Q1 2021 Nexpoint Real Estate Finance Inc Earnings Call

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Good day and welcome to the next point of real estate Finance first quarter Conference call. Today's conference is being recorded at this time I would like to turn the conference over to you Jackie Graham Director of Investor Relations. Please go ahead.

Thank you good day, everyone and welcome to the excellent real estate Finance. This conference call to review of the company's results for the first quarter ended March 31st on the call today are Brian Mitts Executive Vice President and Chief Financial Officer, Martin The Greener Executive Vice President and Chief Investment Officer, Matt <unk> Senior Vice President of investments and assets managed.

And Paul Butcher, Vice president of originations and in person.

As a reminder of this call is being webcast of the company's what day it Andrew.

<unk> dot net dot 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.

The litigation Reform Act of 1995 that are based on the management's current expectations assumptions and the.

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 Companys other filings with the SEC for a more complete discussion of risks and other factors that kind of ex one of my personal statement.

Except as required by law and Ras does not undertake any obligation to publicly update or revise any forward looking statements. This conference call. Also contains an analysis of non-GAAP financial measure sort of 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.

Bryan. Please go ahead Brian.

Jackie welcome to everyone joining us today.

Dave will cover the first quarter of 2021, four and Ross I'll begin with an overview of the quarter discuss our results and guidance and then turn it over to Mac guests and Paul Richard to discuss the portfolio pipeline and general market conditions.

Then we'll wrap up our prepared commentary with a close the comments from mountain the greener Borgwarner the Q&A.

So starting with an overview of the quarter was a pretty quiet quarter, we originated one low Zach.

The two two separate loans the same deal.

Mezzanine loans on the multifamily redevelopment property for approximately 26 million.

For the IRR in the mid teens.

Net income was $1 26.

Per diluted share from Q1 compared to net income of $1 32 per diluted share for Q4 core earnings were <unk> 53 per diluted share.

Quarters compared to <unk> 55 per diluted share.

The prior quarter book value per share increased four 4% quarter over quarter to $20 33.

We ended the quarter with 63 investments totaling approximately 1.4 dollars 7 billion subsequent to quarter end, we added another investment of $76 million of Bp's.

Frame out the piece from the six 8% Unlevered, IRR, which I guess Paul cover the <unk>.

Detailed in their commentary.

As of March 31st our capital stack consisted of southern area of $80 million senior secured facility on the S of bar loans of $60 million senior secured facility on the multifamily mezzanine pool.

Hundred $62 million of repurchase agreements $36 5 million of unsecured notes and $37 5 million preferred equity $97 million of common equity and $286 million of redeemable non controlling interests.

Subsequent to quarter end, we issued $75 million of unsecured $5 75 per cent notes the churn of 2026.

Our debt has a weighted average remaining term of six years and a weighted average rate of $2 four 9% as the.

At March 31st when the 15, 6% of our financing is subject to mark to market.

And we continue to be low levered at 2.47 times debt to equity.

We have a $15 million of.

Unrestricted cash on the balance sheet as of March 31.

As of April 28 through our ATM, we issued.

The issue 260000 shares of common stock and the average price per share of $20 27 for gross proceeds of <unk>.

$5 2 million.

Also as of April 28, we were trading at a 1.7% premium to our March 31 book value and had an implied yield of nine 2%.

We quickly go through the results for the quarter a high.

The high level net income attributable to common shareholders as of April $24 million or $1 26 per share, which compared to a $6 $4 million loss in the first quarter 2020 or of.

The loss of one $1 22 per share core earnings for this quarter was $2 9 million or <unk> 53 per diluted share as compared to $1 2 million of 23 cents per diluted share Q1 of 2020.

Our CAD or cash, but available for distribution was $2 8 million for Q1 of this year or <unk> 52 per share as compared to $1 5 million or 28 cents per diluted share last year.

Book value on a consolidated basis was $20.33.

Ah versus $17.72 this time last year.

First quarter reported of loan loss provision of 124000, let's compare to the provision of 212000 in the first quarter of 2020, reflecting the improved credit conditions are now that we're a year plus of the COVID-19 we.

We paid the dividend of 47 cents per share in the first quarter and the board has declared the dividend of <unk> 47, five cents per share payable on June 30 to shareholders of record as of June the seats.

Well me touching.

Touching of our guidance here before we turn it over to the rest of the team.

We are issuing core guidance for the second quarter 2021 are as follows.

62 per diluted share of the low end 60.

Sorry, 66 cents per diluted share of the high end for midpoint of 64 cents per diluted share.

Our CAD per diluted share.

57 cents per share on the low end 61 cents per share of the high end for midpoint of 59 cents per share at the.

The midpoint, that's the dividend coverage ratio of 1.24 times.

So with that let me turn of them back debts, and then Paul Richards to discuss some of the details. Thanks.

Thanks, Brian in the first quarter of 2021 results continued to show strong performance across each of our investments in asset classes.

We continue to focus on investment verticals, where we believe we have an advantage due to our experience in owning and operating commercial real estate, our ability to leverage information from being both of an owner and operator as long as the lender the commercial real estate investments.

How's us to find relative value throughout the capital stack with the goal of delivering higher than average risk. Adjusted returns. We continue to believe our investment strategy focusing on credit investments and stabilized residential in the storage assets conservative underwriting at low leverage with well heeled sponsors will provide consistent and stable value to our shareholders. The.

The portfolio continues to perform strongly and we were able to capitalize on the opportunities during the first quarter and immediately thereafter.

Current investment portfolios comprised of 64 individual investments with approximately 1.5 billion of total outstanding principal loan portfolios of 100% residential of 57% invested in senior loans collateralized by single family rental and 43% invested in multifamily the agencies seem be S preferred equity and mezzanine debt.

The portfolio's average remaining term of seven of half years is 94% stabilized has a weighted average learned the value of 66, 8% and an average debt service coverage ratio of two points here of two times the <unk>.

Portfolio is geographically diverse with the bias towards southeast and southwest markets and of 100% of our investments are current.

As mentioned in our earnings none of our underlying loans are currently in forbearance no change from the fourth quarter of 2020 per.

For reference as of the forbearance with poor published by Freddie Mac on March 21st roughly seven 4 billion or $2 two per cent of the total of Freddie Mac securitize unpaid principal balances entered forbearance, both metrics improving slightly since the fourth quarter.

Moving to the opportunities we were able to take advantage of during and immediately after the first quarter as Brian mentioned, we made a $26 3 million dollar of mezzanine investment in multifamily redevelopment, Los Angeles, California with great sponsorship. The Mezz investment is of floating rate yield of Wall Street Journal Prime plus 10%.

On April 28, we purchased the C N B S. Io strip with approximately $50 million of notional for $6 1 million. The investment was capitalized of cash and additional repo financing. The underlying portfolio consists of 50 fixed rate multifamily mortgages with a weighted the.

The weighted average LTV of 64 eight per cent.

The yield on the investment is higher than what we're seeing on the new issue pricing for the same tranche, we find the close another floating rate of Freddie Mac K series B piece Tomorrow April 29th the B pieces purchase price in par values, approximately $76 million and pays the current yield of separate post 625 bps the <unk>.

Lateral calls made up of 37 loans with the total appraised value of approximately $1 4 billion. The total unpaid principal balance is approximately 1 billion representing of the average loan to value of 70 per cent.

The underlying properties consists of 8587 units and a 95% of occupied the.

The investment has 9.8 years of remaining term and the debt service coverage ratio of two three times.

In summary, we continue to find attractive investment opportunities throughout our target markets and asset classes and we'll continue to evaluate these opportunities with the goal of delivering value to our shareholders, but now like to hand, the call over to Paul Richards to discuss what we are currently seeing in the bond market repo financing and FSFR portfolio. Thanks, Matt during the first quarter of the company was not active in the <unk>.

Secondary bond market Gordon issue agency MBS market, but as previously discussed we deployed approximately $76 million on of new issue of floating rate pretty Mackey d's and $6 million on the Freddie Mac excellent Io strip of Q2, new issue of agency bond pricing level off some of this past month and bonds are now pricing at near COVID-19 near free.

The code is all of our <unk> portfolio has greatly benefited as the direct result of the yield compression experienced since mid 2020 and have seen a healthy increase in value. We continue to be prudently levered on a repo at roughly 50% LTV at quarter end and even lower after purchasing the latest <unk> discussed in previous earnings calls it would take downward mark.

Valley moving of approximately 25% on currency MBS portfolio before LTV increase of six 5% Lastly, we want the briefly touch on the continued performance of the MSR loan pool. All of those are current and performing as the demand of massive tailwind from single family rental in general continued to accelerate the fully expect this trend to persist.

As tenant retention. The Occupancies are all time highs to finalize the prepared remarks before we turn it over for questions I'd like to turn it over to matter of greater thanks.

Thanks, Paul in closing I'd, just like to say briefly that we're excited about the credit quality of durability of the existing portfolio as well as our team's ability to consistently generate attractive investment opportunities such as caf one of the wait the closes today.

We're also extremely pleased with our latest notes offering generating $75 million of of proceeds and dramatically reducing our debt cost of capital from our prior 2020 notes offering this capital will help fuel growth in the coming quarters as we look to deploy capital of our core verticals, including several potential new SaaS <unk> opportunities in the self storage sector.

That's all we have for prepared remarks today, great. Thanks to the team and now we'd like to turn it over to the operator for questions.

Yeah.

Thank you would you like to ask a question. Please signal by pressing star one on your telephone keypad.

Using the speaker phone. Please make sure your mute function is turned off the allow you to take note of reach our equipment again, you May press star one to ask a question. Our first question comes from Jade Rahmani with K B W.

Thank you very much I'm wondering what you're seeing in terms of production volume from Fannie Mae Freddie Mac has there been any slowdown.

Slowdown in their pace of acquiring loans from seller servicers and it seems like with slightly higher rates and competitiveness from debt funds that there's likely would have been some moderation in the volumes.

Hey, Jay it's Matt.

I actually was on the phone with him yesterday, they're actually seeing a pickup and obviously the floating rate.

Loans are that theyre purchasing and quoting right now.

Obviously, the caps have been lowered.

But with the you know the amount that they can do that as uncapped via.

You know of loans to affordable housing.

That hit certain metrics are they're still seeing plenty of floor. So we don't see any reason why they can't.

Securitize at the same levels that they've been doing in the past few years.

Okay. Thanks for that.

And secondly could you give any color on what is driving the really strong growth for the second quarter and core EPS and cash.

Because of their purchasing additional op units with the cash range from the unsecured notes offering.

So Jay that's basically a function of of of the funds the existing investment in the in the company, which which allows us to generate higher earnings per share.

So that's equivalent to buying back stock and a reduction in share count.

Yes slightly.

Okay.

And.

Did you quantify I forgot it.

Apologize if I missed the did you quantify the amount of that.

Quantify the amount of what.

Of this how many op units will be purchasing that purchased with cash.

Okay.

Yes, we did of the Mccann, it's just that the book value that we issued $20.33.

Well, our divided by the southern part of the mine.

What was the calculus.

So the $75 million is all being used to repurchase O P units.

Essentially yes, which will then be used to make the investment that we're closing this morning, which is that $76 million b piece.

Okay.

So.

I'm kind of getting confused now you issued $75 million of decks.

And you're using how much of it to fund new investments and how the how much of it to purchase additional O P units.

So were the the REIT is using the proceeds to purchase of OCA units, which will then be used to fund the b piece of vessel.

Okay got it.

Thank you very much for taking the questions.

Thanks Ryan.

Thank you again the star one if you like to ask a question. Our next question comes from Amanda Sweitzer with Baird.

Thanks, Good morning, guys.

The improved cost of equity capital of the day do you of any update on where you think you could reasonably take your acquisition volume this year given the opportunity set of guilty of that.

I think it's still yeah, I think it's still the same.

As of today of minutes map of greater I think that the.

Yeah, the just the volume of the stock still.

It is what it is but we know we can continue to use the ATM of all voice should of premiums ex that we we can fund new investments.

I mentioned, we have probably a little bit higher growth in the self storage sector. I think we can do anywhere from $15 million to $30 million in lieu of additional investments there so coupled with you know.

A few b pieces, probably looking anywhere from $1 50 to 200 million now, which I think prior we were yeah, one one the $1 50.

It makes sense and then just with some of the meaningful increase in the institutional Investor day did that at the bar space.

Net trend are you finding of any increased opportunities to increase our investment in that space with the bakery.

Hey, Matt. This is Paul Yeah, we've been actively searching for investments in either of the measure of the Bp's portion of the stack for as the bar on the it is a little you know debt holding its own.

Definitely the demand is high. So we are we are searching sourcing we've underwritten deals just nothing that we would pull the trigger on yet, but that's definitely in the definitely.

Definitely of the Hopper.

Okay. That's helpful.

And then.

Just following up on kind of the acquisition of op units that you mentioned is that changing.

The amount of ads L. P units of your plant index change for equity of about passes that the annual meeting are no change to that plan.

Yes.

Its totally separate.

Once we get the vote of the assuming that we do all of them.

SaaS sort of how much stock we want to convert the win.

Oh very helpful. Thanks for the time.

Thanks, Matt.

Thank you there are no additional questions at this time.

Okay great.

I appreciate everyone's time and thank you.

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

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Moving forward.

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