Q1 2024 Nexpoint Real Estate Finance Inc Earnings Call

Participants

Kristen Thomas; IR Contact Officer; Nexpoint Real Estate Finance Inc

Brian Mitts; Chief Financial Officer, Executive Vice President - Finance, Treasurer, Secretary, Director; Nexpoint Real Estate Finance Inc

Paul Richards; Originations & Investments; NexPoint Real Estate Finance Inc

Matthew Mcgraner; Executive Vice President, Chief Investment Officer, Company Secretary; Nexpoint Real Estate Finance Inc

Stephen Laws; Analyst; Raymond James & Associates, Inc.

Jade Rahmani; Analyst; Keefe, Bruyette, & Woods, Inc.

Chris Brendler; Analyst; Piper Sandler

Presentation

Operator

Good morning. My name is Dean, 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 speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and number one on your telephone keypad. If you would like to withdraw your question, have the pound key. Thank you. I would now like to turn the call over to Kristin Thomas, Investor Relations.
Please go ahead.

Kristen Thomas

Thank you, and good day, everyone, and welcome to NexPoint Real Estate Finance conference call to review the Company's results for the first quarter ended March 31st, 2020. For us 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 investor dot 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, does not undertake any obligation to publicly update or revise any forward looking statements in 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 Dr., please go ahead and French person for sure.

Brian Mitts

The room Joining us today are 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 your commentary on the portfolio and the macro demand environment. And 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 25th.
Net interest income decreased to negative $12.8 million in the first quarter 2024 from three point 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, it is available for distribution was negative $0.46 per diluted share in Q1 compared to a positive $0.02 per diluted share in the same period of 2023 and positive of $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 of $0.6 per diluted share in Q1 compared to $0.55 per diluted share in the same period 2023.
A decrease in cash flow for distribution from the prior year was partially driven by the prepayments on lease from the SFR loan paydown. We paid a regular dividend of $0.5 per share in the first quarter. And the Board has declared a dividend of $0.5 per share payable for the second quarter of 2020 for 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 a $1.5 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 so far. 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 gain for $508.7 million of outstanding principal and received $8.9 million in prepayment penalties for portfolios comprised 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 pieces, 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% SCR notes. The assets collateralizing our investments are allocated geographically as follows 90% taxes, 9%, Florida, 8%, California, and 6%, Georgia, 5% merit on 4%, Washington, 3%, Colorado, with the remainder across states of less than 2.5% exposure to this, reflecting our heavy preference for Sunbelt investments, the collateral on our portfolio was 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 $0.4 per share on the low end at $0.5 per share on the high end cash available for distribution of $0.4 per diluted share at the midpoint with a range of $0.35 per share and low end and $0.45 per share on the high end.
So now I'll turn it over to the team for a detailed discussion.

Paul Richards

Thanks, Brent. For first quarter results demonstrated robust performance across all of our investment sectors, particularly in our CMBS diabetes 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 Sunbelt markets from the beginning of the first quarter through today, the Company has been very active in underwriting and deploy capital. We completed the purchase of two new issue five year fixed with the latest one closing this past Tuesday, Freddie Mac EP.'s opportunities with extremely attractive metrics. Both securitizations have high 55 high 60% LTVs of 1.3 OX. plus DSCR and a diverse geographical footprint with restaurants or shifts. These pieces will pay all at an unlevered fixed rate yield of 9.75% and 9.5%, respectively. With my end, with modest leverage, we expect to generate a mid-teen levered returns on very desirable cloud 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.
That's of our 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 at 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. 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 secular 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.

Matthew 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 and 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 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 shock 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 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 deployed into the $220 million life science loan in Cambridge as well as additional Freddie but Freddie KV. 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, the notes offering to match fund the near term for 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 categories run rate, our cash 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 Quest.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again, if you are called upon to ask your questions and are listening via loudspeaker Imagify, please pick up your handset and ensure that your phone is not done yet. When asking your question again, it is star one to join the queue.
And your first question comes from the line of Stephen Laws from Raymond James.
Please go ahead.

Stephen Laws

Hi, good morning. Matt, you may have mentioned that you are you did misstate kind of towards the end of it at the very end of your comments you wanted to get your outlook, you know, Tad versus dividend. You know, obviously some noise or not noise, but some turnover here in the first half, first half of the year.
With regards to recycling capital into new investments, you still have comfort with the dividend level that cat and EAD. can kind of continue supporting the $0.5 level and what your outlook is as you get this capital redeployed as far as the earnings power of a fully deployed portfolio?

Matthew Mcgraner

Yes, of course, yes, we ended the year against $0.51 of of cash run rate and 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 with detracted from CAT on an annual run rate of about $0.35 on an annual or a little bit more $0.4 on an annual basis. So yes, our job is to redeploy that, that capital here in the second quarter and get us back on that $0.51 run rate and then increase vis a vis the Series B and the new investments to Matt 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 stick with the dividend.

Stephen Laws

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

Matthew Mcgraner

Yes, on really everything we're underwriting and whether whether it's a credit KBPs on with modest leverage is in the mid 10s.
On the construction loan side, originations, we think we can do some mid 10s 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, yes into I wouldn't say necessarily favor securities over the originating and private investment. And yes, I think we can price each each pretty well and have enough opportunities to do both in spades. I don't know, Paul, if you have any other thing that I know is accurate.

Stephen Laws

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

Brian Mitts

Yes, hey, Steve, it's Brian. There's a couple of things that contributed to that from five audit overruns and some legal expenses that legal costs as well as the way the stock compensation gets amortized and we say it and one of the Wood Mac that's leaving some of the forfeitures kind of gets flushed through all wanted. So we think that that returns to normal run rate throughout the rest of the year. And we've increased our accruals on various things where needed. So it should be more and more stable and kind of back to the run rate you've seen before.

Matthew Mcgraner

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

Stephen Laws

Yes, sure.
Absolutely.
Appreciate that, Brian. Thanks for the comments this morning.
Thanks, Sue.

Operator

Our next question comes from the line of Jade Rahmani from KBW.
Please go ahead.

Hi, this is actually Jason Adtron on for Jade. It would be helpful if you could speak to credit trends within your mezzanine pref investments and and generally what you're seeing broadly in the market in terms of multifamily credit trends?

Matthew Mcgraner

Yes, I think in our in our management prep books from the I'd say we have one one loan or one price investment in an asset in Atlanta where the sponsors trying to decide whether they want to defend the asset. Again, we're working with them to try to resolve certain issues in that market, especially given just Atlanta. It was kind of challenging over the second half of last year anyway with some fraud issues and some addiction issues with respect to the courts. But yes, outside of that, everything else, it doesn't doesn't scare us more broadly as I mentioned, the the biggest distress we are seeing some relate to the 2021 and 2022 on bridge loans and CRE, C&I, CRE CLOs and the role of floating floating rate nature?
Yes, those largely have been extended and the lenders are working through and extensions and issues the near term problem that we see developing in some in some submarkets as these deals are becoming zombie deals. So yes, there are cash flow constrained because although the interest rates have more than doubled and the the the operators to the extent that they're still in control the assets, some are don't have any 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 that's somewhat isolated again in the CRE CLO market. More broadly, the agency books are experiencing very little distress in our in our in our case series?
Yes, there's still really good performance and solid performance. So I think it depends on where you look both geographically and then what.
Yes, what's a short wrap where the loans are in. But yes, multifamily is a asset class that you can underwrite and people are underwriting with respect to on the transaction market being so robust. There are shippers looking through the supply because I know it'll 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?
Yes, next six to nine months will be a little bit challenging. But But after that, I think, yes, I think it will be much improved.

Great.
Thank you.
So in terms of capital deployment, investment opportunities that you find compelling on, you talked about the B-piece purchases and in life science. But I guess overall for deployment into on measure pressure or direct loans. Are there any geographic markets that you find more interesting? Just would be helpful to just hear broadly your thoughts.

Matthew Mcgraner

Yes.
I mean, I think where we have a pension depending on the property type for some certain geographical areas. Our bread and butter over the past decade has been Sunbelt smile on residential. So that's where we feel most comfortable at even though there's supply issues over the long term. But these markets lead the lead the country in job growth and household formation and which is interesting because right now it's like it's somewhat on sale, right? The most multifamily residential opportunities in the Sunbelt or you have more the operating performance is weaker in the Sunbelt right now for sure. So that creates a little bit more opportunity. So that's good for our underwriting, but that's where we're most comfortable in life sciences, it depends if you're talking GMP or your OR lab lab up, and we're concentrating our investment there in Cambridge on 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 or.
Yes, most of those opportunities are yes, in Morocco 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 to have a pretty pretty strong secular tailwind behind it. So we're excited about both of those places in the market.

Jade Rahmani

Great. Thank you.
Got it.

Operator

Our next question comes from the line of Chris Brendler from Piper Sandler.
Please go ahead.
Thanks.

Chris Brendler

Good morning.
Appreciate it.
My question. I'm just looking at your asset type exposure on Slide 9. It's shifted materially now 65% multi-family, 22% FSR.s, and 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 what in the near term, could you expect to trend more towards multi-family? And with that prepayment potentially going to bridge multifamily opportunities where you've said 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?

Matthew Mcgraner

Yes, I think to tackle your first question, yes, the pie chart on yes, we I think we're predominately 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 in 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 a B piece and an ABS transaction that looks attractive. We'll we'll take it will take to it. But I think largely the pie chart being being somewhat.
Yes, 80, probably 80%-ish percent.
Residential will continue.
I'm sorry, what was your second part of your question?

Chris Brendler

Do you have some of that kind of the brace Moorebank man and exposure right now either from kind of an organic basis or kind of that gap financing?

Matthew Mcgraner

Yes.
So we have no direct senior bridge loan exposure. The one Atlanta asset that I that I mentioned was was behind the CRE, our CLO bridge loan that you have the debt that would be kind of our.
Yes, one of our one of our loan kind of preferred mezz deals in that space. But again, the beauty of the platform and what I would what I like about the business, it's the extent that we have to take with the takeover and wipe out the common equity and a mez position?
Yes, 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 money making more money than our actual investment over time. What's the market heals up beyond that?

Chris Brendler

Okay. Great.
That's what I just wanted to make sure. And then can you just 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 aggressiveness?

Paul Richards

Paul, I think with the beauty about the Series B preferred raise, that there's this constant run rate of it. Matt mentioned, call it, $20 million $25 million a month, which we're able to and will continue to match fund with that with that 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 out in the future. So I think we'll be able to match some pretty pretty well throughout the remainder of the year with the Series B preferred.

Chris Brendler

Great.
Thank you.
I appreciate you all taking the question.
Thanks, Chris.

Operator

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

Brian Mitts

Appreciate nothing further from us. Appreciate everyone's time. Talk to you, and that's all.
Thank you.

Operator

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