Q1 2022 Nexpoint Real Estate Finance Inc Earnings Call
Create 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.
Once made during this conference call speak only as of today's date and except as required by law <unk> does not undertake 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 <unk>.
Financial measures see the company's presentation that was filed earlier today.
I would now like to.
I'll turn the call over to Brian Mitts. Please go ahead, Brian Thank you Jackie.
Everyone joining us for Q&A.
I'll start the call.
Going through our results for the first quarter.
Ill cover guidance briefly and turn it over to the rest of the team.
For them to give a detailed commentary in the portfolio.
Some of the recent activity.
Some of the things that we see ahead for the remainder of the year.
For the first quarter, we reported net income of 81 per diluted share.
Compared to net income of $1 26 per diluted share for the first quarter of 2021.
We reported earnings available for distribution of.
$1 23 per diluted share for the first quarter compared to 43 per diluted share in the same period of 2021.
We reported cash available for distribution of $1.68 per diluted share compared to $2 47 per diluted share in the first quarter of 2021.
Book value per share increased one 3% quarter over quarter, and seven 1% year over year to $21 78.
For the first quarter, we paid a dividend of <unk> 50 per share.
And the board has declared a dividend of <unk> 50 per share for the second quarter.
Let me move to guidance for the second quarter earnings available for distribution per diluted share.
We're guiding to <unk> 55 per share at the midpoint with a range of 50 to 60.
And for cash available for distribution per diluted share were guiding $2 64 per share at the midpoint with a range of 59 to 69.
So with that let me turn it over to the team to go through the portfolio and some of the recent activity.
Thanks, Bryan the first quarter continued to show strong performance across each of our investments in asset classes portfolio is currently comprised of 70 individual investments with approximately $1 6 billion in total outstanding principal.
The loan portfolio is 97% residential with 44% invested in senior loans collateralized by single family right now, 54% invested in multifamily primarily agency MBS CBS . The remaining 30% of the loan book is life Sciences and self storage.
The portfolio's average remaining term of six four years with 94%.
Stabilize.
The weighted average loan to value of 67, 7% and an average debt service coverage ratio of one seven times.
Our portfolio is geographically diverse with a bias versus southeast and southwest markets, Texas, Georgia, and Florida combined for approximately 49% of our exposure on a geographic basis, 100% of our investments are current as mentioned in our earnings net of our underlying loans are currently in programs moving to the opportunities we were able to take advantage of.
During the quarter.
During the quarter, we originated a convertible note in the high <unk>.
$38 7 million, bringing our total convertible notes exposure to ground leases to approximately $60 million subsequent to quarter end for sponsor repaid all about $25 million.
This amount, which is converted into common equity in the company and a 12, 5% discount.
On January 14th we purchased $19 6 million of preferred equity collateralized by single tenant stabilized pharmaceutical manufacturing property with a current yield of 10% on January 27th we purchased $41 $8 million of a preferred equity investment collateralized by a stabilized multifamily property in Las Vegas, Nevada.
On January 23 single family rental first mortgage loans with an aggregate principal amount of $32 1 million already paid in full.
Within records, achieving an IRR of 41, 5% on February 25th a $62 million single family rental first mortgage loan was repaid in full and indirect realized an IRR of 35, 9%.
In summary, we continue to find attractive investments opportunities 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 politics. Thanks, Matt during the first quarter. The company has yet again asset in the primary bond market.
Though there were not any MBS bond acquisitions made during the first quarter. The company participated in two Freddie Mac bond options, one of which was a small balance loan bps in Freddie Mac spreadsheet program and the other which is a floating rate K deal both options demonstrated extremely strong demand and ultimately priced well inside previously previous market clearing levels Jeff.
This morning, we closed on a season, Freddie Mac small balance loan <unk>. The B piece was purchased for approximately $39 million, which we will prudently lever attractively price rebuild financing the voluntary would occur and coupon of approximately four quarter percent and was purchased at a discount we expect to generate in all an unlevered yield of roughly 8% and <unk>.
Other deals in the low to mid teen the weighted average life of the bonds, assuming a 15% CPR is roughly six five years as discussed in the previous quarters commentary the market continues to experience inflation headwinds along with the fed signaling multiple half point rate hike. So as previously mentioned there is an insatiable demand for free of that Get's bonds and we continue.
To see the price we continue to see price tightened we continue to be fiscally levered on a repo at roughly 57% LTV at quarter, and lastly, I want to briefly touch on the continued performance of the <unk> loan pool and the Q1 2022 loan Paydowns. All assets are loans are current performing and demonstrating strong metrics in terms of rent growth in occupancy.
Ts as the demand for single family rental continues to shine brightly the portfolio has had a few <unk> loan paydowns in the first quarter was generated a combined IRR north of 40% compared to the original underwriting of 9% due to the early prepayment penalties investments, we're able to generate additional net proceeds.
The original underwriting which was roughly one third of the original investment time horizon to finalize our prepared remarks before we turn it over for questions I'd like to turn it over to Matt integrator.
Paul again, we continue to be pleased with the underlying credit performance of <unk> portfolio generating book value growth for the eighth consecutive quarter, while providing durable cash flows for our shareholders. The recent market volatility has started to bear fruit for interest of investing.
Pipeline create expected chance in gap financing opportunities in our core property types, especially in the multifamily sector and finally, we continue to cultivate programmatic special situations and preferred opportunities with that so far storage multifamily sponsors with an underwriting pipeline today north of $400 million.
I just want to thank the team for continued execution and now I would like to turn the call over to the operator for questions.
Yes.
Thank you, ladies and gentlemen to ask a question. Please take now by pressing star one on your telephone.
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To ask a question today, please signal by pressing star one on your telephone.
We'll pause for just a moment to allow everyone an opportunity to signal for questions.
Our first question today comes from Stephen laws.
From Raymond James Please go ahead.
Hi, good morning.
As we look at the portfolio mix.
Family asset mix is sort of flipped over the last year. If you look at your investment pipeline and where youre seeing the most attractive risk adjusted returns.
Where do you see that mix going say over the next 12 months.
Hey, Steve about greater yes.
Yes, I think I think we continue just to have more.
More financing opportunities.
Within the.
Within the multifamily sector.
It's just a larger market more institutional more transaction volume.
Obviously, the Freddie Mac pipeline is going to stay there.
And as I mentioned briefly in the prepared remarks.
The agencies kind of.
Keep spreads wider than banks and other.
Life goes we're seeing these these GAAP financing opportunities in multifamily sector kind of accelerate so our historical private preferred pipeline.
There's about 100 million Bucks a year that can be 200 million Bucks this year.
As just lower Ltvs.
No.
<unk> generated by the.
The agencies.
Create that 65% to 85% of the stack type of financing. So I would I would expect us to spend a lot of time in that market.
And that's just a function of the of the recent volatility.
Thanks for that and on the common stock investment kind of what's the outlook there.
If you fully redeploy that into two investments today. If you were to kind of look at it that way what type of impact would that have on adding interesting com or CAD to the current portfolio returns.
Yes.
The ground lease investment I think is what youre, referring to right.
Yes.
Yes, so we decided to convert we could we could repay.
Could I have the whole thing repaid.
We like the we.
We'd like leaving some out there just have some connectivity with the sponsor.
Number one and number two and probably more importantly, we think it's a two X over three years.
Our.
Hopefully investors realize that we're not just.
A dividend payer, we do have a special situation of investments like this one that create book value growth.
And more total return potential than the normal mortgage rates.
We like that risk adjusted.
Yes.
A profile of creating roughly another dollar $1 50, a share for shareholders.
Great. Thanks for the color there and you mentioned dividends I do want to ask about that lastly strong coverage.
Outlook in.
In the supplement looks like continued strong coverage.
Can you talk about how you think about setting the dividend.
Thoughts about potentially increasing that given the strong strong coverage you have in place.
Yeah, Hey, Steve It's Brian .
I think overall, we want to make sure that we can continue to cover.
Go forward earnings and obviously, it's difficult when youre getting prepayments and things to really estimate that out into the future. So.
As we increase earnings we want to be cautious about increasing the dividend.
Try to.
Peg it at a.
Coverage to our earnings available for distribution.
Because we think thats a better longer term for you than just cash available for distribution. So I think once we get a couple of quarters under our belt for the current portfolio.
Better understand where the prepayments are going to go particularly in that so far pool.
I think just the run up in values of FSFR properties.
Puts the borrowers in a position where they.
They are at a pretty low LTV with our loans.
They can refinance those pretty easily.
Not very expensive either.
You can go up to large LTV and so it makes sense for them to pay the huge prepayment penalties some cases, but.
That just creates a little bit of uncertainty in the portfolio. So we just want to be careful before we raise the dividend, but we'll look at it as a coverage on <unk>.
Earnings available for distribution is our sort of benchmark.
Great I appreciate the comments Brian .
Okay.
Thank you as a reminder, ladies and gentlemen to ask a question today. Please signal by pressing star one on your telephone keypad.
I'll now take a question from Jade Rahmani from VW. Please go ahead.
Thank you very much as it relates to the multifamily outlook.
How are you thinking about it.
In terms of valuation of the asset class from the impact.
Rising rates and also a potential slowdown in rent growth.
For some color.
The shelter index is about one third of what the fed looks at in terms of inflation and given the timeline to turn it over assets and I believe multifamily turnover ratios are still running low.
That suggests inflation will have a lagging effect on inflation and so if the fed really wants to get inflation under control they have to slow down not just the home purchase market, but also the rental bucket.
Question is what are you thinking and projecting towards the outlook for rent growth in multifamily as well as single family for rent and what impact do you think housing.
Sorry, rising rates will have on cap rates.
Yes, Hey, Jay <unk>.
Lots of unpack there I think.
So we reported an annex our key earnings two days ago.
Had a strong same store NOI growth.
We've had a couple of years.
Blended lease lease growth, both renewals and new leases north of 20%.
Same thing has occurred in April .
Mid America just is basically the same thing this morning or yesterday after the close.
And most of the operators.
Sort of.
I guess, even even on the gateway markets have all kind of increased guidance in terms of just seeing topline in CPR.
Growth within within the rock within their own the railroads. This.
This year I think as we will see continued.
Strength in underlying leases.
Especially and particularly in the agency.
The middle market.
Yes.
Agency cohort.
I think the cap rates for the <unk>.
Transaction volumes.
At least for now.
To take a brief pause, but theres still a ton of equity out there chasing deals.
And while.
There might be less.
And the buyer pool, so to speak.
Well healed in the institutional.
<unk>.
It's still chasing multifamily because of there is underlying growth and stability in the rents and a perfect perfect.
Perfect.
Close to as close to perfect because you can get for an inflation hedge.
Capital has been.
More and more capital and institutional capital has been allocated toward the residential sector for these reasons as.
As an inflation hedge and so I don't see that abating.
Rates right now are have remained steady.
There is a negative that constant at least on the agency side, where cap rates are tighter than spreads and so that dynamic.
US some concern if any.
The cap rates would increase but they haven't they haven't yet.
As Im sure Youre aware of in the last few weeks the agencies have continued to tighten spreads.
Yes, I would say that.
We're still positive.
Obviously on a relative basis to multifamily.
More so than.
Probably any other property type in this current environment, especially when it's in the Middle market segment segment, which is largely where.
Most of our activity is in terms of FSFR.
I'll, let I'll, let Brian .
Paul comment.
Yeah I'll start it's Brian .
One of the same dynamics I think with multi.
And.
Overall, I think we look at the portfolio itself and the underlying.
Assets.
And then the LTV and those deals is fairly low.
As hard for us to report on that because we don't get updated numbers specifically.
Across the entire portfolio frequently but being in the business and owning over 22000 homes ourselves across the country.
And a different vehicles, we do understand that market.
So we feel pretty optimistic about it.
As we mentioned earlier it is.
Less institutionalized sector it is harder to find opportunities in.
There's a big disparity between a handful of really large players and then everyone else is pretty small and not necessarily to the <unk>.
Types of partners that we want to win two from this vehicle. So I think as part of the sector.
Like FSFR.
It's got a lot of strong fundamentals and tailwind but.
It's hard to put money to work there.
Obviously, we don't control.
<unk> prepayments.
In the current environment.
Paul a few of them.
Yes.
With everything Brian just said and that the only thing I would add Alan would be.
The.
The difference between homeownership are strengthening in the MSR space, we've seen mortgage rates below 5%.
Youre looking at homeowners homeownership cost versus renting.
40% more in HPA versus a game, it's only been about 15% and growth rate. So it's still cheaper to rent on the <unk> side.
If you look at our rental income is it still 2025% so there's still room to run.
In that regard so I think it's still attractively priced from a rental standpoint, I think lastly, Jay I don't know how the fed is going to get it under control by raising rates.
We've had this debate internally.
<unk>.
The fed increases will just continue to make homeownership.
Less.
Affordable and available to the masses.
No.
I think that the rental space the middle market.
On space that we operate in where majority of our investments are.
We will continue to do that.
From up.
Yes, Thanks, I don't know how they will either.
They need to cause unemployment to rise.
And that means probably a recession, but there is a labor shortage so hard to see how all of this.
Lays out.
Let's see on the single family rental repayments any partial pay downs.
<unk> from progress residential and with CLO spreads widened.
And the all in cost to issue a CLO.
Does that decrease any likelihood of repayment from Prague.
Progress residential.
Hey, Jade its Paul on the progress residential or the other resi loan that yes, no no prepayments on that it's still along.
Long dated bonds, so our long dated loans, so that the prepayments still call it 20% or so.
Yes, I don't see that prepaying anytime soon just given the given the size.
So.
Brian do you have anything else on the line.
Thats.
That's all.
Thank you.
In terms of the GSE multifamily outlook do you think that they have recently picked up volumes are they are still struggling to gain market share I saw recently that.
And there are some stories about them loosening underwriting not just.
Tightening spreads as you mentioned, but also then look back debt service coverage ratios a lot of deals have penciled for them because they are looking at old rent instead of where things are today.
Do you have a sense of whether their deal flow has picked up.
Yes, I mean, youre exactly right anecdotally there.
Pretty terrible March in terms of production.
April doesn't seem like there.
Yes, there really gaining any more market share there's less transaction volume in.
Sure.
In April anyway in March so there are definitely behind their pace.
We have Freddie Mac in here.
I think two and half weeks ago.
Yes, they were.
I guess.
Tried to try to internally work through how they can be competitive and make sure that they can still.
Provide liquidity to the market because right now they are there.
Got a month behind there, but last year's run rate.
Yes.
Can you give a mark to market book value.
Value down based on where rates have moved thus far into Q.
From the <unk> side, the B piece is actually did tightened.
Given the fact that the auctions priced 200 basis points tighter than the original market clearing levels or the previous market clearing levels. Those tightened the io strips, which of course are more interest rate sensitive dose did have one they are amortizing into interest rates rising did cause a little bit of a mark to market loss.
Loss on the Io strips, but all in all I believe it was.
A pretty tight quarter in terms of the MBS book.
Okay, but so post quarter end in the second quarter. So far is book value relatively flat would you say or is it up or down any any comment you could provide or not really.
Yes relatively flat as of this month.
Okay.
Thanks, very much and I appreciate the color.
Thanks Jay.
Yes.
As a final reminder, ladies and gentlemen, if you wish to ask a question at this time. Please take note by pressing star one on your telephone keypad.
Okay.
It appears we have no further questions at this time.
Great.
Great everyone's time.
Thank you for participating we'll talk next quarter. Thank you.
Yes.
Thank you.
Today's conference call. Thank you for your participation ladies and gentlemen.
You may now disconnect.
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