NexPoint Real Estate Finance, Inc.

Good morning. My name is Dennis, 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 2023 conference call. 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 star, then number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Kristen Thomas, Investor Relations. Please go ahead.

Thank you. Good day, everyone, and welcome to NextCurrent Real Estate Finance Conference Call to review the company's results for the fourth quarter ended December 31, 2023. On the call today are Brian Mintz, Executive Vice President and Chief Financial Officer, Matt McGrainer, Executive Vice President and Chief Investment Officer, and Paul Richards, Vice President, Originations and Investments. As a reminder, this call is being broadcast 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 Legation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs. Listeners should not place a new reliance on any forward-looking statements in our encouraged review of the Cummings Annual Report on Form 10-K and the Cummings' other filings of the SEC for 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 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. Please go ahead, Brian.

Thank you, Kristen. Appreciate everyone joining us this morning. I'm going to briefly discuss our quarterly and year-to-date results, and then we'll go through some portfolio metrics. talk about the balance sheet a little bit, and then provide guidance for the next quarter. But I'll turn it over to Matt and Paul to discuss the portfolio a little more depth in the macro lending environment. So starting with our fourth quarter results, they were as follows. We reported net income 74 cents per diluted share compared to net loss of 17 cents per diluted share for the fourth quarter of 2022. The increase was largely driven by mark-to-market adjustments on our common stock investments and changes in our net assets related to our consolidated CMBS VIEs. Net interest income increased to $3.8 million for the fourth quarter of 23 from $0.3 million in the fourth quarter of 22. The increase was driven primarily by more originations of preferred equity investments with higher yields. and partially offset by higher financing costs in 2023. Earnings available for distribution was $0.44 per diluted share in the fourth quarter compared to $0.42 per share per diluted share in the same period of 2022 and $0.43 per diluted share in the third quarter of 23. Cash available for distribution was $0.51 per diluted share in the fourth quarter compared to 45 cents per diluted share in the fourth quarter of 22. The increase in earnings available for distribution and cash available for distribution for the prior year is partially driven by originations of additional private preferred investments. 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 of 24. Our dividend in the first Fourth quarter was 0.88 times covered by earnings available for distribution and 1.02 times covered by cash available for distribution. Book value per share decreased 10.4% year-over-year and increased 0.7% quarter-over-quarter to $17.93 per dividend share, with the decrease year-over-year being primarily due to the 74 cents of special dividends paid out during the year. and the increase of prior quarter being primarily driven by mark-to-market increases. During the quarter, we contributed to five preferred equity investments with $16.5 million of outstanding principal, and originated one loan with $15.3 million of outstanding principal. These six investments had a blended all-in yield of 11.5%. We had three senior loans redeemed for $29.5 million of outstanding principal, and one for investment redeemed for $3.5 million of outstanding principal. So moving to year-to-date results, they are as follows. Reported net income of $0.60 per diluted share compared to net income of $0.22 per diluted share in 2022. The increase was largely driven by changes in net assets related to our consolidated CMBS VIEs as compared to 2022. Net interest income decreased 55.5% to $16.8 million, $37.7 million in 2022. The decrease was driven primarily by prepayments on our SFAR loans and CMBS portfolio and higher financing costs in 23. Earnings available for distribution was $1.51 per diluted share in 2023, compared to $2.50 per share in 2022. Cash available for distribution was $1.67 per diluted share compared to $2.97 per diluted share in 2022. The decrease in earnings available for distribution and cash available distribution for the year was partially driven by higher weighted average share counts, increased financing costs, as well as our prepayments on SFR loans in 2023. Moving to the portfolio, our portfolio is comprised of 87 investments with a total outstanding balance of $1.6 billion. Our investments are allocated across the following sectors, 47.2% multifamily, 46% single family, 5.2% life sciences, 1.5% storage. Our portfolio is allocated across the following investment categories, 41.4% senior loans, 30.8% CMBS B pieces, 12.5% preferred equity investments, 8.5% mezzanine loans, 3.5% IOS strips, and 3.3% MBS and MSCR nodes. The assets collateralizing our investments are allocated geographically as follows. 20% Georgia, 17% Florida, 15% Texas, 7% California, 4% Maryland, 5% Minnesota, and 3% North Carolina, with 29% across states with less than 2.5% exposure. All this reflecting our heavy preference for Sunbelt investments. The collateral in our portfolio is 89.9% stabilized with a 68.8% loan-to-value and a weighted average DSCR of 1.72 times. Moving to the balance sheet, we have $1.3 billion of debt outstanding, Of this, $304 million, or 24%, is short-term debt. Our weighted average cost of debt is 4.23%, and has a weighted average maturity of 3.1 years. Our debt is collateralized by $1.7 billion of collateral, with a weighted average maturity of 5.6 years. Our debt-to-equity ratio is 2.9 times. A couple other notes. In December, we launched a continuous offering of Series B 9% preferred equity. To date, through February, we raised $30 million in gross proceeds, which will be used to make accretive investments with low to mid-double-digit yields. In Q1 of 24, we received a prepayment on an SFR senior loan of $509 million of principal, of which $466 million was used to repay the debt associated with the loan. We also received a prepayment penalty of $9 million. The net proceeds of $52 million will be redeployed into accretive investments with much higher yields than the repaid senior loan. Moving to guidance, before I turn it over to the rest of the team, earnings available for distribution for the first quarter of 24 is negative 45 cents per diluted share at the midpoint, with a range of negative 50 cents on the low end and negative 40 cents on the high end. Earnings available for distribution will be negative for the quarter as a result of the $25 million reversal of the unamortized premium associated with the previously mentioned senior SFR loan that was prepaid in January. Cash available for distributions will be $0.58 per diluted share at the midpoint with a range of $0.53 on the low end and $0.63 on the high end. So with that, let me turn it over to Paul.

Thanks, Brian. The results from the fourth quarter showcased our overall strong performance across all of our investments and asset categories, especially within our CMDS BP's portfolio. Our strategy remains centered on investment areas where expertise is owning and operating commercial real estate gives us a unique edge. This dual role as both owner and lender in the commercial real estate market enables us to effectively utilize information, allowing us to underwrite and recognize value throughout the capital stack. with our aim in achieving superior risk-adjusted returns that exceed the average. Our investment approach remains centered on credit investments and stable and near-stabilized assets, emphasizing cautious underwriting, low leverage, and relative debt basis, along with the lending to healthy sponsors to deliver steady and reliable value to our shareholders. In the fourth quarter, despite challenging commercial real estate conditions, our loan portfolio maintains steady performance. consisting of 87 individual assets with approximately $1.6 billion in total outstanding principal. The portfolio is geographically diverse with a bias towards the Sunbelt markets. Texas, Georgia, and Florida continue to be our largest portion of our portfolio at approximately 52% as of year-end, though our Atlanta, Georgia exposure has significantly decreased by more than 10% as our largest SFR whole loan was repaid in full as of Q1 of this year. From the beginning of the fourth quarter through today, the company has been very active in underwriting and deploying capital. We executed on making both follow-on and new investments of $31.8 million of preferred equity investments with an all-in yield of 11.5% in both our SFR and Life Science verticals. We also completed the purchase on a new issue, five-year fixed Freddie Mac V-Piece Opportunity with extremely attractive specs. The overall securitization has a 59% LTV, a 1.34 DSCR, and a diverse geographical footprint. The VPs will pay an all-in unlevered fixed rate of 9.75%. With modest leverage, we expect to generate a mid-teen levered return on a very desirable collateral pool. The company has also purchased new issue SFR ABS paper in the gross amount of approximately $44 million and prudently leveraged to achieve low to mid double-digit returns on a low LTV, high cash flowing, stabilized SFR property pool. Lastly, and Matt McGrainer will touch more on this exciting investment during his prepared remarks, the company closed on a $218 million drawable first mortgage life science loan this past January. This specific loan carries an attractive 27% attachment point on current as-is appraisal valuation and provides SOFR plus 900 pricing. On the disposition loan repayment side, as mentioned, we received approximately $500 million gross of financing and around $60 million in net up financing on the portfolio's largest SFR loan, was repaid in full, and a few smaller SFR loans, generating an attractive overall IRR for investors. At the end of the quarter, we maintain a cautious approach to our repo financing. with leverage standing at approximately 63% lowest value. We consistently engage in communication with our repo lending partners, discussing the market conditions and status of our finance TMBS portfolio. 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. We maintain a strong belief in the resilience of the residential sector, especially in the current interest rate environment. We consider investments in the multifamily and single-family verticals to be safe, as demonstrated by the historical performance, and are extremely excited about our life science CDMO investment pipeline. 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 he just mentioned, we're pleased with the solid Q4 and four-year 2023 results. especially on a relative basis. Our portfolio continues to perform very well, and despite short-term supply challenges and multifamily, underlying performance and multi-SFR storage and life sciences remain relatively stable. As we announced last quarter, and as Brian mentioned, we have successfully launched an in-ref Series B preferred, and to date have raised approximately $30 million over the past couple of months. At this current run rate, paired with the pipeline investments that Paul just mentioned, We expect to increase cash available for distribution by 15% to 20% over the next 12 months. The life science loan originated in January that Paul mentioned will alone provide $200 million of fundings over the next 12 months. We expect to match fund draws on this investment with proceeds from our Series B raise, providing maximum accretion to shareholders. In addition, the large SFR loan payoff will create additional capital to deploy into our $300 million plus investment pipeline. but it also delevers us by a full turn and now sit below two times leverage, the lowest of any commercial mortgage rate. This delevering creates additional optionality in terms of sources of capital to the extent we wanted to relever some of the balance sheet and to fund opportunistic investments. To close, we're excited about these opportunities in the coming quarters and pleased with the company's continued stability and the opportunity to go on offense in this environment. As always, I want to thank the team for their hard work, and now I'd like to turn the call over to the operator for questions.

At this time, I would like to remind everyone, in order to ask a question, simply press star, then the number one on your telephone keypad. Your first question is from the line of Crispin Love with Piper Sandler. Please go ahead.

Crispin Love Thanks. Good morning, everyone. First, can you talk about some of the opportunities that you've already begun to see or expect to see over the next several quarters in bridge multifamily? Have you started offering press or mezz to borrowers in that space? And just how is that progressive or progressing? Are borrowers seeking you out? Are you working with other lenders to help? And do you expect this to be a key way for borrowers to get agency takeouts down the road?

Yeah. Hey, Chris. It's Matt. Great question. We have started seeing both portfolio deals and individual one-off deals seeking for cash-in refinancing dollars, both on the agency and on the CRE-CLO side. Borrowers are seeking money to fund replacement caps. They're seemingly okay with being diluted, seemingly okay with the terms we're providing in terms of risk mitigation and MEDs and liens and the ability to take over the asset. They're being realistic as well on cap rates, so we're getting a better a better debt yield than we otherwise normally would. We have $300 million of investment pipeline. I would consider this to be an additional $100 to $150 million opportunity for us this year, and they're beginning to come more fast and furious than they were in the fourth quarter.

Okay. And just in this strategy of operating a prep or MES to borrow, I find it very interesting, But what do you view as kind of the key risks here as these bars are likely stressed with high LTVs and low DSCRs? So I'm curious what kind of LTVs are coming in at and just if there's any risk that you think in this strategy. Okay.

Yeah, we're going to make sure that we can prime enough equity such that we can own the asset at an in-place cap rate that we think we can either sell the asset or refi into agency. Now, candidly, some of those are few and far between, and we haven't hit on one yet. But we are underwriting. We will target to be no more than probably 80% of the stack on as-is value today. The structure of the investment, because of the cash flows, certainly in 2024, given supply, will be challenged, will probably carry a little bit more of a lower current pay, but the all-in pricing on that can still reach mid-teens. We're selective. Again, we haven't necessarily hit on one yet, but we are seeing opportunities come in the door on a daily basis from sponsors, from the large commercial real estate services companies, investment banks, et cetera. So we do expect to be active this year in that strategy.

Great. Thank you. That all makes sense, Matt. And then just one last question for me, just on the accelerated amortization of the premium with the prepayment on the senior loan you mentioned in the first quarter, which I think you expect to drive the negative EAD in the quarter. Can you give any more detail there? What drove the prepayment on that SFR loan? And is there anything out of the ordinary with that loan or borrower specifically?

No, I wouldn't say so. I mean, they've been reaching out to us for several years to restructure it. And I think they just got to a point now where they found other financing or had equity capital and were willing to prepay it. But I don't think there's anything, knowing that the company that had the loan, that there's any issues with that.

I think I'd add to that, I think that it's a sign of a healthy ABS market in SFR, right? The sponsor is a well-heeled sponsor, very active, very well-known in the ABS space. While we're sad to see it go, it provides us with new capital, and I think it's a healthy sign for liquidity in commercial real estate in general.

Awesome. Thank you. I appreciate you all taking my questions. Thank you.

Your next question is from the line of Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. Congrats on a nice close to the year with the four key results. I want to make sure I get, yeah, I want to make sure I understand kind of the CAD as you move through the year. Matt, I think you mentioned in your comments, you know, opportunity for a brief 15 to 20% growth in the next 12 months. You know, if you think about moving through the year, does Q1 benefit from the 9 million repayment penalty and then we'll see a trough in Q2 as kind of you get a return capital fully redeployed. How do we think about you know, the CAD, you know, migration through this year?

Yeah, that's a good question. The Series B, the way we look at that is with our construction loan in the life science and the pipeline that Paul just mentioned, it's about four to five cents, about five cents per $25 million of Series B raised that's accretive to CAD. So as we move through the year, that's where I'm picking up that 15% to 20%, and perhaps it could be more accretion. Your point, again, is well taken on the payoff. You will see a little bit enhanced in the first quarter and then You know, our job is to redeploy that in the second quarter and make sure that we're fully funded. But again, you know, I'm comfortable with the ability to be still being able to grow, grow cash available for distribution while delivering a full term.

Appreciate those comments. And, you know, when you think about the new investment pipeline and redeploying that capital, given the large discount to book, you know, how do you how do you think about any stock repurchases? I know there's some limits there just given the liquidity, but, you know, can you talk about how you think about, you know, the returns you'd have to see in stock repurchases versus new investments? Yeah, we, we,

Yeah, we have an obligation to fund, you know, another 175, 200 million bucks of, you know, commitments to the extent that we are comfortable, you know, managing cash and funding those investments and getting other, you know, repayments. And we have excess cash. It's an absolute, you know, certainty that we'll look to buy back stock at a, you know, at these levels. You know, we're going to, again, kind of first and foremost fund what we have to fund, and then with the excess capital and to the extent that our Series B, you know, our Series B preferred raise ramps, which we expect it to, I like our chances to be in a position to buy back stock if we continue to trade at discounts. Great. I appreciate the comment, if you want to be. Thank you, Stephen.

Your next question is from the line of Jade Romani with KBW. Please go ahead.

Thank you very much. On the SFR repayment, wasn't there supposed to be a 20% prepayment penalty?

Hey, Jade. It's Paul. Yeah. So, of course, it just matters based on yield maintenance calculations. So, when rates were low back, you know, a year and a half ago when we discussed that, the prepayment penalty was a lot higher. Now that rates have traced back up to, you know, that 5% land, the prepayment penalty was a lot less than what it was back when the rate market was a lot lower.

So there's going to be a $9 million prepayment penalty, correct?

That's correct.

And that's factored into the earnings, but there's more than an offset to reverse the unamortized premium.

That's correct.

Okay. Do you know what pro forma book value should be for the reversal of the unamortized premium?

Yeah, it's around, so the reversal of the unamortized premium, it's about, you know, a little less than a dollar of book value.

So we should expect book value to decline by a dollar.

In a vacuum, if that was the only variable, yes. Of course, there could be mark-to-mark movements, et cetera, on the CMBS book.

Okay. Do you know to date where the mark-to-market is on CMBS?

It's flat to relatively up a little bit. It's not going game-busters by any means, but it's some bonds have been doing well from a mark-to-mark basis, but overall up a little bit through CMBS. through January. So we'll get marks in February coming up and then, of course, in March and see how that works.

Being active, Jade, in the CMBS and ABS markets in the first couple months of the year, we've seen spreads come in quite a bit as the indices rise and as more liquidity returns. So as we sit here today, we feel like the marks will be strong.

Okay. So that'll hopefully be a partial offset to the book value impact.

Yeah. I mean, again, too, we like, you know, in terms of the trade-offs, we did de-lever by $500 million, which is good.

I was going through... Howard Hughes' transcript and their comments about the construction market, construction loan market, really caught my attention. I mean, they basically said they've never seen a market like this where even getting a multifamily loan is challenging. The banks are being told to not do office. It's totally redlined and to pull back everywhere else. So how do you all feel about that? And on the left, science sounds like it is a construction loan based on the magnitude of future fundings and the attachment point being so low. You know, that's a pro forma LTC estimate. So is construction an area you're looking to get more active in?

Yeah, I think so. And I'd say two things. One is the $220 million construction loan is on a 27-acre site in Cambridge where the sponsor's a well-heeled repeat sponsor of ours and has roughly $420 million in equity into the project. This opportunity was born out of banks pulling back, trying to syndicate the senior mortgage. We were, in fact, going to do the mezz on this loan, and so when the banks pulled back, we just stepped in and did the senior mortgage at basically the same rate, lower detachment point, creating a pretty attractive risk return profile. The project was also already funded in terms of equity. Two of the three buildings were built. The third is about to top out. From a risk-reward, this one was a good one. Our storage platform has, through the past decade, through our storage team led by John Good, had a construction development pipeline whereby they would fund construction loans to developers of self-storage and take a profits participation interest. I would expect us to get more active in that space as well as the multifamily space as well because as you mentioned, and this bodes well for multifamily and really all property types performance in 25 and 26, but over the past, you know, nine to 18 months, if you're a developer, you're hurting. You can't find access to capital. So it is a good time. It is on our radar, and we've already been doing it. So your bunny has a good nose.

On the life science, is there a tenant already signed up? Because I know there's quite a lot of supply expected to hit this year and next year.

Yeah, that's a rumor. A lot of the supply hitting has been pushed out to 27 and 28. I think half of what was planned to deliver over the next 12 months won't deliver. So if you would dig into the numbers, and we're happy to share those with you, I think the supply in life sciences is fairly overstated. This particular project is, you know, one of the last to be developed in Cambridge, you know, before a moratorium hits. And, you know, the location, the, you know, the size, the ability to take full blocks is 395,000 square feet total. We expect to be very attractive. And, again, it opens its COs in 2025. It's not like this is, you know, far out project. So we expect leasing velocity to do very well here. But as of today, there is no tenant. But our basis is below. I would just add one thing. Our basis is land value.

Okay. And then on multifamily, lots of noise, lots of you know, there's CLO reports showing delinquencies. There's a lot of scrutiny on some of your peers, mortgage rate peers. But at the same time, you know, the GSEs are showing pretty low delinquencies in their stabilized servicing portfolios that, you know, others like Walker and Dunlop manage. So can you just give us a sense, since you're so active even on the equity side, of what's going on on the ground with multifamily, some of the supply challenges, and yet you know, what looks like pretty decent credit performance.

Yeah, you bet. I think you've got a bifurcate, you know, agency versus non-agency. And just, I guess, generally in multifamily, you know, right now, Q1, Q2, Q3 is the eye of the storm, the supply storm, so to speak. And then, you know, the supply wanes throughout 24 and into 25. It gets, you know, the dynamic really flips in the landlord's favor. On the ground, the The CRE, CLO loans, obviously probably lower quality collateral are hitting air pockets. Their cash flows starve. They're almost zombie deals to the extent that there is no cash flow to fund operations or rehabs or business plans that were conducted or created a couple years ago. Those deals are challenged, and I'm not going to say you can't work through it. Multifamily is the easiest to work through, but those are where you're seeing the most weakness. The agency portfolios, including our own, have held up a lot better, and that makes sense, right? They're particularly better sponsors, maybe well-located. They go through a bunch of different layers. of underwriting and they're more diversified. And so I think those deals will continue to be fine and be able to be refinanced, especially as we get through the next three or four quarters, which I think things, once the Fed decides to actually pivot, that'll ease some pressure on the system and then getting through the supply will also help. A little bit of a rough time in the next two or three quarters, but I do think there's light at the end of the tunnel.

Thanks a lot.

Thanks, Jay.

This concludes the Q&A session of today's call. I will now turn the call back to the management team for closing remarks.

Yeah, I appreciate everybody's time. Great questions today. We'll look forward to speaking again soon. Thank you.

This includes the Next Point Real Estate Finance fourth quarter 2023 conference call. Thank you for your participation. You may now disconnect.

See you again soon. Thank you.