Q4 2022 Nexpoint Real Estate Finance Inc Earnings Call

Ladies and gentlemen, thank you for standing by today's conference call will begin momentarily until that time your lines will again be placed on music hold we thank you for your patience.

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Ladies and gentlemen, good morning, My name is Abby and I will be your conference operator today.

At this time I would like to welcome everyone to the next point real estate Finance fourth quarter 2022 conference call.

Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star one once again.

Thank you and I will now turn the conference over to Christian Thomas You May begin.

Thank you.

Hey, everyone and welcome to the Nektar as real estate Finance conference call to review the company's results for the fourth quarter ended December 31 2020 on.

On the call today are Brian Mitts Executive Vice President.

And Chief Financial Officer, Matt Mcgrew, our executive Vice President and Chief Investment Officer, Matt <unk>, Senior Vice President investments and asset management, and Paul Richard Vice President origination standards.

As a reminder, this call is being webcast through the company's website at <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 Litigation Reform Act of 1995 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 company's other filings with SEC.

For complete discussion of risks and other factors that could affect the forward looking statements.

Does he have made during this conference call speak only as of today's date.

Except as required by law does not undertake any obligation to publicly update or revise any forward looking statements.

This conference call also includes analysis of non-GAAP financial measures for a more complete discussion of these non-GAAP financial measures see the Cubs.

The presentation that was filed earlier today I would now like to turn the call over to Brian Mitts. Please go ahead. Thank you Kristen for say everyone joining us today.

Im joined with our entire.

Entire team here, so what will be giving some commentary on the start.

Let's discuss our results for the quarter and the year provide guidance for the first quarter and the entire team for some detailed commentary on the portfolio.

Lending environment.

We'll start with our Q4 results, which are as follows for the fourth quarter reported net loss of 16 cents per diluted share.

<unk> net income <unk> <unk> per diluted share for the fourth quarter of 2021.

The decrease in net income as a result of lower prepayments in Q4, 2022, and mark to market adjustments on our common stock and see she MBS portfolios.

Interest income increased four 8% over Q4 2021, driven by a 166 basis point increase in average yield on investments offset by lower prepayments in Q4 2022.

Interest expense increased 47, 5% driven by a 116 basis point increase in average borrowing rate.

Earnings available for distribution was 49 cents per diluted share in Q4 compared to <unk> 54 per <unk> per diluted share in the same period of 2021.

Cash available for distribution was <unk> 52 per diluted share in Q4 compared to <unk> 63 per diluted share in the same period 2021.

Decrease in earnings available for distribution and cash flow distribution was the result of lower prepayments on our <unk> portfolio in Q4.

We paid a dividend of <unk> 50 per share in the fourth quarter. The board declared a dividend of <unk> 50 per share payable for the first quarter.

Our board also declared a special dividend of <unk> 85 per share for the first quarter.

You tend to pay additional special dividends of $18 <unk> per quarter for the remainder of 2023.

Our dividend for quarter was <unk> nine eight times covered by earnings available for distribution and 1.04 times covered by cash available for distribution.

<unk> per share decreased to 76% quarter over quarter to $20 11 per diluted share as a result of the mark to market adjustments of our common stock and <unk> portfolios.

During the quarter, we originated two investments with $19 million of outstanding principal with the combined current yield of 11%.

One investment partially redeemed for $10 8 million of outstanding principal.

New to the full year results now for the full year 2022, we reported net income attributable to common shareholders for two one cents per diluted share compared to net income of $3 93 per diluted share for the same period of 2021 again. This was largely driven by lower prepayments on our CFR poor.

Soybean in the period and mark to market adjustments.

Earnings available for distribution was $2 75 per diluted share year to date compared to $1.08 per diluted share in the same period 2021, an increase of 45, 5% cash.

Cash available for distribution was $3.21 per diluted share year to date compared to $2.21 per diluted share in the same period of 2021, an increase of 45, 2%.

Higher year over year earnings available for distribution and cash available for distribution for the year, driven by higher prepayments and requisite prepaid penalties in the first and second quarter of 2022.

As of today, the outstanding total portfolio stood at $1 $7 billion composed of 85 investments.

Weighted average loan to value and debt service coverage ratios for our debt securities were six to eight 6% from $1 seven to eight times respectively.

As of today, the company's debt to book value ratio was 261 times.

Our dividend for the year was 138 times covered by earnings available for distribution of $1 six one times covered by cash available for distribution.

Book value per share decreased six 5% year over year of $20.11 per diluted share.

Moving to guidance for the first quarter, we're guiding to earnings available for distribution and cash available for distribution is false.

Earnings available for distribution of <unk> 47 per cent per diluted share at the midpoint of the range of 42 on the low end <unk> on the high end.

Cash available for distribution of <unk> 50 per diluted share at the midpoint with a range of 45 per share on the low end and <unk> per share on the high end.

The decrease in cash built distribution earnings available for distribution from the fourth quarter, driven primarily by expected redemptions in the first quarter.

So with that let me turn it over to the team for a detailed discussion of the portfolio in credit markets not gets thanks, Brian for the fourth quarter and full year 2020 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 experienced and owning and.

In commercial real estate, and our ability to leverage information from being both an owner and operator and lender 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 in stabilized assets conservative underwriting at low leverage with well heeled sponsors will provide consistent and stable value to our shareholders.

During the fourth quarter the loan portfolio continued to perform strongly and is currently composed of 85 individual assets was approximately $1 7 billion of total outstanding principles.

Principal as Brian mentioned, the loan portfolio is 96% residential with 43% invested in loans collateralized by single family rental properties and 53% invested in multifamily primarily agency MBS.

The remaining 4% of the loan book is life Sciences and self storage.

The portfolio's average remaining term is five nine years as 92% stabilized as a weighted average loan to value of 68, 6% and an average debt service coverage ratio of one 7%.

Our portfolio is geographically diverse with a bias towards the southeast and southwest markets, Texas, Georgia, and Florida continue to be the largest portion of our portfolio at approximately 51%.

100% of our investments are occurring from.

From the beginning of the fourth quarter through today, we were able to close four new investments totaling approximately $34 million with a weighted average unlevered yield of 11, 8% in summary, we continue to find attractive investments opportunities investment opportunities throughout our target markets and asset classes.

We will continue to evaluate these opportunities with the goal of delivering value to our shareholders I would now like to hand, the call over to margins. Thanks, Matt during the fourth quarter. The company was not active in the primary or secondary bond market, but continued to source underwrite and evaluated potential investment targets daily.

Again stress the entire CBS portfolio by shocking cap rates and NOI growth determine how far cap rates could theoretically widen in interest rates could rise until the portfolio is bond performance would deteriorate. The result of somewhat as expected. The vast majority of the portfolio has demonstrated strong NOI growth over the past three years and refi risk minimal even at the.

Stress rates the long dated nature of the <unk> portfolio provides an appealing backdrop, we firmly believe in the resiliency of the residential space and the current inflationary environment and the safety of these investments we continue to be prudently leveraged on our repo financing at approximately 64% LTV at quarter end and have continuous dialogue with our rebuild any part.

<unk> on the state of the market and the finance portfolio lastly, touching on the continued performance of the <unk> loan book.

Most of our loans are in the portfolio, our current performing and displaying strong metrics in terms of rent growth and occupancy as the demand for <unk> continues to be robust portfolio did not have any <unk> paydowns in the fourth quarter to finalize our prepared remarks before we turn it over for questions I'd like to turn it back over to Brian Mitts.

Yes.

Turn it over to questions.

Thank you.

Reminder, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.

And we will take our first question from Crispin Love with Piper Sandler Your line is open.

Thanks. Good morning, everyone first question on Prepays I don't think I saw it in the release, but what where prepays in the quarter versus last quarter and do you expect prepays to remain lower over the near term.

Yeah.

In terms of FSFR, Yes, I think we would expect the prepayments probably to be less prevalent in Q1 of this year Q2. This year as rates continue to kind of our efforts.

4% 10 year rate.

I think we probably won't see as much action in terms of prepayments, but we will continue to evaluate.

Alright, Thanks, and then can you speak to your views on both multifamily and FSFR right now it seems like they're a little bit.

More bullish on at that far, but just what that costs at 8% to 9% cap rates they'll probably in about the 5% range are you seeing demand pull back a lot from borrowers or are there pockets of our asset classes, where borrowers are still active.

Yes, hi, its Matt were greater.

I would say just generally the transaction market and this isn't a surprise to anyone on this on this call is somewhat somewhat muted.

I think deal volumes down in the 70% to 80% from a year ago. So.

That also equates to lower demand for borrowings obviously refinancings are few and far between also because we don't have a stabilized.

10 year terminal rate, yet so I think most most participants that including ourselves on the on the equity side are waiting for.

Cause our pivot or some more clarity from the fed.

Notwithstanding that.

The greater transaction or excuse me the greater.

Performance in <unk> multifamily continues to be strong both.

In our businesses at least we're still seeing high single digit same store NOI growth. So.

Notwithstanding the fact that there is no price discovery the businesses SSR multiyear stope.

Still performing very well.

Okay.

Thanks, Matt and then if I could just squeeze just one last one in can you just provide any detail on what youre seeing on multifamily and single family rents right now and how they are growing on a year on year basis, and then I guess a month on month as well.

Okay.

Yes, so year over year.

Market rent growth.

The worst I'm speaking, mostly to the Sunbelt smile year.

Year over year growth is roughly 4% to 6% so far in the first quarter.

That's a little bit skewed because there is a pretty dramatic earn in from the prior year leases that were signed in the 15% to 25% range. So total rent growth for the year is.

At least in our portfolio is kind of 10% to 12% so still at historically healthy.

On the <unk> side. There is the same same dynamic but to a little bit lesser extent I'd say single family rents are year over year.

6% to 8%.

With a smaller area.

Quarter over quarter they are decelerating.

Multifamily was we finished the year.

Low single digits.

First quarter was 6%. So there if they are decelerating same thing with that so far but to a lesser extent.

Thanks, I appreciate you taking my taking my questions.

And we will take our next question from Stephen laws with Raymond James Your line is open.

Hi, good morning.

Hi, good morning, Congrats on a nice year, I mean, certainly great C and a special dividend pretty material size special as well so congrats on that.

When you look at your investment pipeline I know you.

<unk> talked about the two.

Equity deals you did in <unk>.

The last quarter, but when you look at the pipeline and where Youre seeing the best opportunities as you think about portfolio mix and how that may or may not shipped over the year. How is your pipeline building and where do you guys see the best opportunity to deploy capital kind of as you look out the next six months.

Yes, I think youre going to see.

Youre going to see us waters from grass in the life science space.

We're underwriting about 400 ish million dollars of.

Of preferred equity and Mezz opportunities when I say med is not true.

True true kind of 60% to 80% of stack, but more kind of 55% to 65% of stack theres a number of opportunities.

Both in the lab kind of redevelopment and in the cgmp space.

But we're spending a lot of time on that space historically, historically at least on the cgmp side not well bank.

So we're defining in our niche in that space as we speak.

So I would expect that portion if youre looking at a pie chart to expand from where it is I think it's now roughly two 3%.

So maybe 10% to 12% so that's probably the overwhelming majority of what we're doing right now, but we still have.

The robust pipeline.

And the private multifamily preferred as well.

Great Thanks for that and Brian .

Maybe quick answer, but any impact of C sold as far as implementation any changed.

<unk> book value of reserve or anything we need to consider with our models.

Yes, so in the K or we're going to have a range of what the impact is going to be that there'll be a little bit of an impact.

But the implementation is proceeding well and.

We're on target so starting this quarter, we will be reporting under seasonal.

Great well I'll look for that in the K and thanks for the comments this morning.

Thank you.

And we will take our next question from Jade Rahmani with <unk>. Your line is open.

Thank you very much just a follow up to Steven's question is there any percentage impact to book value you could.

Comment on on this call.

From Stifel.

Not as of 12, 31, but there'll be a little bit of an impact starting this quarter.

I think on a go forward basis.

The seasonal amount is a little bit more than our loan loss provisions.

Without Cecil.

Okay.

Thanks, very much in terms of the credit outlook for commercial real estate broadly then the next point platform can be somewhat opportunistic do you expect to play in it in any of the buckets of distressed or opportunistic investment that's playing out whether it be office repositioning.

Meaning whether it would be you know I think you mentioned preferreds in multifamily, but how do you feel overall about that.

Kind of a segment of the market.

Hey, Jay it's Matt Greater I'd say, we're pretty hands off.

I do I do know folks and a lot of smart folks that are playing in.

Office SaaS beazer.

Heavy weighted office condo and retail that are pretty pretty significant significantly distress.

Since we don't have a big operating platform, an office or retail or any of those higher capex capex type of property types, we're not we're not.

Yes.

I wouldn't put our investors' money in those and those types of transactions at this point.

Okay fair enough.

Wanted to ask about multifamily.

Five markets constitute about 25% of the 1 million units currently under construction, including <unk>.

This growth markets, such as Phoenix, and Austin, Yeah, what are your thoughts about the market's ability to absorb that supply and whether it creates any issues some pain.

Yes.

We see.

Supply, peaking in either Q Q4, this year Q1 of next year.

Largely those.

Or in the Sunbelt Smile, where we operate <unk> assets, albeit at a lower price points.

There will be some softness in terms of occupancy and rents in our view in the sunbelt smile with over the next year or so.

But after that deliveries.

Those deliveries fall off a cliff.

They're basically going from 387000 units delivered in the fourth quarter of this year.

Down to 126000 in the fourth quarter of <unk> 24, So thats and then they're down to in Q3 of 25% to 12000 and so.

That's the data that we're seeing there will be kind of a short term blip I think in terms of softness.

In these areas, mostly around the higher end type of products.

But I think you want to be an owner of assets and an owner of multifamily in late 'twenty four and 'twenty five.

Yeah.

And on the single family for rent side, how is performance tracking relative to your expectations clearly a moderation in rent growth that we're seeing as well as an uptick in turnover driving increased expense and then there's also still inflation pressures on the expense side.

The less rents are still high in occupancy as high any any performance issues and on the single family for rent side.

Not not in our portfolio nor in the loan portfolio that we have.

Yes, as you mentioned rents are still going up at a pretty pretty good clip and I think.

Mitigating some of the other cost increases.

It receives a NOI growth is still relatively strong.

Don't see any issues in our portfolio with that or in the future.

Thanks very much.

Thank you Jade.

And ladies and gentlemen, we have no further questions at this time I will now turn the call back over to our presenters for any additional or closing remarks.

Net Roger I appreciate everyone's time and thoughtful questions.

It will talk to you next quarter.

And this concludes today's conference call. We thank you for your participation you may now disconnect.

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