Q2 2023 NexPoint Real Estate Finance Inc Earnings Call
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Ladies and gentlemen, thank you for standing by today's conference will begin in approximately two minutes to allow as many participants as possible to join until that time. Your lines will again be placed on music hold and we thank you for your patience.
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Hello, and welcome to the next point real estate Finance cute you 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 and if he would like to ask a question. During this time simply press star one on your telephone keypad.
Now I'll turn the conference over to Christian Thomas Please go ahead.
Thank you good day, everyone and welcome to the next point real estate Finance its conference call to review the company's results for the second quarter ended June 32023 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.
<unk>, Vice president of investments and asset management, and all Richard Vice President origination.
As a reminder, this call is being webcast through the company's website.
In restaurants and earthquake dotcom.
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 SEC 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, except as required by law interrupted not no obligation to publicly update or revise any forward looking statements.
This conference call also includes an analysis of non-GAAP financial measures.
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 Mitts. Please go ahead, Brian . Thank you Kristen.
I appreciate everyone joining us today I'm going to get US started discussing our results for the second quarter, then I'll provide guidance for the third quarter, and then turn it over to the rest of the team for their prepared comments.
Q2 results.
The second quarter, we reported net income of 36 cents per diluted share.
Compared to net income of 26 cents per diluted share in the second quarter 2022.
The increase in net income as a result of improved performance of our <unk> investments in the second quarter of 'twenty three.
Earnings available for distribution was 46 cents per diluted share in the second quarter compared to 49 cents per diluted share in the same period in 'twenty two.
Cash available for distribution was 49 cents per diluted share in the second quarter compared to <unk> 56 per diluted share in the same period in 'twenty two.
A decrease in earnings available for distribution and cash available for distribution from the prior year was partially driven by higher weighted average share counts as well as a loss on the common stock component of two of our new investments.
You paid a dividend of <unk> 50 per share in the second quarter. The board has declared a dividend of <unk> 50 per share payable for the third quarter.
Third also declared a special dividend 18 assets per share for the third quarter, we had.
Tend to pay the same special dividend of <unk> 18 per share for the fourth quarter as well.
Our dividend for the second quarter was <unk> 92 times covered by earnings available for distribution and <unk> 98 times covered by cash available for distribution.
The value per share decreased one 6% quarter over quarter to $19.28 per diluted share primarily due to the special dividend and mark to market adjustments of our common stock investments.
During the quarter, we originated three investments was $27 1 million of outstanding principle, the blended all in yield of 16, 7% we.
We had one investment to partially redeem for $6 2 million of outstanding principal.
Two senior loans are fully redeemed for $11 million.
Moving to guidance for the third quarter regarding two earnings available for distribution and cash available for distribution swallows.
Earnings available for distribution of <unk> 46 cents per diluted share at the midpoint with a range of 41 cents on the low end and 51 cents and higher.
Cash available for distribution of <unk> 50 per diluted share at the midpoint with a range of 45 on the low end 55 on the high end.
The increase in cash available for distributions in the second quarter is driven primarily by the impact of the new preferred equity investments made in the second quarter.
Now I'd like to turn it over to Matt <unk> for his comments.
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 in total outstanding principal.
The loan portfolio is 94% residential was 44% invested in loans collateralized by single family rental and 50% invested in multifamily primarily be agency MBS, 4% of the loan book is life Sciences, and 1% self storage.
The portfolio's average remaining term is five one years with 92% stabilized has a weighted average loan to value of 69, 2% and an average debt service coverage ratio of 183 times the portfolio portfolio is geographically diverse with a bias towards the southeast and southwest markets, Texas, Georgia, and Florida combine for Apache.
53% of our exposure on a geographic basis.
During the quarter, we originated three new investments was $26 3 million of outstanding principal with an estimated combined current yield of 16, 7% one investment partially redeemed for $6 2 million of outstanding principal on the <unk> lines with a total of $10 5 million or fully paid off.
The three new investments consisted of a $3 9 million dollar preferred investment in our life Sciences redevelopment located in the woodlands, Texas a suburb of Houston.
<unk> is a well heeled rupee client with extensive experience in the life Sciences real estate sector.
<unk> has signed a long term lease and is relocating our headquarters from southern California to Houston upon completion of the property investment has a current estimated yield of 13%.
<unk> also made a $21 million preferred equity investment into a cgmp facility in Temecula, California with another repeat sponsor the preferred equity as a current estimated yard of 17, 5%.
The tenant has also signed a long term lease agreement is relocating 100% of their operations from Austin, Texas.
The $1 $2 million preferred equity investment was made into build to rent portfolio in Phoenix, Arizona with repeat sponsor their preferred has a current estimated return of 13, 3%.
The two full redemptions in the quarter consisted of $10 $5 million of single family rental loans.
Was that were purchased from Freddie Mac.
In 2019 that you paid off loans achieved an average IRR of 11, 1% in summary, we continue to find attractive 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 Paul Richards.
Thanks, Matt in order to assess the impact of potential interest rate changes on our CBS portfolio. We conducted a stress test we aim to identify the extent to which implied yields would need to rise in portfolio marks would have to decrease to account for $66 million decline in market value of the $66 million difference reflects the variance between our.
Book value and the market value at the close of the previous night.
Upon conducting the stress test, we observe that implied yields would need to increase by around 60% to result in a 12% decrease in the MBS portfolio overall value more importantly to recognize any real impairment there would need to be a substantial decline of over 30% in underlying multifamily and single family property values. It is essential to note that such losses will.
Comparable to.
Surpass the challenges faced during the great financial crisis.
Right. The stress test results, we maintain a strong belief in the resilience of the residential sector, especially in the current interest rate environment. We consider these investments in vertical the multifamily and single family properties to be safe as demonstrated by the historical performance.
At the end of the quarter, we maintain our cautious approach share repo financing with the lever standing at approximately 63% LTV, we consistently engage in communication with our repo lending partners discussing the market conditions and the status of our financing MBS portfolio.
Guarding the ongoing performance of the <unk> I am pleased to report that all of that so far loans within the portfolio are currently performing exceptionally well.
The robust debt service coverage ratios and other notable net.
Net operating income growth the demand for FSFR remains strong contributing to the positive trend I'd also like to highlight that there were two <unk> pay downs during the second quarter generating a combined IRR of approximately 11%.
We finalized the prepared remarks before we turn it over for questions I'd like to turn it over to navigator.
Thank you Paul.
Underlying NOI is embedded in our stabilized <unk> multi life science and George collateral will continue to outperform other property types, providing and resilient base of earnings for distribution and stable yields to our investors.
We continue to believe in RAF has the highest quality collateral in the commercial mortgage REIT sector, evidenced by strong coverage ratios stabilize values and no investments on reserve or watch list.
On the origination front and transaction volumes are still relatively muted, but we are seeing some seller capitulation in the five five in a quarter cap rate cap rate range for multifamily and storage assets, we expect cash and refis to provide a stable pipeline of originations, particularly for our multi for our private preferred business to multifamily operators.
As a reminder, we generally generate low double digit yields here layered at 60% to 75% of the capital stack with the ability to take over the assets in the event of a default we.
We expect this attractive business to be quite active as many multifamily bridge loans maturing over the next two years, we'll need that financing to meet agency refi tests.
Multifamily, we are seeing more structured financing opportunities across the board as equity investors would rather see preferred or mezz to shore up capital stacks and call capital, particularly as the investment community searches for a stable risk free rate to.
To close we are excited about these opportunities in the coming quarters and pleased with the Companys continued stability and as always I'd like to thank the team for their hard work and now we would like to turn the call over to the operator for questions.
Thank you if you have a question. Please press star one on your telephone keypad to withdraw your question simply press Star one again.
Your first question comes from the line of Crispin Love with Piper Sandler. Please go ahead.
Thanks, Good morning.
Heard right you mentioned losses on two common stock investments early in the call can you just provide a little more detail on those investments.
Yes, so two of our preferred investments to have common stock component to them.
And thank you is about 500000 for each one of those.
We account for those as equity method investments for we don't have a controlling interest.
Our partner in those deals has a key role.
And there are some startup costs associated with those investments.
First expenses relative to our common stock position.
Essentially mark you down to zero and this first quarter, but we expect to recoup that.
Mark to market gain when we exit these investments yes.
Yes, Chris the development deals.
<unk> loss per Se, it's just as David mentioned as expenses that are occurring because of the development and just the way the accounting works.
Okay.
That makes sense and then.
Just in the release you called out a life sciences as kind of being kind of a big sector for you guys right now right.
<unk> heard that kind of a new deal in the quarter, but can you just speak to kind of some of the key drivers there on.
Calling out life sciences, rather than other sectors didn't have to do with less demand for for multifamily right now just given the rate environment or just kind of other reasons why you view life sciences to be more attractive right now.
Yes, sure it's Matt.
I think it's.
Well I guess first of all the multifamily I think we're going to see more opportunities just by virtue of the sheer size of that market over the next 24 months, but in particular, we like life Sciences.
And more specifically the cgmp side of life Sciences, and pharmaceutical manufacturing and other good manufacturing practices as.
As we've stated in prior calls we like the sector for a lot of reasons the re shoring waves.
From offshore supply chains constraints.
Constraints.
And then the sectors, particularly non bank at the moment, so it's hard for for most banks.
John Hart for most banks to make loans any way right now but.
Particularly for for assets that.
Dave you are more industrial in nature, but we view is completely mission critical to the tenant base, we see this as a giant.
Wave over the next kind of five to 10 years and would just like to get in front of it we're catching isn't as many of these opportunities as we can again because it's it's.
It's really played by debt funds and other commercial mortgage Reits because banks can understand.
Underwriting the <unk> and the basis.
That's why we like it we have great relationships within the sector.
Just wanted growing more but I would say life sciences, and multi will be <unk>.
Probably the two strongest areas of growth over the next couple of years.
Great that makes sense I appreciate you taking my questions. That's all from me.
Thanks, a lot.
Your next question comes from the line of Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
Good morning.
I wanted to follow up I guess on Christine's question kind of touched on life Sciences, but.
Two investments there.
But I know this one is a pretty short remaining term the one in.
Tim a cooler so can you talk to that and at that time.
One thing we may see is this more like short duration inverse.
Looks like that.
For that one.
Typically Stephen.
The extended their use of kind of the nature of.
The facility itself.
Most likely extend that out a year or so for the short term investments.
I would assume deposit 2024 type type payout there okay. So I don't need to look at that paying off this quarter.
Thanks.
Okay great.
Great.
Latin Greener, maybe bigger picture can you can you talk a little bit about whats youre seeing in multi across affordable and workforce housing.
Cap rates have done can you talk about the Freddie program and performance there and I know we are.
Pretty low volumes, calling of that looking at where we are year to date on those limits, but can you talk bigger picture about what youre, seeing and kind of workforce and affordable multifamily.
Yes of course.
Love to I think.
I think generally multifamily.
And the class B range has held up pretty well.
Approaching a time.
With some tough comps a year ago and that sector most.
Operators were able to drive double digit increases in rents.
Today Youll Youll see some early benefit from from 2022 strong rents, but you are seeing new lease trade outs.
One 3%, that's what we experienced a solid EMEA experienced the same thing renewals are a little bit stronger in the kind of four 5% range.
And then Occupancies are are generally stable.
I think that on the <unk>.
Transaction size.
You are starting to see a little bit more deals.
Purchases in sales I expect.
I will pick up in the transaction volume.
And really after labor day after the summer.
Winds down.
The 5% cap rate range still feels like the right answer given that.
Youre underwriting <unk>, if your cost of debt is generally around 5% and you can underwrite it a little bit of growth you have some positive leverage.
I do think thats kind of a new normal at least at least as it sits here today.
But generally speaking I think.
I think the multifamily sector is healthy.
There will be some challenges with some of the CRE CLO.
Youre seeing articles written about that as a real thing and there will have to be some capital call or some gap financing to shore up those deals, but I don't think.
I think there'll be able to be worked through.
<unk> family, especially in the <unk> sector is a great business.
They're not everything that the fed is done and everything with the banking crisis is just going to make affordable housing all the more important.
Great I appreciate the comments this morning. Thank you.
Thanks Sue.
Once again, if you have a question it is star one.
Your next question comes from the line of Jade Rahmani of K B W. Please go ahead.
Thanks, very much are you starting to see.
A pickup in deal flow on some of these <unk>.
Multifamily bridge loans were.
To get to get a GSE.
TSA takeout.
It's really about the debt service coverage and LTV I think you need something like below 60% LTV.
I have a one two times debt service coverage. So I think mortgage Reits that have that exposure are going to be offering preferred equity.
In some cases mezzanine with pick interest.
And given the Nx.
Platform as well as the strong relationship with Freddie Mac I would think providing that gap filler capital could be a big opportunities are you starting to see an increase in deal flow there.
Yes, we are Jay that's a great point.
And when I touched on briefly in the prepared remarks, and this is a business that we started really in concert with Fannie and Freddie back in 2013 2014, so yes.
We were able to to work with them.
Yes.
<unk> comprised of a set of documents that would allow for our ability as a select sponsor to take over the asset if there isn't a bit of a default agree with you that the bridge loans.
We're kind of two years or two plus one.
<unk> originated in 'twenty, one and 'twenty two.
That wave will come we're not going to be able to meet.
Meet the agency tests, and there will be opportunities and we love to offer.
Like I said, we are in this business a lot of them.
Little little over $500 million of it from just not a gross investment dollar, but a net investment dollar amount so.
Really excited about this opportunity for sure.
And do you think those rescue opportunities are going to be the primary source of deals or.
Youll see de Novo acquisition deals with regular way financing that youre going to plan.
Yes, I think it's going to be both I think with the cost of with the cost of debt, where it is and if we are indeed higher for longer.
The GAAP financing.
From from well heeled sponsors is going to be a thing.
You're already seeing it in.
Even with great.
New construction deals and great sponsors.
Those opportunities for matters are appearing.
I think.
I do see this as.
As are probably the biggest piece of the pie over the next certainly over the next 12 months.
And on the Freddie Mac see MBS pools as loans come up for maturity and need to refinance is it your expectation that there won't be.
Meaningful defaults or do you think there is some reasonable range that you would expect naturally to occur.
Yes.
Yes, I think.
Given how.
The history of this of the K K program.
I think 30 basis points of cumulative defaults or losses over the history of the program.
They've done a good job with.
With especially with the special Servicers and particularly the DC ages like ourselves in.
In these deals to work through and worked through and reach now com.
To the extent there is a problem.
Accessible to everyone.
These calls are highly diversified.
And most of the loans that we own in.
Or look to look through loans or.
The biggest loans or in parts of the parts of the country, where we operate but Texas and Florida and Georgia.
So we.
We think there'll be some pain I wouldn't expect it to be anywhere near the CRE CLO, but I think any any sort of issues will be more easily worked through.
By virtue of the K program.
Then Dan in the private conduit market.
If you have these issues in the Fannie and Freddie program as a sponsor then youre kicked out and you certainly don't want that you want to be in the apartment business.
Thanks for taking the questions.
Thanks Jay.
There are no further questions at this time I will turn the call back to the management team for closing remarks.
Yes, I appreciate everyone's time.
We'll be back in touch next quarter. Thank you.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
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