Nexpoint Real Estate Finance Inc (NREF) 2020 Q4 法說會逐字稿

Good day, and welcome to the NexPoint Real Estate Finance Fourth Quarter Conference Call. Today's conference is being recorded.

At this time, I would like to turn the presentation over to Ms. Jackie Graham. Please go ahead, ma'am.

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

On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; and Matt McGraner, Executive Vice President and Chief Investment Officer; Matt Goetz, Senior Vice President, Investment and Asset Management; and Paul Richards, Vice President for 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 the managed -- on management's current expectations, assumptions and beliefs.

Forward-looking statements can often be identified by words such as expect, anticipate, intend and similar expressions and variations or negatives of these words. These forward-looking statements include, but are not limited to, statements regarding the company's business and industry in general, investment activity, estimated IRRs, guidance for our financial results for the first quarter of 2021, including the company's estimated net income, core earnings, dividends per common share, cash available for distribution and dividend coverage ratios for the first quarter 2021.

They are not guarantees of future results and are subject to risks, uncertainties, assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement.

Listeners should not place undue reliance on any forward-looking statement and are encouraged to review the company's registration statement on Form S-11 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.

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 analysis of core earnings in CAD, which are non-GAAP financial measures. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss computed in accordance with GAAP.

For a more complete discussion of core earnings and CAD, see the company's presentation that was filed earlier today.

I'd like to turn the call over to Brian Mitts. Please go ahead, Brian.

Thank you, Jackie, and welcome to everyone joining us for the Fourth Quarter 2020 NexPoint Real Estate Finance Earnings Call. I'll give some quick highlights of our financial performance, capitalization activity during the year and guidance for Q1 2021 and then turn the call over to Matt Goetz and Paul Richards to discuss the portfolio and opportunities we see. We'll conclude our prepared remarks with some closing comments from Matt McGraner.

Let me start with highlights of 2020. In February, we completed our IPO at $19 per share raising approximately $100 million in gross proceeds. We used the net proceeds to pay down 100% of our repo financing. In mid-March, as a result of the pandemic, credit markets froze out of creating panic selling through margin calls on repo lines. It's had an adverse effect on mortgage REIT stocks, including in NREF, which dropped to a low of $6.34 per share.

Although NREF had no repo financing at the time. Book value dropped from $19.30 per share at IPO at a low of $17.72 at the end of the second quarter. In May, as markets began to recover, we drew on our repo lines to make attractive and highlight created investments to Freddie Mac B-Pieces.

In July, we launched a preferred equity offering, raising $46 million in gross proceeds using the net proceeds to acquire 2 more Freddie Mac B-Pieces. We're stock traded with ticker NREF PA. In October, we launched a private unsecured notes offering, raising gross proceeds of $36.5 million. And that proceeds were used to purchase of 4 multifamily mezzanine loans from Freddie Mac.

As of December 31, our capital stack consisted a $781 million facility on the SFR loans, $60 million facility on the mezzanine, $161 million of repo financing, $36.5 million of unsecured notes, $37.5 million preferred equity, $90.7 million of common equity within $276 million redeemable noncontrolling interests.

The $781 million credit facility is equivalent by $854 million of SFR mortgages and has matched in structured duration in the underlying SFR portfolio as well as the fixed rates. Each has a weighted average remaining term of 7.4 years.

The rate on the facility at December 31, is fixed at a weighted average of 2.44% against the yield on underlying assets and have a weighted average of 4.9% or a 06-basis-point spread on cost of debt.

The $60 million facilities collateralized by $98 million of multifamily mezzanine loans. As at December 31, the rate on the facility is fixed at a weighted average of -- or 30 basis points against a yield on underlying assets of a weighted average 7.46% or 716 basis points spread over the cost of the debt. We have a weighted average remaining term of 8.8 years.

The $160 million repurchase or repo balance just finalized by $317 million of CMBS securitizations for 51% LTV compares interest at [L court C29]. At December 31, when 15% of our financing is subject to mark-to-market, we're low levered at 2.57x debt-to-equity.

The weighted average cost of our debt was 2.49% with a weighted average term of 6.4 years. With ample liquidity of $30 million of unrestricted cash as of December 31. For 2020, which was a short year, which we went public in early February, we had net income attributable to common shareholders of $2.6 million or $0.47 per share. Core earnings of $2.9 million or $0.54 per share.

We recorded a loan loss provision for the year of $320,000. As of December 31, we repurchased 327,420 shares at average price of $14.61 per share, representing a discount to our current book by 25%. We paid a dividend of $0.40 per share in the fourth quarter. On Monday, the Board declared a dividend of $0.475 per share payable on March 31 to shareholders of record as of March 15, and this represents an 18.5% increase in dividend.

For the first quarter, we are issuing core guidance -- core earnings guidance of $2.9 million at the midpoint, $2.8 million on the low end and $3 million on the high end. That equates to $0.54 per diluted share at the midpoint, $0.52 per diluted share below and $0.50 -- $0.56 per share on the high end. And at the midpoint, that would give us a dividend coverage on $0.475 of 1.14x covered.

With that, let me turn it over to Matt Goetz and Paul Richards to discuss the portfolio.

Thanks, Brian. Our fourth quarter and full year results continued to show growth and strength in what we believe are the most resilient commercial real estate property types throughout all market cycles. We believe this trend will continue into the near future as more and more gateway residents look to move to less densely populated markets, which should continue to strengthen our targeted and underlying asset classes.

While we can't predict potential legislation, taxation or the future impact of COVID-19 and the effect each might have on the commercial real estate sector, we believe our defensive strategy, namely credit investments in stabilized residential and storage assets, conservative underwriting and loan leverage with loan yield sponsorship, should provide consistent and stable value to our shareholders.

Signs of relative strength as evidenced by Freddie Mac's most recent K-Series securitizations, which have transacted at yields similar to pre-COVID levels and 250 to 275 basis points in size with our last fixed- and floating-rate B-Piece investments.

That said, we'd like to spend a few minutes discussing the current portfolio's performance as low as discuss the opportunities we were able to take advantage of in the fourth quarter and intermediately thereafter.

The current investment portfolio is comprised of 62 individual investments with approximately $1.4 billion of total outstanding principal. The loan portfolio is 100% residential, with 60% invested in senior loans collateralized by single-family rental, and 40% invested in multifamily via Agency CMBS, preferred equity and mezzanine debt.

The portfolio's average remaining term is 7.6 years, which we believe is atypical in the commercial mortgage REIT space. The portfolio is 96.1% stabilized at a weighted average loan value of 68.3% and a weighted average debt service coverage ratio of 2.4x. The portfolio is geographically diverse with the bias towards Southeast and Southwest markets and 100% of our investments are current.

As mentioned in our earnings, a number of underlying loans are currently in forbearance similar to last quarter's report. For reference, as of the forbearance report noted by Freddie Mac on October 25, roughly $7.6 billion or 2.4% of the total Freddie Mac's securitized unpaid principal balances entered into forbearance, both metrics improving slightly since the third quarter's report.

As you know, the new administration has extended the forbearance of portfolio in moratorium for federally backed mortgages until June 30 of this year. As of now, we don't expect any material impact to our portfolio, evidenced by the strength of the portfolio's debt service coverage ratio to loan leverages and strong sponsorships.

One mezzanine investment located in Columbus, Georgia redeemed December 11, the $10 million total investment was outstanding for 65 months and achieved an IRR and MOIC of 11.6x -- or 11.6% and 1.63x, respectively.

As a reminder, we have 0 construction loans, no heavy transitional loans, no land loans and no for sale loans. Moving to the opportunities, we're able to take advantage of during and immediately after the fourth quarter. As Brian mentioned, we have been able to deploy proceeds from our unsecured senior notes offering and redemptions into accretive investments for all our stakeholders. On October 20, we purchased a portfolio of 18 individual mezzanine loans collateralized by stabilized multifamily property for $99 million plus accrued interest. We received approximately 50% seller financing and have underwritten a portfolio to providing estimated above IRR of 17.3%.

On January 21, 2021, we posted $26.4 mezzanine investment with multibillion dollars sponsorship for a multifamily redevelopment in Los Angeles, California.

In summary, we continue to find attractive investment opportunities through other target markets and asset classes. 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 the SFR portfolio.

Thanks, Matt. During the fourth quarter, the company was not as active in the secondary or new issue Agency CMBS market since we were able to deploy capital and purchasing accretive mezzanine loans both from Freddie Mac with equally as attractive seller-financing as Brian and Matt previously mentioned.

New issue agency bond pricing came even tighter over the fourth quarter and the beginning of 2021 with both our floating rate and 0 coupon VPs has continued to drive up in value. As mentioned on the Q3 earnings call, management expected the spread to tighten as oil continues to normalize and the economy regains stability.

This thesis is held true as we have seen spreads on new issue bonds on both closing-rate and fixed-rate B-Pieces tightening 250-plus basis points for pre-COVID-based pricing. Though the application of these new issue pricing and marks have not been baked into our Q4 2020 book value, we fully expect, and have been in January, marks our CMBS portfolio increase. We continue to be prudently levered on the repo at 51% LTV at quarter end, implying it would take an approximate downward market value movement of $75 million on our current $370 million CMBS portfolio before LTV increasing 55%.

Taking it one step further, this would imply a 29% decline in market value and spreads widening roughly 750 basis points on our repo book [relative] to market and new issue pricing. Lastly, we wanted to briefly touch on recent news on Front Yard Residential entering into the current (inaudible) in this merger being with Ares and Pretium, like how this transactions closed in January of this year. We still view this as a credit positive for the company and expect performance to be optimal just as we do for the entire SFR loan pool.

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

Thanks, Paul. I'd like to end with a couple of brief thoughts. First, I'm proud of the team and the results we generated in 2020 in a tough credit and operating conditions. The team's ability to capitalize on the market dislocation last year is already very prudent as you can see with the significant increase to book value this quarter.

We're also proud to deliver on our expectations set forth a year going to our IPO investors. We appreciate your trust. We're pleased and proud, as Brian mentioned, to substantially increase the dividend by double digits while maintaining it through COVID delivering on yet another promise to our shareholders.

As we begin 2021, we expect to continue to do what we've been doing, and that is leveraging NexPoint's core verticals to continue to source attractive opportunities in the self-storage and commercial, residential asset classes.

So that's all we have for prepared remarks. Now I would like to turn the call over to the operator for questions.

(Operator Instructions) And we'll take our first question from Stephen Laws with Raymond James.

I guess, first off, hopefully, you're all doing well in Texas given the weather, but congrats on a nice quarter and a strong dividend increase. Brian, can you maybe talk about the capacity for new investments? Where you see leverage moving? And so I guess part of that discussion is also the portfolio mix change a good bit sequentially and I would want to get you to touch on maybe where you see that mix shifting over the course of 2021.

Yes. I'll cover the capacity question, then I'll let Paul and Matt, Matt jump in on sort of where the portfolio would go in the future.

We've had success last year and creative in raising capital through preferred equity, unsecured notes and then using thoughtfully the repo once that market recovered. And it seems that there is a pretty big upside for yield out there. So we think we could do a little bit of those again and probably tighter pricing than we did in July for October -- before -- in October for the unsecured notes.

So we have a number of things that we're looking at and I'll let the guys talk about that, but I think we can fund those and we're being proactive about sourcing the ability to fund anything that comes down.

Yes. Steve, it's McGraner. I think that you'll see, because we're in the Freddie Mac flow as you know, you'll see probably primarily our first few investments this year or at least the significant ones to being multifamily and the commercial mortgage-backed security B-Pieces. They're also, as you know, very creative, and we work closely with them on bespoke opportunities like the SFR pool, like the mezzanine investment we made.

So that's probably what we're -- where we will focus, resulting in an increase in the multifamily portion of the book. So that's primarily where we'll be sitting with this over time.

Steve, we've not mentioned sort of what we had said during the IPO. We tried to stick to that even despite what happened during COVID. The only thing that we talked about was being patient and thoughtful in trying to get the stock price up above book.

We, after initially having a decline in book value, it's climbed up above the IPO book value. Paul didn't say with where we've seen pricing on the CMBS book go in January and into February. We expect book value to continue to increase.

But we think they making emphasis with these increases is very, very helpful in getting the stock price up and continuing to put up good earnings numbers and making further investments.

So what we were saying that ultimately, I think we'd like to raise common equity to put into new investments. But it won't be bad for trading at a discount of the book, which is still the case today.

Sure, sure. I guess just a follow-up. Sourcing of this new investment, competition you're seeing in the market. I think Paul touched a little bit on spreads tightening, where we see those today back to, I think, pre-COVID levels. Can you talk a little bit about returns on new investments on CMBS and also then competition you're seeing from new mezz and other type investments you're looking to add?

Yes. It's Goetz. On the CMBS front, yes, like I said, the spreads on B-Pieces for the latest transactions went off at 250 and 275 basis points inside of our last purchases, which are, I think, like 25 basis points above the low of the pre-COVID level. In terms of competition in the CMBS space for the Freddie Mac B-Pieces, it's still limited just because of the high bar that they set for becoming a select sponsor and DTH.

So it's -- I would say there's still probably about 20 active bidders in that space. And they usually do an auction maybe once or twice a quarter. and then after that, there -- the securitization they introduces is placed. In the mezz world, you're getting more debt funds. But in that space that we plan, where we can make a $5 million or $10 million mezz investment on a multifamily asset in the Southeast or Southwest, we don't have a ton of competition. The bigger players are looking to put out a lot more money, and it's not really worth their time to spend it on $5-million and $10-million loans.

And we'll now take our next question from Amanda Sweitzer with Baird.

Do you have any update you can share on your plans for the self-storage common stock investment? And could that be a potential source of funds this year?

Yes. Hey, Amanda. It's Matt McGraner. It is -- we've been working with a number of funds, actively working with a number of funds to recap that piece out. We think that, that can be a 2021 source of funds. Highly likely that you can see that this year.

Okay. That's helpful. And then following up on the mezz investment you made in January. Can you just talk a bit more about how you got comfortable with the Los Angeles exposure, a little bit different where -- than where you've invested in the past and then the slightly higher LTV for the largest portion of that investment.

Yes. I think that for us in terms of markets and gateway markets, we're not a huge gateway market fan, as you know, from your coverage under [XRT]. That being said, we didn't lump L.A. in a different bucket than San Francisco and New York. It has shown more resiliency across the multifamily spectrum during COVID.

And then in terms of the underwriting, we've been really watching this mezzanine pool, I think, for over a year. So we've been working with Freddie Mac. They kind of put it on -- put on hold, negotiating with us for -- during COVID and then we picked it back up. But we've monitored this book through COVID, like I said, for over a year.

So we were comfortable enough through the course of 12 to 14 months, watching the performance of the pool that we ultimately decided that we could close on it and we could sleep well on that.

That's helpful. And then it's small, but in your book value bridge, you noted a $0.03 per share realized loss in the fourth quarter. Is that just related to the Georgia preferred equity redemption or something else during the quarter?

That's due to paydowns on senior secured loans that were borrowed at a premium. So in itself, that premium puts into realized loss book.

(Operator Instructions) We'll now take our next question from Jade Rahmani with KBW.

Given where credit spreads are in the CMBS space. Do you have range of mark-to-market book value you might be able to provide? Should we be assuming the $19.48 is up something around perhaps 4%?

Jade, it's Paul. Yes, looking at January's numbers, I would say that a 3% to 4% increase would be correct. And then given where new issued pricing, as Matt Goetz described before, it could be higher in February and March. That's still TBD where brokers come out with remarks. But I think that's a fair assessment.

What should we expect for the pace of capital deployment this year either on an annual or quarterly basis in terms of how much equity capital and cash there is available to deploy into new investments?

Yes. It's McGraner. I think what we're targeting is $100 million this year, so $25 million a quarter would be an optimistic goal for us and one that we think is doable based upon the B-Piece funnel and other private preferreds that Matt discussed earlier that are more one-off opportunities, both of which we're actively sourcing and have term sheets out on now.

On the credit front, when I look at Freddie Mac versus Fannie Mae, it's clear that in Freddie Mac, there is a noticeable increase or a greater proportion of loans in forbearance, about 2.4% of securitized UPB, which is about 1,200 loans or $7.7 billion of collateral as of November.

Yes, in NREF's portfolio, you cite that there are no loans in the portfolio that are currently in forbearance. Can you talk about what would explain the difference between the NREF portfolio and Freddie Mac's overall securitized book?

Yes. So a portion of the NREF portfolio was purchased post-COVID. So I think we've bought 2 or 3 bps B-Pieces post -- or, yes, 3 B-Piece post-COVID and then obviously, the mezz book is a little bit different. But the 3 B-Pieces had the additional interest reserves. So the credit underwriting was much stronger post-COVID securitizations.

Interest reserves tax and insurance accrual or reserves that, yes, are uncommon and never been implemented before throughout the program.

So even though there's about 2.4% of the Freddie Mac securitized loans in forbearance, they're still in the Freddie Mac B-Piece portfolio that -- portfolios that NREF owns, there's no loans within those pools that are in forbearance?

That's correct. So Back in the second quarter, there were a number of loans in the B-Piece portfolio and in the SFR portfolio that were in forbearance. Those have exited forbearance. So at 1 point, we did have loans in forbearance, but we don't anymore.

Great. On the resi portfolio, I'm wondering if it's your expectation that ultimately, Pretium and Ares, which bought mezz, plan to refinance that debt, either through securitization and some other means. Perhaps we could capitalize the prepayment penalty, which I believe 10%.

So it'd be at high cost, but they'd be able to create probably a higher earnings stream, a higher ROE on a go-forward basis. So if they eventually plan to exit that investment, they could capitalize the interest, they capitalize the cost to exit that piece of debt, refinance it cheaper, show a higher earnings stream and then have a more graceful exit. So what's your expectation with respect to that investment?

Yes, Jade. It's Brian. I'll let Paul talk about the actual numbers here, but we've had discussions with Pretium and they've indicated they don't continue to refinance that. And then Paul, once you get through the numbers, could you give us a look?

Jade, yes. So when we calculated the actual B-Piece penalty that they would have to use to break a loan, it's roughly 25% to 30%, given where rates are right now, which would imply roughly $130 million to $150 million worth of yield, which are decent. With that, even looking at where new issued CMBS or ABS, like for example, where Tricon traded, it still wouldn't make sense on a breakeven, like a 12-year breakeven period given those numbers.

And if that were to happen, I assume that you all would be viewing that as a huge gain to book value to get that prepayment penalty of that B-Pieces upfront and be able to deploy it elsewhere would probably be a good news item if that did happen.

That's exactly right.

(Operator Instructions) And as if there are no further telephone questions, I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Yes. Thank you for everyone who joined the call. And to reiterate some of Matt's closing comments, we're very happy with 2020. Happy that we were able to perform as we said we would during the IPO roadshow and we hope to continue doing that until 2021. So thank you. We'll talk next time.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.