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spk07: Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the NextPoint Real Estate Finance fourth quarter 2022 conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you, and I will now turn the conference over to Kristen Thomas. You may begin. Thank you.
spk03: Good day, everyone, and welcome to NextPoint Real Estate Finance Conference Call to review the company's results for the fourth quarter ended December 31st, 2022. On the call today are Brian Mintz, 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, Originations and Investments. As a reminder, this call is being webcast through the company's website at inrep.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 Except as required by law, NREF does not undertake any allocation to publicly update or revise any forward-looking statements. This conference call also includes 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. Please go ahead, Brian.
spk01: Thank you, Kristen. Appreciate everyone joining us today. I'm joined with our entire team here. So we'll be giving some commentary. I'm going to start, briefly discuss our results for the quarter of the year, provide guidance for the first quarter, and then turn it over to the team for some detailed commentary on the portfolio and the lending environment. We'll start with Q4 results, which are as follows. For the fourth quarter, reported net loss of $0.16 per diluted share, compared to net income of $0.92 per diluted share for the fourth quarter of 2021. The decrease in net income as a result of lower prepayments in Q4 2022 and marked market adjustments on our common stock and CMBS portfolios. Interest income increased 4.8% over Q4 2021, driven by a 166 basis point increase in average yield on investments, offset by lower prepayments in Q4 2022. Interest expense increased 47.5% driven by 116 basis point increase in average borrowing rate. Earnings available for distribution was 49 cents per diluted share in Q4 compared to 54 cents per diluted share in the same period of 2021. Cash available for distribution was 52 cents per diluted share in Q4 compared to 63 cents per diluted share in the same period of 2021. Decrease in earnings available for distribution and cash flow distribution is the result of lower prepayments on our SFR portfolio Q4. We paid a dividend of 50 cents per share in the fourth quarter, and the board has declared a dividend of 50 cents per share payable for the first quarter. The board also declared a special dividend of 18.5 cents per share for the first quarter, and we intend to pay additional special dividends of 18.5 cents per quarter for the remainder of 2023. Our dividend in the fourth quarter was 0.98 times covered by earnings available for distribution and 1.04 times covered by cash available for distribution. Book value per share decreased 2.76% quarter over quarter to $20.11 per deleted share as a result of the mark-to-mark adjustments in our common stock and CMBS portfolios. During the quarter, we originated two investments with $19 million of outstanding principal, with a combined current yield of 11%. One investment partially redeemed for $10.8 million of outstanding principal. Moving to the full year results now. For the full year of 2022, we reported net income attributable to common shareholders of $0.51 per diluted share, compared to net income of $3.93 per diluted share for the same period of 2021. Again, this is largely driven by lower prepayments on our SFR portfolio at the end of the period and marked market adjustments. Earnings available for distribution was $2.75 per deleted share year-to-date compared to $1.89 per deleted share in the same period of 2021, an increase of 45.5%. Cash available for distribution was $3.21 per deleted share year-to-date compared to $2.21 per diluted share in the same period of 2021, an increase of 45.2%. Higher year-over-year earnings available for distribution and cash available for distribution for the year were driven by higher prepayments and requisite prepaid penalties in the first and second quarter of 2022. As of today, the outstanding total portfolio stood at $1.7 billion, composed of 85 investments. Weighted average loan-to-value and debt service coverage ratios for our debt securities were 68.6% and 1.78 times respectively. As of today, the company's debt-to-book value ratio is 2.61 times. Our dividend for the year was 1.38 times covered by earnings available for distribution and 1.61 times covered by cash available for distribution. Book value for share decreased 6.5% year-over-year to $20.11 per completed share. Moving to guidance for the first quarter, we're guiding to earnings available for distribution and cash available for distribution as follows. Earnings available for distribution at 47 cents per diluted share at the midpoint with a range of 42 cents on the low end and 52 cents on the high end. Cash available for distribution at 50 cents per diluted share at the midpoint with a range of 45 cents per share on the low end and 55 cents per share on the high end. Decrease in cash fill for distribution earnings available for distribution in the fourth quarter is driven primarily by expected redemptions in the first quarter. So with that, let me turn it over to the team for a detailed discussion of the portfolio and credit markets. Matt, Kev? Thanks, Brian.
spk02: The fourth quarter and four-year 2022 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 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 85 individual assets with approximately $1.7 billion of total outstanding principal. As Brian mentioned, the loan portfolio is 96% residential with 43% invested in loans collateralized by single-family rental properties and 53% invested in multifamily, primarily via H&C CMBS. The remaining 4% of the loan book is life sciences and self-storage. The portfolio's average remaining term is 5.9 years, is 92% stabilized, has a weighted average loan-to-value of 68.6%, and an average debt service coverage ratio of 1.78x. The portfolio is geographically diverse, with a bias towards the Southeast and Southwest markets. Texas, Georgia, and Florida continue to be the largest portion of our portfolio at approximately 51%. 100% of our investments are current, From the beginning of the fourth quarter through today, we were able to close four new investments totaling approximately $34 million with a weighted average unlevered yield of 11.8%. In summary, we continue to find attractive investment opportunities throughout our target markets and asset classes. We will 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.
spk06: Thanks, Matt. During the fourth quarter, the company was not active in the primary or secondary bond market. but continue to source, underwrite, and evaluate potential investment targets daily. We have again stressed the entire CMBS portfolio by shocking cap rates and NOI growth to determine how far cap rates could theoretically widen and interest rates could rise until the portfolio's bond performance would deteriorate. The results are somewhat as expected. The vast majority of the portfolio has demonstrated strong NOI growth over the past few years and refi risk is minimal even at the stress rates. The long-dated nature of the CMBS DEP's portfolio provides an appealing backdrop. We firmly believe in the resiliency of the residential space in the current inflationary environment and the safety of these investments. We continue to be prudently levered on ARIPA financing at approximately 64% LTV at quarter end and have continuous dialogue with ARIPA lending partners on the state of the market and the finance portfolio. Lastly, touching on the continued performance of the SFR loan pool, All SFR loans in the portfolio are current performing and displaying strong metrics in terms of rent growth and occupancy as the demand for SFR continues to be robust. The portfolio did not have any SFR paydowns in the fourth quarter. To finalize our prepared remarks, before we turn it over for questions, I'd like to turn it back over to Brian Mitz.
spk01: Thanks, guys. Yeah, so we'll turn it over to questions now.
spk07: Thank you. And as a reminder, if you would like to ask a question, please press star, then the number one on your telephone keypad. And we will take our first question from Crispin Love with Piper Sandler. Your line is open.
spk09: Thanks. Good morning, everyone. First question on prepays. I don't think I saw it in the release, but what were prepays in the quarter versus last quarter?
spk08: And do you expect prepays to remain lower over the near term?
spk06: In terms of SFR, yeah, I think we would expect the prepayments probably to be less prevalent in Q1 of this year, Q2 of this year, as rates continue to kind of start at that, you know, 4% type 10-year rate. So I think we probably won't see as much action in terms of prepayment, but, you know, we'll continue to evaluate.
spk09: All right, thanks. And then can you speak to your views on both multifamily and SFR right now? It seems like you're a little bit more bullish on SFR, but just with debt costs at 8% to 9%, cap rates still probably in about the 5% range. Are you seeing demand pull back a lot from borrowers, or are there pockets or asset classes where borrowers are still active?
spk05: Yeah. Hey, it's Maverick Rainer. I would say just generally the transaction market, and this isn't a surprise to anyone on this call, is somewhat muted. I think deal volume is down 70%, 80% from a year ago. So that also equates to lower demand for borrowings. Obviously refinancings are few and far between also because we don't have a stabilized 10-year terminal rate yet. So I think most participants that we're including ourselves on the equity side, are waiting for a pause or a pivot or some more clarity from the Fed. Notwithstanding that, the greater performance in SFR and multifamily continue to be strong. In our businesses, at least, we're still seeing high single-digit, same-store and high growth. Notwithstanding the fact that there's no price discovery, the businesses, SFR and multi, are still still performing very well.
spk09: Thanks, Matt. And then if I could just squeeze just one last one. Can you just provide any detail on what you're seeing on multifamily and single-family rents right now and how they're growing on a year-on-year basis and then, I guess, month-on-month as well?
spk05: Yeah, so year-over-year rents, Market rent growth, the worst thing, I'm speaking mostly to the Sunbelt smile. Year-over-year growth is roughly 4% to 6% so far in the first quarter. That's a little bit skewed because there's a pretty dramatic earn-in from the prior year leases that were signed in the 15% to 25% range. So total rent growth for the year is, at least in our portfolio, is kind of 10% to 12%, so still historically healthy. On the SFR side, there's the same dynamic, but to a little bit lesser extent. I'd say single-family rents are year-over-year, 6% to 8% with a smaller earn-in. Quarter-over-quarter, they're decelerating. Multi-family, we finished the year low single digits. First quarter was 6%-ish, so they are decelerating. Same thing with SFR, but to a lesser extent.
spk09: Thanks. I appreciate you taking my questions.
spk07: We will take our next question from Stephen Laws with Raymond James. Your line is open.
spk04: Hi, good morning. Congrats on a nice year. I mean, certainly great seeing a special dividend. It's a pretty material size special as well, so congrats on that. You know, when you look at your investment pipeline, I know you talked about the two – equity deal she did in the last quarter. But when you look at the pipeline and where you're seeing the best opportunities, you know, as you think about portfolio mix and how that may or may not shift over the year, you know, how is your pipeline building and where do you guys see the best opportunity to deploy capital kind of as you look out the next six months?
spk05: Yeah, I think you're going to see us water some grass in the life science space. We're underwriting about $400-ish million of preferred equity and MES opportunities. When I say MES, it's not true, you know, true kind of 60% to 80% of the stack, but more kind of 55% to 65% of the stack. There's a number of opportunities, both in the lab kind of redevelopment and in the CGMP space that we're spending a lot of time on. That space is historically, at least on the CGMP side, not well banked. So we're defining a niche in that space as we speak. So I would expect that portion, if you're looking at a pie chart, to expand from where it is. I think it's now roughly 2%, 3% to maybe 10%, 12%. So that's probably the overwhelming majority of what we're doing right now, but we still have a robust pipeline in the private multifamily preferred as well.
spk04: Great. Thanks, Matt. And, Brian, maybe a quick answer, but, you know, any impact of CECL as far as implementation, any change to marks or book value reserve or anything we need to consider with our models?
spk01: Yeah. So, in the K, we're going to have a range of what the impact is going to be. There will be a little bit of an impact. But the implementation is proceeding well, and we're on target. So, starting this quarter, we'll be reporting under CECL.
spk04: Great. Well, I'll look for that, McKay, and thanks for the comments this morning. Thank you.
spk07: And we'll take our next question from Jade Romani with KBW. Your line is open.
spk00: Thank you very much. Just to follow up to Stephen's question, is there any percentage impact to book value you could comment on on this call from Cecil?
spk01: Not as of 12-31, but there will be a little bit of an impact starting this quarter. So I think on a go-forward basis, the CECL amount is a little bit more than our loan loss provisions is calculated without CECL.
spk00: Okay. Thanks very much. In terms of the credit outlook for commercial real estate broadly, since the NextPoint platform can be somewhat opportunistic, Do you expect to play in any of the buckets of distress or opportunistic investment that's playing out, whether it be office repositioning, whether it be, I think you mentioned preferreds in multifamily, but how do you feel overall about that kind of segment of the market?
spk05: Hey, Jay, it's Matt McGranner. I'd say we're pretty hands-off. You know, I do know folks and a lot of smart folks that are playing in, you know, office SASBs or, you know, heavy-weighted office condo retail that are, you know, pretty significantly distressed. Since we don't have a big operating platform in office or retail or any of those higher CapEx type of property types, we're not – I wouldn't put our investors' money in those types of transactions at this point. Okay.
spk00: Thank you very much. I wanted to ask about multifamily. I think five markets constitute about 25% of the 1 million units currently under construction, including growth markets such as Phoenix and Austin. What are your thoughts about the market's ability to absorb that supply and whether it creates any issues downstream?
spk05: Yeah, we see supply peaking in either Q4 this year or Q1 of next year. Largely, the units are in the Sunbelt Smile where we operate in the NXRT's assets, albeit at a lower price point. There will be some softness in terms of occupancy and rents in our view in the Sunbelt Smile over the next, like I said, year or so. But after that, deliveries. Deliveries fall off a cliff. They're basically going from 387,000 units delivered in the fourth quarter of this year down to 126,000 in the fourth quarter. of 24. And then they're down in Q3 of 25 to 12,000. So that's the data that we're seeing. There will be kind of a short-term blip, I think, in terms of softness in these areas, mostly on the higher-end type of product. But I think you want to be an owner of assets and an owner of multifamily in late 24 and 25.
spk00: And on the single-family for rent side, how is performance tracking relative to your expectations. There's clearly a moderation in rent growth that we're seeing, as well as an uptick in turnover, which is driving increased expense. And then there's also still inflation pressures on the expense side. Nevertheless, rents are still high and occupancy is high. Any performance issues on the single family for rent side?
spk01: Not in our portfolio, nor in the loan portfolio that we have. As you mentioned, rents are still going up at a pretty good clip, and I think mitigating some of the other cost increases that we're seeing. So NOI growth is still relatively strong. We don't see any issues in our portfolio with that or in the future.
spk00: Thanks very much.
spk08: Thank you, Jay.
spk07: And ladies and gentlemen, we have no further questions at this time. I will now turn the call back over to our presenters for any additional closing remarks.
spk01: No, we're all good. Appreciate everyone's time and thoughtful questions. Appreciate it. We'll talk to you next quarter.
spk07: And this concludes today's conference call. We thank you for your participation.
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