Nexpoint Real Estate Finance Inc (NREF) 2021 Q4 法說會逐字稿

Good day, and welcome to the NexPoint Real Estate Finance Q4 2021 Quarterly Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference 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 and full year ended December 31, 2021. 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, Investment 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 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.

Thank you, Jackie. We appreciate everyone joining us today. I'm going to discuss our results for the quarter and the year and then turn it over to the team for a detailed commentary. Net income for the year was $3.93 per diluted share compared to net income of $1.74 per diluted share for 2020. Earnings available for distribution was $1.89 per diluted share in 2021 as compared to $1.46 per diluted share in 2020 or an increase of 29.5%.

Cash flow for distribution was $2.21 per diluted share in 2021 compared to $1.67 per diluted share in 2020 or an increase of 32.7%. Net income for the quarter was $0.92 per diluted share compared to net income of $1.32 per diluted share of Q4 2020. Earnings available for distribution was $0.54 per diluted share in Q4 2021 compared to $0.44 per diluted share in Q4 2020 and $0.51 per share in Q3 of 2021 or an increase of 22.7% and 5.9%, respectively.

Cash available for distribution was $0.63 per diluted share in the fourth quarter of 2021 compared to $0.47 per diluted share in the fourth quarter of 2020 and $0.62 per diluted share in third quarter of 2021, for an increase of 34% and 1.6%, respectively.

Book value per share increased 2.2% quarter-over-quarter and 10.4% year-over-year to $21.51. We recognized a mark-to-market gain of $9.1 million on the company's investment in NexPoint Storage and $900,000 on the company's CMBS and IO strip portfolio.

During the quarter, we originated a purchase to following investments. We purchased a $61.3 million floating rate Freddie Mac K-Series B-Piece with an estimated yield of 525 basis points of SOFR. We originated mezzanine and convertible notes with an aggregate principal amount of $40.8 million. Matt McGraner will discuss this investment in his remarks.

We originated a preferred equity investment for $30 million, yielding 10%. We originated another preferred equity investment of $3.8 million, yielding 10%. We originated a third preferred equity investment for $5 million, yielding 10.5%. At the quarter end, we funded an additional $41.8 million to this investment. We ended the quarter with 74 investments totaling approximately $1.7 billion.

During the quarter, 2 single-family rental loans were repaid totaling $20.2 million with penalties of $3.6 million paid. And the gross proceeds received $18.6 million was used to pay down the Freddie Mac senior facility. As of February 17, 2022, across the portfolio, weighted average coupon is 6.32%, weighted average remaining term on investment is at 6.5 years. Weighted average loan value is 67.9%. And weighted average DSCR is 1.99x.

The values used for the collateral that we use in the LTV calculations, the value of the time a loan is purchase originated. Values for multifamily and [SFR] assets have moved dramatically over the past few years and months. Paul will talk about these revised weighted average loan to values using our estimates of the changes in the underlying collateral value during his prepared remarks.

As of December 31, our debt capital consisted of the following: $726.3 million of senior secured facility on the single-family rental loans, $59.9 million of senior secured facility from the mezzanine pool, $286.3 million repurchase agreements, $171.5 million of unsecured notes and $32.5 million of mortgages payable.

As of February 17, 2022, our debt has a weighted average remaining term of 4.8 years and a weighted average rate of 2.79%, which provides a 353 basis point spread on our investment income over the cost of our debt. As of December 31, 23.9% of our financing is subject to mark-to-market. Our debt-to-equity ratio was 2.5x at December 31. We paid a dividend of $0.475 per share in the fourth quarter and the Board has declared a dividend of $0.50 per share payable on March 31 in the first quarter of 2022.

Our dividend is 1.14x covered by earnings available for distribution, and 1.3x covered by cash available for distribution. Today, we are issuing guidance for earnings available for distribution and cash available for distribution for the first quarter of 2022 as follows: earnings available for distribution per diluted share of $1.22, and cash available for distribution per diluted share of $1.57. Large increases over the prior quarter and prior year, driven by prepayment total lease on the single family rental loans that we've received this quarter.

Now let me turn it over to the rest of the team to provide their commentary. Matt Goetz?

Thanks, Brian. The fourth quarter and full year 2021 results continued to show strong performance across each of our investments and asset classes. We continue 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-operator and lender 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 assets, conservative underwriting at low leverage with well-heeled sponsors will provide consistent and stable value to our shareholders. During the fourth quarter, the loan portfolio continued to perform strongly. It is currently composed of 69 individual investments with approximately $1.7 billion of total outstanding principal. The loan portfolio is 98% residential with 45% invested in senior loans collateralized by single-family rental homes and 53% invested in multifamily via agency CMBS preferred and mezz. 2% of the loan book is in life sciences.

The portfolio's average remaining term is 6.5 years, is 91% stabilized as a weighted average loan-to-value of 67.9 and an average debt service coverage ratio of almost 2x. As Brian mentioned in his earlier remarks and Paul will describe further later on, we believe the market book-to-value of the entire book is approximately 52%, as new appraisals have not been performed on a large portion of the assets since they were originated in 2018 or 2019.

The portfolio is geographically diverse with the bias towards the Southeast and Southwest markets. Texas, Georgia and Florida combined for approximately 50% of our loan exposure on a geographic basis, 100% of our investments occurring. As mentioned in our earnings, number of our underlying loans are currently in forbearance for references of the multifamily forbearance report published by Freddie Mac on a monthly basis. There are 243 forborne loans totaling $2.1 billion of outstanding UPB, equating to 90 basis points of the total Freddie Mac securitized loan population by loan count to 60 basis points of securitized unpaid principal balance.

Moving to the opportunities we were able to take advantage of during this quarter. During the quarter, we originated 2 mezzanine notes on stabilized multifamily assets located at Dallas, Texas and Bentonville, Arkansas, with an aggregate principal amount of $20.4 million. The sponsors on the 2 transactions are repeat borrowers who have extensive experience in the value-add multifamily sector.

The properties are 98% and 95% occupied and weighted average debt service coverage ratio of 1.92x. Our net investments have an average current yield of 6.5% and an all-in unnumbered estimated yield of approximately 11%. On November 8, we purchased $30 million of preferred equity collateralized by single-tenant stabilized in pharmaceutical manufacturing property with a current yield of 10%. On December 9, we purchased $60.13 million of Freddie Mac K-Series B-Piece with an estimated yield of SOFR plus 525. This B-Piece is originated at a tighter spread than our previous K-Series floating investments as it represents the bottom 10% versus 7.5% of the debt capital stack as an underwritten debt service coverage ratio of over 2.3x with strong sponsorship on the underlying ones.

During the quarter, we also originated convertible notes and amount of $20.5 million for our well-helled sponsor focused on ground leases with an estimated yield of 9% with future upside and a lesser loan to value of 18%.

Two of the single-family rental book were repaid with the total principal balance of $20.2 million. The combined IRR realized on these investments was 31.4%. Paul Richards will go into more detail on how the capital was accretively reinvested in his prepared remarks shortly.

In summary, we continue to find attractive investments opportunities -- 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 would now like to hand the call over to Paul Richards.

Thanks, Matt. During the fourth quarter, the company was again active in the primary bond market. As previously discussed, we deployed $61.3 million on a Freddie Mac floating rate B-Piece of SOFR plus 525. Even as the market has experienced inflation headwinds, which have caused the market to price in multiple rate hikes, there has been an [sensational] demand for Freddie Mac B-Piece bonds. We have continued to see pricing tighten as evidenced by the last auction with spreads on the small balance loan B-Pieces coming in higher than pre-pandemic levels. We continue to be sensibly levered on our repo at roughly 57.5% LTV at quarter end. Lastly, we wanted to briefly touch on the continued performance of the SFR loan pool and a Q1 2022 loan paydowns.

All loans are current and performing as the demand and immense tailwinds for single-family rental continues to pick up speed. We fully expect this trend to persist as tenant retention, new lease and re-lease growth rates and occupancies are at all-time highs, creating a tremendous backdrop especially for us as a lender to high-quality institutional SFR sponsors.

The portfolio has had 2 SFR loan paydowns in the first quarter of 2022, which has generated a combined IRR of roughly 35% versus the original underwritten IRR of only 9%. Due to the early prepayment penalties, the investments were able to generate an additional $7 million of net proceeds than the originally underwritten and in approximately 1/3 of the original investment time horizon.

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

Thanks, Paul. We're obviously pleased with our fourth quarter and full year results for 2021 and look forward to another strong year in 2022. I wanted to quickly touch on the special situation investment we made late in the fourth quarter that Matt Goetz just mentioned. A sophisticated ground sponsor was interested in supply chain and COVID-related debt financing delays and needed a quick and efficient financing solution late in the year. We responded in the span of 2 weeks in late December to investment sponsors' needs originating $75 million of convertible notes [yielding a fat 29%] with an ability to convert to common equity at 12.5% discount. The attachment to cash before of our investment in the company's assets is roughly 18% LTV and creates a profound risk reward investment for NREF, both in terms of yield and total return potential.

Finally, we're in the middle of refinancing NexPoint Storage Partners capital stack as we speak with (inaudible) to refinance the senior debt portion and a more favorable raise in proceeds and expect these efforts along with the constraint in the self-storage sector generally to be accretive to the common equity held by NREF. We expect to close this financing in Q2 and we'll provide an update during our next quarterly results.

That's all we have for prepared remarks today and now would now like to turn the call over to operator for questions.

(Operator Instructions) We'll go ahead and take our first question from Stephen Laws with Raymond James.

First, I want to congrats on a nice quarter and certainly another dividend increase you guys delivered to investors. Can you talk maybe, Brian, a little bit about the guidance. It looks like a big Q1. What items are being pulled in? I think your EAGs is like 40%, 45% of next year's total guidance in Q1. So can you talk a little bit about what's going to drive the onetime items in Q1 that benefit earnings?

Yes. Most of that increase seems to be weighted to the prepayment penalties, the prepayments of the SFR loans. And it's a -- just a function of how that's calculated. And the calculation of that metric is something that the SEC has been focused on across the sector. So with these prepayments that we're seeing, and we'll probably continue to see just given the strength in the single-family sector. We may see more of that down the road.

That's what's driving most of that decrease for the first quarter. Obviously, the remainder is just the new investments that we've made that we've discussed, and then accretively reinvesting the payments that we're getting -- prepayments we are getting on the SFR loans. It's currently structured those as some of our lowest yielding investments, and were following us back into higher-yielding deals with the ground lease that Matt mentioned.

So piggybacking on that, Brian, when you think about the guidance you guys just issued for the full year, how conservative or how did you go about thinking -- calculating expected contributions maybe not in the next 3 months, but say, second half of this year in your guidance?

Yes. We didn't make any assumptions around prepayments or onetime type of things. So we try to give a more smooth out, stabilized return profile just based on the investments that we have. Obviously, if people make those prepayments, we generally view that as a positive and that we can clip a big penalty and recognize that immediately, but then redeploy that in higher-yielding investments.

We've run those analysis and scenarios that show if the entire book is repaid in 2022, what that would look like and what we could drive earnings. And it would be hugely accretive to both book value and our earnings available for distribution and cash flow for distribution.

Great. Switching over to the portfolio. One item, common stock investment looks like it appreciated nicely in Q4. But can you talk about your intentions with that when you may look to say, harvest those gains and recycle capital into cash flowing investments, any timing to that?

Steve, it's Matt McGraner. Are you talking about the storage...

Yes.

So we're probably going to close the refinancing of the senior debt in May. And then following that, we're going to restructure the preferred, the extra state preferred, and we expect to fund that down to creating kind of an enhanced profile of the common equity of the value, the yield to the common equity to make it as valuable as we can. And once we do that, I think we either look to recap that out or we think its better to hold current exit upon re-IPO in 2023, which we think is viable. We'll do that. So look for an update in the second half of the year only in Q2, and we'll have better visibility into it. But the either one of those outcomes, I think, is -- will be greatly accretive for this company.

(Operator Instructions) We can go ahead and take our next question from Jade Rahmani with KBW.

Can you say more about the ground lease investment? What kind of entity this was? And the capital structure this is? Is it secured by a different investment, by a portfolio, by some kind of equity interest? If you could elaborate, that would be helpful.

Yes, sure, happy to. It's the prior REIT that was formed in, I think, around early 2020. They went out, they raised capital in a 144A offering, raised about $110 million of equity. And started originating deals through 2021. Hit a sophisticated sponsor, hit this externally managing this vehicle. Had some delays in the fourth quarter with some additional LPs via a follow-on for the 144A offering. We came in and they had to close those deals. So we effectively bridge that with this instrument at the corporate level.

So these are -- we funded the company or the company then fund these investments. So -- like we said, we like this risk reward. We like the 9 assets that they were originating ground leases on a significant portion of our multi-family, which is obviously one of our bread and butter. So just jumped on it, and we think it's a great investment, again, both with yield and total return potential to the extent that we wanted to hold it.

Okay. Was this a preferred equity investment?

No, it's true debt. It's convertible notes.

Okay. Got it. I guess any update on the progress residential single-family rental portfolio? I've seen that has not started to prepay. And if not, when might you expect that to occur?

I don't -- we haven't gotten any word from them or any communications or indications, so it's hard to tell. I mean it's a big number that they would have to prepay. It's part of the progress, part of the deal, and they are definitely issuers of securitizations. Having said that, that market has gotten a lot wider here recently. So it really depends on what progress the party want to do with that portfolio. If they don't want to repay it, we would immediately start to look for places to put in. I think we have plenty of places that we can roll that. I don't know, Paul, have you got any indication from them or anything different?

No. That's what you said is exactly what my thoughts are, and it's roughly a $75 million to $80 million prepayment as it currently stands. So it's still a hefty prepayment loan.

And so far prepayments you're getting, what is the refinancing going into? Are they strives of (inaudible) or lenders or something else?

You're breaking up a little bit, but I think we've got the gist of the question. I think they're just going into either securitizations or in some cases, they are just getting another bank that essentially isn't necessarily cheaper than what they're rolling out of.

But because the values have run up so much, they're getting additional proceeds. I think their analysis is that it's worth paying the prepayment penalty and maybe getting a cheaper rate or somewhere similar, but getting a lot of higher LTV on their investments. A lot of these investments were underwritten at 60%, 65%. So today, they can finance those at 80%, 85% higher in some cases, LTVs. I think the math is working out in their favor and that's where they're rolling it into.

The spread widening you mentioned in the securities market, what do you think is driving that? Is it this supply issue based on the magnitude of issuance in January that we saw or something else?

It's Paul. Yes, I think that's right. I think you saw a very large increase in supply in Q4 of last year and then continuing in Q1 of this year. Also, the interest rate shock on the 5 and 7 years, but that didn't help either. I think you'll probably see -- and then just LTVs in general are 88.5% in some cases on these deals. So they are higher, as Brian alluded to, versus bank debt or in this case, we had a 65% LTV loan with them currently. So those are all factors kind of contributing to the spreads widening recently.

Okay. I guess is there a range of earnings post the first quarter or at the end of the first quarter, could you tell us what earnings would be excluding the outsized repayment income? Just to have an anchoring earnings expectation is beyond these accelerated prepayments.

Yes, we can get that number and kind of pull out the prepayment stuff. We want to be careful that, like I said, the SEC has been monitoring disclosures of these different metrics pretty closely. So we want to make sure that we're in line with that and not providing something that's outside of what they were looking for.

Okay. Does the dividend increase contemplate any benefit from the prepayment income because I assume, well, reading the language of the press release, it has an increase in the quarterly dividend. It doesn't cite just specifically the first quarter, so that implies that this is a recurring -- the dividend is going to be $0.50 for the foreseeable future. Is any part of the dividend increase related to the SFR early prepayment income?

No. It's meant to be a consistent dividend. So it's not a special dividend and wasn't driven by any of the prepayment numbers.

So it's fair to assume that recurring earnings might be something close to the dividend?

That's right.

It appears there are no further questions at this time. I would like to turn the conference back to the speakers for any additional or closing remarks.

Yes. Thank you. I appreciate everyone's time and appreciate the questions. We'll see you in such next quarter. Thank you.

And this concludes today's call. Thank you all for your participation. You may now disconnect.