Q2 2021 Nexpoint Real Estate Finance Inc Earnings Call
[music].
Good day and welcome to the next point real estate Finance second quarter Conference call.
Today's conference is being recorded at this time and I would like to turn the conference over to Jackie Graham Director of Investor Relations and capital markets. Please go ahead.
Thank you good day, everyone and welcome to the point real estate finance income.
The conference call to review of the company's results for the second quarter and they cannot yet on the call today are Brian Mitts.
[music], Vice President and Chief Financial Officer, Matt and the Greener Executive Vice President and Chief Investment Officer.
Non-GAAP senior Vice President of investments and asset management, and Paul Richard Vice President for mortgage origination and investment assets.
Binder of this call is being webcast of the Companys website, and our E <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 price.
The Securities Litigation Reform Act of 1995 that are based on management's current assumptions expectations and beliefs.
Listeners should not place undue reliance on any forward looking statements.
Net and are encouraged to review the Companys 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 statement.
Except as required by law and rest of does not undertake.
And any obligation to publicly update or revise any forward looking statements.
This conference call also includes and analysis of non-GAAP financial measures for a more complete discussion of these non-GAAP financial measure and see the Companys presentation that was filed earlier today.
Now I'd like to turn the call over to frame. It. Please go ahead Brian.
Thank you Jackie and thank.
Everyone join us today.
On the call we're going to go.
Thanks.
That's the second quarter 2021.
And as well as discuss our portfolios and the acquisitions we've made this.
This quarter and year to date.
And talk about our pilot.
Yeah.
And Brian you are cutting up a little bit.
This is the operator I'm going to try to reconnect Brian Please standby.
Thanks.
Yes.
Okay.
The operator since.
Hey, guys, sorry about that.
Okay. No problem go ahead of <unk> issues.
So we purchased approximately 80% of the fixed rate Freddie Mac K series principal only bp's.
Purchased 5 C and B S Io strips and we sold 3 CBS.
Strips, we had 1 preferred investment of paid off and 1 of the.
The single family rental loans that paid off.
For the.
And the investments we sold the redeployed those net proceeds from the sales and payoffs acquired the new C and B S Io strips and the Freddie Mac.
B piece.
For the results net income for the quarter was 58 cents per diluted share compared to net income of $1 per diluted share.
For Q2 of 2020.
Core earnings for the quarter were 59 cents per diluted share compared to 37 cents per diluted share and Q2.2000.
C and 53 per diluted share in Q1 of 2021 look.
Book value per share increased <unk>, 2% quarter over quarter to $20.38 year over year core earnings has increased 59% cash available for distribution has increased 41% and book value per.
Share of common stock of increased 19, 3% on a per diluted share basis. We.
And we recognize the mark to market gain of $2.5 million and the second quarter on the company's investment and next point storage partners.
And just formally J cap.
And $3.2 million of the company's <unk> and <unk>.
The 2 portfolios.
Just to note mark to market gains are a component of net income and earnings per share, but are excluded from our reported core earnings we.
We ended the quarter with 64 investments totaling approximately $1.6 billion.
As of June 30.
Our capital stack consisted of the following 700.
2 of 5 million senior secured facility on the <unk> loan pool of $60 million senior secured facility on the mezzanine pool.
$177 million of repurchase agreements of $111.5 million of unsecured notes $37.5 million preferred equity.
1.
The $68 million of common equity at the June 30 of closing price and.
And $286 million of redeemable non controlling interest.
As of June 30, our debt has a weighted average remaining term of 5.7 years and a weighted average rate of 2.62% and.
Approximately 60% of our financing and subject to mark to market to the repos.
Our debt equity ratio was 2.54 times at June 30th.
During the quarter of and it actually inception to date through our ATM.
The ATM program, we have.
Issued approximately 408000 shares of common.
And when stocks and average price per share of $20 of 61.
Which represents approximately 1.1 premium to book value.
And we had net or gross proceeds of $8.4 million 3 of those issuances and.
And year to date, we have deployed $191 million of cap.
And 2 new investments.
A quick overview here of the results for the second quarter.
And that's compared to last year.
Net income attributable to common shareholders was $12.3 million or 58 cents a share.
And the $19.3 million of $1 per share.
For Q T lost.
Catheter core earnings of $3.4 million or 59 cents per share as compared to $1.9 billion of 37 cents per share.
CAD or cash available for distributions was $3.4 million.
And 59 cents per diluted share compared to $2.2 million and <unk> <unk> per diluted share.
The last joke value on the consolidated <unk> was $20.38 versus $18.33 at the edge.
The end of Q2.2020.
We pay the dividend of 47, 5 cents per share and the second quarter and the board has declared the dividend of 47 out of cents per share payable on September 30th share holders of record as.
As of September 15th.
Our dividend is currently 1.24 times covered by of core earnings.
Let me update our guidance for the third quarter before I turn it over to Matt gets.
Core earnings per diluted share on the low end.
And at 61 cents on the high end and 65 cents for a midpoint of 63.
And our cash available for distributions.
Diluted share 51 cents and the low and 55 cents on the high end.
And 53 cents on the midpoint.
So.
And I apologize for the type of.
Technical difficulties, but let me turn over now to and that gets.
Thanks, Brian and the portfolio continued to perform strongly and the second quarter and we were able to capitalize on a few opportunities the car.
The investment portfolio as Brian said is comprised of 64 individual investments.
Proximately 1.58 billion of total outstanding principal the portfolio of still of 100% residential of 57 per cent invested and senior loans and 43% invested in multifamily VA agency MBS preferred equity and mezzanine debt.
The portfolio's average remaining term of 7.3 years as 92% stabilized.
And with the average loan to value of $66, 9 and and average debt service coverage ratio of.
207 times.
And the portfolio is geographically diverse and biased towards the southeast and southwest markets and the 100% of our investments are current as.
You mentioned and our earnings none of our underlying loans are currently and forbearance.
And that's no change from the first quarter of 2021.
The references of as of the Forbearance report published by Freddie Mac on June 25th roughly $5.4 billion and 1.5% of the total of Freddie Mac securitize unpaid principal balances endured the forbearance both metrics improving dramatically since the first quarter.
And we realized and at a.
<unk> seen.
2.5% IRR and $2.1 2 times multiple on invested capital on the redemption of the $3.8 million preferred equity investment and we had $115.3 million of single family rental loan that was repaid in full.
Moving to opportunities and we're able to take advantage of during the second.
The quarter as discussed on our first quarter earnings call. We closed another floating rate for any amount of case series of Bp's for approximately $76 million and.
$76 million.
That investment has a current yield of average 30 day.
And so for of plus 625 bps. The collateral pool is made up of 30.
7 loans.
And.
Has it appraised value of approximately 141.4 billion.
We were also able to take advantage of cycling out of some case series of Io strips that we purchased and the depth of the Covid downturn and <unk>.
Redeploy that capital into higher yielding small balance Io strips.
We closed on approximately 90% of the Freddie Mac fixed rate bp's with the bond equivalent yield of 688% and the investment has 5 and a half years of remaining term.
As of 67, 3%.
LTV and has the current debt service coverage ratio of 194 times and summary, we continue to find.
And the investments and 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 I would now like to hand, the call over to Paul Richards to discuss what we are currently seeing and the bond market repo financing and as of our portfolio. Thanks, Matt during the second quarter of the company is highly active and the secondary.
And the card market as well as new issue agency MBS as previously discussed we deployed approximately $76 million on of new issue of floating rate, Freddie Mac bps, and $89 million and the combined basis for Freddie Mac Io strips and of season, and Freddie Mac BP and Q2.
New issue agency bond pricing was relatively muted when compared to the previous.
This quarter with bonds pricing close to pre COVID-19 levels. Our CBS portfolio has greatly benefited as the direct result of the yield compression and experienced since the mid 2000, Twenty's mid 2020, and yet saw a meaningful increase in value of this past quarter. We continue to be prudently lever on the repo at roughly 45% LTV at quarter end, which includes an additional 40.
And $3.7 million of repo financing to close the season of the bps. As previously discussed we were also able to negotiate and achieve lower cost of financing on the repo financing to the tune of approximately 50 basis points on a weighted average basis when compared to the previous quarters, all and rate Lastly, we want to briefly touch on the continued performance of the <unk> loan pool.
Our loans are current and performing as the demand and the north tailwind sort of single family rental in general continues to accelerate we fully expect this trend to persist as tenant retention and Occupancies are and all time highs to finalize our prepared remarks before we turn it over for questions I'd like to turn it over to Matt <unk>.
Paul Youre from Matt and Paul are multifamily and <unk>.
And our verticals and the underlying fundamentals are performing extremely well.
Revenue and NOI growth of reaching double digits and of further accelerated into July.
Our storage platforms, no exception and Q2, the the NSP partners saw strong performance as well as a reminder, most of the NSP portfolio.
<unk> and the lease up phase, but given the strong tailwind and the sector. We believe the portfolio is well ahead of our pro forma expectations. When we acquired Jernigan capital back in Q4 of 2020.
Across the entire portfolio our properties gained nearly 700 basis points and occupancy in Q2 over Q1 and saw same store NOI growth more than.
<unk> as it was up 101% versus Q1 for the quarter, we outperformed our 2021 budgets by 15% bolstered by 14, 8% growth and in place rents quarter over quarter, we continue to evaluate.
Evaluate options to monetize this investment, but also believe that once stabilized the NSP position could be worth another $3.
And and $55 per and Rev share.
That's all I have per <unk> for prepared remarks, thanks to the team for continuing to execute and now we'd like to turn the call over to the operator for questions.
Thank you if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad. If you were using a speaker.
And double and please make sure your mute function is turned off to allow your signal to reach our equipment.
Again press Star 1 to ask a question.
We'll take our first question from Stephen laws of Raymond James.
Hi, good morning.
I appreciate the comments and the prepared remarks can you guys.
Touch on.
And the.
New investment pipeline and and how you think about the investment opportunity is relative to prepayments what kind of visibility of that you have and prepayments coming in.
Kind of.
Like you had some thoughts on how youre able to match those up.
Yes, I see the some of greater I think the.
The 2 that we saw and this quarter were largely.
We have made up the bulk of the thing the investments that can be prepaid that we are unaware of the rest of it are the b pieces that either amortize off as the floating rate loans are working their way through the securities.
<unk>.
And then the single family called <unk>.
Fixed and has the largest of fees and so we don't expect the material amount going forward.
Of repayments certainly we're not on the same treadmill as most of the of our peers to get capital back 2 years or 3 years. So our.
Expectation is that this is again sort of the bulk of it and going forward and we'll be looking to invest.
Probably mostly and CP space.
Thanks, and kind of the follow up on the pipeline.
I guess first of a big investment on the last day of the quarter. So certainly and maybe you could talk to.
To what quantified the impact you think youll see sequentially, the really didn't wasn't there last quarter and.
What do you see on the Mezz side I don't think you guys have done of new Mezz loan maybe since the January looking at the table and the deck. So kind of what's that pipeline and is it just not as relevant and attractive relative to the securities and investments at this point.
Yes, the <unk>.
The piece gets the beef piece is going to add about 10.
Per share to core.
Because it's a fixed rate and zero coupon.
Doesn't add anything to CAD and <unk>.
That's why there is the difference between our large difference between corn and CAD and <unk>.
Our guidance for next quarter.
On the on the Mezz side the theirs.
It's been granting of the on the met side. There is there are opportunities that we're currently underwriting between.
The private preferred multifamily, where the kind of where we made our our name layering.
And capital behind Freddie and Fannie.
Given where cap rates are 3 and output for a quarter percent.
And debt so cheap right now.
The the high kind of current coupon the opportunities are gone, but you can still find opportunities that can get you a double digit return, but most of that's going to.
And uptick to the sponsors so you might do of 4.5% current and another 4 of 5% of accruing.
Our underwriting I'd say kind of 25 million ish of that right now and so.
So we could do that but it's I.
I think less attractive than.
Mike of floating rate <unk> or K deal that we could execute.
And the third and the fourth quarter.
Alright, I appreciate the comparison there.
Last question for me.
You'd have a preferred from a year or 2 ago, you've got a year ago, you've got the unsecured notes now obviously you are able to use the ATM.
We're about $8 million. So far you know as you think about your need for capital.
And outlook for growth and how you'd like to see the mix of your capital stack come together what are your thoughts around that.
I think to the extent and we can.
Issue issue equity above book value, we will do that first.
And the extent, we're kind of at or at parity with book value.
And then we then we like the preferred market.
Incrementally more than the secured note market or unsecured note market.
I think that our cost of cap don't think I know our cost of capital and the preferred perpetual markets come down.
So we.
And we'll continue to.
<unk>.
The evaluate that and order to the fund the Q3 and Q4 investments that we have visibility into.
It's probably in the neighborhood of $75 million to $100 million.
Great. Thanks for the color there and it's got the have all of those options at your disposal. Thanks for the timing.
Thanks, Dave.
Thank you once again to ask a question. Please press star 1 we'll take our next question from Jade Rahmani with K B W.
Thanks very much.
Core EPS came in at 59, and I believe the prior guidance midpoint for the second quarter was 64.
What's.
The difference between your guidance and core earnings due to timing of capital deployment, what are there any other factors that you and now.
Yeah its timing.
The.
And it's basically <unk> for the repayments and then another kind of <unk>.
<unk> 4 per ATM issuances and then.
We did redeploy that capital back into some accretive investments that Paul if you want to.
Elaborate on wheat.
The team.
Yeah, Hey, Jay.
And what gets discussed recently and as we redeploy capital and see some friends bx ones and as.
Well as <unk>.
The main normal <unk> and then the big purchase was the roughly $67 million season Bp's.
And that we purchased at the last day of the quarter.
Okay, So and your prior guidance contemplated that purchase taken place and there.
Yes.
No I think it's more of the fact that we got 30.
And just notices on the repayments from from the Preferreds and.
We didn't necessarily anticipate okay.
Okay.
And youre, not expecting something similar and the third quarter.
No.
And what was the aggregate dollar amount of 2 key of investments.
30 days.
100 <unk>.
Yes, it was about $170 million.
Okay.
In terms of the <unk>.
Yield compression are you seeing it broadly across that space.
And does that change.
And the businesses.
Ultimate Levered.
ROE vs are going to make.
I think I think and some of granting of the yields are for.
For sure compressing.
I don't I don't think that they're going to get necessarily that much tighter and the beef and the BP.
And what you've market and I think that Thats.
And the <unk> market, and that's largely where we're where we're focused.
In terms of of generating at least in the near term new investments.
We think that and sort of niche areas self storage and life Sciences, we can get some outsized.
Piece of returns to bolster the row and still maintain.
And what we said when we went public and so thats that would be the goal and then just sort of as a reminder, we don't have to do anything new.
The current book.
It has over 7 years of duration and.
<unk> of the earnings visibility and transparency of the.
These earnings the <unk>.
Bolster our ability to pay it and outsized dividend with the superior credit profile of our in place from from here through the next 4 of 5 years and just to add 1 thing to match com and it to our financing has gone down dramatically as well as mentioned before.
The repo financing has decreased roughly 50 basis points over the past quarter and as Matt mentioned, we think we can get a better cost of capital and the preferred side as well as the unsecured notes.
Okay.
And the expectation for the dividend to be maintained.
Or is there room for upside.
The potential increase.
Yes.
And we're having healthy coverage and we have to pay out.
Almost all of it so.
There's certainly room for increase.
Okay, and could you remind us what the basis and NSP is.
40.
And $1 million.
Okay.
And what is the.
Timing of any potential realization of that.
Yes, it's a good question so like.
And we've looked at and constantly.
Looking at the cap stack of the of the company itself.
44 and like.
And like we've been talking about financing rates come in we can rightsize that debt balance.
The company's balance sheet.
And we'll and we'll do that probably in the fourth quarter of of 2021.
The portfolio, we thought would be stabilized kind of 2024 of its probably.
Probably 2023 now and.
We.
We can certainly monetize the investment now, but we're also excited about the storage the underlying storage fundamentals and believe that the NSP portfolio represents probably the best in class urban infill and high density storage.
And the <unk>.
Some of the best Submarkets in the country and.
And we want to be cognizant of the ability to add debt $3.50 to $5 per share per and Rev share.
Accretion to book value that I think is a differentiator amongst our amongst our peers. So we're kind of weighing all.
Considerations, but I.
And I think it's a good problem to have at this point.
Okay, and so the capital structure was.
Rationalized streamlined.
The prepared and will be paid off and it would be.
You said that the again.
All of the 3 to $5 of share potentially.
No if you recall the.
The current position as was preferred.
That was contributor there was converted into common so the $44 million of common.
Special situations of investment and the prefer that was converted into.
2 of common.
And a common investment of the company.
We could go sell that common 2 of third party right now we could sell it to our funds or we can wait for it to stabilize and then re IPO or sale of at that point.
The $3.50 to $5 per share.
Is.
As of stabilized range based upon a pro forma of discounted pro forma.
Cap rate range, Thats Conservative and I think that we can.
We wanted to sell it today, we could probably get a couple of bucks per and Rev share for sure.
But.
I do think that debt thats not going anywhere.
And in the foreseeable future.
Got it so if the company was recapitalized.
And the capital structure streamlined that when the necessarily.
And that you guys are selling down the position there.
Alright.
That's right I mean, we've got.
Converted and we could convert it if we wanted to for example into of preferred.
But that would be of yield closer to 6 or 7%, whereas if we took if we took the capital.
Weighted a year and a half.
And then monetize it then.
And then that $8.40.
It turns in the 90, we re lever that and then reducing the book value and the ability to reinvest and drive earnings.
<unk>.
That is an attractive option.
Okay and lastly on the.
And the single family rental side could you give an update on progress residential of formulas.
Yes.
The given where rates are today does the.
The potential for that loan to be prepaid increase.
Hey, Jay.
Still has so much term left on the actual loan that the yield maintenance <unk> and the well over $100 million, which of course it.
And it just doesn't make sense for them to prepay or pay any yield maintenance and.
Refinance debt loans. So it's the same story as last quarter.
Thanks for taking the questions.
Thanks Jade.
Once again to ask a question. Please press star 1 we'll take our next question from Amanda.
Sweitzer with Baird.
Thanks, Good morning, guys.
Can you talk more about the potential tightening and for some of the mezzanine investments and did the either life science or self storage are there any near term opportunities do you expect to pursue or is this something where you're thinking about timing it upon the recycling.
And of that J cap investment.
Yes, I think the lifestyle and it's Matt.
I think the life Sciences.
Investments will occur and the second half of the year for sure. We're hopefully to get 1 or 2 done and we thought we might be able to get 1 done and the second quarter and its been pushed into the fall into.
And the third quarter of the end of the third quarter, but I will.
I do think we'll get some of those life Sciences done this year self storage has.
And.
A little bit harder, we're still working on some opportunities aggregating enough size and.
And we're doing some 1 off.
On line 10.
$12 million.
Underwritings on on single assets that won't really move the needle, but the life Sciences, I think will be will be of bigger splash and the second half of the year.
Okay. That's helpful. And then are those investments on life Science development projects and how do you think about the.
And exposure level that you are willing to go to with life Sciences and cold storage.
Yes, I mean, yes.
As you May know we made.
We made a 9 figure investment as a platform and 1 of the Allen Gold's companies IQ HQ and it worked alongside him for the last few years.
And.
And you have gotten the familiarity with.
Sort of types of of life science facilities that were comfortable investing and I'd say the near term opportunities are.
Rail lease sale leasebacks of.
Either either some small cell manufacturing or our other smaller kind of logistical.
Type type deals.
And are anywhere from $30 to $50 to 75 million of piece that we could do some mezz or preferred on and.
And those of the types of opportunities that we're looking at it and think it's a it's a space that's.
And that's largely pretty interesting right now.
And interesting.
That was all I had I appreciate the time.
Thanks Amanda.
Thank you and at this time, we have no further questions in queue I'll turn it back to management for closing remarks.
Yeah. Thanks, it's more of a greener, we appreciate everyones time and availability of this morning and.
And I look forward to speaking to you.
During our third quarter conference call.
Thanks again.
This concludes today's call. Thank you for your participation you may now disconnect.
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And.
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Okay.
True.
Okay.