Q3 2022 Nexpoint Real Estate Finance Inc Earnings Call
Go ahead.
Thank you good day, everyone and welcome to <unk> Real estate Finance conference call to review the company's results for the third quarter ended September 32022 on the call today are Matt <unk> Executive Vice President and Chief Investment Officer, Brian Mitts, Executive Vice President and Chief Financial Officer.
Matt <unk> senior Vice President investments and asset management, and Paul Richard Vice President originations and investments.
As a reminder, this call is being webcast through the Companys website at <unk> Dot next quaint dot com.
Four 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 $19 95 that 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 Companys off other filings with SEC for a more complete discussion of risks and other factors that could affect the forward looking statements. This statement.
It's made during this conference call speak only as of today's date and except.
As required by law required by law in Russia 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 non-GAAP financial measures see the company's the presentation that was filed earlier today I would now like to turn the call over to Matt Mcgregor. Please go ahead Matt.
Actually good because it'll be Brian .
Thanks, Kristen and appreciate everyone joining today I'm going to kick things off going through our Q3 and year to date results.
And then I will touch on guidance for the fourth quarter, and then turn it over to you for some detailed commentary.
Q3 results were as follows third quarter, we reported net loss of <unk> <unk> per diluted share compared to net income of $1 17 per diluted share for the third quarter of 2021 <unk>.
A decrease in net income as a result, lower prepayments in Q3's, mark to market adjustments on CBS portfolio.
Interest income increased 14% over Q3 2021, driven by a 76 basis point increase in average yield on investments.
<unk> expense increased 37% driven by $102 million of additional borrowings and a 98 basis point increase in average rate.
Earnings available for distribution of <unk> 48 per diluted share in Q3 compared to <unk> 51 per diluted share in the same period of 2021.
Cash available for distribution of <unk> 50 per diluted share in Q3 compared to <unk> 62 per diluted share in the same period of 2021.
The decrease in earnings available for distribution and cash available for distribution was the result of lower prepayments in Q3.
We paid a dividend of <unk> 50 per share in the third quarter and the board has declared a dividend of <unk> 50 per share for the fourth quarter.
Dividend in the third quarter was <unk> 96 times covered by earnings available for distribution and one times covered by cash available for distribution.
Book value per share decreased four 2% quarter over quarter to $20 68 per diluted share partially as a result of mark to market adjustments and Cvs portfolio.
During the quarter, we originated or purchased non investments with $113 million of outstanding principal.
Find current yield of eight 3%.
Our investments will redeemed or sold was $27 5 million of outstanding principle for total net loss of 731000.
Yes.
Year to date results are as follows the nine months ended September 32022, we reported net income attributable to common shareholders of <unk> 71 per diluted share compared to net income of $3 <unk> per diluted share for the same period of 2021.
This decrease was largely driven by mark to market adjustments in our CBS portfolios.
He is available for distribution was $2 25 per diluted share year to date compared to $1 35.
<unk> per share.
Per diluted share in the same period in 2021, an increase of 67, 5% cash.
Cash available for distribution was $2 69 per diluted share.
Year to date compared to $1 57 per diluted share in the same period of 2021, an increase of 72, 1%.
Higher year over year earnings available for distribution and cash available for distribution for the year, driven by higher prepayments and requisite prepayment penalties in the first and second quarters.
[music].
Our dividend for the year was one five times covered by earnings available for distribution to one eight times covered by cash available for distribution.
Now, let's move to guidance for the fourth quarter the.
The fourth quarter, we're guiding to earnings available for distribution of cash available for distribution as follows.
Earnings available for distribution of <unk> 53 per diluted share at the midpoint with a range of 48 since on the low end 58 on the high end.
Cash available for distribution of <unk> 52 per diluted share at the midpoint with a range of <unk> 47 from the low end 57, and the high end.
Okay.
Hum.
The increase in cash available for distribution in earnings available for distribution from the third quarter is driven primarily by new investments in the portfolio.
Yes.
Okay.
[music].
Yes.
Okay.
[music].
So with that let me turn it over to the team for the detailed commentary.
Thanks, Brian .
Third quarter continued to show strong performance across each of our investments in asset classes as of today. The portfolio is currently comprised of 83 individual investments with approximately $1 7 billion of total outstanding principal.
Loan portfolio is 96% residential with 42% invested in senior loans collateralized by single family rental and 54% invested in multifamily primarily the agency MBS. The remaining 4% of the loan book is life Sciences and self storage.
The portfolio's average remaining term is five six years is 93% stabilized has a weighted average loan to value of 68, 1% and an average debt service coverage ratio of 176 times. The portfolio is geographically diverse with a bias towards the southeast and southwest, Texas, Georgia, Florida combined for approximately 49% of our exposure.
On a geographic basis, all of our investments our current <unk>.
Moving to the opportunities we were able to take advantage of during this quarter and shortly thereafter through today, we were able to close 11, new investments totaling $132 million with a weighted average unlevered yield of 9%.
There are 9% and an average levered yield of 11, 2%.
$9 million of mezzanine investment.
Investments were made collateralized by stabilized self storage property located near Miami, Florida, with an unlevered yield of 11% 21, 5 million and three separate preferred equity investments collateralized by a stabilized by stabilized multifamily properties.
In Plano in Fort worth, Texas, and PERC, one Washington at a weighted average estimated yield of 13, 3% of.
$15 million preferred equity investment also closed collateralized by stabilized life Sciences, CMO property outside of Minneapolis, Minnesota yield of 10% the tenant as well capitalized group and signed a long term lease at the property.
$5 million of MSR notes with an estimated levered yield of 13, 8% closed an $85 1 million or <unk>, including the Freddie Mac bps with an average unlevered yield of seven 6% Unlevered yield of 12, 9% closed shortly after the quarter.
Summary, we continue to find attractive investments throughout our target markets and asset classes. We will continue to evaluate these opportunities with the goal of delivering delivering value to our shareholders I would now like to hand, the call over to Paul Richards. Thanks, Matt during the third quarter. The company was active in the primary bond market and was awarded a 70 plus $5 billion Freddie Mac floating rate.
An attractive deal that sofa, plus 525, and our levered yields in the low to mid teens, which is prudently leveraged via attractive price repo financing the bond boast a great geographical presence prudent underlying loan leverage as always excellent sponsorship.
We stressed the entire MBS portfolio by shocking cap rates and NOI growth to determine how far cap rates could theoretically widening and interest rates could rise until the bond performance to deteriorate. The results were somewhat as expected. The vast majority of the portfolio has shown strong NOI growth over the past few years and refi risk is minimal even at these stressed.
Rates.
We continue to be sensibly leveraged on the repo at roughly 60% LTV at quarter end and have constant dialogue with our great repo lending partners on the state of the market and the rebuild of the MBS portfolio.
Lastly, touching on the continued performance of the <unk> loan pool, and the Q3 2022 loan Paydown at all at some of our loans are performing and demonstrated strong metrics in terms of rent growth and occupancy is as the demand for single family rental growth is still a red hot the portfolio. The portfolio had one <unk> loan payoffs in the third quarter, which generated an IRR.
22% as compared to the original underwritten IRR of only 9% due to the early prepayment penalty. The investment was able to generate outsized net proceeds than the original underwriting and in 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 mammogram.
Paul and the team as mentioned in roads credit investments in primarily stabilized shorter term lease duration assets with lower capex that could have and should continue to maintain dynamic pricing power in today's inflationary environment.
Underlying NOI is embedded in our stabilized <unk> multi and storage collateral continue to outperform other property types, providing a resilient base of earnings for distribution is stable year yields to our investors.
Though moderately decelerating from historical peaks earlier this year same store NOI growth in multifamily FSFR and storage are still pushing high single to low double digits.
On the origination front the team continues to put capital to work in our core property types at accretive yields and in addition, we believe this market is right for us to generate more of our special situations Tactical Tiger.
Investments for well heeled sponsors to take advantage of the lack of liquidity in the private markets, especially as it relates to multifamily portfolio transactions and single family rental, particularly particularly in the build to rent space.
We're also pleased with the lack of transitional assets or business plans within our portfolio. Indeed, we're not we think we're not speaking to you today discussing transitional business plans on office or other longer term duration assets and finally, it is an exciting time for our business and that our portfolio enjoys a stable and transparent earning stream for the next five plus years.
From which we can utilize our deep relationships and frankly, our own investment platforms across multi <unk> storage and life sciences to continue to generate outsize risk adjusted returns to our investors.
That's all I have for.
For our prepared remarks, and I would like to turn the call over to the operator to answer any of your questions.
Thank you if you'd like to ask a question simply press the star key followed by the digit one on your telephone keypad.
If youre using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Once again star.
Star one we'll pause for a moment.
And we'll first hear from Stephen laws of Raymond James.
Hi, good morning.
Mark.
Morning, I guess, let me Matt in the grain or maybe start with a bigger picture question, you know with mortgage rate going but 7% where they are can you talk about.
What impact do you expect that to have on your <unk> in multifamily.
<unk>.
Rolls through do you expect higher renewal rates, how do you expect to look at occupancy or expect increases there.
Maybe talk about the <unk>.
Buying a whole becoming less affordable and how that benefits your FSFR multifamily investments.
Yes, I think as.
Youre alluding to it but youre exactly right.
I think the fed is doing right now is it making home affordability and easier.
Across the multifamily loan book and in our equity portfolio.
We're seeing retention rates and renewal retention rates go from $40 48.
Excuse me, 45% to 50%.
<unk> to 50, 556%.
And sort of the affordability workforce space, which is largely.
What our CBS portfolio makes up as well.
Anything on the on the <unk>.
Our platform their volume growth and our other platforms continue to see.
Really high retention.
Especially again to that affordable space and.
I would expect with the lack of construction financing out there.
Yes, the supply is going to even decrease for for developers new starts have fallen off a cliff.
In the second half of the year.
We think multifamily supply peaks in late 'twenty three.
As such the 'twenty four 'twenty five.
Probably be pretty good years for both equity.
Investors in this space and on the credit side.
Great. Thanks, Matt.
When we think about new investments when you look at things on a relative attractiveness.
Money go into work and I appreciate that.
Highlighting the new investments.
Some new private equity investments preferred equity investments too I think but.
Can you talk about how those stack up from a return standpoint versus considering stock repurchases just given the.
The weakness here ahead of the quarter and where book value came in north of.
Most of 'twenty.
Yes, I think.
I think the idea is probably to balance it in a barbell strategy and do both.
Thankfully.
You might recall in Q2, we had $150 million of pipeline for the for the rest of the year.
Roughly $115 million of that has been soaked up and so we're pretty we're pretty pleased with the growth profile over the next 12 months from external investments.
To the extent that we stay at 75% of book value that might be our first.
Our first use of free cash flow.
On the margin, but otherwise.
I think I think it would be a barbell.
Great and my last question for now.
The two common stock investments can you give us an update on those and how you're thinking about.
Investment timeline and returns are.
Considerations of reallocating anything into cash flowing debt investments.
Yes.
I'll start with the.
The storage piece and I'll kick it to Paul to talk about.
The ground lease investments so on the storage side.
We're seeing within our own portfolio pretty dramatic same store NOI growth.
Yes.
Eclipsing 25 plus percent.
And then in <unk>.
<unk> to.
'twenty three we think it could be.
Low teens, as well rents and kind of the same.
In the same realm we.
We just closed on the on the senior side of the portfolio of SaaS B right. After labor day with J P. Morgan at accretive.
Levels. So we're sorting out the capital stack that was the first piece.
Second piece is ongoing with extra space discussions in terms of.
De levering their preferred.
I would expect that we would have a resolution there.
By year end added accretive at an accretive level for the common equity.
So pretty pretty pleased with how the portfolio is performing and also pleased with the.
The cap stack maneuvering that we've been able to achieve so far this year. This environment, Paul you talked about.
Yes, that's all on our ground lease investments right now they are rolling on all cylinders right now to have dry powder that they're deploying it for five plus percent cap rates on stabilized.
Our leases so.
Our stabilized assets they have a very good runway into the aggressive this year and next year to take advantage of what's going on in the marketplace, which as you know a lack of liquidity on the credit side, some nail to fill that gap with these with the types of investments so.
I think thats, because they really hit their stride at the right time and with this dry powder is going to be a good next 12 to 18 months. So I think in terms of exit call. It three or four years from 82 to four years, but I think there's also market, possibly for an exit to since we are such a small piece of the equity as well so.
I think we are.
I think the great time to be in this investment.
Yes, particularly if I just add that Steven.
These are both kind of bite size check sizes, and a really great portfolio is to the extent that we found.
The special sit or other use of proceeds that we thought was more accretive.
We have a number of external parties and quite frankly internal parties.
To monetize these two assets.
Pretty pretty good optionality.
Great really appreciate the color.
On both of those investments thank you.
Thanks Sue.
Yes.
Next we'll hear from Steve Delaney of JMP JMP Securities.
It's nice to be on with you on the call and also to be active from a research perspective.
I was wondering if you guys have had a great track record with the Freddie K series, we've been reading lately, just trying to keep up with all the problems in the CLO market.
Freddie is.
Starting to crank up this Q series again with.
With multifamily bridge loans, just wondering if you are looking at that.
So you're you prevent you prefer stabilized rather than transitional.
<unk>, but as this develops and expands could you see yourself getting involved in the Q series as well as with the K that you've done so well with.
Yes. Thanks, Steve This is Matt in greater and pleasure pleasure to talk to you and appreciate.
I appreciate the coverage.
We have had a long history as you noted with Freddie and iterate with them on a number of entrepreneurial and creative things that they've tried to do we will continue to do that with the Q series.
I think it's in the early early stages.
To the extent that we think is attractive.
Investment for this portfolio, we will look at it but yes.
On the other things that we're doing with them.
I think largely still prefer the stabilized property types.
The K series.
Got it and with the case series obviously those are.
Fixed rate term loans, mostly 10 years I guess.
This move up in coupons I suspect when we see reports from Walker Dunlop Arbor Realty et cetera, we're going to see a dramatic slowdown. So is it your expectation when you sort of looking at the portfolio out into 'twenty three anyway.
This is going to be a big drop in issuance.
Yes, I think that largely.
The case series that we've done it in floating so we're actually benefiting from the.
From the sofa.
Okay, Yes.
LIBOR moves but.
Youre right you get on the you've got a team thats going on right now so to the extent that.
There is refi activity or purchase activity most sponsors are floating.
Our floating today.
You have given us that they don't want to put on fixed rate debt at five 5% to 6% levels and thats pretty pretty material negative leverage.
If you believe cap rates are still.
So sub 545, $4 or 5%, which we which we do.
So most of the product I think over the next six months.
To nine months will be skewed on the floating side would be my guess, yes. It makes sense.
Depends on your view on the fed but.
Eric are thinking here is that we're going to get a pivot sometime in the second half of 'twenty three.
We'll just see how how far we move back down the hill so to speak.
Great.
Yes.
Just one last quick one.
We're not.
We've got a major disruption.
Been talking about.
We don't know how to call on how long it will last hopefully hopefully not but let's just say.
The.
Yes.
Mess continues well through 2023 do you think you could see some situations where.
There will be needs for rescue financing by borrowers or even seen.
<unk> bank capitulate and be selling some loans at an attractive discount I know, we're not there now but.
Is that something you would be prepared to take advantage of it.
This thing gets really bad.
Yes.
If you go back to Covid, there was a great opportunity that lasted about three weeks to buy capacity dislocated yes.
<unk> Securities.
We did as much as we possibly could but there's just so much capital on the sidelines that soaked it up.
Yeah.
I do think an interesting research project for.
For someone would be to go call Gateway office assets that are 40 years old.
Longer that are held by your CBS or banks.
At the basis of.
Whatever the per square foot basis of the loan is that I think probably are in trouble or will be in trouble.
Yeah that could be that could be an interesting.
Instead of weakness, but I don't think youll see us dip into that space, but I do think thats probably work.
As a distress probably first first illuminate.
Yes, that's where we're seeing all the four and five rated loans with the commercial mortgage Reits Thats for sure is that you often have base what was it. Thank you so much for the comments this morning.
Thanks, Steve.
Next we'll hear from Jade Rahmani of K B W.
Thanks, very much do you have any view on home prices and where you think.
They will go in 2023.
What would your.
Guess or estimate be for magnitude of home price declines.
Yes, Hey, James Brian .
From an <unk> perspective, I think you've got to distinguish it from housing itself, obviously housing prices I think youre going to.
A decline or decelerate and increase it.
It has not declined but I think from the <unk> perspective, we're seeing really strong rent growth and high Occupancies I think invitations reported already but.
As Matt mentioned within our private portfolio, which is quite large.
We haven't seen a deceleration of brands we've seen good NOI growth, so I think that.
We're not going to see the same type of decline in asset values in that context, So I think <unk> still got great fundamentals.
I think as you look across our loan portfolio at the underlying assets. That's very similar so we may see a little retracement.
Just depending on kind of where cap rates go and where they're at as kind of anyone's guess at this point just transaction volumes pretty thin.
Ross really all sectors, but.
It certainly hasn't moved in tandem with interest rates and I think that.
Occupancy the same types of value degradation in <unk> T will on housing in general.
Okay.
They did report invitation homes and their stock is down 8% today.
And their results.
Their expenses I think were quite high and surprise to that.
The downside for us outside of our <unk>.
Decrease in our guidance, but I think the public markets and private markets for us. So far I think are very disconnected as well.
Okay.
Where do you think multifamily either prices and absolute nominal terms or cap rates go.
Also.
Similar to <unk> its not yes, its matter of greater I think so.
So we're marketing ourselves on the on the equity side portfolio Sunbelt portfolio today.
And bids are coming in.
Spot cap rates around 5%.
Levels.
There is.
A couple of data points out of the market on larger portfolio is 500 million plus that are non sunbelt are partially sunbelt.
Eclipsed that are eclipsing five.
5% today so.
Taking those two data points from what we see and Theres not a lot of transaction activity as you know but.
If you're if you got to sell its probably a 445% to 5% cap rate today and.
And in the bid sheets.
That's your targets aren't as deep as they were certainly the first half of the year.
Okay, and so to finance that you'd be in the sixes on our cost of debt or high fives.
It depends if you if you can.
Fixed or floating if you'd go floating youre, probably 200 over.
The sofa right so yeah.
Floating basis, and then on a fixed rate basis, the spreads to the 10 year largely been $1 50 to 175.
What we're seeing.
Michigan business on the agency side.
Bill.
Well tight spreads probably 20 to 30 basis points on both floating and fixed.
20% to 30 basis points, yes.
Okay, and so what do you think the IRR is on those kinds of things.
Deals.
On a leverage basis.
Probably high single digits on a five year hold if you have growth if not it's certainly it's certainly less than that.
Too much negative leverage right now in in the multifamily space.
Yes.
Someone's got to give.
On an unlevered basis, which could.
We think youll, probably see most of the activity in the latter half of the year.
Or in the first half of the year are these core funds that are buying a core plus products.
And I think that their underwriting so an unlevered.
Probably six or 7%.
Return it over a 10 year old.
Okay.
Operator any other questions.
Yes.
There are no further questions at this time I will turn the call back over to our presenters for any additional or closing comments.
Yeah I appreciate everyones.
Participation today and look forward to speaking to you next quarter. If you have any other questions feel free to reach out to the team here and we will be happy to answer them. Thank you.
That does conclude today's conference. Thank you all for your participation you may now disconnect.