Q3 2020 Nexpoint Real Estate Finance Inc Earnings Call

Lastly, we want to briefly touch on a read on the recent news of front yard residential entering into a definitive merger agreement with various in premium and how that could possibly affect the company's large slowed in the SFR loan pool management does not believe that to be a negative of that at all but rather a credit positive for the company given the buyers extensive experience in large.

Footprint in the real estate sector, we do not believe the loan will be repaid it given the approximate $160 million of the seasons or roughly 30% of the loans unpaid principal balance associated with the underlying terms the debt to finalize our prepared remarks before we turn it over for questions I'd like to turn it over to Mamet greater.

Thanks, Bob I don't have much other than to say that team has continued to execute and do a great job sourcing attractive credit investments in our core affordable residential and self storage property types.

We are pleased and excited to be speaking to you today about generating attractive risk adjusted yields and set of expected credit losses or reserves or exposure to large single assets in gateway markets. We're also excited about welcoming the jernigan capital team to the next point family here in Q4, and expenses and expect their network and expertise to generate attractive credit investor.

That one there in revenue benefit.

To that end our various verticals here in next point continue to inform and frankly validate our investment thesis the credit investments in affordable housing and self storage will continue to outperform and remain resilient throughout all credit cycles, including especially during these difficult times.

So we have for prepared remarks, and I would like to turn the call over to the operator for questions.

Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again, Please press star one to ask a question.

We'll pause for just a moment to allow everyone the opportunity to signal for questions.

Our first question will come from Stephen <unk> with Raymond James.

Hi, good morning.

Hey, first off congrats on a nice quarter and.

Impressive guide it looks like the new investment certainly accretive to two existing returns and.

Okay, along those lines can you talk about.

Surely you did the roughly 100 million of Mezz investing with what the seller financing in place. There can you talk about what's your remaining investment pipeline looks like and kind of what you target from a leverage standpoint.

As you look at new investments from today forward.

Hey, Steve Stephens matter Greener, yes, we.

We think we're going to get kind of two or three b pieces in the coming years 2021 from from Freddie Mac, and so thats going to be.

Source of source.

Sourcing investment opportunities and expect.

A little bit a tightening there, but still very attractive and especially if we can match with the term loan.

Or or.

Series, a preferred so something like a perpetual that we did earlier. So that's I think that's going to be the primary focus and.

For two minutes on financing, but I think we're going to continue to stay the same ratio or try to stay the same leverage ratio.

Yes, I think thats right and.

Obviously, we're trying to do here is that our stock price in line with our book value and look to issue equity at some point down the road, but I think in the interim we found some ways to raise capital and obviously deployed accretively. So we.

We.

As part of our core capital we've been raising there's a number of covenants that we have to be aware of nowhere near him now so we saw plenty room.

We would largely I think keep our leverage is the current level and where we telegraphed during the IPO roadshow and since then.

Great and when I think about the the guidance.

No the.

The duration stability of your portfolio is unique among the the sector and really gives you better visibility than a lot of peers.

Are there one time items involved in this kind of 51 cents midpoint for Q4, and even with that said it.

Is there room just from the current portfolio given that it's going to be higher ups in Q1, because we didnt have the met the new beds investments in the quarter for the first 20 days of Q4.

Yes. So there are no one time items in that 51 cents Steven the.

As far as the investment we closed the Mezz investment pretty early in the quarter. So there will be a little bit of additional pickup in the first quarter, but not a ton.

We are looking at some other things to do the.

The single family rental space is pretty hot as is the financing.

Side of that so we're looking for things to do there.

But yes aside from that I think the the 51 cents without issuing any kind of formal 2021 guidance is a pretty pretty solid number.

Great and lastly, and ill hop back in the queue to give sort of a chance, but when we think about the dividend based on that guidance clearly when we start to look at next year.

You're at the current dividend level below the distribution requirements.

How do you how do you think about.

Increasing the dividend in Q1.

Versus maybe you know underpaying the dividend short term in order to buyback stock I know you're somewhat limited given the liquidity and you you have been able to buyback roughly a quarter million shares but.

How do you how do you think about what the best way to return shareholders return capital to shareholders is between the an increased dividend versus stock repurchase.

Yes, I think starting on the dividend policy when we.

First kind of talk to the board about this and then as we were on the road for the IPO in kind of sense in our different public disclosures. The idea was to do what we've done obviously, it's a little bit different through code than what we originally planned but ultimately to it.

Yes capital and lever the balance sheet and then in 2021 look at the dividend and start to.

Yes, readjust to where we are I think we're kind of looking at because of the reach status, 95% of our core earnings.

As a payout.

We do have some taking the portfolio is just be aware of that but.

I think we're in good shape and we're going to.

Talk to the board in the next quarter about 2021.

Go for but I think we're in good shape to obviously.

Look at that in.

Potentially increase or just given where core earnings is gone.

Where we're currently paying out a 40 cents.

I think thats the the idea on the dividend.

Sorry was there another part of the question Didnt end, just stock repurchase and somewhat limited with liquidity, but talks around that.

Yes, so the stock repurchase obviously, we've done this before and other.

Format, but if we could buy our stock at a 20% discount will take thats a great investment.

The the problem is just the liquidity in the stock itself and the limits that we have to adhere to keep.

Keeps us from buying more.

But thats fine I think we're adding a lot of value of buying it at 20%.

And it's not a ton of capital. So I don't think were really pushing up against any of our liquidity constraints for covenants.

Great well again, congratulations on a great quarter and at attractive new investments and look forward to speak with you soon.

Thanks.

Thank you. Our next question comes from Amanda let's start with Baird.

Thanks, Good morning, guys.

Following up on your capacity and apologies if I missed this in your prepared remarks, but do you have an update on kind of the most likely outcome for that Jay cap preferred investment and then if it is redeemed where are the most likely you said that proceeds you think youd earmarked that for additional self storage investment or is that something that you put into the BP in the sense that you're talking about.

Yes, thank them and mamet grain or so.

The most likely outcome in our view is that that.

That will be.

We have taken out probably at some point in 2000 2021, there is a tremendous amount of capital.

Seeking self storage investments evidenced most recently.

Days go by keep Smarts Green.

We have four cap purchase of sorts of locks and then and then the Blackstone acquisition from from Brookfield about platform. So you're seeing you're seeing a lot of capital into space and I think we'll be half will have a thoughtful approach to monetizing. This this investment this accretive.

For for our shareholders and in return.

I mentioned that we're adding the team here in Q4.

They have a wealth of knowledge and great network to generate opportunities and I think you could see EPS.

Utilize that network in the first half of <unk>.

Up next year.

Generating.

Senior loans that we could then package and syndicate and pull the bps and so I think that you have 40 plus million dollars.

Stay in self storage ideally and.

The.

Hub of our own kind of EPS in the storage sector.

Yeah, Amanda it's Brian just.

No one thing that the guidance that we issued a 51 cents at the midpoint assumes that the J caf investments converted from.

The current preferred into common and so we've stripped out any earnings from that so to extent that we can solve that and then redeploy that capital that that will be accretive to that 51 cents.

Okay. That's helpful. I'm, certainly seems like an interesting opportunity and then on the Mezz portfolio purchase how did you guys just get comfortable with some of the geographic exposure those assets would that be fleet outside of your traditional sunbelt targets and then going forward do you think you'll expand the geography that you are willing to invest.

On the Mezz and preferred side or is this kind of a one off opportunity that you saw.

So taking actually I'll answer doesn't reverse order I think we will continue to find those opportunities. This was just an opportunity to purchase.

Portfolios Mezz loans. These are actually all originated by Freddie Mac.

As part of a program, where they would give borrowers.

Additional financing if today.

Signed an agreement to not raise rent on a portion of the property above CP VI.

From a number of the units above CPI.

For a certain amount of years just to kind of further their mandate on affordable housing.

So then to answer your first question on how do we get comfortable.

Yeah, we looked at the markets that we typically arent and and got pretty comfortable just because of the.

Hi, guys service coverage ratios, even through kind of it.

So currently Delaware.

Coverage ratio is 1.4 times, Florida is 1.24 times, we have it.

Large geographical presence there with us in X. RT and in SFR portfolio.

Georgia is 1.3 times higher which our property management company.

BH management is actually based in des Moines and.

And now on properties surrounding the property that we just invested in its 1.3 times, Illinois, 1.3 Times, Maryland, 1.5 Times, New Jersey 1.4 times.

The two lowest far Nevada and Pennsylvania.

Nevada tick down on 630.

Of this year to over 1.2 times and Pennsylvania.

1.16 times.

Sylvania I believe is the smallest.

In Nevada, obviously has its issues coming out of it and reopening.

But we have a large geographical presence there within next our tea and see that market rebounding. So we're pretty comfortable looking at our portfolio.

Our equity portfolio.

When underwriting that one and then Texas is obviously extremely strong at over 1.6 times coverage and then.

Washington, which is just outside of.

Seattle was 1.5 times I'd add to that the Maryland exposures.

Well heeled sponsor repeat Freddie buyer and then.

Just being able to match the financing through through Freddie Mac, and then providing seller financing that is sort of a unicorn paper again.

All those things together, coupled with what maggots, just said I think made it worth it worth the investment.

Yes, it makes sense. Thanks for all that data that's it for me.

Thank you. Our next question comes from Jade Rahmani with KBW.

Yes, thank you very much.

Separately, how do you think about putting leverage on the on the subordinate position it's in the mortgage REIT space.

Total mortgage rates in particular, we don't often see companies, putting leverage on mezzanine or bps position. So maybe.

Maybe you could give us some insight into that.

Yes AJ it's.

It's more of a greater I think I think the reason you probably don't see it as often is because they're not generating.

Investments in stabilized multifamily rather they are doing transitional loans on redevelopment properties that just can't there's there's no cash flow.

Here the duration of the cash flows with the investment property types or so durable that you.

You can run a little hotter and and I think the nature of the program the credit quality in the liquidity of the of the.

Particularly the B pieces.

I think we're comfortable with that leverage.

As I mentioned our yeah.

Yes long experience in credit investing so.

But primarily there or what's your ability to have a stabilized cash flows and multifamily properties that have been.

90, 90, 390, 495% occupied for decades.

Decades.

Thank you with the recent improvement in the securitization market and some securitizations in a single family rental market at very attractive levels do you still believe that the front yard loan is unlikely to repay.

Okay.

Hey, Jay its Paul Yes, when we did the calculation and as discussed in the remarks, it was roughly $160 million of the defeasance penalty and even looking at a sub 2% type recent refinancing of that loan even interest savings would take roughly 11 years plus to recoup the deeds in specialty so we're pretty comfortable with.

Yeah.

The fact that we don't believe that the loan will be repaid.

And perhaps portion of that $160 million, the fame BP them to pay something and.

I believe $55 million range is that correct.

Yes, Thats approximately right. We would we would receive a portion of that 160. The exact number on top of my head I can't remember.

Okay and be a massive Andy amassed book value gain those guys. I think is the point to to your point.

The a.

Jay Cat refinance be a book value gain.

Yes, I think the yet is the tip to take out of the conversion on the on the preferred is at 105 so.

So there will be a slight book value gain there.

Okay.

Violence or what do you think.

Right five points okay.

Yeah, I mean, I think its a.

Yes, it's good that you've created optionality in these investments to generate gains.

Book value would you be accretive for shareholders.

Lastly, just what is the current capital availability in terms of new investment capacity.

Well our repo line is under 50% right now I think we can go up to 65, we'd like to keep it lower than that and.

As as values recover that increases our potential.

And then the note offering we just did we can reopen that at any time.

Saying the same sort of goes for the preferred that we did in July so we have.

Certain amount of capacity that we can we can tap on that obviously, it's dependent on the markets, but it both the unsecured note and the.

Preferred equity were able to.

We were able to pull in some institutions that werent previously invested and I think there is some.

Good opportunities to expand on those and then as we mentioned earlier, we have cash and balance sheet.

Right now that we can we can tap approximately 15 million.

So I think we have a lot of avenues to get there even with the stock trading below book value.

Thanks very much.

They should.

At this time I am showing no questions in the queue I'll now turn the call back over for closing remarks.

Okay.

Yes, I think.

That does it for us appreciate everyone's participation.

Look forward to speaking next quarter.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

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