NexPoint Real Estate Finance, Inc.

Good morning. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the NextPoint Real Estate Finance First Quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press start and the number one on your telephone keypad. If you would like to withdraw your question, press the found key. Thank you. I would now like to turn the call over to Kristen Thomas, Investor Relations. Please go ahead.

Thank you. Good day everyone and welcome to NextPoint Real Estate Finance Conference Call to review the company's results for the first quarter ended March 31, 2024. On the call today are Brian Mintz, Executive Vice President and Chief Financial Officer, Matt McGraner, Executive Vice President and Chief Investment Officer, and Paul Richards, Vice President Originations and Assessment. As a reminder, this call is being webcast through the company's website at .nextpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements with 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 risk and other factors that could affect the forward-looking statement. The statements made during this conference call speak only as of today's date and if this is any part of our 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 Mitz. Please go ahead, Brian.

Thanks, Kristen. Appreciate everyone joining us today. It's Brian Mitz here. I'm going to start by briefly going through our quarterly results and then provide guidance for the next quarter. And then I will turn it over to Matt and Paul to give commentary on the portfolio and the macro lending environment. So, started off, Q1 results are as follows. For the first quarter, we reported a net loss of 83 cents per diluted share compared to net income of 37 cents per diluted share for the first quarter of 2023. The decrease in net income is largely driven by accelerated premium amortization on $508.7 million dollars of SFR loan that was prepaid on January 25th. That interest income decreased to negative $12.8 million in the first quarter of 2024 from a positive $3.9 million in the first quarter of 2023. The decrease was driven primarily by the $25 million of premium that was amortized in Q1 due to the SFR loan prepayment I just mentioned. Earnings available for distribution was negative $6.46 per diluted share in Q1 compared to a positive $0.52 per diluted share in the same period of 2023 and positive $0.44 per diluted share in Q4 of 2023. Again, the negative result was due to the acceleration of premium on the prepaid SFR loan. Taxable level for distribution was $0.60 per diluted share in Q1 compared to $0.55 per diluted share in the same period of 2023. Increase in cash level for distribution from the prior year was partially driven by the prepayment penalties from the SFR loan pay down. We paid a regular dividend of $0.50 per share in the first quarter and the board has declared a dividend of $0.50 per share payable for the second quarter of 2024. Our regular dividend in the first quarter was 1.2 times covered by cash level for distribution. Book value per share decreased .8% from the first quarter of 2023 and decreased .9% from the fourth quarter of 2023 to $16.69 per diluted share with the decrease being primarily due to the SFR loan prepayment. During the quarter we contributed to six preferred equity investments with $11.5 million of outstanding principal and a weighted average yield of .8% and originated one loan with $44.6 million of outstanding principal and a rate of 900 basis points over SOFR. And we sold 1.2 million shares of our Series B cumulative redeemable preferred stock for net proceeds of $27.7 million. We had one senior loan redeemed for $508.7 million of principal and received $8.9 million in prepayment penalties. Our portfolio is comprised of 90 investments with total outstanding balance of $1.2 billion. Our investments are allocated across sectors as follows, .2% multifamily, 46% single family rental, .2% life sciences and .5% storage. Our portfolio is allocated across the following investments, .3% CNBS B pieces, .3% preferred equity investments, .2% mezzanine loans, .6% senior loans, .3% mortgage backed securities, .4% IO strips and .9% MSCR notes. The assets collateralized in our investments are allocated geographically as follows, 19% Texas, 9% Florida, 8% California, 6% Georgia, 5% Maryland, 4% Washington and 3% Colorado with a remainder across states of less than .5% exposure. This reflecting our heavy preference for Sunbell investments. The collateral on our portfolio is .6% statewide with a .5% loan value and a weighted average DSCR of 1.72 times. We have $843 million of debt outstanding. Of this $342 million or 41% is short-term debt. Our weighted average cost of debt is .9% and has a weighted average insured to 1.7 years. Our debt is collateralized by $1.2 billion of collateral with a weighted average maturity of 5.3 years and our debt to equity ratio is 2.04 times. Moving to guidance, earnings available for distribution of 45 cents per diluted share at the midpoint with a range of 40 cents per share on the low end and 50 cents per share on the high end. Cash available for distribution of 40 cents per diluted share at the midpoint with a range of 35 cents per share on the low end and 45 cents per share on the high end. So that will turn it over to the team for detailed discussion.

Thanks, Brian. The first quarter results demonstrated robust performance across all of our investment sectors, particularly in our CMBS E-Piece portfolio. Our approach focuses on areas where our dual expertise in owning and operating commercial real estate provides a distinct advantage. This dual role as both owner and lender allows us to effectively leverage information to assess and identify a value across the entire capital stack, aiming to deliver risk-adjusted returns that surpass the norm. Our investment strategy continues to focus on credit investments and assets that are stable or nearly stabilized, prioritizing careful underwriting, minimal leverage, and a moderate debt basis. We also emphasize lending to reputable sponsors and consistently provide dependable value to our shareholders. In the quarter, despite tough conditions in the commercial real estate market, our loan portfolio remains stable, comprising of 90 individual assets with approximately $1.2 billion in total outstanding principal. The portfolio is geographically diverse with a bias towards the Sunbelt markets. From the beginning of the first quarter through today, the company has been very active in underwriting and deploying capital. We completed the purchase of two new issue, five-year fix with the latest one closing this past Tuesday, Freddie Mac E-Piece opportunities with extremely attractive metrics. Both securitizations have high 50% LTVs, 1.30x plus DSDR, and a diverse geographical footprint with great sponsorships. These B-pieces will pay an all-in unlevered fixed rate yield of .75% and .50% respectively. And with modest leverage, we expect to generate a mid-teen levered return on very desirable collateral pools. The company also purchased the new issue SFR ABS paper in the gross amount of approximately $44 billion and prudently levered to achieve low to mid double digit returns and high cash-link stabilized SFR collateral pool. On the disposition load repayment side, as mentioned, we received approximately $508 million gross of financing and around $50 million net of financing as the portfolio's largest SFR loan was repaid in full. At the end of the quarter, we continue to maintain cautious approach to our repo financing with leverage standing in the 60% loan value range and fortifying the CMBS book by acquiring a creative AAA new issue CMBS paper. We consistently engage in communication with our repo lenders discussing the market conditions and status of our finance CMBS portfolio. In summary, we are consistently identifying appealing investment opportunities across our target markets and asset classes. We are committed to meticulously evaluating these opportunities to enhance shareholder value. We have strong confidence in the resilience of the residential sector, particularly given the current interest rate climate. Our investments in multifamily and single-family verticals are considered secure as evidenced by the historical performance and the current -to-own dynamic providing long-term sector tillage. Additionally, we continue to be very enthusiastic about our investment pipeline in the life science CDMO sector. To finalize our prepared remarks before we turn it over to Matt McGraner.

Thank you, Paul. As he just mentioned, we remain pleased with our solid Q1 results, especially on a relative basis. Our portfolio continues to perform very well and despite short-term challenges in supply and multifamily, the underlying performance in multifamily SFR storage and life sciences remain relatively stable. From a capital market's perspective, we are seeing improved liquidity led by the CMBS market with a risk-on signal from spreads. Continuous material inflows of cash to fixed-income investors should further support spread tightening over the near term and should offset some of the -for-longer shocks. The distress we do see in housing mostly lies in the 2021 to 2022 vintage non-agency floating rate bridge loan market. We believe these loans and the underlying properties will be challenging over the next 12 months or so, but afterwards, deliveries do start to rapidly dissipate and should create a favorable supply-demand balance in the landlord's favor. And that said, capital for residential assets continues to be plentiful in real time. Over the last 60 days, private equity investors have aggressively priced over $15 billion of housing product in the low five cap rate range. And meanwhile, over $240 billion of private equity dry powder still remains on the sidelines. We continue to successfully ramp our series B preferred raise and expect that that pace will be $15 to $20 million per month in the second quarter. Proceeds will continue to be deployed into the $220 million life science loan in Cambridge as well as additional Freddie K. B pieces. In addition, we are currently underwriting over $250 million worth of special situation opportunities across the residential and life science sectors. To extend any of these due hit, we would look to modestly relever the balance sheet via notes offering to match fund the near term and lock in accretive spreads for the company. Given all this positive activity, we expect our current capital base, including the SFR loan repayment, to be redeployed in the second quarter and continue on our normal CAD run rate range and growing throughout the second half of the year. 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, thanks to the team here for the hard work and now we'd like to turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is star one to join the queue and your first question comes from the line of Stephen Lowe from Raymond James. Please go ahead.

Hi, good morning. Matt, you may have mentioned this or you did mention it kind of towards the end of it, I wanted to get your outlook, CAD versus dividend, obviously some noise or not noise, but some turnover here in the first half of the year with regards to recycling capital into new investments. You still have comfort with the dividend level that CAD and EAD can kind of continue supporting the 50-cent level and what's your outlook as you get this capital redeployed as far as the earnings power of a fully deployed portfolio?

Yeah, of course. We ended the year, I guess, 50, 51 cents of CAD run rate in 23 with the Series B and the pipeline investments that we know we have to deploy throughout the 2024 year. We thought we could grow that range from 15 to 20%. What we didn't see was the big loan repayment on the front yard line which was 510 million roughly. That was detracted from CAD on an annual run rate of about 35 cents on an annual or a little bit more, 40 cents on an annual basis. So our job is to redeploy that capital here in the second quarter and get us back on that 50, 51 cent run rate and then increase -a-vis the Series B and the new investments to match. So I feel pretty good about the run rate post this redeployment of capital. So that's why we're sticking with the dividend.

Great. I appreciate the color there. You also provided some return numbers on the new B pieces and I believe Simone, she did appreciate that. But kind of generally as you look at your pipeline, when you look at achievable returns and securities versus Meas or Press investments, can you talk about what you're seeing, relative attractiveness across those different options?

Yeah, really everything we're underwriting and whether it's a Freddie K B piece with modest leverage in the mid-teens, on the construction loan side originations we think we can do mid-teens as well. So I think from a risk reward perspective, those are the two primary areas that we'll focus on and have investment pipeline visibility into. I wouldn't say I necessarily favor securities over originating a private investment. I think we can price each pretty well and have enough opportunities to do both in space. I don't know if Paul, if you have any other? No,

I think that's it.

One

final one, if I may. Operating expenses will get more color when the queue comes out, but any one-time OPEX that was a result of the events in Q1, or can you talk about your expectations for run rate operating expenses moving forward?

Yeah, hey Stephen, it's Brian. There's a couple things that contributed to that from audit overruns and some legal expenses that yield costs, as well as the way the stock compensation gets amortized in. With Magdeaf leaving, some of the forfeitures kind of gets flushed through all at once. So we think that that returns to normal run rate throughout the rest of the year. We've increased our rules on various things where needed, so it should be more stable and kind of back to the run rate that you've seen before.

I think we'll move back to that kind of six and a half, give or take, number on OPEX.

Yeah,

that's right. Awesome. Appreciate that, Brian. Thanks for the comments this morning. Thanks, Stephen.

Our next question comes from the line of Jade Romani from KBW. Please go ahead.

Hi, this is actually Jason's app, Sean, on for Jade. It would be helpful if you could speak to credit trends within your Mez and Pref investments and generally what you're seeing broadly in the market in terms of multifamily credit trends.

Yeah, I think in our Mez and Pref books, I'd say we have one loan or one press investment in an asset in Atlanta where the sponsor's trying to decide whether they want to defend the asset. We're working with them to resolve certain issues in that market, especially given just Atlanta was kind of challenging on the second half of it last year anyway with some fraud issues and some eviction issues with respect to the courts. Outside of that, everything else doesn't scare us. More broadly, as I mentioned, the biggest distress we are seeing relates to the 2021 and 2022 bridge loans and CRECLOs that were all floating in great nature. Those largely have been extended and the lenders are working through extensions and issues. The near-term problem we see developing in some submarkets is these deals are becoming zombie deals. They're cash flow constrained because all the interest rates have more than doubled and the operators, to the extent that they're still in control of the assets, don't have any money to keep operations up, rehab units. The occupancy in some of these submarkets are dipping and causing some market distress. That's somewhat isolated again in the CRECLO market. More broadly, the agency books are experiencing very little distress in our case series. There's still really good performance and solid performance. I think it depends on where you look both geographically and then what wrapper the loans are in. Multi-family is an asset class that can underwrite and people are underwriting with respect to the transaction market being so robust. They're looking through the supply because they know it'll wane here pretty aggressively in 2025 and 26, after which there's basically no deliveries. I think multi-family, more broadly, over the next six to nine months will be a little bit challenging, but after that, I think it'll be much improved.

Great, thank you. In terms of capital deployment and investment opportunities that you find compelling, you talked about the BP's purchases and then life science, but I guess overall for deployment into Meas or PREF or direct loans, are there any geographic markets that you find more interesting? It would be helpful to just hear broadly your thoughts.

Yeah, I think we have a penchant depending on the property type for certain geographical areas. Our bread and butter over the past decade has been Sunbelt Smile residential, so that's where we feel most comfortable and even though there's supply issues over the long term, these markets lead the country in job growth and household formation, which is interesting because right now it's somewhat on sale. The multi-family residential opportunities in the Sunbelt are more, the operating performance is weaker in the Sunbelt right now for sure, so that creates a little bit more opportunity. That's good for our underwriting because that's where we're most comfortable. Life sciences, it depends if you're talking GMP or lab, we're concentrating our investment there in Cambridge in a site that we like and know really well, so we still have another $160 million to fund on that and that gives us a good earnings runway. But GMP or most of those opportunities are in Bacaville where we have a loan or the research triangle or Houston, so I think those markets will continue to see growth and certainly with nearshoring and reshoring, the advanced manufacturing and pharmaceutical industries have a pretty strong secular tailwind behind it, so we're excited about both of those places in the market. Great, thank you.

Our next question comes from the line of Chris Bindla from Piper Center. Please go ahead.

Thanks, good morning. I appreciate you taking my question. I'm just looking at your asset type exposure on slide nine. It's shifting materially now, 65% multifamily, 22% FSR, driven by that prepay you talked about, but would you expect to get closer to a more even split on multifamily and SFR longer term or

over

the near term, could you expect a trend more towards multifamily with that prepayment potentially going to bridge multifamily opportunities where you said you've seen stress and could provide gap financing there and do you have any exposure right now in that bridge space?

Yeah, I think to tackle your first question, the pie chart, I think we're predominantly going to be residential and whether that's multifamily or SFR will depend on the opportunities. There's just more multifamily paper out there and our flow is more active there. There's more distress there at the moment, so that's probably where we'll be focusing a lot more of our efforts. That said, to the extent that we find an ABS transaction or a BP sent an ABS transaction that looks attractive, we'll take to it, but I think largely the pie chart being somewhat 80-ish percent residential will continue. Sorry, what was your second part of your question?

Do you have some of the kind of the bridge multifamily exposure right now either from kind of an organic basis or kind of a gap financing?

Yeah, so we have no direct, you have senior bridge loan exposure. The one Atlanta asset that I mentioned was behind a CRE CLO bridge loan. That would be kind of one of our loan kind of preferred MEDS deals in that space, but again the beauty of the platform and what I like about the business is to the extent that we have to take over and wipe out the common equity in a MEDS position. We're big owners in Atlanta with 3,000 units owned and we have operating verticals and multifamily, so that's a situation where we may wind up making more money than our actual investment over time once the market heals, but beyond that,

no. Okay, great. That's what I thought I just wanted to make sure. Then can you talk about the deployment of the continuous preferred and how that's been? What's the monthly cadence and would you expect that to take a back seat for a little bit just given the prepay and redeploying that capital?

Hey, Chris, this is Paul. I think with the beauty about the series of preferred rates that there's this constant run rate of, as Matt mentioned, call it 15, 20, 25 million a month, which we're able to and will continue to match fund with that Cambridge life science asset as that has monthly draws. So we'll be able to match fund those as well as continuously deploying capital into additional B pieces, other types of paper, structured paper in the future. So I think we'll be able to match fund pretty well throughout the remainder of the year with the

series B preferred. Great. Thank you. I appreciate you all taking my questions. Thanks, Kristen.

I'm showing there are no more questions. I'll now turn the call back over to the management team for closing remarks.

Appreciate it. Nothing further from us. Appreciate everyone's time. We'll talk again next quarter. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Yeah, appreciate it. Nothing further from us. Appreciate everyone's time.