Q3 2021 Nexpoint Real Estate Finance Inc Earnings Call

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Please standby were about to begin.

Good day and welcome to the next point real estate Finance third quarter Conference call. Today's call is being recorded at this time I'd like to turn the call over to Jackie Graham. Please go ahead.

Thank you good day, everyone and welcome to <unk> Real estate Finance This conference call to review the Companys results for the third quarter ended September 30 on the call today are Brian Mitts Executive Vice President and Chief Financial Officer, Matt Mcgrew, Our executive Vice President and Chief Investment Officer might guess senior Vice President of investments and asset management Hello, Richard.

Vice President originations and investments and David will Moore, Vice President of Finance as a reminder, this call is being webcast at the company's website and our E. S. Dot one dot com that's.

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 management.

They 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 state.

<unk> made during this conference call speak only as of today's date and except as required by law and rough does not take does not undertake.

Take any obligation to publicly update or revise any forward looking statements. This conference call. Also include an 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 Brian. Please go ahead.

Thank you Jackie I appreciate everyone joining us today.

On the jump right into our results for the quarter and then I'll turn it over to the team to give some more detailed commentary on the portfolio and macro environment net.

Net income for the quarter was $1.17 per diluted share compared to net income of <unk> 52 cents per diluted share.

Second quarter of 2020.

Earnings available for distribution was 71 cents per diluted share in the third quarter compared to 42 cents per diluted share in the third quarter of 2020 or an increase of 69% cash.

Cash available for distribution was 70 cents per diluted share in the third quarter compared to 42 cents per diluted share in the third quarter of 2024, an increase of 55, 6%.

Book value per share increased three 2% quarter or over quarter to $21.04.

Recognized the mark to market gain of one 4 million on the company's investment in <unk> storage and $12 eight.

8 million on the company see MBS, an Io strip portfolio during.

During the quarter, we purchased 60, MBS Io strips, the notional value of $115 1 million.

$13 $1 million.

During the quarter to single family rental loans were repaid totaling $22 6 million of proceeds plus yield maintenance penalties of $3 3 million.

On September 17th we originated a $32 8 million dollar.

$4 five 8% bridge loan on a multifamily asset in Florida, the takeout to agency debt low.

One was repaid after our quarter ends on November one.

September 29th originated a preferred equity investments was $3 million yielding 10%.

After quarter end on October 26, we originated a 975 million mezzanine loan.

Yielding 11%.

We ended the quarter was 68 investments totaling approximately $1 6 billion.

The cross portfolio, our weighted average coupon of 599% our weighted average remaining term on investments of $6 nine years, our weighted average loan to value of 66, 8% and our weighted average.

<unk> is two times.

The value of the collateral used to calculate the 66, 8% weighted average loan to values outdated.

As we know that the values for multifamily and single family rental assets of new pretty dramatically over the past few years and even in the past few months. So Paul them out are in there.

Our comments will we'll talk about those revised numbers that we've calculated using estimates on the increases in that collateral value.

At September 30th our debt capital consisted of $745 million senior secured facilities on the single family rental loans $60 million senior secured facility on the mezzanine pool $223 million of repurchase agreements and 111 5 million of unsecured notes.

Our debt has a weighted average remaining term of five two years and a weighted average rate of 2.59%.

As of September 30th 20% of our financing is subject to mark to market through the repurchase agreements are.

Our debt to equity ratio was 2.29 times at September 30th.

On August 18th we issued $2 1 million shares of common equity at 21 per share raising gross proceeds of $43 million you.

We paid a dividend of 47 five cents per share in the third quarter and the board has declared a dividend of 47 five cents per share payable on December 30 <unk>.

Our dividend is a is 149 times covered by earnings available for distribution of $1 four seven times cover by CAD.

Let me update our guidance here for the fourth quarter or give guidance for the fourth quarter, and then I'll turn it over to the team.

For the fourth quarter.

We're issuing guidance for earnings available for distribution.

<unk> 50 cents on the low end 60 cents on the high end 55 cents at the midpoint.

For cash available for distribution, we are issuing guidance of.

Forty-six sensible low end 56 cents on the high end with 51 cents on the low end.

So without let me turn it over to Mark gets we will start with my guess and then goes up Paul Richardson.

Thanks, Brian the third quarter of 2021 results continued to show a 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 an owner operator.

And lender to commercial real estate investments allows 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 as stabilized residential and storage assets conservative underwriting at low leverage with well heeled sponsors will provide consistent and stable.

All of you to our shareholders.

We are also excited excited to begin investing in the life Sciences real estate sector on both the preferred and debt basis.

<unk> Sciences sector presents the opportunity to put capital to work in one of the most exciting and fast growing real estate sectors over the last 20 years compelling life science real estate fundamentals, mainly limited supply and or no availability in existing buildings and growing demand are driven by demographic tailwind in a row crop requirement for continued innovation.

To solve evolving healthcare needs life science real estate plays a critical role as specialized space is required to support scientific research development and ultimately the manufacturing of novel drugs and therapeutics, the life sciences sector as evidenced by Alexandria real estate.

Share price has outperformed the R&D by over 104% over the last 15 years.

During the third quarter the portfolio continued to perform strongly and we were able to capitalize on a number of opportunities.

During the third quarter and immediately thereafter, the current investment portfolio is comprised of 68 individual investments with approximately $1 6 billion of total outstanding principle, the loan portfolio is 100% residential.

With 52% invested in senior loans collateralized by single family rental and 48% invested in multifamily via agency MBS preferred equity and mezzanine debt.

The portfolio's average remaining term of six nine years is 93% stabilized and has a weighted average loan to value of $66 seven and an average debt service coverage ratio of 2.02 times.

As Mitch said, Paul Richard will expand on the LTV metrics and what we believe are.

Appear to be high compared to.

The current market level valuations the portfolio is geographically diverse with a bias towards south eastern southwest markets, 100% of our investments are current as mentioned in our earnings out of our underlying loans are currently in forbearance no change from the second quarter of 2021.

For reference hazards of Forbearance report published by Freddie Mac on September 25th roughly $7 5 billion or two 4% of the total Freddie Mac securitized unpaid principal balance has entered a forbearance.

During the quarter, we realized 40% plus irr's on to single family rental loan repayments and the amount total amount of $22 6 million.

Moving to the opportunities we were able to take advantage of during the quarter.

We purchased 60, MBS Io strips as Matt said with an aggregate notional amount of $115 1 million for $13 1 million of net cash proceeds with estimated current yields of approximately 14% on September 17th we made a bridge loan in the amount of $32 8 million at a rate of roughly four 5% with 50 basis points going in.

Which was subsequent subsequently repaid on November one.

We also.

Closed approximately 12.75 million of preferred or Mezz.

Multifamily.

And the Georgia market are in the Atlanta market at approximately 11% of our run rates in summary, we continue to find attractive.

The attractive investments 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 in the bond market repo financing in the portfolio at large thanks, Matt during the third quarter the company with highly active in the secondary bond Mark.

But as previously discussed we deployed a combined $115 1 million notional value or $13 1 million in net cash on Freddie Mac Io strips in Q3 again this quarter. The company see MBS portfolio has greatly benefited as a direct result of the yield compression experience does the mid 2000, and yet again saw a meaningful increase in value.

And the bonds purchased during Covid, we continue to be sensibly levered on a repo at a roughly 54, 6% LTV at quarter end as mentioned previously we undertook the project of applying adjustments and the underlying collateral value at our <unk> and <unk> portfolios in the case of our <unk> portfolio, we acquired the case Shiller national.

Home price index based on the first payment date on each one through August 31, 2021, which was the last data point available and our multifamily both net and CBS assets, we apply the U S National apartment price per unit index based on securitization date on CBS and loan origination date for the mezzanine portfolios.

September 32021, which is the last data point available on the original appraisal values. The combined results yielded our pro forma portfolio LTV of 51, 9%, which is approximately 15% less than the stated LTV of 66, 8%. These results demonstrate an even more robust credit profile.

Backdrop, and an even more attractive risk return profile lastly to briefly touch on the continued performance of the <unk> loan pool, all loans are current and performing as a demand and there's tailwind for single family rental in general continues to accelerate we fully expect this trend to persist as tenant retention. The occupancies are still at all time highs to finalize your prepared remarks.

Before we turn it over to questions I'd like to turn it over to Matt for granted.

Thanks, Paul we're making progress restructuring the capital stack for next point storage partners, formerly J cap and I expect and expect to have an update during the first quarter of 2022.

We're optimistic that these capital allocation moves will produce higher returns for an SP and ultimately in revenue. We're also excited as Matt said about entering the life Sciences space on the credit side, making an inaugural 35 approximately $35 million investment.

Upcoming this quarter in a pharmaceutical manufacturing facility with a high quality sponsor.

On the underwriting of half a dozen more opportunities in this sector and expect to transact on several of them in the first half of 2022.

Overall, as Paul mentioned, the underlying credit quality and fundamentals of multifamily self storage and single family rental continues to accelerate and performed remarkably well and Rev. Business is doing exactly what it was designed to do namely produce a consistent durable cash flow stream for investors backed by the highest quality assets in the commercial mortgage REIT sector I want to congratulate them.

Team for continuing to source and monitor high quality investments and with that I'd like to turn the call over to the operator for questions.

Thank you if you would like to ask a question you may 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. Once again star one for questions. We'll take our first question from Amanda Sweitzer with Baird.

Hi, good morning.

Morning.

I wanted to start on that the guidance range is obviously, a little bit wider than normal.

The equity issuance and redeploying those proceeds.

Can you give an update on the near term acquisition pipeline and the volume of potential opportunities that you could close into yearend.

Yeah, Hey, Matt its Matt.

The guidance is a little bit wider because we have received.

<unk>.

A potential smaller pay off in the <unk>, which are the timing of we don't we don't know what that is.

So we made it a little bit wider coupled out with the.

Pharmaceutical investment I was just mentioning hasnt closed yet.

Timing is sometime this quarter, we just don't know when so we could potentially outperform.

Perform that that number, but we wanted to be appropriately conservative.

Okay. That's helpful and then.

Following up on that comment on repayments beyond that ICA bar lounge as well as the bridge has long been repaid any other near term loan repayments that you expected the fourth quarter.

No.

Okay.

That's helpful. And then finally, it sounds like Youll have a more fulsome update early next year, but any updated thoughts about potential book value per share upside from the self storage common stock I think last quarter, you said three to $5.

Yes, it's still in that range.

Yes.

We're optimistic in the higher end of that range, but I think thats a good thats still a good range for it.

That's helpful. I appreciate the time.

Thanks Pam.

We will take our next question from Stephen laws with Raymond James.

Hi, good morning.

Good morning.

To follow up on the pipeline question. It looks like you had a couple of deals close here at the end of the year Mezz loan I think a bridge loan as well close another mezz loan in October.

You know I know the opportunities we mentioned on our life science, but can you talk about just your pipeline of.

All of these investments.

When youre looking to add any more see MBS b pieces, how your pipeline is building and how are you.

Think about deploying capital across your different investment options.

Yes, we have.

We think we'll have a K deal.

That will close in the fourth quarter.

It's a 10%.

Thickness deal.

For about 65, nine which for years, some repo on but roughly we'll call it $35 million or $30 million of equity.

And then obviously, it's a critical life sciences.

Got it.

Yeah, No I was just going to follow that up with <unk>.

Given these opportunities.

How do you think about available capital additional.

Sorry available liquidity additional capital needs I know you.

The ATM, although I think you're probably a little limited given the trading volume, but can you talk about your outlook on liquidity, having just come off the secondary.

When do you think fully deployed and book too.

To grow the balance sheet again.

Yeah, Hey, Steve it's not a greater I think.

The next kind of.

Tool in the toolkit, we reviews as potentially reopening the.

The notes offering that we did over the summer and pricing is pricing.

Pricing of tighter we've gotten indications from from our bankers that we could do that and we think that that would be over the near term is probably the most accretive coupled with.

Some some repo financing we just.

Advertise the balance sheet, a little bit more.

But we.

We think that with those two tools are really not even having to tap the unsecured notes we can be fully fully deployed by the end of the fourth quarter. This year.

Great appreciate the color there Matt.

Lastly.

Operating expenses you guys have shown some really good.

Fence control here largely flat to this year on a quarterly basis can you can you talk about the outlook. There is a good run rate or how should we think about those expenses.

As you as you grow the platform.

Yeah, I mean, I think that.

You know one of the benefits of an excellent platform is that this isn't the sole company and how it doesn't have to keep the lights on and so we've created a fee structure that we think is.

That is helpful.

And conservative.

We don't.

We don't think that expenses should should.

Should carry too much too much higher. So this is a pretty I think a pretty good run rate.

For the.

The next 12 months or so.

And agree we focus on that a lot and one of the things to I think it is helpful and differentiated about our portfolio is that were not constantly getting that capital back yes, we get a small repayment here or there, but largely the the earnings stream is fixed so were not on that treadmill or we have to.

The key.

Keep kind of repaying and eroding book value coupled that with production offices, we have one office here in great networks through owner operator.

And the banks.

Commercial.

Commercial services company and commercial real estate services company. So.

Yeah, I think we're pretty pleased and we'll continue to monitor these expenses at this level.

Great well congrats on another nice quarter and appreciate your time this morning.

Thanks, Dave.

As a reminder, star one if you would like to ask a question well go next to Jade Rahmani with K B W.

Thank you is the main reason that <unk>.

<unk> guidance for earnings is below <unk>.

Equity offering and timing of capital deployment.

Yes, Thats right Jay.

Okay.

In terms of continuing to deploy capital into things like mezzanine loans and preferred equity you know, what's your comfort level with the competition in that market space.

Yeah, we feel pretty comfortable I mean, a lot of the people that were making investments with <unk>.

<unk> clients that we've had relationships relationships with for 10 years.

And we kind of pride ourselves on being easy to work with.

Creative.

Nimble fast.

Everything that a sponsor needs to get a deal closed.

We don't have to feed a big machine and.

At this size that we're currently at Theres still aren't a ton of people playing in that $9 million $20 million equity check.

In terms of medicine.

Preferred.

So we don't we don't run into a ton of competition.

That said there are there is competition at the higher levels and especially for the B pieces, but.

We have a robust pipeline on the on the smaller medicine preferred investments.

Thank you and can you quantify the magnitude of yield compression that youre seeing.

Maybe by product area.

Hey, Jade its Paul on the <unk> side on the BP side from some of the Covid bonds that we bought back in 2020 in the Bay area. We were buying we think we bought at a roughly 11% bond equivalent yield and we've seen prices on those.

Compress down to mid sixes, so you've seen a meaningful yield compression on those types of bonds. So we're quite pleased with that and we think there's probably still room to run just given given the demand out there for those types of bonds.

And on the preferred and Mezz side.

Just since we're still playing in a smaller dollar amount, we're still able to get 10 11, 12%.

All in rates on on that paper.

Thanks for taking the questions.

With no additional questions in queue at this time I would like to turn the call back over to our speakers for any additional versal.

Good morning.

Additional or closing remarks.

Yes, I think were for <unk>.

Good over here I appreciate everyone's time, and we'll be back in touch thank you.

That will conclude today's call. We appreciate your participation.

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