NexPoint Real Estate Finance, Inc.

Hello. At this time, I would like to welcome everyone to the NextPoint Real Estate Finance Incorporated Q3 2024 earnings 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, just press star and the number one. I would now like to turn the call over to Kristen Thomas, Investor Relations. You may begin.

thank you good day everyone and welcome to next point real estate finance conference call to review the company's results for the third quarter ended september 30th 2024. on the call today are brian miss executive vice president and chief financial officer matt mcgriner 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 website at nref.nextpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the means 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 SEC for a more complete discussion of risk and reliability 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 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.

Thanks, Kristen. Appreciate everybody's time this morning. I'm Brian Mitz. I'm joined today by Matt McGrainer and Paul Richards. I'm going to start the conference by briefly going through our quarterly results, get some portfolio and balance sheet stats, and then our guidance for the next quarter. And then I'll turn it over to Matt and the team to go through the portfolio in detail. Our key three results were as follows. For the third quarter, we reported net income of 74 cents per diluted share compared to net loss of 90 cents per diluted share for the third quarter of 2023. The increase in net income for the quarter was due to unrealized gains on our common stock investments, as well as an increase in net interest income. Interest income increased by 5.6 million to 23.6 million in the third quarter. from $18 million in the third quarter of 2023. The increase is driven by our increase in interest income, which is driven by higher rates, as well as lower interest expense from deleveraging that occurred in the first quarter of this year. Earnings available for distribution of $0.75 per diluted common share in Q3 compared to $0.43 per diluted share in the same period last year. cash available for distribution was 67 cents per diluted common share in the third quarter compared to 47 cents for the same period last year the increase in earnings available for distribution was driven by the increase in net income for the quarter 50 cents per share in the third quarter and the board has declared a 50 cent dividend per share payable in the fourth quarter 24. a regular dividend the third quarter is 1.34 times covered by cash available for distribution book value per share increased 2.6 percent in second quarter to 16.95 per diluted share with the increase again being primarily due to the unrealized gains on our common stocks during the quarter we funded 28.8 million on a life science development property cambridge which redeemed 9.7 million of, or sorry, we redeemed 9.7 million senior loans and sold an $82 million CMBSB piece with a bond equivalent yield of 9.2%. During the third quarter, we sold 1.9 million shares of our Series B cumulative redeemable preferred shares for net proceeds of 42 million. Moving to the portfolio and balance sheet, our portfolio is comprised of 83 investments, with a total outstanding balance of $1.1 billion. Our investments are allocated across sectors as follows, 17% SFR, 52.3% multifamily, 26.7% life sciences, 1.5% storage, 1.8% specialty manufacturing, and 0.6% marina. Our fixed income portfolio is allocated across investments as follows, 11.2% senior loans, 31% CMBS B pieces, 20.1% preferred equity investments, 23.2% mezzanine loans, 4.2% IO strips, 1% MBS, and 9.2% promissory notes. As far as the assets collateralizing our investments, they are allocated geographically as follows. 16% Texas, 20% Massachusetts, 8% California, 6% Florida, 6% Georgia and 5% Maryland with remainder 4% across other markets, but heavily in all of our portfolio is heavily exposed to Sunbelt markets. The collateral on our portfolio is 77.5% stabilized and with 60.2% loan to value and weighted average DSCR of 1.36 times. We have $816 million of debt outstanding. Of this $324 million or 39.7% is short-term debt. Our weighted average cost of debt is 6.1% and has a weighted average maturity of 1.4 years. Our debt is collateralized by $1.1 billion of collateral with a weighted average maturity of 3.9 years. Our debt to equity ratio is 1.52 times. Moving to guidance for the fourth quarter, we are guiding to earnings available for distribution of $0.79 per diluted share at the midpoint with a range of $0.75 on the low and $0.05 on the high end. We're guiding to cash available for distribution of $0.50 per diluted share at the midpoint with a range of $0.45 on the low end and $0.55 on the high end. So with that, let me turn it over to Matt. Matt, go ahead.

Hey, thanks, Brian. This is Paul Richards. I'm going to go before Matt, but I appreciate it. The results for the third quarter demonstrated strong performance in all of our investment sectors. We remain focused on areas where expertise and ownership can effectively harness information to evaluate and uncover value throughout the entire capital structure with the goal of achieving superior risk-adjusted returns. Our investment strategy remains centered on credit investments and assets that are either stable or nearing stabilization with an emphasis on meticulous underwriting, low leverage, and a conservative debt structure. We prioritize lending to reputable sponsors to ensure consistent value for our shareholders. In the third quarter, although conditions in the commercial real estate market continue to improve, they remain somewhat challenging. Nonetheless, we successfully deployed capital into accretive investments and leveraged strong bids in the secondary bond market to recycle seasoned bonds into new opportunities. The portfolio is geographically diverse with a strong preference for Sunbelt markets. Since the beginning of the first quarter, the company has been actively underwriting and deploying capital. An additional $28.8 million was funded on the Life Science Senior Loan, which carries an interest rate of so far plus 900 dips. On the disposition and loan repayment front, we capitalized on a strong bidder pool in a secondary bond market, selling a seasoned BPs acquired during the depths of COVID at roughly 200 basis points tighter than the original purchase price. This generated a robust gain, which was redeployed into newly originated and accretive deals. At the close of the quarter, we maintained a cautious stance on repo financing, keeping the leverage within a 63% LTV range. We reduced our repo lines by approximately $40 million lowering our overall debt-to-book value ratio to 1.52 times from over 2.0 times in the first quarter. We continue to actively communicate with our repo lending partners, discussing market conditions and the performance of our finance CMBS portfolio. In summary, we continue to identify attractive investment opportunities across our target markets and asset classes, with a commitment to thorough evaluation aimed at enhancing shareholder value. We remain confident in the resilience of the residential sector, especially in the current industry environment. Our investments in the multifamily and single-family segments are well-positioned, supported by historical performance and a favorable rent versus own dynamic that provides long-term momentum for the sector. Additionally, we are highly optimistic about our investment pipeline in the life sciences and CDMO sector. To finalize our prepared remarks before we turn it over to questions, I'd like to turn it over to Matt McGrainer.

Thank you, Paul. Yes, we're very pleased with the quarter. Credit quality remains attractive and stable, and we're also pleased with the increase in book value quarter over quarter, which is a great sign for the business. Absorption of record levels of multifamily supply continue to exceed our expectations, and transaction activity is also picking up. Leasing in the life sciences sector is also increasing, with particular strength in Q3 and the Kindle and LMA submarkets, which is a positive for our alewife loan. Our storage business and exposure also had a nice quarter. The portfolio has recently achieved 90-plus percent occupancy across the entirety of the portfolio, a significant milestone for the portfolio as it moves into stabilized operations and had an 11 percent increase year-over-year during the quarter in occupancy. We also closed on a highly accretive SASB financing in early October that recapitalized all of the company's outstanding debt stack with a fixed rate execution and strong interest from the market at tighter pricing than anticipated. So instead of monetizing perhaps our storage assets in 2026, we could be in a position to monetize them in 2025. Going forward, you'll likely see us be more active in the multifamily sector over the next couple of quarters as we're underwriting approximately $250 million of opportunities for senior bridge loans, CMBS, and even construction financing within the sector. Finally, we're pleased with the capital options available to us as we fund this growth. With where the balance sheet is and the success we're having with the Series B raise, we have multiple creative avenues to fund growth, including A-note warehouses and even a rated bond deal. 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.

All right, perfect. Thank you. And just as a reminder, if you would like to ask a question, please press star followed by the number one. All right, our first question comes from the line of Crispin Love from Piper Stanley. Please go ahead.

Hi, this is Brad Capuzzi on for Crispin Love. Just on the portfolio exposure shifts continuing, multifamily exposure decreased again while life sciences now makes up more than a quarter of the portfolio. How do you expect this to progress? And would you expect stability with current exposures or continued increases in life sciences? Thank you.

Yeah, I think the life science exposure is both because we've deployed a number of opportunities over the last quarter or two, but also the paybacks or the capital that's coming back to us has come from the residential sector. So it's kind of like shrinking the overall pie size and probably skews it a little bit. But as we sit here today, one and a half times levered, In the portfolio, exposure to multifamily, where it is, I would, or in residential, like I said in my prepared remarks, see that increasing over the next couple of quarters. But ultimately, we'd like to see life sciences be about a quarter to a third of the portfolio on a fully levered basis, so.

Thank you, I appreciate it. And then just the last question for me, on credit quality, LTVs and debt service coverage ratios, they'll screen attractive to others in the industry, but do you see these, do you see the debt service coverage ratios decrease in the quarter? Can you just dig into that a little deeper and what the key drivers were there?

Yeah, of course. So, you know, you have seen the DSCRs decrease, you know, minimally over the past few quarters. That's kind of twofold. One has to do with, you know, just some of the opportunities that we are in, such as the repositioning of the ALYS loan or the one senior loan, that's SOPR plus 900 that Matt's discussed. That, of course, doesn't hold the DSCR right now because, you know, it's being released and leased up right now. And also, you've seen some slippage, you know, in the multi and SFR, but not much. But those are the two main components of why it's seen, you know, a little bit of a drop off in the DSCR. But in the future, we expect that to maintain or even provide even better coverage in the future.

And just to add to Paul's comments, this is Matt. The property balance sheets in multifamily, we're starting to see throughout the CMBS and KDeals and even our own portfolio stabilizing as the front end of the curve shifts down, caps and other hedges get higher. you know, less expensive. And as you know, that the servicers, including especially the agencies, have been mandating cash flow sweeps to escrow for replacement caps on the floating rate side. So as those escrow mandates kind of shift and credit and liquidity become more available within, you know, within multifamily and the broader commercial real estate sector as the Fed, you know, continues to ease. We expect this to only improve the coverage ratios.

Thank you for taking my question.

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

Thanks very much. Do you have an update as to how book value is trending inter-quarter given the spike in rates?

Sure, Jade. Yeah, there's not much movement. I would say in our CMBS book, it's been flat to somewhat positive. It's pretty mute right now in terms of growth or decline. We're sticking to where our current book value is, which we discussed at the end of Q3.

Good to hear. Thanks a lot. In terms of the interest rate dynamics, it's catching a lot of people by surprise. Everyone thought Fed lowers rates and then bond market cooperates, and we're not seeing that. In fact, multifamily, starting to see some hiccups here and there. For example, Annie May in their 10Q noted an uptick in delinquencies, quite a sizable uptick, in fact, and they booked a really large reserve, one-third of it related to seniors' housing. They did attribute all of the increase to floating rate loans. So just wanted to see what your thoughts are as to credit performance in multifamily, if you're seeing any issues creep up, and how you're thinking about the outlook.

Yeah, it's been a roller coaster over the last, you know, quarter or so. You know, the start of the quarter, everyone was feeling pretty good about life or better about life. And then, you know, with the recent, you know, run up in yields on treasuries, it's, you know, We've seen some retrades in the transaction market and a bit of a pause as we head into the election. I think that's going to clear up some of it. But, you know, overall, the underlying dynamics within the multifamily sector, I can't speak to seniors housing because we're not, you know, that's not really a part of our business. But within multifamily, obviously, we're an owner of 30,000 units and can tell you that, you know, absorption continues to be really important. really promising um as we're you know sitting here in this in the eye of the supply storm today in q3 and then you know q4 i think our overall outlook on multi-family um is you know increasingly positive just given the the way that the um rents and ois and uh levels of man held up during these challenging times both in the capital market side um you know but also in this supply wave but again as we've stated Over the past year, to the extent people have listened, you know, really in 2025 gets great. And 2026 is even better on the residential side when landlords should have increasing pricing power. Just due to the, you know, really lack of deliveries for 2026, it's going to be a pretty special time, I think.

In terms of deals that you're looking at right now, how would you characterize competition in the debt space? Seems like there's a ton of capital on the sidelines looking to be active, but really a dearth of good deals, lots of refi activity, and many of those have problems, but the acquisition market being quite muted. How would you characterize the state of play and competition?

Yeah, I'd say, yeah, I think you're alluding to there's a number of players out there on debt funds. A lot of capital has been raised, tons of capital has been raised on the debt fund side. And, you know, we are seeing a ton of competition, particularly for, you know, stabilized deals. But or even in the multifamily sector, you're seeing a lot of competition. groups bunch up around, you know, SOFR plus, you know, 250 to 300. And so, you know, that's tough to, you know, it's tough to underwrite. The opportunities that we're hitting on are mostly repeat sponsors that you know, have a business plan that we understand as an equity owner and, you know, we're able to kind of differentiate ourselves by our relationship and being there throughout the past, you know, few years for these guys and working through issues and, you know, just, you know, differentiating ourselves from a platform perspective based on relationships, I think, is the way we're winning deals and also on the On the CNBS side, we're getting increasingly involved in the HRR deal flow with the bigger banks and underwriters. Obviously, we continue to be a select sponsor with Freddie Mac and enjoy that relationship. You know, we like our opportunities to be selective, and the good news is for us, like, we don't have to do anything. You know, we have a stable book value. We have a great credit quality that's, you know, out-earning our dividend coverage, and, you know, we can be opportunistic and selective, and that's a good place to be in right now.

Thanks a lot.

Thanks, Jay.

And as a reminder, if you would like to ask a question, please press star and the number one. Our next question comes from the line of Steven Moss from Raymond James. Please go ahead.

Hi. Morning. Congrats on the last quarter and strong guidance for Q4. I appreciate the details you guys provide. I want to touch base, I guess, first, Matt, to start, get an idea of how unfunded commitments are funding down. Is that the number, the $29 million shown in the supplement, is that what was funded off your unfunded commitments, or is that just a portion of it? And can you talk about if there's any growth on that unfunded side? And I guess not to get too long-winded, but how do you think about raising capital through the Series B issuance, and is that really the capital that's going in to fund these commitments? How do you handle matching it up? How do you think about that?

Yeah, the 29 or 30 was alewife, and that's a funded commitment that we have another, call it $100 million or $90 million to fund. The draw schedule is increasingly being, you know, accretive to us, both in terms of timing and the activity. So with the Series B... that's matching somewhat dollar for dollar on that asset. The extent we see or are able to hit on a number of these other opportunities, to go into your question, had great meetings and are working on an A-note facility with a couple of banks that really slices an A-B-note structure that, particularly on the multifamily residential side and even the life sciences side, that we could throw loans into and have a great net interest margin. So we'd like that kind of as a second option to pair with the Series B. And then, you know, going forward, if we have any other deals pop up, then, you know, we recently have been in discussions with the rating agencies, S&P, Fitch Moody's on, you know, on this. kind of a high-yield bond deal, given where the company's balance sheet is and how under-levered we are. We think we could take advantage of that as well. So there's a number of, you know, creative ways that we can fund growth. And, you know, this is kind of unique, I think, in the sector right now to be able to do that.

Yeah. And what is the coupon on that Series B? Nine. Nine figures. clipping a pretty good, you know, 500 vips of spread as you raise capital there and deploy, you know, so for plus 500. Yeah, exactly. So that's really creative. What is the cap? I mean, is there a limit on how much Series B you can raise, or what is the authorization there?

Yeah, so we, I think the shelf is 400 million total, and we've raised about 100 of that.

Great. Switching gears a little bit, and you could touch on this a little bit, but on the multifamily side, you mentioned kind of seeing an increase in pipeline or maybe resi investments. Can you talk about what's in the pipeline? Are you looking at preferred equity investments? Are you looking at med loans? Are you looking at B pieces out of deals? Is it kind of a little bit of everything? I'm just curious kind of where you're seeing the best opportunities as you look to get more active on that resi investment pipeline.

Yeah, you bet. So we're working with a repeat sponsor on a portfolio of, it'd be, uh, uh, half repurchase, half refinancing of the existing, you know, kind of garden-style portfolio in the southwestern, you know, Arizona and Texas and Georgia. That's about $100 million. And then, you know, on the construction side, we're looking at a $75-ish million financing there. And then the remainder is, you know, Freddie B., Freddie K. So it's kind of, you know, $175 million, $175 million. senior loans, CMBS, and construction.

Fantastic. Appreciate the color this morning and thanks for your comments. Thanks, Stephen.

That is all the questions that we have in the queue, so I would like to turn it back over to management for closing remarks.

Yeah, Matt, Paul, if you guys have anything else. Sorry, go ahead.

No, I appreciate everyone's time this morning and look forward to talking to you again next quarter.

That concludes today's conference. Have a pleasant day, everyone.