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 speaker's 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 pound 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 31st, 2024. 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 of Originations and Investments. As a reminder, this call is being webcast through the company's website at nrf.nextpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements with the meanings 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 statements. The statements made during this conference call speak only as of today's date, and except as required by 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 any 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, Preston. 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, to start it off, Q1 results are as follows. For the first quarter, we reported a net loss of $0.83 per diluted share compared to net income of $0.37 per diluted share for the first quarter of 2023. The decrease in that income is largely driven by accelerated premium amortization on $508.7 million 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 $0.46 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. Cash available for distribution was $0.60 per diluted share in Q1 compared to $0.55 per diluted share in the same period of 2023. The increase in cash available 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 available for distribution. Book value per share decreased 14.8% from the first quarter of 2023 and decreased 6.9% 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 10.8% and originated one loan, $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 outstanding 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. 47.2% multifamily, 46% single family rental, 5.2% life sciences, and 1.5% storage. Our portfolio is allocated across the following investments. 43.3% CMBSB pieces, 18.3% preferred equity investments, 15.2% mezzanine loans, 11.6% senior loans, 6.3% mortgage-backed securities, 4.4% IO strips, and 0.9 percent MSCR notes. The assets collateralized in our investments are allocated geographically as follows. Nineteen percent Texas, nine percent Florida, eight percent California, six percent Georgia, five percent Maryland, four percent Washington, and three percent Colorado, with a remainder across states with less than 2.5 percent exposure, this reflecting our heavy preference for Sunbelt investments. The collateral on our portfolio is 86.6% statewide, with a 68.5% loan-to-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 5.9%, and has a weighted average maturity of 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 for the range of 40 cents per share on the low end and 50 cents per share on the high end. Cash available for distribution of $0.40 per diluted share at the midpoint with a range of $0.35 per share on the low end and $0.45 per share on the high end. So with that, I'll 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 VT's 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 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 first quarter, despite tough conditions in the commercial real estate market, our loan portfolio remained 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 DP's opportunities with extremely attractive metrics. Both securitizations have high 50% LTVs, 1.30X plus DSCR, and a diverse geographical footprint with great sponsorships. These B pieces will pay an all-in, unlevered fixed rate yield of 9.75% and 9.50% respectively. And with modest leverage, we expect to generate a mid-teen lever return on very desirable collateral pools. The company also purchased the new-issue SFR ABS paper in the gross amount of approximately $44 million and prudently leveraged to achieve loaded mid-double-digit returns and high cash flow and stabilized SFR collaborative pool. On the disposition loan 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 continued to maintain a cautious approach to our repo financing. with leverage standing in the 60% loan-to-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 the status of our financed 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 rent-to-own dynamic providing long-term sector tailwinds. 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 questions, I'd like to turn it over to Matt McGrainor.

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 markets 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 higher 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 more 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. V pieces. In addition, we are currently underwriting over $250 million worth of special situation opportunities across the residential and life science sectors. To the extent any of these do hit, we would look to modestly re-letter the balance sheet via notes offering to match fund the 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 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker 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 1 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, at the very end of your comment. You know, I wanted to, you know, get your outlook, you know, CAD versus dividend, you know, 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 know, you still have comfort with the dividend level that, that CAD and EAD can kind of, uh, continue supporting the 50 cent level and what's your outlook as, as you get this capital redeployed as, as far as the earnings power of a fully deployed portfolio.

Yeah, of course. Um, You know, 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, you know, we thought we could grow that range from 15 to 20 percent. What we didn't see was the big loan repayment on the front yard loan, which was $510 million, roughly. That detracted from CAD on an annual run rate of about $0.35 on an annual, or a little bit more, $0.40 on an annual basis. Our job is to redeploy that capital here in the second quarter and get us back on that $0.50, $0.51 run rate and then increase vis-a-vis the Series B and the new investments to match. feel pretty good about, you know, the run rate post this redeployment of capital. And so that's why we're sticking with the dividend.

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

Yeah, really everything we're underwriting and whether, you know, whether it's a Freddie KB piece, you know, with modest leverage in the mid-teens, you know, on the construction loan side originations, we think we can do, you know, 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 spades. I don't know, Paul, if you have any other – No, I think that's exactly right.

One final one, if I may. Operating expenses, you know, we'll get more color when the queue comes out, but, you know, any one-time OpEx that was a result of the events in Q1, or can you talk about, you know, 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 kind of audit overruns and some legal expenses that yield costs, as well as the way the stock compensation gets amortized in. We think, and one of the, you know, with Magneth 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 accruals on various things where needed. So it should be more stable and kind of back to the run rate you've seen before.

I think we'll move back to that kind of, you know, six and a half, give or take, number on the 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 Sapshon on for Jade. It would be helpful if you could speak to credit trends within your MES and PREP investments and generally what you're seeing broadly in the market in terms of multifamily credit trends.

Yeah, I think in our MES and PREP books, I'd say we have one 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. Again, we're working with them to resolve certain issues in that market, especially given just Atlanta, it's kind of challenging on the second half of 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 CRE CLOs that were all floating rate in nature. Those largely have been extended and the lenders are working through extensions and issues. The near-term problem that we see developing in some sub-markets 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, and so the occupancy in some of these some markets are dipping and causing some market distress. And that's somewhat isolated, again, in the CRE-CLO market. More broadly, the agency books are experiencing very little distress in our case series. There's still really good performance and solid performance. So I think it depends on where you look, both geographically and then what, yeah. what wrapper the loans are in, but multifamily is an asset class that you 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 25 and 26, after which there's basically no deliveries. And so I think multifamily, more broadly, over the next six Nine months will be a little bit challenging, but after that, I think, yeah, I think it'll be much improved.

Great. Thank you. So in terms of capital deployment and investment opportunities that you find compelling, you talked about the BP's purchases and in life science, but I guess overall for deployment into MES 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 mean, 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, right? The multifamily residential opportunities and the Sunbelt are more, the operating performance is weaker in the Sunbelt right now for sure. So that creates a little bit more opportunity. So 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, most of those opportunities are... you know, in Vacaville where we have a loan or, you know, the Research Triangle or Houston. So, yeah, I think those markets will continue to see growth and certainly with nearshoring and reshoring, you know, the advanced manufacturing and pharmaceutical manufacturing industries have a pretty strong secular tailwind behind it. So we're excited about both of those places in the market. Great. Thank you.

You bet.

Our next question comes from the line of Chris Finla 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 shifted materially now, 65% multifamily, 22% FSR. I assume that's 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, you know, the pie chart, you know, we – 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 distrust 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 B piece in an ABS transaction that looks attractive, we'll take to it. 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 mobile family exposure right now, either from kind of an organic basis or kind of a gap financing?

Yeah, so we have no direct exposure. you know, senior bridge loan exposure. The one Atlanta asset that I mentioned was behind a CRE, CLO bridge loan that, you know, that would be kind of our, you know, one of our loan kind of preferred meds deals in that space. But, you know, again, the beauty of the platform and what, you know, what I like about the business is, to the extent that we have to take over and wipe out the common equity in a MES 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. And 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 backseat for a little bit, just given the prepay and redeploying that capital?

Hey, Chris. This is Paul. I think, you know, with the beauty about the Series B preferred raise, 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 or 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.

Yeah, 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.

Appreciate it. Nothing further from us. Appreciate everyone's time.