Title

Presentation

Operator: 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 NexPoint 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. [Operator Instructions] I would now like to turn the call over to Kristen Thomas, Investor Relations. Please go ahead.

Kristen Thomas: Thank you. Good day, everyone, and welcome to NexPoint 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 Mitts, Executive Vice President and Chief Financial Officer; Matthew McGraner, Executive Vice President and Chief Investment Officer; and Paul Richards, Vice President Originations and Investments. As a reminder, this call is being webcasted through the Company’s website at nref.nexpoint.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 more a 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.

Brian Mitts: Thank you, Kristen. I appreciate everyone joining us today. It’s Brian Mitts 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 starting off, Q1 results are as follows. For the first quarter, we reported a net loss of $0.83 per diluted share compared to a net income of $0.37 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 of SFR loan that was prepaid on January 25. Net 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 ’23. 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 flow for distribution from the prior year was partially driven by the prepayment penalties from the SFR loan paydown. 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 1.2x 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 repayment. During the quarter, we contributed to six preferred equity investments for the $11.5 million of outstanding principal and a weighted average yield of 10.8% and originated one loan, $44.6 million of outstanding principal at 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 a total outstanding balance of $1.2 billion. Our investments are allocated across sectors as follows: 47.2% multifamily, 46% single-payment rental, 5.2% Life Sciences and 1.5% storage. Our portfolio is allocated across the following investments: 43.3% CMBS B-Pieces, 18.3% preferred equity investments, 15.2% mezzanine loans, 11.6% senior loans, 6.3% mortgage-backed securities, 4.4% I/O Strips and 0.9% MSCR notes. The assets collateralized in our investments are allocated geographically as follows: 90% Texas, 9% Florida, 8% California, 6% Georgia, 5% Maryland, 4% Washington and 3% Colorado, with the remainder across states of less than 2.5% exposure. This reflecting our heavy preference for Sun Belt investments.

The collateral in our portfolio is 86.6% stabilized with a 68.5% loan to value and a weighted average DSCR of 1.72x. 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 2.04x. Moving to guidance. Earnings available for distribution of $0.45 per diluted share at the midpoint with a range of $0.40 per share on the low end and $0.50 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 a detailed discussion.

Paul Richards: Thanks, Brian. The first quarter results demonstrated robust performance across all of our investment sectors, particularly in our CMBS B-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 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 Sun Belt 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 issues five-year fixed, with the latest one closing this past Tuesday, Freddie Mac B-Piece 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 in all-in unlevered fixed rate yields of 9.75% and 9.5%, respectively.

And with modest leverage, we expect to generate a mid-teen levered return on very desirable collateral pools. The Company also purchased a new issue SFR ABS paper in the gross amount of approximately $44 million and prudently levered to achieve low to mid-double-digit returns and high cash flow and stabilized SFR collateral 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 at 60% loan-to-value range and fortifying the CMBS book by acquiring accretive 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 Sciences CDMO sector.

To finalize our prepared remarks before we turn it over to questions, I’d like to turn it over to Matt McGraner.

Matthew McGraner: Thank you, Paul. As we 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 in 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 in 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 million 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 the extent any of these do hit, we would look to modestly re-lever the balance sheet via notes offering to match fund in the near term — or 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 rate run rate — our 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.

Operator: [Operator Instructions] And your first question comes from the line of Stephen Laws from Raymond James.

Stephen Laws: Matt, you may have mentioned this — or you did mention it kind of towards the end of — at the very end of your comments. 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 the CAD and EAD can kind of continue supporting the $0.50 level? And what’s your outlook as you get this capital redeployed as far as the earnings power of a fully deployed portfolio?

Matthew McGraner: Yes, of course. We ended the year, I guess, $0.51 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%. The — kind of the — what we didn’t see was the big loan repayment on the front yard loan, which was $510 million roughly. That was 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. So our job is to redeploy that capital here in the second quarter and get us back on that $0.51 — $0.50, $0.51 run rate and then increase vis-a-vis the Series-B and the new investments to match. So I feel pretty good about the run rate post this redeployment of the capital. And so that’s why we’re sticking with the dividend.

Stephen Laws: Great. And I appreciate the color there. And you also provided some return numbers on the new B-Pieces, and I believe it was some loan. I appreciate that. But kind of generally as you look at your pipeline, when you look at achievable returns in securities versus mezz or pref investments, can you talk about what you’re seeing relative attractiveness across those different options?

Matthew McGraner: Yes. Really, everything we’re underwriting, 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 spades. I don’t know, Paul, if you have any other thing to add to that?

Paul Richards: No, I think that’s exactly right.

Stephen Laws: One final one, if I may. Operating expenses, we’ll get more color when the Q comes out. But any onetime OpEx that was a result of the events in Q1? Or can you talk about your expectations for run rate operating expenses moving forward?

Brian Mitts: Yes. Steve, it’s Brian. There’s a couple of things that contributed to that from audit overruns and some legal expenses, debt yield costs, as well as the way the stock compensation gets amortized in. We think — and one of the — with [indiscernible], 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 that you had seen before.

Stephen Laws: I think we’ll move back to that kind of 6.5%, give or take, number on the OpEx.

Brian Mitts: Yes. That’s right.

Operator: Our next question comes from the line of Jade Rahmani from KBW.

Jade Rahmani: This is actually Jason Sabshon on for Jade. It would be helpful if you could speak to credit trends within your mezz and pref investments? And generally, what you’re seeing broadly in the market in terms of multifamily credit trends?

Matthew McGraner: Yes. I think in our mezz and pref books, the — I’d say we have one loan or one perfs investment in an asset in Atlanta, where the sponsor is 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 was kind of challenging on the second half of last year anyway with some fraud issues and some eviction issues with respect to the courts. But outside of that, everything else doesn’t scare us. More broadly, as I mentioned, the biggest distress we are seeing relate to the 2021 and 2022 bridge loans and CRE CLOs. They were all floating rate 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 submarkets as these deals are becoming zombie deals. So they’re cash flow constrained because all the — the interest rates have more than doubled. And the operators, to the extent that they’re still in control of the assets, are — don’t have any money to keep operations up, rehab units. And so the occupancy in some of these submarkets are dipping and causing some submarket distress. And that’s somewhat isolated again in the CRE CLO market. More broadly, the agency books are experiencing very little distress. In our K-Series, there’s still really good performance and solid performance. So I think it depends on where you look, both geographically and then what wrap 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 I know it will weigh in 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 to nine months will be a little bit challenging. But after that, I think it will be much improved.

Jade Rahmani: Great. So in terms of capital deployment and investment opportunities that you find compelling — you talked about the B-Piece purchases and Life Science. But I guess overall for deployment into mezz 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.

Brian Mitts: Yes. I mean, I think we’re — we have a penchant depending on the property type for certain geographical areas. Our bread and butter over the past decade has been Sun Belt Smile residential. So that’s where we feel most comfortable. And even though there’s supply issues over the long term, but these markets lead the country in job growth and household formation, which is interesting because right now it’s like — it’s somewhat on sale, right? The multifamily residential opportunities in the Sun Belt are more — the operating performance is weaker in the Sun Belt 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 in Vacaville, where we have a loan, or the Research Triangle or Houston. So I think those markets will continue to see growth. And certainly with near shoring and re-shoring, 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.

Operator: Our next question comes from the line of Crispin Love from Piper Sandler.

Crispin Love: I’m just looking at your asset type exposure on Slide 9. It has shifted materially. Now, it’s 65% multifamily and 22% SFR. 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 to trend more towards multifamily with that prepayment potentially going to bridge multifamily opportunities where you’ve said you’ve seen stress and could provide gap financing there. And do you have any exposure right now in that bridge space?

Matthew McGraner: Yes, I think to tackle your first question, the pie chart, 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 distress there at the moment. So that’s probably where we’ll be focusing a lot more of our efforts. And that said, to the extent that we find an ABS transaction or — a B-Piece and 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?

Crispin Love: Do you have some of — the kind of the bridge multifamily exposure right now, either from kind of an organic basis or kind of gap financing?

Matthew McGraner: Yes. So we have no direct senior bridge loan exposure. The one Atlanta asset that I mentioned was behind a CLO bridge loan. That would be kind of our — one of our loan, kind of preferred mezz 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 mezz position — we’re big owners in Atlanta with 3,000 units owned, and we have the operating verticals in 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.

Crispin Love: Okay. Great. That’s what I thought. I just want to make sure. And then can you just 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?

Paul Richards: Chris, this is Paul. I think — what’s the beauty about the Series B preferred raise, that there’s this constant run rate of, as Matt mentioned, call it, $15 million, $20 million, $25 million a month, which we’re able to and we’ll continue to match fund with that Cambridge Life Science asset as — that has monthly draws. So, we’ll be able to match on 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 them pretty well throughout the remainder of the year with the Series-B preferred.

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

Brian Mitts: Yes, I appreciate. Nothing further from us. I appreciate everyone’s time. And we’ll talk to you next quarter. Thank you.

Operator: Ladies and gentlemen, that concludes today’s call.