Q1 2023 NexPoint Real Estate Finance Inc Earnings Call
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Good morning, My name is Abby and I will be your conference operator today.
This time I would like to welcome everyone to the next point real estate by next quarter, One 2023 conference call.
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 star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one on your telephone keypad.
Thank you.
Christian Thomas you May begin your conference.
Thank you good day, everyone and welcome to the next point Real estate Finance Conference call to review the company's results for the first quarter ended March 31st 2023 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.
In asset management, and Paul Richard Vice President originations and investments.
As a reminder, this call is being webcast through the company's website at <unk> Dot net quite 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 the S. E. C for a more complete discussion of risks and other factors that could affect the forward looking statements.
The statements made during this conference call speak only as of today's date and except as required by law and does not undertake any obligation to publicly update or revise any forward looking statements. This conference call. Also includes an analysis of non-GAAP financial measures for a more complete discussion of these non-GAAP financial measure.
See the company's presentation that was filed earlier today.
I would now like to turn the call over to Brian Mitts. Please go ahead Brian .
Thank you for that Kristen. Thank you for everyone joining us today I'll get it started by briefly going through our results for the quarter and then I can go into guidance for Q2.
And then turn it over to the team and talk about.
Thank you <unk>.
Some of the things Youre seeing in the world today and.
What we see in the lending environment.
So starting with Q1 results for the first quarter. We reported net income of 36 37 cents per diluted share compared to net income of 78 cents per diluted share for the first quarter of 2022 decrease in net income year over year as a result of lower prepayments in Q1 'twenty.
Three if you recall, we had quite a few prepayments last year, particularly in the first quarter.
Earnings available for distribution was 52 cents per diluted share in the first quarter compared to $1.20 per diluted share in the same period of 2022.
Cash available for distribution of <unk> 55 per diluted share in Q1.
<unk> to $1.55 per diluted share in the same period in 2022.
Again as with net income earnings available for distribution of cash available for distribution were lower year over year as a result, lower prepayments in the first quarter of this year.
We paid a dividend of <unk> 50 per share in the first quarter and the board has declared a dividend of <unk> 50 per share payable for the second quarter. The board has also declared again, a special dividend of $18.05 per share for the second quarter.
Tend to declare special dividends of 85.
For the remainder of each quarter for this year.
A dividend in the first quarter is one point your four times covered by earnings available for distribution and one one times covered by cash available for distribution.
Book value per share decreased two 2% quarter over quarter to $19.59 per diluted share primarily due to the special dividend and mark to market adjustments on our common stock investments.
During the quarter, we originated six investments with $34 $8 million outstanding principal with a combined current yield of 11, 4%.
During the quarter, we had one investment to partially redeem for $11 5 million of outstanding principal and another investment that fully redeemed for $24 7 million.
So let me now move to guidance for the next quarter.
For earnings available for distribution and cash available for distribution.
Earnings available for distribution were guiding to 46 cents per diluted share at the midpoint with a range of 41 cents on the low end 51 cents.
On the higher.
Cash available for distribution of regarding to <unk> 50 per diluted share at the midpoint with a range of 45 cents on the low end and 55 from a high in the decrease in cash flow for distribution in earnings available for distribution for the first quarter again is driven by our SAR is driven by.
Primarily the onetime gain on the deconsolidation of the multifamily property that we consolidated for 2022.
With that ill turn it over to the team for additional commentary.
Thanks, Brian during the quarter the loan portfolio continued to perform strongly and is currently composed of 88 individual investments with approximately $1 7 billion of total outstanding principal.
One portfolio is 95% residential with 44% invested in loans collateralized by single family rental and 51% invested in multifamily primarily the agency <unk>.
94% of the loan book, because life science and self storage.
The portfolio's average remaining term of five four years is 92% stabilized the weighted average loan to value of 68, 7% and an average debt service coverage ratio of one nine times. The portfolio is geographically diverse with a bias towards the southeast and southwest markets, Texas, Georgia, and Florida combined for approximately <unk> <unk>.
31% of our exposure on a geographic basis as Brian mentioned during the quarter. We originated six investments with $34 8 million of outstanding principal with a combined current yield of 11, 4%.
One investment partially redeemed for $11 5 million of outstanding principal on one investment fully redeem for $24 7 million.
Six new investments consisted of a $14 million preferred equity investment in the build to rent portfolio and Forney, Texas, a suburb of Dallas with a well heeled repeat sponsor the preferred has a fixed rate of return of 11%. We also invested $500000 in common equity into the project for additional upside.
And $11 $2 million preferred investment was made with the same sponsor on a build to rent portfolio located in Richmond, Virginia. The investment has also has a fixed rate of return of 11% and included another $500000 of common equity for additional upside.
To follow on life Sciences preferred investments were made for a total of $2 7 million and have an average fixed rate return of 10%.
One follow on multifamily investment was made for $1 $2 million and has a fixed rate of return of 11%. The property is located in Houston, Texas and is owned by a repeat sponsor with 80000 units under management across the country.
We also purchased a floating rate piece with an outstanding principal balance of approximately $15 million.
With two years left until maturity and a current yield of 13, 1%.
After the quarter ended we made a $20 million preferred equity investment into the cgmp facility in Temecula, California with repeat sponsor the preferred equity has a fixed rate of return of 10%.
Redemptions in the quarter consisted of the partial redemption of approximately 11 5 million of preferred equity on stabilized multifamily property located in Las Vegas, Nevada for redemption of our mezzanine investment partner for our mixed use project located in Los Angeles, California, and the amount of $24 7 million and.
In summary, we continue to find attractive investment opportunities throughout our target markets and asset classes and 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 Paul Richards.
Thanks, Matt as previously discussed during the first quarter. The company was able to source underwrite and acquire season agency DP floater, providing a very attractive yield of silver plus eight 5%. We began this stress the entire C. MBS portfolio by shocking interest rates to determine how far implied yields would have declined in march that have evolved.
Equal a decline of $142 million in market value of 100.
$42 million represents the difference between our book value and market value as of close last night, the stress that fuel as a result of implied yields almost doubling to approximately 21%, which is equivalent to a 25% decrease in the MBS portfolio value and over a realized 40% plus decline in the underlying multifamily.
And single family property values to recognize any real impairment. These types of losses would be on par or worse than what was experienced during the great financial crisis, we firmly believe in the resiliency of the residual space and the current inflationary environment and the safety of these investments as evidenced by the performance in these verticals, we continue to be prudently levered on a REIT.
So financing at approximately 60% LTV at quarter end and a continuous dialogue with our rebuilt many partners on our state of the market and the finance portfolio lastly, touching on our continued performance.
Also if our loans in the portfolio are currently performing and display strong NOI.
NOI growth as the demand for FSFR continues to show great strength. The portfolio did not have an SSR paydown during the first quarter to finalize our prepared remarks before we turn it over for questions I'd like to turn it over to an operator.
Thank you Paul underlying NOI is embedded in our stabilized FSFR multi life science and storage collateral continue to outperform other property types, providing a resilient base of earnings for distributions stable year yields to our investors.
<unk> business is doing exactly what it was designed to do namely produce a consistent durable cash flow stream for our investors backed by the highest quality assets in the commercial mortgage REIT sector. We're pleased to be speaking to you. This morning about special dividends unrivaled credit quality and originations of quality cgmp and residential investments and not seasonal reserves for office.
Loans and other watch lists.
On the origination front, we have a robust pipeline of low double digit yielding preferred and mezz investments in the cgmp and <unk> sectors and expect to continue to recycle capital into these opportunities in the coming quarters I want to thank the team for continuing to source and monitor high quality investments and with that we'd like to turn the call over to the operator for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
For just a moment to compile the question and answer roster.
Your first question comes from the line of Chris <unk> from Piper Sandler Your line is open.
Thanks, and good morning, everyone.
Just first off on credit quality and Paul I. Appreciate your comments that you just made but I'm just looking for a little bit of an update on the credit outlook recently, there seems to be just more caution on a multifamily property is broadly in the industry with some defaults in the news not related to <unk>, but are there. So just curious on your thought.
On the current credit environment, and kind of where we could be headed over the next few quarters and kind of multifamily and FSFR, especially as you continue to have no loans in default or forbearance.
Hey, Chris Vince about the greener.
Say the.
As I mentioned, the underlying NOI at least in our portfolio.
That is largely underwritten by in conjunction with.
Quality sophisticated servicer like al Walker, and Dunlop, our CB or something like that plus our underwriting.
Plus plus Freddie.
Most of the multifamily that we.
That we see are sold.
<unk> positive NOI.
Well covering a one to two <unk> debt service coverage ratio.
And our five where youre seeing problems I think are the 2000 22021 sort of vanilla vintage that fund or CRE CLO.
Deals that were struck it.
Low three cap <unk> forecasts that are going to have to be a cash and refinance or or just extended from a from a valuation scenario.
Most of those like I said, our CRE CLO or.
Like a debt funds. So we don't have any exposure to those types of assets.
I think I think the juxtaposition is one where we will continue.
To underwrite the source.
On the Freddie K side and leave the problems elsewhere to those that struck those deals.
Paul do you have anything to add on as a bar now safely.
Thanks, Pat helpful. There and then I think I might have missed this in the prepared remarks, but just an update on the Las Vegas multifamily investment that triggered the material weakness in the 10 10-K.
Sounds like you were able to deconsolidation of that I think I heard you mentioned that there was a one time gain just can you just dig a little bit deeper into that one time gain as well was that in the first quarter or is that is that a second quarter event.
Yeah, Hey, Brian So we.
We did correct the issue with the <unk>.
<unk> is now recorded as a preferred investment which is the intent all along.
So there was a gain and indeed consolidating that that happened in the first quarter.
We're obviously closely with the auditors through that process and so don't expect any more issues from that.
Also working closely with them and the board.
To remediate that material weakness, which we expect to.
Half of this year and Theyre, taking other measures to make sure that yes, obviously avoid something like that in the future.
Alright, Thanks, Brian how how large was that gain.
Most of the $5 million.
One 5 million.
Appreciate that thank you so much for taking my questions sure.
Your next question comes from the line of Stephen Laws from Raymond James Your line is open.
Hi, good morning.
You guys are a little more narrow focus from a property standpoint, the most of your peers, but do have the flexibility to do a much broader range of investments than many other CRE mortgage Reits.
And maybe the recent perhaps investment activity is assigned but can you talk about your investment pipeline.
Where youre seeing the best opportunity to put money to work and then.
Matt I know you ran through in a couple of redemptions and a couple of of new investments, but maybe kind of netting that all out what is your appetite for new investment from a net growth standpoint, or sort of net flat kind of how do we think about.
Appetite for new investments.
Okay.
Yes Stephen.
I think the.
The lack of bank activity in general right now it makes it.
It makes it pretty opportunistic in an attractive time to put money to work really anywhere, especially in our verticals.
The cgmp focus will continue to be a primary focus for us because even at a normalized banking environment. This is an on bank sector.
And with the re shoring wave of pharmaceutical manufacturing other specialty manufacturing coming back.
Coupled with a lack of liquidity in the space, There's just a tremendous opportunity. So we're spending a lot of time.
With sale leasebacks from.
From users in <unk>, and we will continue to try to source those opportunities because we just we love that we love that space and understand it and again its non bank.
Spreads on Freddie K I think it will continue to provide an attractive.
Sources of investments.
<unk>, earning in some cases as Paul mentioned.
Three times, the Unlevered asset yield and a great credit positions.
Those two spaces for me, we will continue to be attractive.
Great. Thanks.
Brian I wanted to touch quickly on the the unrealized loss I think in your prepared remarks, you mentioned it was mainly related to the common stock.
Do you have a breakout what was unrealized on the security market versus versus comment on that.
So we have that.
We can perhaps get back to you on the details on that Steve.
A follow up there when you look at the common stock investments I guess, the two smaller ones recently relate to the private equity you talked about but.
The bigger ones can you talk about what's your return expectations are and kind of monetization outlook and how you think about that capital allocation versus capital allocated to our cash flow and debt investments.
Yes, I mean, the big ones Stephen It's Matt.
Sure.
<unk> ground lease investment in the <unk> storage.
Our partners investments.
Kind of take them in reverse order.
Storage portfolio.
As in our view one of the highest quality.
Storage assets are storage portfolios out there kind of exposure to Florida.
A lot of Miami and in fact, I think we might be the largest self storage owner in Miami now so.
We like that investment long term.
Thanks.
It's not the right time to monetize that one because.
The lack of liquidity, albeit we get some.
Yes.
<unk> of our values from the from the recent life in the XR deal. So yes.
So we feel really good about that investment.
But it's just not the right time to monetize it when we do.
I think we are.
Like I said, we're looking at two or $3, a share and book value gains from that investment.
The <unk> investment is another attractive on obviously, that's more of a bond like.
<unk>.
Equity investment, but it's also.
It's also I think at two to $3 share of book value accretion so.
We like these investments for the total return aspect, obviously that I think differentiate our portfolio from just.
Steady steady yield.
We think this can get.
These two investments when monetize add together five or six bucks a share of book value accretion.
Great color on that.
Thanks for your time.
You bet.
Your next question comes from the line of Jade Rahmani from K B W. Your line is open.
Okay. Thanks, very much so as it stands today a follow up on the credit question Youre not expecting any deterioration default pressure on performance I mean, it just seems that with.
The magnitude of rate increases, we're seeing many of the multifamily deals by necessity meeting interest rate caps that eventually they are going to be pressures. So what are your expectations.
Yes, Jay it's Matt again.
We don't have.
But we're not aware of any.
Underlying issues in any of our our credit.
Investments or preferred investments and in case of a preferred investment in our multifamily deal.
They're underwritten structured as such that to the extent there is a default we can take over the.
The management.
<unk> equity position at our basis and think that we've underwritten those given our multifamily experienced in our operating partnerships in that space very prudently.
Those are all deals that are performing well with quality sponsors repeat sponsors that to the extent there were issues that we could have them recap.
The equity to the extent that we.
Our issues, but again there are no issues.
And then Paul I'll kick it over to you for some of the securitization and also the sales down the rental to those deals were struck back in 18 originated back in 2018 were all fixed rate investments all 4% to 5% type of fixed rate debt. So <unk> are growing.
Growing on those aspects to NOI growth has been great for for those specific investments as well. So there isn't much stress on the <unk> side as far as the securitization ago in our EPS or trial consist of vintages anywhere from 19 2021 'twenty two.
Both fixed and float and we haven't seen much stress.
In terms of the floaters, where people are getting new caps et cetera, where it <unk> performing going up increasing so it feels like really good performance throughout the securitization book as well.
Yeah, and I'd add one thing and then ill give an update on Steven's question earlier.
Most of the multifamily REIT public world as reported.
Thus far it's been pretty positive so obviously not apples to apples as they're pretty low levered compared to some of the sponsors that we work with where we sit in the cap stack, but I think fundamentally.
It's shown that multifamily is still performing pretty well overall.
The depth of our industry, our sectors expected to kind of have similar results when they report.
The markets.
Steven to answer your question directly.
<unk> was down 1 million NSP.
The storage platform was down 240000, and then the remainder of the losses from the MBS book.
On the follow up question, if I could ask yes go ahead Jay.
Do you know what the debt service coverage ratio is the Freddie Mac.
Syed.
Our in our entire portfolio is one nine and on the Freddie Mac side as <unk> technologies are wrong the wrong number.
We'll follow up on the exact pool, because we break it down by.
And by loan and our internal nodes. So we can aggregate that and get back to you.
Third side.
You know what percentage of the deals.
Floating rate debt and interest rate caps.
So right now we have roughly four securitization for B pieces that are floaters and those all would have some sort of caps and.
Of course, I would defer because of the vintages from our 19 somewhere 'twenty or 'twenty, one and the caps are usually down three three year four year cap. So they come up at different times. So it's more of a <unk>.
Our second wave of when those happen to be replaced.
Hey, guys.
So Friday required all of those borrowers to purchase caps.
For any floating rate debt.
Super low leverage.
So on the preferred side.
The preferred multifamily deals you've done not debating that.
What percentage are floating.
And what are not the preferreds, but the underlying thats floating and what percent have interest rate caps.
Yes, all of the floating rate preferred deals that we've done have caps on them.
And they may not have been.
Got it.
I was going to say most of the underlying debt floating.
Okay.
On the exact breakout.
I would say it's probably.
A majority of floating.
So we can get back to you.
Yes.
Sure.
Alright, thanks for taking the questions. Thank you Jay to answer your question about what the NCR is the floating rate securitization. This two spot two nine times.
Okay great.
That's good coverage so thanks for that.
Okay.
Okay.
Again, if you would like to ask a question press star one on your telephone keypad.
There are no further questions at this time, Mr. Brian Mitts, I'll turn the call back over to you.
Yes. Thanks.
I want to highlight one thing before we go.
Paul had mentioned the stress test we did internally.
And I think if you look at where the stocks trading versus sort of the underlying fundamentals of the portfolio.
Not to mention.
Almost 15% yield including the special dividends.
But pretty pretty strong values.
Hopefully investors will do.
You will see that and see the results from this quarter.
And sort of the guidance that we've issued for next quarter.
And see that value proposition.
Having said that I appreciate everyone's time and participation questions, we'll get back into that information.
We couldnt answer here, but with that thank you and we'll see you next quarter.
This concludes today's conference call you may now disconnect.
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