Nexpoint Real Estate Finance Inc (NREF) 2024 Q1 法說會逐字稿

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. (Operator Instructions) Thank you.

I would now like to turn the call over to Kristen Thomas, Investor Relations. Please go ahead.

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; Matt Mcgraner, Executive Vice President and Chief Investment Officer; and Paul Richards, Vice President, Originations and Investments. As a reminder, this call is being webcast on 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 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 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, Kristen. Appreciate everyone joining us today. It's Brian Mitts here. I'm going to start by briefly go into 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 started off, Q1 results are as follows. For the first quarter, we reported a net loss of $0.83 per diluted share compared to net income of $0.37 per diluted share for the first quarter of 2023. The decrease in net income was 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 2024 from a positive $3.9 million in the first quarter of 2023. The decrease was driven primarily by the $25 million 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 '23. Again, a 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 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 and first quarter was 1.2 times covered by cash available for distribution.

Book value per share decreased 14.8% from Q1 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 prepayments. During the quarter, we contributed to six preferred equity investments from 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.

For portfolios comprised of 90 investments with total outstanding balance of $1.2 billion. Our investments are allocated across sectors as follows, 47.2% multi-family, 46% single-family rental, 5.27% life sciences and 1.5% storage.

Our portfolio is allocated across the following investments, 43.3% CMBS B-Piece, 18.3% preferred equity investments, 15.2% mezzanine loans, 11.6% senior loans, 6.3% mortgage-backed securities, 4.4% IO Strips and 0.9% MSCR notes.

The assets collateralizing 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 on our portfolio is 86.6% stabilized with a 68.5% loan to value and a weighted average DSCR of [1.72 times]. 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 2.04 times.

Moving to guidance, earnings available for distribution of $0.45 per diluted share at the midpoint for the 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.

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 the 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 surpassed 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 remains 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 issue 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 of 1.30x-plus DSCR and a diverse geographical footprint with great sponsorships. These B-Pieces will pay all-in unlevered fixed rate yield of 9.75% and [9.50%], respectively. And with modest leverage, we expect to generate a mid-teen levered returns on very desirable collateral pools.

The company also purchased a new issue SFR ABS papers in the gross amount of approximately $44 million and prudently leverage to achieve low to mid double-digit returns and high cash flowing stabilized SFR collateral pool.

On the disposition loan repayment side, as mentioned, we received approximately $508 million gross of financing in around $50 million net of financing as the portfolio of partners 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 at 60% loan-to-value range and fortifying the CMBS book by acquiring accretive triple-A new-issue CMBS paper. We consistently engage in communication with our repo lenders discussing the market conditions and the status of our financing MBS portfolio.

In summary, we are consistently identifying appealing investment opportunities across our target markets and asset classes. We are committed to continuously 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 science CDMO sector.

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

Thank you, Paul. As he 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 remained 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 and 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 5 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 extend any of these do hit, we would look to modestly relever the balance sheet via notes offering to match fund 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 repayments to be redeployed in the second quarter and continue on our normal [CAD] 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.

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Stephen Laws, Raymond James.

Hi, good morning. Matt, you may have mentioned -- you did mentioned kind of towards 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 CAD and EAD can 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?

Yeah. 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 line, which was $510 million roughly.

That would 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 $0.50, $0.51 run rate and then increase vis-a-vis the Series-B and the new investments to match. So feel pretty good about the run rate post this redeployment of capital. And so, that's why we're sticking with the dividend.

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

Yeah. Really everything we're underwriting and whether it's a credit KBPs with modest leverage is in the mid-teens. On the construction loan side, originations, we think we can do some mid-teens as well. So I think from a risk reward perspective, those were the two primary areas that we'll focus on and have investment pipeline visibility.

I wouldn't say necessarily favor securities over originating and 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 that --

No, I think that's exact accurate.

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

Yeah. Hey, Stephen, it's Brian. There is a couple of things that contributed to that from audit overruns and some legal expenses, the legal costs as well as the way the stock compensation gets amortized, and we say -- and one of -- with [Mack Dave] leaving some of the forfeitures kind of gets flushed through all at once.

So we think 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 back to the run rate you've seen before.

I think we'll move back to that kind of [6.5%] give or take some number on OpEx.

Yeah.

Appreciate that, Brian. Thanks for the comments this morning.

Jade Rahmani, KBW.

Hi, 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?

Yeah. I think in our mezz and pref books, I'd say we have one loan or one pref investment in asset in Atlanta where the sponsors 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, it was challenging over 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, it 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 there are cash flow constrained because all the interest rates have more than doubled and the operators to the extent that they're still in control the assets are driving money to get 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 a very little distress in our K-Series. There's still really good performance and solid performance. So it depends on where you look both geographically and then what wrap where the loans are in.

But multifamily is a asset class that you can underwrite, and people are underwriting with respect to transaction market being so robust. There are looking through the supply because I know it will wane 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.

Great. Thank you. So in terms of capital deployment and investment opportunities that you find compelling, you talked about the B-Piece purchases and in 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? Just would be helpful to just hear broadly your thoughts.

Yeah. I mean, I think we have a pension depending on the property type for some 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 even though there's supply issues over the long term.

But these markets lead the 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, that's where we're most comfortable. In 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 is where most of those opportunities are there. In Vacaville, where we have a loan or on the Research Triangle or Houston. So I think those markets will continue to see growth. And certainly, with near-shoring and reshoring, the advanced manufacturing and pharmaceutical manufacturing industry have a pretty strong secular tailwind behind it. So we're excited about both of those places in the market.

Great. Thank you.

Crispin Love, Piper Sandler.

Good morning. Appreciate taking my question. I'm just looking at your asset type exposure on slide 9. It's shifted materially now 65% multi-family, 22% SFR, that's driven by the prepay you talked about. But would you expect to get closer to a more even split on multifamily and SFR longer term or hope in the near term, could you expect to trend more towards multi-family with that prepayment potentially going to bridge multifamily opportunities where you said you've seen stress and could provide gap financing there? And do you have any exposure right now in that bridge space?

Yeah. I think to tackle your first question, the pie chart -- I think we're predominately going to be residential and whether that's multifamily or SFR. We'll depend on the opportunities. There's just more multifamily paper out there and our flows more active, there is more distress there at the moment. So that's probably where we'll be focusing a lot more of our efforts.

That said, to the extent that we find an ABS transaction or 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 residential will continue. Sorry, what was your second part of your question?

Do you have some the bridge multifamily exposure right now either from an organic basis or gap financing?

Yeah. So we have no direct senior bridge loan exposure. The one Atlanta asset that I mentioned was was behind the CRE CLO bridge loan that would be kind of 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, it's the extent that we have to takeover and wipe out the common equity in 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, we're making more money than our actual investment over time one the market heals, but beyond that, no.

Okay. Great. That's what I just wanted to make sure. And then can you talk about the deployment of that 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 prepaid pulling back capital?

Hey Crispin, it's Paul, I think with the beauty about the Series-B preferred raise, that there's this constant run rate, as Matt mentioned, call it, $15 million, $20 million $25 million a month, which we're able to and will continue to match fund with the Cambridge Life Science as a node that has monthly draws.

So we'll be able to match fund those as long as well as and continuously deploying capital into additional B-Pieces or other types of paper structured paper in the future. So I think we'll be able to match some pretty well throughout the remainder of the year with the Series-B preferred.

Great. Thank you. I appreciate you all taking the question.

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

Appreciate it. Nothing further from us. Appreciate everyone's time. And we will talk to you next quarter. Thank you.

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