NexPoint Real Estate Finance, Inc.

Thank you for standing by. My name is Amy and I will be your conference operator for today. At this time, I would like to welcome you to the next point, Real Estate Finance Q2 2024 Earnings Conference Call. Please note that all lines have been placed on mute to prevent any background noise. It's now my pleasure to turn the call over to Kristin Thomas, Investor Relations. Please begin.

Thank you. Good day, everyone, and welcome to NextPoint Real Estate Finance Conference Call to review the company's results for the second quarter into June 30, 2024. On the call today are Brian Mitts, 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 webcast through the company's website at nref.nextpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's annual report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect the forward-looking statements. The statements made during 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 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 Mitts. Please go ahead, Brian.

Thank you, Kristen, and appreciate everyone joining us today. I'm going to briefly discuss our quarterly results and then give our guidance for the next quarter. before turning it over to the team for a detailed commentary on the portfolio and the macro lending environment. Q2 results are as follows. For the second quarter, we reported a net income of 40 cents per diluted share compared to net income of 33 cents per diluted share for the second quarter of 2023. The increase in net income for the quarter was due to the change in net assets related to consolidated CMBS including the sale of CMDS BPs for a realized gain of $6.2 million. That interest income increased by $2.5 million to $6.7 million in the second quarter, from $4.2 million in the second quarter 2023. The increase is driven by an increase in interest income, which is driven by higher rates as well as lower interest expense from deleveraging that occurred in the first quarter this year. Earnings available for distribution was 68 cents per diluted share in Q2 compared to 50 cents per diluted share in the same period of 2023. Cash available for distribution was 64 cents per diluted share in Q2 compared to 53 cents per diluted share in the same period of 2023. The increase in earnings available for distribution was driven by the increase in net income for the quarter. We paid a regular dividend of 50 cents per share in the second quarter, and the Board has declared a dividend of 50 cents per share payable for the third quarter of 2024. Our regular dividend in the second quarter was 1.28 times covered by cash available for distribution. Book value per share decreased 1.1% from Q1 2024 to $16.51 per diluted share. with the decrease being primarily due to the decrease in fair value marks on our common stock investments. During the quarter, we funded $55.1 million on the drawable first mortgage on the Life Science Development property in Cambridge. We originated a $150 million promissory note funding $67.5 million, which yields 16.5%, and purchased a $31.9 million CMBS BP with a bond equivalent of 9.5%. During the quarter, we sold 1.5 million shares of our Series B cumulative preferred or redeemable preferred for net proceeds of 32.6 million. Our portfolio is comprised of 85 investments with a total outstanding balance of 1.2 billion. Our investments are allocated across sectors as follows, 18.8% in single-family rental, 56.9% multifamily, 22.2% life sciences, 1.5% in storage, and 0.6% in marina. A fixed income portfolio is allocated across investments as follows. 11.5% senior loans, 36.7% MBS pieces, 20.7% preferred equity investments, 19.5% mezzanine loans, 4.2% IO strips, 1.6% MBS, and 5.8% promissory notes. The assets collateralizing our investments are allocated geographically as follows. 17% in Texas, 14% in Massachusetts, 8% in California, 7% in Florida, 6% in Georgia, 4% in Maryland, with the remainder across states with less than 4% exposure, reflecting our heavy preference for Sunbelt markets. Collateral on our portfolio is 80.3% stabilized with a 62.3% loan-to-value and a weighted average DSCR of 1.52 times. We have 861 million debt outstanding of this 281 million or 32.6% short-term debt. Our weighted average cost of debt is 6.2% and has a weighted average maturity of 1.6 years. Our debt is collateralized by 1.1 billion of collateral with a weighted average maturity of 4.9 years. and our debt to equity ratio is 1.78 times. Moving to guidance for the second quarter, we are guiding to earnings available for distribution and cash available for distribution as follows. Earnings available for distribution of 50 cents per diluted share at the midpoint with a range of 45 cents on the low end and 55 cents on the high end. Cash available for distribution of 45 cents per diluted share at the midpoint with a range of 40 cents on the low end and 50 cents on the high end. So, with that, I'd like to turn it over to Paul for a discussion of our portfolio.

Thanks, Brian. The second quarter results exhibited strong performance across each of our investment sectors. Our approach continues to center on areas where our 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 outside risk adjusted returns. 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 emphasized lending to reputable sponsors to consistently provide dependable value to our shareholders. In the second quarter, despite improving yet still less than ideal conditions in the commercial real estate market, we were able to deploy capital in accretive investments as well as take advantage of strong bids in the secondary bond market and recycle more seasoned bonds into other opportunities. Our loan portfolio remains stable, comprising of 85 individual assets with approximately $1.2 billion in total outstanding principal. The portfolio is geographically diverse with a preference towards Sunbelt markets. From the beginning of the first quarter through today, the company has been very active in underwriting and deploying capital. During the quarter, we completed the purchase of a new issue, five-year fixed, Freddie Mac B-piece investment with attractive metrics. The securitization has high 50% LTV, 1.3x plus DSCR, and a diverse geographical footprint with great sponsorships. The VPs will yield an all-in unleveraged fixed rate of 9.5%, and with utilizing reasonable leverage, we expect to generate a mid-team lever return on a strong collateral pool. The company also funded an additional $55 million of life science senior loan, which bears an interest rate of SOFR plus 900. On the disposition loan repayment side, as mentioned, we sold a bond which generated a very healthy gain, which was redeployed into newly originated and accreted deals. At the end of the quarter, we remained committed in maintaining a cautious approach to repo financing, with the leverage standing in the 60% loan-to-value range and de-leveraging our repo lines by approximately $60 million and further decreasing our overall debt-to-book value ratio to 1.78x from over 2.0x from the prior quarter. We consistently engage in communications with our repo lending partners, discussing the market conditions and the status of our finance CNBS 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 a strong confidence in the resilience of the residential sector, particularly given the current interest rate climate. Our investments in the multifamily and single-family verticals are considered secure as evidenced by the historical performance and current rent versus ownership dynamic, providing a long-term sector tailwind. 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 for questions, I'd like to turn it over to Matt McGranner.

Appreciate it, Paul. As he just mentioned, Q2 was an active investment quarter. in which we originated $200 million worth of deals across multifamily and life science verticals. $150 million bridge loan originated during the quarter is emblematic of great opportunities in the market to earn outsized risk adjusted returns. We're seeing wonderful opportunities to make senior secured loans on new construction, redevelopment, and increasingly last mile TI funding in the life sciences sector at great basis ease. These loans are underwriting to mid 50% LTVs with all in mid double digit returns. The other material investments made during the quarter were in the Freddie Mac K program, where multifamily credit quality and underlying performance continues to outperform expectations, even in the face of record supply. Same-store NOI growth continues to improve in the residential sector broadly, with demand being quite exceptional during the first half of the year. Supplies expected a peak in the second half of the year, and I'd like to share a couple stats from our research tracking starts and deliveries. Annual starts in the multifamily sector are now at their lowest level in 10 years, approximately 280,000 units per year. The year-over-year drawdown in starts from 2023 is approximately 40%. Two Q24 quarterly starts came in at just 38,000 units nationally, which would represent an annual run rate of 150,000 new units, or 50% of the trailing 10-year average. Trailing 12-month starts are way down from the peak across all major metros, including Sunbelt markets. down anywhere from 40% to 60% versus 2020's peak. Finally, RealPage forecast a return to normal 2% to 4% annual organic rent growth in 2025. Meanwhile, we remain pleased with our solid Q2 results, especially on a relative basis. Our portfolio continues to perform exceptionally well, and despite these short-term supply challenges in multifamily, underlying performance in multi, SFR, storage, and life sciences remain stable. 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 we'd like to turn the call over to the operator for questions.

Thank you. The floor is now open for questions. As a reminder, if you would like to ask a question, please press star and the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one. We'll pause for just a moment to compile the Q&A roster. The first question comes from the line of Steven Laws with Raymond James. Your line is now open.

Hi, good morning. Good morning. Nice quarter. Appreciate the comments and the guidance as always. I wanted to touch base just how you think about, you know, the capital raising with the perpetual series B, as well as the funding of the life sciences investment. Did those two things sort of match up as the drawdown matches the capital raising? And then, you know, outside of that, you know, where do you stand on redeploying the capital that was supporting the large repayment that occurred in Q1?

Yeah, hey, Steven. I'll start. It's Matt. Good morning. On the capital raising front with the Series B, it's actually matching up pretty well. We're raising roughly $15 million or so approximately a month, and that fairly matches draws of about $15 to $20 million a month. So from a timing perspective, it's actually working out really well, and one reason why we think the or our forecasting guidance covering our dividend going into the second half of the year and feel good about that. And then in terms of redeploying the payback from the loan payoffs, we've largely delevered by that, and then we're reviewing several capital markets options on how best to relever the balance sheet and match new investments with those opportunities. But for now, the Series B is kind of, you know, making it easier and consistent for us to redeploy the capital and match fund the Cambridge loan.

Great. And as a follow-up, you know, I wanted to talk about the kind of, I hate to say transition, but, you know, a little bit of a shift in the portfolio situation. and probably the right time in the cycle to do it. I imagine it's a little less stabilized, a little lower DSCR, but it's also seen the LTV drop a good bit. So it seems like you're looking at maybe taking advantage of financing market inefficiencies and some people that have left the sector. But can you talk about where you're seeing the most attractive risk-adjusted returns and what's driving that focus as you put new money to work today?

Yeah, I mean, I think you're alluding to our activity increasing in life sciences sector. And from our vantage point, it is just that. It's a retrenchment of a number of different types of lenders into the space at a time when you're really seeing, you know, not a hockey stick, but a resurgence of growth. You know, ARE's quarter and second quarter, they had releasing of over a million square feet, 300,000 square feet in new developments. we're seeing some of the same things across our investments in life sciences without really any lender support. You have projects that were started in 2021-22 that raised a ton of capital. We can come in and prime that capital that's been raised and fund the last dollars to finish out some of these TIs and other warm shell components and be at a basis of you know, $700, $800 a square foot on projects that are finished that are worth $1,500 to $1,600 a square foot, all in with rates that are, you know, probably mispriced in a normalized environment. You know, meanwhile, on the multifamily side, you have, you know, a ton of liquidity coming into that space and spreads have, you know, dramatically, you know, come in. We just announced yesterday or two days ago with NXRT, you know, a $1.5 billion refinancing at a borrower spread of 109 basis points over SOFR. You know, so that should, you know, give you some indication. Oh, as well as the Blackstone AIRC, you know, CMBS deal that's about to, you know, go off or just did. It was upsized by almost, you know, a third from $2.1 billion, I think, to $2.9 billion. So the market is really you know, is really there for certain property types right now. And, you know, we want to take advantage of where it's not and, you know, have enough conviction and belief and see it on the ground that, you know, liquidity will return, you know, probably in 25 and certainly 26. And we can make investments today that will bear fruit over the long term for our shareholders.

Appreciate the comments this morning, Matt. Thanks, Stephen.

Your next question comes from Jade Romani with KVW. Your line is now open.

Thank you very much.

What are you seeing in terms of multifamily deal flow? Are you seeing any pickup from the agencies? And what do you think is driving their behavior this year?

I missed the second part of the question, Jade. Can you repeat that for me?

And what do you think is driving their behavior this year? They seem somewhat conservative on multifamily lending.

Yeah.

I think, you know, from our perspective, it's just the deal flow. I guess the first part of your question answers the second part of the question. You know, the deal flow is still very, very muted. Negative leverage persists. cap rates for, you know, good quality product that agencies would typically finance are still, you know, five or, you know, we bid on a deal in South Florida that was four and a half percent cap rate or ended up going off at a four and a half percent cap rate. So leverage is still negative in most cases, which is having some impact to deal flow. That being said, you did, you know, see the KKR-Lenar deal go off and, you know, obviously the $20 billion worth of private equity multifamily transactions in the first quarter So large deals are getting done. I would say individual, you know, smaller deals, you know, are still, you know, down. I think the last stat I saw was 40%, again, year over year down in transaction volume. So I think it's from an agency standpoint, not that they're being, you know, overly conservative. And, Paul, I'll kick this to you after this for your comments. But it's just there's just not a lot of product. When we went to them with our pool of multifamily loans, the billion and a half, they were pretty excited about the opportunity because they haven't seen the bulk, if you will. Paul, I don't know if you have anything to add to that.

Yeah, I think in the past you saw a lot of 10-year fix, 7-year floats. We've been seeing new origination of the more than five-year fix as we close on two from this year alone. So, you know, a shorter term, but, you know, if you see Treasury rates today, they're, you know, five years down to 385. And, you know, if that sticks, I think you might see some more deal flow as Treasuries continue to rally. But, you know, as of right now, it seems like, you know, it's unfauling, but still a little, like as Matt pointed out, a little tight in the agency space for deal flow.

The NXRT refinancing, that's at 100 to 110 basis points, Brett?

It was 109 basis points over SOFR.

And so in your mind, when you look at the weighted average cost of capital and maybe some expectation of rate moderation, what do you think the – how do you look at the all-in cost of capital of that debt deal?

Well, that deal is sort of different because we have – $1.25 billion of swaps at an average blend of 1.36%. So borrowing cost is just an additional 109 basis points over that, but the swaps are burning off in 26. So for that company, it's amazingly accretive in keeping the flexibility on the floating rate to buy and refinance and have zero defeasance or yield maintenance penalties. That's a one-off situation, but it does, I think, illustrate the, you know, the agencies, Freddie in particular, rolling up their sleeves, digging in and trying to, you know, come up with a bespoke solution to one of their select sponsors.

And more broadly, when you look at a multifamily acquisition, maybe for NXRT, you know, you mentioned bidding on something that sold at a four and a half. Let's say you were bidding maybe at a five-ish. how are you looking at, you know, levered returns in that kind of situation?

Yeah. I mean, I think it's all, you know, it depends on who you are. And in our case, we're, you know, a public company that has an implied cap rate sitting out there at six and a quarter. And, you know, the, the, the transaction market is still tight at private transaction market is still tight at 5% or, or lower cap rate. So, you know, we have the opportunity to sell assets there and buy back stock. And, you know, that's what we, you know, continue to do. But in terms of underwriting new levered returns, you know, the way that we look at it historically is try to, you know, go in at a plus or minus 5% cap rate and move that cap rate to a six and a half, seven over the course of three or four years by, you know, adding value and, you know, renovating units and then deciding whether to sell or refinance.

Okay. And then lastly, on the book value per share, do you have a post-quarter or intra-quarter update? How do you think it compares with quarter-end book value?

Are you talking about from 6-30 to today?

Yeah, just the mark-to-market impact of where book value might be, if there's been any improvement based on spreads.

Yeah, that's a great question. We are seeing more of a reflation this past month on market-to-market just from treasury rates alone on our market-to-market book of CMVS. So, yeah, you are seeing an uptick in those values. So, I would say that we have clawed back some percentage points this past month just on the market-to-market of those CMVS.

It's a good question, Jade. In addition, I wanted to mention that part of the book value decline was from our storage portfolio that I think we're doing a pretty big refinancing there on some of the debt that we'll expect to agree to value for the storage portfolio in a SASB later on in the year, probably in the third quarter, if not the in the third quarter, late third quarter, early Q4. And that portfolio, I'm pleased to report, is, you know, for the first time in history, given, you know, it was all development back in, you know, 17, 18, 19, is now 90% stabilized, 90% leased and occupied, and it's performing well. So we'd expect some, you know, some reflation in that mark as well.

Thank you. Just on the preferred issuance, I know that you're now excluding potential dilution from the share count. And just to reduce any confusion, how do you think of that? Do you believe that those shares would eventually be settled in cash? And so it makes sense to exclude the dilution?

Yeah, another good question. So there's a couple factors of how we came to that methodology. First and foremost, there's a two-year lockout for the company to even redeem shares. The second point is there's a mechanism where only 20% of the actual outstanding prep can be redeemed per year. So there's a cap on it. So there wouldn't be any event where the full prep would be fully redeemed at any one point in time. There's also large penalties for investors to redeem. That's stair steps down over time, but currently there's, I believe, an 11% penalty for investors to redeem at this point in time. And the last point, I think that you guys have seen in NSRT NREF, all our vehicles, our plan is never to dilute the company when we're trading below book value. It's just not helpful. And so we would love to settle in cash in the future. So that's why we came to the conclusion of using this specific share account versus a fully diluted with the Series B shares included.

Thanks very much. That's helpful. Thanks, Jared.

Again, if you'd like to ask a question, press star and the number one on your keypad. At this time, there are no further questions. I would like to turn the call back over to the management team for closing remarks.

Thank you. Sorry, Matt. Go ahead.

No, go ahead. Appreciate it. Thanks for everyone's time. We'll talk to you next quarter.

That concludes the call for today. Thank you so much. You may now disconnect.