NexPoint Real Estate Finance, Inc.

Thank you for standing by. My name is Kate and I will be your conference operator today. At this time, I would like to welcome everyone to the next point, real estate finance Q2 2025 earning 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 with the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Kristen Griffith, Investor Relations. Please go ahead.

Thank you. Good day, everyone, and welcome to Next Point Real Estate Finance conference call to review the company's results for the second quarter ended June 30th, 2025. On the call today are Paul Ridgwick, Executive Vice President and Chief Financial Officer, and Matt McGrainer, Executive Vice President and Chief Investment Officer. 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 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 the SEC for more complete discussion of risks and other factors that could affect forward-looking statements. The statements made during this conference call speak only 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 Paul Richards. Please go ahead, Paul.

Thank you, Kristen, and welcome everyone joining us this morning. I'm going to briefly discuss our quarterly results, move to our balance sheet, and lastly, provide guidance for the next quarter before turning it over to Matt for 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 54 cents per diluted share compared to net income of 40 cents per diluted share for the second quarter of 2024. The increase in net income for the quarter was due to an increase in interest income between the second quarter of 2025 to the second quarter of 2024. Interest income increased by $4.6 million to $22.8 million in the second quarter of 2025 from $18.2 million in the second quarter of 2024. The increase was driven by an uptick in interest income driven by increased income from investments. Interest expense decreased $700,000 in the second quarter of 2025 compared to the same period in the prior year from the deleveraging that occurred in the second quarter of 24. Earnings available for distribution was 43 cents per diluted common share in Q2 compared to 68 cents per diluted common share in the same period of 2024. Cash available for distribution was 46 cents per diluted common share in Q2 compared to 64 cents per diluted common share in the same period of 2024. The increase in earnings available for distribution was driven by the increase in net income for the quarter. We paid a regular dividend of $0.50 per share in the second quarter, and the board has declared a dividend of $0.50 per share payable for the third quarter of 25. Our dividend in the second quarter was 0.92 times covered by cash available for distribution. Book value per share increased 1% from Q125 to $17.40 per diluted common share, with the increase being primarily due to unrealized gain on the preferred stock investments. During the quarter, we funded $39.5 million on life science preferred, and we purchased $15.3 million CNBS I.O. Strip with a bond equivalent yield of 7.24%. Moving to our balance sheet and portfolio. Our portfolio is comprised of 86 investments with a total outstanding balance of $1.1 billion. Our investments are allocated across the sector as follows. 49.5% multifamily, 32.7% life science, 15.5% single-time rental, 1.6% storage, 0.7% marina, and 0.1 specialty manufacturing. Our fixed income portfolio is allocated across investments as follows. 28.3 CNBSBPs, 24.9% MED loans, 18.7% preferred equity investments, 12.9% revolving credit facilities, 10.4% senior loans, 4.5% IO strips, and 0.1% promissory notes. The assets collateralizing our investments are allocated geographically as follows. 27% Massachusetts, 15% Texas, 6% California, 6% Georgia, 4% Maryland, 4% Florida, with the remainder across states with less than 4% exposure, reflecting our heavy presence and preference for Sunbelt markets with the Massachusetts and California exposure heavily weighted towards life science. The collateral on our portfolio is 74% stabilized with a 58.5% loan-to-value and a weighted average DSCR of 1.44 times, We have 815.6 million of debt outstanding with a weighted average cost of 5.9%. Our debt is collateralized by 865.4 million of collateral with a weighted average maturity of 3.8 years. Our debt to equity ratio is 1.14 times. Moving to our guidance for the third quarter, we are guiding to earnings available for distribution and cash available for distribution as follows. Earnings available for distribution of $0.42 per diluted common share at the midpoint with a range of $0.37 on the low end and $0.47 on the high end. Cash available for distribution of $0.50 per diluted common share at the midpoint with a range of $0.45 on the low end and $0.55 on the high end. Now I would like to turn it over to Matt for a detailed discussion of the portfolio and markets. Matt?

Thank you, Paul. As he just mentioned, we're pleased to report another strong quarter amidst the challenging macro backdrop. I'd like to spend a few minutes here discussing our verticals and what we're seeing before I turn over to talk about our pipeline. On the residential front, supply pressures have eased somewhat, but continue to present concentrated challenges in Sunbelt markets in particular. According to RealPage, 2Q of 2025 marked the first quarterly drop of over 20 basis points in inventory growth in over 15 years, as new deliveries tapered after peaking in late 2024. Despite the slowdown, over 400,000 units were delivered in the trailing 12 months, sustaining elevated competition in lease-ups. The upshot here is that after one more quarter of significant deliveries in 3Q of 2025, the national delivery outlet contracts to a GFC-level output of just 77,000 units per quarter. which supports our thesis on accelerating fundamentals in the multifamily sector in 2026, 2027, 2028. More positive news, demand outperformed expectations in the first half of the year. Net absorption surged and the national stabilized occupancy rate improved to 94.6 in July. New lease rates are still modestly negative in most of our markets as operators continue to be defensive. However, we are very constructive on rental rates continuing to inflect higher as the supply picture continues to improve. On the storage front, the REITs guided for flat to very low single-digit revenue growth and flat to negative 1.5% NOI growth in 2025. Q1 earnings were slightly better than expected, but guidance was maintained. Post-nay REIT commentary in June indicated rising occupancies and improving rates, Still, the sluggish housing market continues to weigh on the self-storage demand. Home sales are at a multi-year low and mortgage rates remain elevated, softening the 2025 peak leasing season. Still, the REITs are pushing street and web rates, which could support Q2 results and have so far. REITs with exposure to major markets are outperforming on the occupancy front, i.e. extra space and public storage, smart stop. These exceed their 2025 projected averages, while operators in secondary and tertiary markets continue to underperform. On the supply outlook, new development remains below equilibrium, under 2.5% of existing supply, and with limited bank financing, high land and construction costs, and elevated interest rates, supply continues to be in check. This supply discipline should help restore pricing power as housing activity rebounds. Finally, on the life science front, lab leasing continues to be challenging, particularly given the tariff and NIH funding uncertainty under the new administration. But that said, we're pleased to report some great, great momentum at our project. We're closing in on a 245,000 square foot lease with an AI biologics company on a 15 year deal, producing a debt yield of just over 8% for this, just the portion of this project. We expect the formal announcement to occur in the first half of Q3. They're very excited about this upcoming event. As Paul also mentioned, we were able to accretively dispose of Mofford last week, creating even more liquidity to fuel our pipeline. Today, our active pipeline of origination stands at over $235 million and largely in the resi sector. We expect this incremental pipeline activity to create an increase in our CAD run rate in the high single digits. In closing, our underlying credit profile of the portfolio remains very strong atop the commercial mortgage rate sector. Moreover, we continue to have some of the lowest leverage profile of any commercial mortgage REIT, which allows us a variety of capital options to pursue accretive growth. Indeed, we're excited about our growth, in particular, and cautiously optimistic about the overall market dynamics going into the second half of the year. As always, I want to thank the team for their hard work, and now I'd like to turn the call over to the operator for questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jace Romani with KBW. Your line is open.

Thank you very much. Can you comment on credit trends within the Freddie Mac DPS portfolio? Both GSEs talked about a slight uptick in delinquency trends within their portfolio.

Hey, Jay, this is Paul. Yes, our VP's portfolio is still overall, you know, very solid when compared to, you know, other CRE, CLO, and that 21-22 vintage. You know, our VP's is, again, straddle 2018 through a 2025 vintage. So, you know, we have some really good collaterals, some really good deals that are both diversified fixed and floating. And I would say, yeah, there's, you know, a few problem loans here and there. But overall, especially on the fixed side, uh it's been really sturdy and you know really good credit profile but um you know again i would say you know in our floating rate vintages in that 21 pool yeah there are a few loans that we have our eye on but uh you know nothing of uh complete concern as of right now matt i'll give you anything to add to that yeah i think the um you know given the amount of liquidity in the market uh for for resi in particular um you know we're optimistic that

Some of the troubled assets just broadly across all K deals and even in our portfolio are going to be able to catch a bid here in the second half of the year and the borrowers will be able to have liquidity options available to them whether it's more agency or the debt funds are getting more aggressive in particular on the multifamily sector. With the liquidity profile, I think everyone's waiting out the first half of 2025, looking forward to 2026, and expect the overall delinquency picture to improve going into the back half of the year, even though we're still in a challenging supply environment.

Thanks. On the life science side, can you talk about pro forma for that lease that you mentioned? occupancy would be at that point?

Yeah. So it's about. Yeah. Yeah, of course. So it's two thirds of the first phase of the project, which is which is what our loan is. So it'll be, you know, like I said, two thirds lease post post deal announcement.

So once that happens, how much duration will there be remaining on this loan?

roughly on a fully extended basis, roughly two and a half years.

But importantly, we're already seeing and in talks with, you know, back leverage and aid note lenders. And, you know, with the lease, we have a lot more, you know, financing options to us to probably be taken out before that.

So this project seems quite different from, or resistant to the pressures we're seeing in life science overall. Several of the mortgage REITs, for example, have downgraded to risk five life science loans and books reserves this quarter.

Yeah. Well, the good news for us is that we started, you know, we made this loan in the midst of 2024, early 2024, and not in 2020 or 2021 or 2022. So that, coupled with the fact that the sponsor has $400 million of equity versus our $218 million mortgage, and then plus we were able to land a lease. So in a different spot than our peers, fortunately.

Thanks. Wanted to ask your thoughts on the seniors housing space. You know, the thought is that COVID really outweighed the favorable demographic trend underpinning that sector. because there were huge inflation and operating costs and a lot of delinquent tenants that remained in occupancy. You know, the inflation rate has moderated and the delinquencies are being reversed. So the fundamental outlook for that sector is much improved. Do you agree with that? And are you interested in adding exposure to that? What are your thoughts generally?

Yeah, I 100% agree with that. And, you know, look no further than the outperformance of Well Tower, you know, over the last couple years. And then, yeah, the proliferation even I think that they're doing in build to rent and specialized, you know, projects for an aging population. We're seeing, you know, a lot of capital in that space we put to work, you know, on the build to rent side and, you know, highly amenitized senior housing. projects are finding good capital and great cap rates. So I do think that that is a good place to play. We looked at a couple of purpose-built, you know, senior build-to-rent deals. Haven't hit on any thus far, but it is an attractive space, I agree with you, and one with some legs and, you know, over the next, over the course of this decade, I think. So, yeah, we're interested in it.

Thanks. I'll stay tuned for that. You all have been pretty nimble at identifying those kinds of opportunities. So I imagine it's something you'll look at.

Yeah, I agree. Thank you, Jay. Thanks.

I will now turn the call back to the management for closing remarks.

Thank you very much for everyone's time today, and we look forward to speaking to you after the third quarter.

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