Nexpoint Real Estate Finance Inc (NREF) 2021 Q1 法說會逐字稿

Good day, and welcome to the NexPoint Real Estate Finance First Quarter Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jackie Graham, Director of Investor Relations. Please go ahead.

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance's conference call to review the company's results for the first quarter ended March 31.

On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; Matt Goetz, Senior Vice President, Investments and Asset Management; and Paul Richards, Vice President, Originations and Investments.

As a reminder, this call is being webcast 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 a more complete discussion of risks and other factors that can affect forward-looking statements. Except as required by law, NREF does not undertake any obligation to publicly update or revise any forward-looking statements.

This conference call also contains 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, Jackie. Welcome to everyone joining us today. Today, we'll cover the first quarter of 2021 for NREF. I'll begin with an overview of the quarter, discuss our results and guidance and then turn it over to Matt Goetz and Paul Richards to discuss the portfolio, pipeline and general market conditions. And then we'll wrap up our prepared commentary with some closing comments from Matt McGraner before going to Q&A.

So starting with an overview of the quarter. It was a pretty quiet quarter. We originated 1 loan. It's actually 2 separate loans of the same deal, mezzanine loans, on a multifamily redevelopment property for approximately $26 million at an unlevered IRR in the mid-teens.

Net income was $1.26 per diluted share for Q1 compared to net income of $1.32 per diluted share for Q4.

Core earnings were $0.53 per diluted share for the quarter as compared to $0.55 per diluted share in the prior quarter.

Book value per share increased 4.4% quarter-over-quarter to $20.33. We ended the quarter with 63 investments totaling approximately $1.47 billion. And subsequent to quarter end, we added another investment, a $76 million B-Piece -- Freddie Mac B-Piece with a 6.8% unlevered IRR, which Matt Goetz and Paul will cover in detail in their commentary.

As of March 31, our capital stack consisted of $780 million senior secured facility on the SFR loans, a $60 million senior secured facility on the multifamily mezzanine pool, $162 million of repurchase agreements, $36.5 million of unsecured notes, $37.5 million of preferred equity, $97 million of common equity and $286 million of redeemable noncontrolling interest.

Subsequent to quarter end, we issued $75 million of unsecured 5.75% notes maturing in 2026. Our debt has a weighted average remaining term of 6 years and a weighted average rate of 2.49%.

As of March 31, only 15.6% of our financing is subject to mark-to-market, and we continue to be low levered at 2.47x debt to equity. We have $15 million of unrestricted cash on the balance sheet as of March 31.

As of April 28, through our ATM, we've issued 260,000 shares of common stock at an average price per share of $20.27 for gross proceeds of $5.2 million.

Also, as of April 28, we were trading at a 1.7% premium to our March 31 book value and had an implied yield of 9.2%.

Let me quickly go through the results for the quarter. High level, net income attributable to common shareholders was $8.4 million or $1.26 per share, which compared to a $6.4 million loss in the first quarter of 2020 or a loss of $1.22 per share.

Core earnings for this quarter was $2.9 million or $0.53 per diluted share as compared to $1.2 million and $0.23 per diluted share in Q1 of 2020.

Our CAD or cash available for distribution was $2.8 million for Q1 of this year or $0.52 per share as compared to $1.5 million or $0.28 per diluted share last year.

Book value on a consolidated basis was $20.33 versus $17.72 this time last year.

First quarter recorded a loan loss provision of $124,000 as compared to a provision of $212,000 in the first quarter of 2020, reflecting the improved credit conditions now that we're a year-plus into the COVID.

We paid a dividend of $0.47 per share in the first quarter, and the Board has declared a dividend of $0.475 per share payable on June 30 to shareholders of record as of June 15.

Let me touch on our guidance here before we turn it over to the rest of the team. We are issuing core guidance for the second quarter of 2021 as follows: $0.62 per diluted share on the low end, $0.60 -- sorry, $0.66 per diluted share on the high end, for a midpoint of $0.64 per diluted share.

Our CAD per diluted share $0.57 per share on the low end, $0.61 per share on the high end, for a midpoint $0.59 per share. At midpoint, that's a dividend coverage ratio of 1.24x.

So with that, let me turn it over to Matt Goetz and then Paul Richards to discuss some of the details.

Thanks, Brian. The first quarter of 2021 results continued to show strong performance across each of our investments and asset classes. We continued to focus on investment verticals where we believe we have an advantage due to our experience in owning and operating commercial real estate. Our ability to leverage information from being both an owner and operator as well as a lender to commercial real estate investments allows us to find relative value throughout the capital stack with the goal of delivering higher-than-average risk-adjusted returns.

We continue to believe our investment strategy, focusing on credit investments and stabilized residential and storage assets, conservative underwriting at low leverage with well-heeled sponsors will provide consistent and stable value to our shareholders.

The portfolio continues to perform strongly, and we were able to capitalize on the few opportunities during the first quarter and immediately thereafter. The current investment portfolio is comprised of 64 individual investments with approximately $1.5 billion of total outstanding principal. Loan portfolio is 100% residential with 57% invested in senior loans collateralized by single-family rental and 43% invested in multifamily via Agency CMBS, preferred equity and mezzanine debt.

The portfolio's average remaining term is 7.5 years, is 94% stabilized, has a weighted average loan-to-value of 66.8% and an average debt service coverage ratio of 2.02x.

The portfolio is geographically diverse with a bias towards Southeast and Southwest markets, and 100% of our investments are current.

As mentioned in our earnings, none of our underlying loans are currently in forbearance. No change from the fourth quarter of 2020.

For reference, as of the forbearance report published by Freddie Mac on March 25, roughly $7.4 billion or 2.2% of the total Freddie Mac securitized unpaid principal balance has entered forbearance, both metrics improving slightly since the fourth quarter.

Moving to the opportunities we were able to take advantage of during and immediately after the first quarter. As Brian mentioned, we made a $26.3 million mezzanine investment in a multifamily redevelopment in Los Angeles, California with great sponsorship. The mezz investment has a floating rate yield of Wall Street Journal prime plus 10%.

On April 28, we purchased a CMBS IO strip with approximately $50 million of notional for $6.1 million. The investment was capitalized with cash and additional repo financing. The underlying portfolio consists of 50 fixed rate multifamily mortgages with a weighted average LTV of 64.8%. Yield on the investment is higher than what we are seeing on the new issue pricing for the same tranche.

We plan to close another floating rate Freddie Mac K-Series B-Piece tomorrow, April 29. The B-Piece's purchase price and par value is approximately $76 million and pays a current yield of SOFR plus 625 bps.

The collateral pool is made up of 37 loans with a total appraised value of approximately $1.4 billion. The total unpaid principal balance is approximately $1 billion, representing the average loan-to-value of 70%. The underlying properties consist of 8,587 units and are 95% occupied. The investment has 9.8 years of remaining term and a debt service coverage ratio of 2.3x.

In summary, we continue to find attractive investment opportunities throughout our target markets and asset classes, and we'll continue to evaluate these opportunities with the goal of delivering value to our shareholders.

I'd now like to hand the call over to Paul Richards to discuss what we are currently seeing in the bond market, repo financing and SFR portfolio.

Thanks, Matt. During the first quarter, the company was not active in the secondary bond market or in new issue agency CMBS market. But as previously discussed, we deployed approximately $76 million on a new issue floating rate Freddie Mac B-Piece and $6 million on a Freddie Mac X1 IO strip in Q2.

New issue agency bond pricing leveled off some this past month, and bonds are now pricing at near COVID -- near pre-COVID levels. Our CMBS portfolio has greatly benefited as a direct result of the yield compression experienced since mid-2020 and have seen a healthy increase in value. We continue to be prudently levered on our repo at roughly 50% LTV at quarter end and even lower after purchasing the latest B-Piece.

As discussed in previous earnings calls, it would take downward market value movement of approximately 25% on current CMBS portfolio before LTV increased to 65%.

Lastly, we wanted to briefly touch on the continued performance of the SFR loan pool. All loans are current and performing as the demand and massive tailwinds for single-family rental, in general, continues to accelerate. We fully expect this trend to persist as tenant retention occupancies are at all-time highs.

To finalize the prepared remarks before we turn it over for questions, I'd like to turn it over to Matt McGraner.

Thanks, Paul. In closing, I'd just like to say briefly that we're excited about the credit quality and durability of the existing portfolio as well as our team's ability to consistently generate attractive investment opportunities, such as KF-108 that closes today.

We're also extremely pleased with our latest notes offering, generating $75 million of proceeds and dramatically reducing our debt cost of capital from our prior 2020 notes offering. This capital will help fuel growth in the coming quarters as we look to deploy capital in our core verticals, including several potential new SaaS B-Piece opportunities in the self-storage sector.

That's all we have for prepared remarks today. Great. Thanks to the team. And now we'd like to turn it over to the operator for questions.

(Operator Instructions) Our first question comes from Jade Rahmani with KBW.

Wondering what you're seeing in terms of production volume from Fannie Mae and Freddie Mac. Has there been any slowdown in the pace of acquiring loans from seller/servicers? It seems like with slightly higher rates and competitiveness from debt funds that there's likely to have been some moderation in their volumes.

Jade, it's Matt. No, I actually was on the phone with them yesterday. They're actually seeing a pickup in, obviously, the floating rate loans that they're purchasing and quoting right now. Obviously, the caps have been lowered, but with the amount that they can do that is uncapped via loans to affordable housing that hit certain AMI metrics, they're still seeing plenty of [fluff]. So we don't see any reason why they can't securitize at the same levels that they've been doing in the past few years.

Okay. Secondly, could you give any color on what is driving the really strong growth for the second quarter in core EPS and CAD?

It's because we're purchasing additional OP units with cash raised from the unsecured notes offering.

Jade, that's basically a [redemption] of the fund's existing investment in the company, which will generate higher earnings per share.

So that's equivalent to buying back stock and a reduction in share count?

Yes, slightly.

Okay. And did you quantify -- I forgot if -- I apologize if I missed it. Did you quantify the amount of that?

Quantified the amount of what?

Of OP units being purchased with cash.

Yes. We do -- I mean, we can. It's just that the book value that we issued, $20.33, divided by the $75 million, what would calculate...

So the $75 million is all being used to repurchase OP units?

Essentially, yes, which will then be used to make investment that we're closing this morning, which is $76 million B-Piece.

So you -- I'm getting confused now. You issued $75 million of debt, and you're using how much of it to fund new investments and how much of it to purchase additional OP units?

So the REIT is using the proceeds to purchase OP units, which will then be used to fund the B-Piece investment.

(Operator Instructions) Our next question comes from Amanda Sweitzer with Baird.

With the improved cost of equity capital today, do you have any update on where you think you could reasonably take your acquisition volume this year, given the opportunity set of deals we see today?

I think it's still -- yes, I think it's still the same. As I said today, Amanda -- it's Matt McGraner. I think that the -- the volume of the stock is still -- it is what it is. But we continue to use the ATM, and we'll issue the premium to the extent we can fund new investments.

As I mentioned, we have probably a little bit higher growth in the self-storage sector. I think we can do anywhere from $15 million to $30 million in new additional investments there.

So coupled with a few B-Pieces, probably looking anywhere from $150 million to $200 million now, which I think prior we were $100 million to $150 million.

Makes sense. And then just with some of the meaningful increase in institutional investors in the SFR space this year, which you've mentioned, are you finding any increased opportunities to increase your investments in that space specifically?

Amanda, it's Paul. Yes, we've been actively searching for investments in either the mezz, the B-Piece portion of the stack for SFR. It is a little difficult, and it's -- definitely the demand is high. So we are searching/sourcing. We've underwritten deals. Just nothing that we've pulled the trigger on yet, but that's definitely in the hopper.

Okay. That's helpful. And then finally, just following up on kind of the acquisition of OP units that you've mentioned. Is that changing the amount of OP units that you plan to exchange for equity if the vote passes at the annual meeting? Or no change to that plan?

Yes. No, it's totally separate. Once we get the vote, assuming that we do, we'll assess sort of how much of that we want to convert and when.

Thank you. There are no additional questions at this time.

Okay. Great. I appreciate everyone's time. Thank you.

Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.