Q1 2020 Earnings Call
[music].
Welcome to Nexplanar real estate Finance first quarter 2020 conference call.
Today's call is being recorded.
This time it it's my pleasure to turn the conference over to Miss Jackie Graham Investor Relations Ma'am. Please begin.
Thank you good day, everyone and welcome to like real estate finances conference call to review the company's results for the first quarter ended March 31st on the cost. They are Brian Smith Executive Vice President and Chief Financial Officer, Matt Mcgrane, Our executive Vice President and Chief investment Officer, and not get senior Vice President investment and happen.
As a reminder, this call is being webcast to the company's website at Www Dot next like finance dotcom.
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, better based on management's current expectations assumptions and beliefs.
Forward looking statements can often be identified by words, such as expects anticipates intend and similar expressions expressions and variation or negative somebody's where it.
These forward looking statements include but are not limited to statements regarding the company's business and industry in general and guidance for financial results for the second quarter of 2020.
They are not guarantees of future 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 Companys registration statement on form S 11, and the company other filings with the FTC. Some more complete discussion of risks and other factors that could affect the forward looking statements.
Except as required by law and RASK does not undertake any obligation to publicly update or revise any forward looking statements.
This conference call also included an analysis core earnings which isn't.
Non-GAAP financial measure.
This non-GAAP measure should be used and supplement cheese and not a substitute for net income was in accordance with gap.
For a more complete discussion of core earnings see the company presentation that was filed earlier today I would now like to turn the call over to Brian. Please go ahead right. Thank you Jackie.
On a welcome everyone to her inaugural and our rough next weren't real estate Finance quarterly earnings conference call today will cover the highlights from the first quarter 2020, which I'm getting at our IPO is.
February 11, that'll be I'm sort of a brief part.
Oh, so given sort of the unprecedented events, we seen with the cobot situation and how that's impacted everyone. We'll spend a fair amount of time on on Q2 and.
What's happened post coated.
I M, Brian Mitch Chief Financial Officer, Im joined by Mountain Graner, Who's our Chief investment officer, as well as Mac and cheese or senior VP in charge of investments in asset management.
I'm going against some quick highlights of our financial performance and capitalization.
Would you take or considerable strength for this company certainly as compared to other mortgage region debt funds now I'll turn the call over matter greener and that gets to discuss the portfolio or strategy and some the opportunities we see a [noise].
As mentioned, we IPO the company on February 11th.
<unk> 19 per share.
And began trading on the New York stock exchange rate total gross proceeds of 100.7 million.
And after offering cost me use the proceeds to pay down debt.
So I think once we launch.
In a month, we were in the cobot situation and I think during that period that pretty much.
Decimated the mortgage riet industry for month, we did fairly well we had no margin calls no liquidity issues no credit problems I think today, we're positioned to take advantage of whatever unfolds and Matt Maddox go into more detail around that let me talk about our.
Capitalization.
As of March 31st we had a desk to book value ratio of 2.49 times.
Our debt as of March 31 consisted of the 788 million dollar credit facility, we have Freddie Mac.
That's clot realized by the nine or 33 million single family rental mortgage portfolio.
And that is matched in structured duration to the underlying portfolio has both pay fixed rates and each of an average remaining term of 8.1 years. So that gives us long term visibility instability.
And to the bulk of our portfolio as of March 31st the rate on the facility is fixed at a weighted average of 2.44% against the yield on the underlying assets of a weighted average at 4.91% or.
Locked in 247 basis points spread over the cost of does.
On April 23rd we entered into a $60 million repurchase agreements Mizuho, which was collateralized by our case 62, K. 70, Freddie Mac the pieces, which we contributed.
Hi, PEO, we immediately utilized 49.8 million of that to purchase the K one to 740 bps, which back guests will go into its more detailed during his remarks.
As of April Thirtyth repo balance.
Represents a 31% advance rate on fair value of our CMBS portfolio.
Which bears interest at 2.75% over the one month LIBOR enrolls monthly.
Including the repo.
As of today, only 5.9% of our financing is subject to mark to market.
And the word a very low levered, 31% advance rate. So that provides ample cushion for any mark to market movements, we may see in the future and still be able to avoid the margin calls.
Hit a lot of other companies.
Let me go to the financial performance for the first quarter, which keep in mind was about half of a quarter. So these are about half the numbers that we we expect going forward, but we reported net loss of 6.4 billion or $1.22 cents per diluted share that was driven primarily by it.
Interest income of 3.2 million or 18 cents per share.
Unrealized mark to market loss in the CMBS B pieces is 24.9 million or one point 41 cents per share the mask Mad Catz and provides a more color on PPG pricing in his commentary.
We recorded a loan loss provisions here in 12000, or one penny per share purchase it shows the credit quality of the underlying portfolio. We reported core earnings of 1.2 million or 28 cents per share.
We ended the quarter with a book value of 83 million were $17.72 per share.
Which was a decrease of $1.44 cents per share from our post IPO book value or some 0.5% decrease and again it was driven primarily by the 24.9 million dollar mark to market unrealized loss.
During the quarter after the cobot situation hit we repurchased 87466 shares of our stock at an average price at $15.30 per share.
But you think was a good good bargain at the time, we paid a pro rated dividend of 21.98 cents per share for the first quarter.
And as maybe the if we had cash on hand to 4.3 million near term a our collections of 2.1 million and repo capacity and the current facility of 11.1 million.
Which equates.
The under that repo, if we went up to the full amount would be the roughly 33%.
Total advance rate. So we have about 17 half million of near term liquidity that we can access.
Sunday The board declared a dividend of 40 cents per share for the second quarter payable on June thirtyth to shareholders of record as of June 15th.
And then for the second quarter, we are estimating core earnings of 38 cents to 42 cents per share and cash available for distribution to 40 cents to 44 cents per share.
So with that I'll turn it over to member Greener talked about our strategy portfolio. Thanks, Brian before turning the call over to my gets discussed the business I'd like to highlight a few the.
Reinforce some important characteristics that we believe differentiate in Rev and ours relevant now if not more than when we went public just a couple of months ago.
First we heard a differentiated purpose built portfolio of investment is concentrated in the most resilient property types multifamily single family rental and self storage and good times in a bad proven throughout prior downturns. These property types of exhibited resiliency and typically become liquid and recover earlier in cycles.
Our underlying collateral consists of stabilized properties with 93% average occupancy in place cash flows and a locked in earnings stream of over 7.5 plus years of duration.
Consider for a moment that economic occupancy would need to fall to that 70% on average before the underlying borrowers could not covered debt service contrast, this with the peer group owns or as originated loans on undergoing transitional business plans or redevelopment or worse buildings that are closed hotels or retail centers for example, and therefore.
We have relatively more conviction and the underlying cash flows to sustain book value and provide consistent distributions to investors.
Our three property types or sectors in which we have deep operating expertise as owners and owners and investors as well multifamily was index, our t., obviously, SFR with Monro codes and self storage to our publicly traded partnership with Jernigan capital.
We also believe the underlying credit portfolio is attractive, particularly 60 cents on the dollar book value.
Call that over 95% of our portfolio consists of investments.
In loads in the affordable housing sector, both single family in multifamily.
Robin in discussing retail office or hospitality loans again of which we have zero exposure. Our recent conversations with investors center around whether there is more or less demand the collection activity and stabilize class a or class b multifamily.
And our view in this view shared by the National multi housing council and the demand for affordable housing postcode will be greater than ever in particular, we believed demand for lower density housing mainly garden style apartments and single family rental were outperform in our view for the foreseeable future.
Single family rental may even be more resilient the multi our single family operating vertical and partner Viber codes. For example, quite good almost all their in April nearly 98%.
What's more impressed and perhaps telling us that they renewed 91% of the residents with leases expiring in April or positive leasing spreads one month of data for sure, but we believe the their operating performance exhibits the demand for affordable single family rental housing.
Recall, 75% of interest portfolio is comprised of single family rental properties with high quality sponsors just like volume growth and we're seeing the same trends.
Our self storage exposures through our partnership with publicly traded Jacob senior in the capital stack the common equity and represents about 30% to 40% LTV look through to the underlying storage portfolio, which we believe is the highest quality self storage collateral in the United States.
Another point I'd like to briefly touch on as our geographical exposure.
70% of the portfolio is concentrated in states that are reopening or have already reopened, including Texas, Arizona, Georgia and Florida.
Not only that helpful to have local economies actually open to generate underlying rents. These geographies tend to be more per business friendly and impose less restrictions on landlords ability to collect rent and enforce the underlying leases.
But it's putting aside for a moment the gateway custom coastal markets are likely to reopen later in a slower slower pace, who knows when these state and local governments will begin to actually enforce evictions and lift foreclosure or Torrance.
For example, la in New York in San Francisco placed moratorium on evictions with no announced in date in Massachusetts. Another example, theres a moratorium on all evictions until the earlier of August 18, 2020, or 45 days from the date the governor lift the state of emergency.
And our view these factors provide additional qualitative support to our to our positive view on our underlying credit portfolio, especially on a relative basis compared to gateway in coastal markets.
Now I'd like to turn the call over to my guess is Skus our operating performance.
Thanks, Matt as Matt just discuss our diverse geographic exposure.
Is mainly located in the southeast and southwest United States, We have 1.1 billion and current principal.
Investment outstanding 75% of our portfolio as senior loans.
20% is roughly CMBS.
Three and half percentage preferred stock, which.
As BJ cap series, a preferred 1.6 preferred equity in 0.3 as mezzanine debt.
Historically speaking multifamily.
Securitizations and that Freddie Mac bps, or K series transactions have had losses.
Annual defaults and for each 1% of loans outstanding only three times since 1994 since 2009 through February 2020, there been only 18.8 million in.
And losses on roughly 360 billion of issuances single family rental although it's a relatively new asset class that was really institutionalized in the wake of the global financial crisis.
We think it's going to exhibit the same resiliency attend to multifamily specifically class b.
The current portfolios capitalized secured credit facility with Freddie Mac that Brian mentioned as match and about duration infrastructure of underlying loans and has eight 8.1 years of average when you turn to maturity and locked and spread of 250 basis points.
In total our portfolio has 10.7 years.
Average remaining term, 99.7% stabilized, 64.5% weighted average loan to value and a 1.78 debt service coverage ratio.
We closed.
Freddie Mac bps on April 23rd.
Fixed rate deal K, one a seven.
It has a weighted average coupon.
With the BTT balance being 82 million again, it's that lot of 7.5% of stack.
The weighted average coupon is three and half percent.
But since you are buying it at a purchasing it I'd discount the current yield on equity is 6.1%.
The underlying close 1.1 billion and outstanding mortgages with a weighted average interest rate of 3.6%.
Amortizing debt service coverage ratios 1.733 times.
Average loan to value is 64% on their 50 properties and that pool.
[noise] diving into the portfolio, our current investments that we arms.
You know at IPO plus came when our seven we had 122 loans across the three Freddie Mac the pieces zones.
On par value of approximately 181 million.
For the B piece.
This portion of it Weve received to date year forbearance requests.
In the portfolio, we have no loans that are currently with the special servicer. We have few loans that are on the watch list for minor deferred maintenance issues. One line that's consistently on the watchlist due to timing of payment and the special servicer. So they always end up paying a daily which triggers and being.
Added to the watch list.
But thats been going on since alone was issued in early 2019.
And another one being is on the walks less for occupancy being below a threshold of 80%.
Underwritten occupancy at the time of.
Issuance was 70%, which was market for the specific asset at the time. So it automatically on the walks us so we feel pretty comfortable at the CMBS portfolio.
Like I said, the CMBS portfolios about 65% LTV and has a debt service coverage ratios.
Including interest on at around 2.75 times.
Our single family rental portfolio.
Has 9780 homes.
Across that portfolio. We have received here forbearance request to date the portfolio has an extremely healthy debt service coverage ratio and we believe is relatively low levered leverage or LTV.
So 70% again, the remaining term on those loans has over eight years.
Which we have matched financing for.
Moving onto the preferred equity and mezzanine Buck.
The weighted average LTV is roughly 75% debt service coverage ratio is healthy 1.6 times.
We have received one forbearance request.
Small.
Small deal and the preferred equity portfolio.
We believe that they were being proactive.
And reaching out asking for forbearance.
Or the preferred and the first mortgage loan had almost two x. coverage.
And it is sub 60% LTV.
[music].
They are current on their payments and.
We are waiting for Fannie Mae to respond to their forbearance.
At this time, we don't believe dates that actually need to forbearance.
But they like I said kind of were being proactive early in the game.
And requesting it just as a precaution.
Occupancy yet again more on that asset occupancy dipped.
About 230 basis points over the last two months.
It is still on the within the range of or the average for.
The last few years that that they have owned the property.
And it.
Yes.
Diodes ships that we purchased on April 15th.
The current yield of around 12%, which is about 800 basis points spread.
[music].
That's our coverage ratios above 107, 10 plus years of.
Weighted average term left all loans, our current with one small loan on the watch list for hail damage as mcgrane or mentioned the preferred stock investment in Jernigan capital, which is a publicly traded self storage mortgage riet or hybrid agree.
Some storage has historically outperformed during economic downturns.
And the series B preferred which is publicly traded is currently trading at a 7.9% yield.
Whereas our series a is Perry.
The capital stack with them is between 20% to 40% of the capital stack.
And there is almost two times the yield.
So with that ill turn it back over to Brian for closing remarks, yeah. Thanks Bye.
I think will at this time turn it over to any questions.
Right, Yes, Sir.
At this time, if you would like to ask a question you may do so by pressing star one on your telephone keypad.
Questions will be taken in the order in which the RBC.
Again that is job one to ask a question.
Our first question comes from Alex can protect with Baird wealth management.
Good morning, everyone hopefully well.
Is on a 40% advance rate you guys have taken out on the Phebe CMBS B piece portfolio a good gauge for how far you guys plan to take that in the current environment just any insight on how you guys decision. How do you guys move into the coming months that would be helpful.
Yeah, it's not a great I think I think thats right Theres, though.
There's no need to really pushed.
At this point and then Furthermore, it's just not available most most rebuffed facilities now or.
Utilizing 50% to 65% haircuts.
Yes, I'd say also if you look at the CMBS portfolio overall in where we estimate the marks are right now we think it's more kind of what a 31% advance rate.
But yes, it to reiterate what Matt said repo financing can be.
You can cut both ways, we're going to be very cautious with it but.
Given that the assets that we bought with it.
It was priced post coded we think it made sense and we have tons of room and cushion. If it's marks move downward to still be covered it not hit any margin calls and additionally, that's the 40% advanced rate is only on the collateral that was flattish. So we started a significant amount.
One of collateral that we havent pledged which way.
Drop that number and to the mid Twentys.
Alright. Thank you again, that's star one to ask the question.
Next we have Stephen laws with Raymond James.
Hi, good morning.
I guess first guys. Congratulations on your first quarter as a public company and it would slow and interesting three months that you guys decided to make that you're debut.
You know to I guess to start.
Interesting opportunities are out there as you guys have very strong balance sheet relative to peers.
Demonstrated that with the two recent investments.
One of the mezzanine or are structured financing side. It seems like this environment would create a lot of interesting opportunities.
Historically.
You have been great at sourcing those and generating attractive returns across your different vehicles. So can you talk about your appetite for toward investments like that that wouldn't require to use of leverage.
And your willingness to do something like that or is it still too early to consider those type of vessels.
Yeah, Hey, Steve it's not a greater there are.
There are special situation opportunities that are beginning to appear.
As recently is.
The one announced with Coke in latter.
There are several others that are on ongoing in various property types.
It's a little too early for our.
Our bread and butter multifamily single family rental.
And self storage because as we.
Thomas payment on all those credit credits or are holding up better in this environment, we absolutely have Africa appetite for it when it becomes we're under the intent on a number of opportunities.
These into the.
Become transactional.
One thing one thing we'd like to just pointed out is that we know capital is out there thats non dilutive, whether the JV or some sort of GP opportunity.
To to invest that we would look at with current current partners and other aspects are current investors another fund vertical oil.
Oil or new ones.
We actually looked at.
Potentially utilizing a partner for K one of the seven.
But felt that we given where the yield transacted that it would be.
It would enhance book value at a stabilized environment and benefit the the company.
Take down ourselves so.
Sort of long winded answer, but hopefully that provide some color.
That's great color, Matt I appreciate that.
Picking on the two primary asset classes.
Through through this and other vehicles you your big investors in both multifamily in single family rental can you talk about the dynamics. There are you seeing a ship is the social distancing and cobot world going to push of marginal.
Person to two single family for more space or you're not really seeing that and thats just more of a theory thats not playing out any any color from the macro site will now be great.
Yes.
I think there's two to two important points in first as geographical which I.
It on and my.
Prepared remarks, I, just reject the notion outright.
Coastal.
Yes gateway cities World that are denser.
We'll and normally colder climates will.
Outperform going forward I, just don't see that.
Especially in high Tech states, so that means that you'll you'll still have I think the net migration that afford as there is as the texas' where.
Yes, Theres theres more need for affordable housing. So I think I do think that the garden style apartments, or we think that the garden style apartments I will continue to exhibit resiliency in the global financial crisis.
Class, a and class C took the.
The pain first if you will.
I think 5% to 7% revenue declines in each of the.
Of course agency.
These were be garden was more zero to 3% and held up held up better over the over the near and intermediate term as you had a trade down effect.
From from class a cohort renters, and then see to took pain, obviously with more hourly wage earners. So I think that you'll see some weakness there.
If you if you haven't new lease up deal in multifamily year.
You're not happy.
New leases or are tough the combined when there is no one.
In the leasing office the field.
Yes feel new leases, so you'll see some pressure and I think you have seen some pressure.
As recently as yesterday's earnings release from each you are.
My Hunch is probably gets worse in the near term over over new leases and so it's good to have a stabilized garden.
Multifamily property type as your underlying collateral the single family rental.
[noise] asset classes is really impressed me personally over the last.
Couple of years, and then even more so for the cell Turner I think that that's going to be.
Winner.
And even more resilient potentially than than multifamily as folks just walk around house they want their own yard.
And and they want an affordable.
Price point so.
We're very happy that 95 on a relative basis altogether with happy right now, but on a relative basis, we feel pretty good about the about our exposure being 95% buses to property sites.
Hey, Steve that a little bit certainly on the single family rental side and that I think.
This thing has unfolded so quickly we're not even two months into it feels like a decade, but it's it's only been two months and I think what we've seen is retention has gone way up across multi and single family. So some of these trends that I think may develop in the future. It's just too early.
I think for our from our view Youre going to see things that have been developing since the great financial crisis, it's kind of accelerate once.
We kind of get to the early stages of this.
Got it will definitely benefit just the workforce housing sector, whether its multi or single family.
I think single family in particular.
It could be a big winner here and creates a lot of opportunities that property type is still very much not institutionally owned.
And there's a lot of upside out there.
For example, our.
Our single family rental company is seen Retentions hit the high Eightys.
So is up from about mid Seventys typically so.
In may they they've seen.
Their collections through yesterday.
Eighties versus typically kind of 75% to this this time period.
Historically in that's given the fact that.
Dave like most people can't.
Process evictions or even charge late fees.
So to be able to collect that kind of money is in the first five days may which I think everybody thought would be the big bellwether of where things are going to speaks a lot about the SFR space.
That's great color and comments I appreciate the detail.
Brian to to shift to the Q2 guidance you.
In rats unique in providing that most.
Think of any other peers that are doing that now but.
What are the underlying assumptions in that that we need to consider is a built is built on any additional investments other than the two that are disclosed or is that largely built around the in place portfolio and then some adjustments to the factors for that.
I'll, let that magic the second part of the question, let's say in the first part.
Because of the structure of our portfolio.
We have a lot of visibility into because of our operating platforms.
I think we have more near term visibility overall that gives us more confidence to be able to issue.
Guidance and typically if your lender you're going to hit our report.
30 days 25 days after month end in data on trickles in over time for us given that we have multifamily and single family and storage portfolio as we kind of see operationally what's happened on the ground whats going on with rent collections et cetera, So I think that.
Gives us a lot more confidence and maps of the several times our geography also.
We're just in better.
Areas from a business friendly perspective, and I think just.
Affordability as well.
So Matt on together on stuck with us.
The other deals within the guidance yet.
Steve Bat Mcgregor.
The guidance for primarily just assumes came on a seven which we just closed as additional investment and.
In the next three there's not a ton of new investments in there.
As we think you might actually transact in the second quarter, so either there theres some pretty healthy cushion I think.
Great.
I will stop I'll follow up there, but I do want to thank you for the detailed does supplement thats been very helpful. Updating our model appreciate the work that went into that.
Yes. Thanks appreciate it.
Thank you. Our next question comes from Jade Rahmani with KBW.
Thanks, very much good to hear from you and I hope, you're all doing well and and get help wanting to ask if you could comment on what the Mark on B pieces is so far this quarter, if there's been any value recovery and perhaps could you give.
Actually a range around pro forma book value.
Yes, it's about Mcgregor there.
They have stabilized in terms of in terms of the new ones or at least the guidance that we think we have from Freddie Mac that there.
Sort of.
Okay.
It was 82 or Ks 72.
What was 82 and now it's 87.
Ish, so picking up a few retracement there so that's.
In again stabilize market, we think that they want to seven which we just bought.
You know is probably unicorn paper in the sense that number one is the fixed rate deal that has a current pay aspect to it and number two.
[noise] likely a 150 200 basis points, while prior prior bps, which was the or coupon and Jay doesn't know from following some of the Servicers.
Like Walker and Dunlop.
A lot of the fear that was out in the market people now paying ramp.
As of today hasn't been a country airplane, the multifamily or single family rental space.
So a lot of the 331 marks were driven by.
For sellers.
Paper, who are using repo.
Financing the ticket.
80%.
Margin on on their positions.
So obviously, we are affected by that but.
Like we said in our remarks, we haven't seen forbearance request in our portfolios.
And across the universe and speaking with other.
Company executives, they havent as well.
In access across the Midland surfacing key servicing to offer Dunlop CVRD Jim So.
So I just wanted to add a little bit more color.
Is there a percentage of the dollar 41 unrealized loss on a per share basis that.
You know has been recovered and thus far maybe a quarter of that or what's a reasonable.
Estimates.
I think thats a reasonable estimate.
Okay.
There's been a quarter.
Excuse me.
That ends in a quarter.
Yes.
Sorry.
Okay.
How should we think about the risk of additional or the risk of margin calls Havent had there been any margin calls since the IPO and how should we think about the risk of additional modern calls and most importantly, the liquidity that's available to handle that.
Yes, So we've had no margin calls in the portfolio no for sales.
And through April 23rd we had.
Debt that had no margin call feature there is no mark to market feature.
Now or just under 6%, but with the advance rates that we have it's just very low we use that to price a new deal post of it. So yes, it's already at lower prices that we've kind of seen in the marketplace.
We're not saying that there may not be a downward move is yet another shoe drops, but we have plenty of cushion don't doesnt vision any mark to market movements that with for some margin call or any kind of sales on our end.
And what on the balance sheet would be.
The tool to meet any margin call.
And that access undrawn borrowing capacity.
That.
That and the addition of adding further CMBS Freddie Freddie K collateral to the to the.
The collateral package, but the lender.
Yes. So we note one we now that our filing earned in the stuff that we have a 40% advance rate.
That got us the $49 million of refinancing and that is assuming we falling posted a portion of the collateral. So we have quite a bit of collateral that we have not posted yet.
So we could repos that drawn down on it to me to margin call.
And can you say, how much that excess collateral list.
I believe is 50 69.
Okay.
Thank you.
Thanks.
Alright and speakers at this time there are no more questions in the Q.
Great. Thank you everyone.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect. Thank you for your participation. Please enjoy the rest of your debt.
[noise] [noise] [noise].
[music].
[noise] [noise].
[music].