing this vehicle, hit some delays in the fourth quarter with some additional LPs via follow-on for their 144A offering. We came in and they had to close those deals, so we effectively bridged that with this instrument at the corporate level. So these are We funded the company, and the company then funds these investments. So like we said, we like this risk-reward. We like the nine assets that they were originated, ground leases on. That's a significant portion of our multifamily, which is obviously one of our bread and butter. So just jump on it, and we think it's a great investment, again, both with yield and total return potential to the extent that we wanted to hold it.

Was this a preferred equity investment?

No, it is true, Dad. It's convertible notes.

Okay, got it.

I guess any update on the progress residential single-family rental portfolio? I assume that has not started to prepay, and if not, when would you expect that to occur?

I don't, we haven't gotten any word from them or any communications or indications, so it's hard to tell. I mean, it's a big number that they would have to prepay. It's part of the Progress, Pretium deal, and they are definitely issuers of securitizations. Having said that, that market has gotten a lot wider here recently. So it really depends on what Prioris and Freddie want to do with that portfolio. If they wanted to repay it, we would immediately start to look for places to put it. I think we have plenty of places that we could roll that. I don't know, Paul, have you gotten any indication from them on anything different?

No. What you said is exactly what my thoughts are, and it's roughly a $75 to $80 million prepayment penalty as it currently stands.

So it's still a happy prepayment for them.

And so far, prepayments you're getting, what is the refinancing going into? Are they financing with letters or something else?

You're breaking it up a little bit, but I think we got just the question. I think they're just going into either securitizations or in some cases they are just getting another bank that essentially isn't necessarily cheaper than what they're rolling out of, but because the values have run up so much, they're getting additional proceeds. And I think their analysis is that it's worth paying the prepayment penalty and maybe getting a cheaper rate or somewhere similar, but getting a lot higher LTV on their investments. A lot of these investments were underwritten at 60, 65%. And today they can finance those at 80, 85, even higher in some cases. I think the math is working out in their favor, and that's where they're rolling it into.

The spread widening you mentioned in the security market, what do you think is driving that? Is it a supply issue based on the magnitude of issuance in January that we saw or something else?

Hey, Jay, it's Paul. Yeah, I think that's right.

I think you saw a very large increase in supply in Q4 of last year and then continuing in Q1 of this year. Also, the interest rate shock along the five and seven years, that didn't help either. I think you'll probably see, and then the LTVs in general are 88.5% in some cases on these deals, so they are higher, as Brian alluded to, versus you know, bank debt, or in this case, we have a 65% LTV loan with them currently.

So those are all factors kind of contributing to the spreads widening recently.

Okay. I guess, is there a range of earnings post the first quarter or in terms of the first quarter? Could you tell us what earnings would be excluding the outsized repayment income? Just to have an anchoring for earnings expectations beyond these accelerated repayments.

Yeah, we can get that number and kind of pull out the prepayment stuff. We want to be careful. Like I said, the SEC has been monitoring disclosures of these different metrics pretty closely, so we want to make sure that we're in line with that and not providing something that's kind of outside of what they were looking for.

Does the dividend increase contemplate any benefit from the prepayment income? Because I assume, well, reading the language of the press release, it says an increase in the quarterly dividend. It doesn't cite just specifically the first quarter, so that implies that this is a recurring dividend. the dividend is going to be 50 cents for the foreseeable future. Is any part of the dividend increase related to the SFR early prepayment income?

No. It's meant to be a consistent dividend. So it's not a special dividend and wasn't driven by any of the prepayment numbers.

So it's fair to assume that recurring earnings might be something close to the dividend. That's right. Okay. Let's see. A couple of things. Yeah, a couple of questions to add. Thanks so much. Really appreciate your time.

Thank you.

All right. It appears there are no further questions at this time. I would like to turn the conference back to the speakers for any additional closing remarks.

Yeah, thank you. Appreciate everyone's time and appreciate the questions. We'll be in touch next quarter. Thank you.

And this concludes today's call. Thank you all for your participation. You may now disconnect.