Q3 2023 NexPoint Real Estate Finance Inc Earnings Call
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Ladies and gentlemen, thank you for standing by my name is Cheryl and that'll be a conference operator today.
At this time I would like to welcome everyone.
So the next point real estate Finance conference call.
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After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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Now I'd like to turn the call over to Christian Thomas. Please go ahead. Thank you.
Good day, everyone and welcome and excellent real estate Finance conference call to review the company's results for the third quarter ended September 32023 on the call today are Brian Mitts Executive Vice President and Chief Financial Officer, Matthew joined our Executive Vice President and Chief Investment Officer, and Paul Gregory.
Vice President origination standpoint.
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.
Assumption absolutely.
Listeners should not place undue reliance on any forward looking statements in our encourage you 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 and except as required by law in Russia 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 measure.
Please see the company's presentation.
Filed earlier today.
I like to call turn the call over to Brian Mitts. Please go ahead, Brian Thanks Kristen.
Everyone's participation today.
Joining me today are Matt for Greener, and Paul Richards I'm going to kick off the call Bruce will discuss our quarterly and year to date results.
Discuss our portfolio and balance sheet, and then provide updated guidance for next quarter.
Before I turn it over to the team for a detailed commentary in the portfolio and the macro environment.
So we'll start with Q3 results, which are as follows.
For the third quarter, we reported a net loss of 82 cents per diluted share compared to a net loss of 49 cents per diluted share for the third quarter 2022. The decrease in net income was largely driven by mark to market adjustments of our common stock investments in Q3 dollars 23, and a higher provision for credit losses.
<unk> 23, as we transition to seasonal.
Net interest income increased 14, 3% to $4 8 million in the third quarter, 23% from $4 2 million in the third quarter 'twenty. Two the increase was driven primarily by more originations a preferred equity investments with a slightly higher yield than in 2022, partially offset by higher financing costs in 'twenty three.
Yes.
Earnings available for distribution was <unk> 43 per diluted share in the third quarter compared to <unk> 40 per diluted share in the same period 22 50.
<unk> 50 per diluted share in Q2 of 'twenty three.
Cash available for distribution was <unk> 47 per diluted share in the third quarter compared to <unk> 42 per diluted share for the same period last year at 53 per diluted share for the second quarter of 'twenty three.
The increase in earnings available for distribution and cash available for distribution from the prior year was partially driven by the deconsolidation of the <unk> investment and fewer realized losses.
Excuse me, we paid a regular dividend of <unk> 50 per share and a special dividend <unk> <unk> per share in the third quarter. The board has declared a regular dividend of <unk> 50 per share and a special dividend ATF cents per share payable in the fourth quarter.
Our dividend in the third quarter was <unk> 86 times covered by earnings available for distribution on that that's the regular dividend and <unk> 94 times covered by cash available for distribution.
Value per share decreased 13, 5% year over year over year, and seven 1% quarter over quarter to $17 88 per diluted share primarily due to the special dividend and a mark to market adjustments.
During the quarter, we originated six preferred equity investments was $16 $3 million outstanding principal and one loan of $5 million of outstanding principle. These seven investments at a blended all in yield of 11, 3%. We also purchased three common equity securities for $1 8 million, we had one preferred investment redeem for three <unk>.
$6 million of outstanding principal and sold one CMV as bps for $45 million.
Moving to year to date, we reported a net loss of 11 cents per diluted share compared to net income of 48 cents per diluted share for the same period in 2022 to.
The decrease in net income was largely driven by higher unrealized losses, and 23 as compared to 22 and a higher provision for credit losses in 'twenty three.
Net interest income decreased 61, 6% to $13 million year to date 23 from $43 8 million in the same period in 'twenty two.
The decrease was driven primarily by fewer prepayments on our rest of our loans and higher financing costs and 23.
Earnings available for distribution was $1 44 per diluted share in the third quarter or sorry in the first nine months of 2003 compared to $1 74 per diluted share in the same period 22.
Cash available for distribution was $1 54.
Per diluted share year to date compared to 2018 per diluted share in the same period in 'twenty two.
The decrease in earnings available for distribution and cash available for distribution for prior year, partially driven by higher weighted average share counts as well as lower prepayments on our S. Four loans in 'twenty three.
Today, we announced the launch of a 400 million series B, 9% redeemable preferred equity offerings.
Often will be sold through our retail distribution team. The series D is redeemable at the option of the holder or the issuer us.
The issuer may be the redemption in cash or common stock in our sole discretion.
Redemptions initiated by holders are limited to 2% of the total outstanding series B per month, 5% per quarter and 20% per year. There are also penalties for redeeming prior to year four proceeds will be used to take advantage of accretive investment opportunities, we see in the market, which Matt will discuss in more detail in his prepared comments.
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Moving to our portfolio our portfolio is comprised of 89 investments the total outstanding balance of $1 6 billion.
Vestments are allocated across sectors as follows 45, 8% in single family rental 48, 1% and multifamily four 6% life Sciences and 1.5% storage.
Which represent the sectors that we're involved in and across our platform.
Our portfolio is allocated across investments this fall's 42, 8% in senior loans.
One 2% in <unk> B pieces 10, 9% preferred equity investments eight four.
4% mezzanine loans and three 5% in Io strips and the remainder is in mortgage backed securities.
So it's collateralized and our investments are located geographically thus.
This follows 21%, Georgia, 17%, Florida, 14% and taxes and 6% in California, with the remaining 40%, 42% across states with less than 5% exposure, reflecting our focus on sunbelt markets. The.
The collateral and our portfolio is 99% stabilized with a 69% weighted average loan to value and a weighted average <unk> 177 times.
We have $1 2 billion of debt outstanding of this only approximately $300 million or 25% of short term debt in the form of repurchase agreements that role monthly.
Our weighted average cost of debt is four 3% and has a weighted average maturity of three two years.
Our debt is collateralized by $1 6 billion of value with a weighted average maturity of five seven years and our debt to equity ratio is 293 times book value.
Moving to guidance for the fourth quarter, we are guiding earnings as follows earnings available for distribution of <unk> 45 per diluted share at the midpoint with a range of 40 and the low end and <unk> 50 on the high end.
Cash available for distribution of 47% diluted share at the midpoint with a range of 42 on the low end and 52.
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So now I'll turn it over to <unk> to discuss.
Our portfolio in our lending environment. Thanks, Brian for the third quarter results continuing to show strong performance throughout each of our investment in asset classes, most notably our Bp's portfolio. We continue to focus on investment verticals, where we believe we have an advantage due to our experience in owning and operating commercial real estate real estate, our ability to leverage information from being both an owner.
Operator, and lender GE commercial real estate investments allows us to find relative value throughout the capital stack with the goal of delivering high higher than average risk adjusted returns. We continue to believe our investment strategy and focusing on our credit investments in stabilized assets conservative underwriting at low leverage with healthy sponsors will provide consistent and stable value.
During the third quarter the loan portfolio continued to perform strongly and it's a tough backdrop and currently comprised of 89 individual assets with approximately $1 6 billion of total outstanding principle.
The portfolio is geographically diverse with a bias towards the southeast and southwest markets, Texas, Texas, Georgia, and Florida continue to be largest portion of our portfolio at approximately 52%.
From the beginning of the third quarter through today, we were able to make follow on investments of $16 $3 million to existing preferred equity investments with an all in yield of 11, 3%. We also received approximately $48 million gross of repo after disposing of the bps, which delivered a levered return of approximately 14% we saw an opportunity to post to solve.
Return on equity piece that was short dated and a value add wrapper and avoided the possibility of any refinance risks in order to assess the impact of potential interest rate changes on a C. MBS portfolio. We conducted a stress test we aim to identify the extent.
Two which implied yields would need to rise and portfolio marks would have decreased to account for $61 million decline in market value the $61 million deferred 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 we need to increase by around 40% to result, an 11% decrease.
<unk> and the <unk> MBS portfolios overall value more importantly to recognize any real impairment there would need to be a substantial decline of over 30% in the underlying multifamily and single family property values.
Despite these stress test results, we maintain a strong belief in the resilience of the residential sector, especially at our current interest rate environment. We consider these investments in the verticals of multifamily and single family properties to be safe as demonstrated by the historical performance at the end of quarter, we maintain a cautious approach to our repo financing with leverage standing at approximately 60.
6% LTV, we consistently engage in communication with our repo lending partners discussing market conditions and the status of our financing MBS portfolio regarding the ongoing performance of <unk> local I'm pleased to report that all <unk> loans within the portfolio are currently performing very well they exhibit robust <unk> and have experienced a notable.
NOI growth the demand for FSFR continues to remain strong contributing contributing to this positive trend 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 to finalize our prepared remarks before we turn it over for questions I'd like to turn.
And it over to Matt or greater.
Thank you Paul as he just mentioned our credit portfolio continues to hold up and perform very well. Despite a record rise in longer term reference rates during the quarter, our <unk> loan in multifamily CBS portfolios remained healthy as well as our life Sciences and cgmp investments.
While modestly mark to market in this environment, our common stock and special situations investments remain a source of opportunistic liquidity potentially delivering a 60 to 90.
Of additional annual CAD once fully monetize.
This past week CBRE published a report confirming the opportunity we outlined last quarter, namely the ability to provide GAAP funding for existing multifamily assets facing maturities <unk> in need of refinancings.
In that report CB outlined the sample set of over $20 billion of near term maturities meeting those criteria and given our cadence and relationship with Fannie and Freddie we are positioned to immediately take advantage of these opportunities and our 13% to 15% all in yields.
To that end, we announced some exciting news. This morning that we've been working on as a firm and demonstrates the resources on the next point umbrella.
Brian mentioned, we plan to utilize our talented internal next sales and distribution team to issue an <unk> series B preferred to various retail and institutional advisers. We believe the security provides attractive yields to investors, while providing us with accretive capital to deploy and to this dislocated market.
The near term opportunities are seemingly endless liquidity is scarce as the banking sector has all but shut down and if there is liquidity most of it still requires cash and refinancing refinancings are assets that have negative leverage profiles.
Again, the CBRE indicated in its recent analysis loans originated from 2018 to 2020 will face refi test funding gap totaling upwards of $20 billion in the multifamily sector. In this environment. We believe we can originate GAAP funding with all in yields in the mid teens, coupled that with structure guarantees and interest reserves to mitigate our downside risk.
Other near term opportunities include dislocated CBS cgmp, Lifesize first mortgages and Beano purchases with again, 13% to 15% all in yields collectively our current pipeline of multifamily and life science investments is north of $300 million.
If we're successful in raising and deploying this capital.
We do believe it will be the accretions in <unk> common stock in earnings is powerful.
All told them without any additional leverage assuming we raise and deploy 300 million, we believe cash increased by 20% per year over the next three years.
To close we are excited about these opportunities in the coming quarters Im pleased with the Companys continued stability and the opportunity to go on offense in this environment.
As always I want to thank the team for their hard work and now we would 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 number one on your telephone pole.
We will pause for just a moment to compile the Q&A Russell.
Okay.
The first question comes from the line of Crispin Love with Piper Sandler Christian Your line is open.
Thanks, and good morning, everyone. Just first off on the continuous preferred that you announced this morning, and we're just talking about so definitely a high potential dollar amount there of additional preferreds, but can you talk a little bit more about your thinking there and just on a capital basis do you have any targets of how much you would want preferreds to be as a person.
One of your total capital base over time.
And kind of the timing on when you'd like to add.
Get that done.
Hey, Chris.
It's Matt Thanks for the question I think we've set the number.
$400 million because thats, what we have left on the shelf.
That's <unk>, but the intentional aspect of it is.
We think our fully diluted market cap is around $400 million or so on a mark to market basis, and so we think pairing additional 400.
Of this preferred makes sense as it relates to the timing of the raise it as kind of AAA and we think in November December and then really ramp in the first of the year. Our sales team has moved product similar products 10 to $15 million to $20 million a month and that's the cadence that we expect throughout 2024.
And then we will have a pipeline that is correct.
Match funded.
Investments with those dollars as they trickle in.
Okay, So maybe $10 million to $15 million a month.
Dollar amount as what you're thinking yes.
Yes, that's a good run a good monthly run rate I think that Thats conservative for next year.
Okay.
Sounds good that's helpful. And then just on on credit quality I heard your comments.
In the prepared remarks, no loans in forbearance.
Just on the provision of $4 6 million in the quarter can you just talk to some of the drivers there is that all seasonal or is there anything else there.
Yeah, Hey, it's Brian.
This quarter, we've lowered the rating the risk rating on four of our loans three we've moved from a three loans. We've moved from a risk rating of three to four representing $25 million of principal and then one we've moved to a five rating, which is about $5 5 million of principal so.
Less than 3% of our total outstanding that drove a lot of it and obviously the conversion to seasonal.
Part of it as well but.
So it was those those loans in particular.
I'll put a qualitative wrapper on.
On the $4 6 million in particular, so this was a preferred multifamily deal we did.
Sure.
And.
In the last couple of years.
Good sponsor and Atlanta.
A minus asset in Atlanta multifamily deal.
The sponsor and the deal in particular that air pocket Atlanta recently in the multifamily sector. As we reported our funded expertise call has had a really big backlog of skips and evictions.
Thankfully Fulton counties worked worked through those issues pretty well over over the last few months and getting better but again this deal had an air pocket and.
Like like we do with any of these issues arise we jump to it that we installed or a property manager BH and and I think we can kind of jump in and stabilize the asset.
My belief is the sponsor will defend the asset.
If they don't we'll take it in and operated.
It's a good asset in Atlanta, and one we can jump on and work through any issues, but again, we fully expect.
The sponsored.
To defend it.
Alright. Thanks, I appreciate you taking my questions.
Sure.
The next question comes from the line of Stephen Laws with Raymond James Mr. <unk>. Your line is open.
Hi, good morning.
Matt can talk bigger picture on multifamily you know a lot of different factors moving things from property level expenses are new supply that goes away and not too long.
Obviously tailwind of more mortgage rates are but just generally around multifamily can you talk about.
The company view in your thoughts there and then how youre, taking that view as you deploy capital and where youre seeing opportunities at different points of the different attachment points.
Yes, that's a great great question so.
Multifamily in general I'd say.
At this period is probably as tough as as we've seen in the last few years.
Yes, I would think that the next I'd say two to three quarters.
And at our sandbox in the Sunbelt Smile, I will probably be the toughest that being said absorption rates.
Migration are keeping keeping supply.
Absorbs.
On a pretty good run rate.
And kind of near term the whole market.
As under concessions, whether it's a or b.
The A's.
Operators are merchant builders.
Saw the spike in interest rates in the last.
Two to three months and have gotten really really aggressive on getting their deals leased up so they can.
Hopefully generate.
Generate enough occupancy to refi or if not to solid because our IRR driven but the spike in the 10 year is really driven.
Some concession activity and so now the balance of power. If you will has kind of shifted to renters and theyre demanding concessions and that's regardless of whether its an AVR BDO. The good news is that you are seeing some see renters move up to <unk> and so we think <unk> will continue to stabilize and that's primarily where we where we focus.
Our equity and credit investments.
But the near term is going to be challenging again, two to three quarters and then.
Starts really really.
Dramatically fall off a cliff.
Well it starts are already falloff play with deliveries fall off a cliff in the latter half of 'twenty four in early 'twenty five and so the opportunity for us is.
The next kind of three year, three or four quarters is because theres going to be tough.
Yes, tough sledding, if you have maturities theres not a lot of liquidity in the commercial excuse me in the regional banking space and then there are still has negative leverage because cap rates are.
Sub still sub 6%.
Agency financing is north of 6%, so kind of take those two dynamics and there's going to be.
GAAP and preferred and mezzanine need.
Both in agency, a refinancing near properties and then certainly on the CRE CLO front.
That's why we're excited about this opportunity because we can come in step in underwrite the asset is if we're going to own it and take it.
But a lot of the work and the dislocation is already has already been done. So we think we can get some really good terms and good structure and some outsized returns over the next year.
So long winded, but.
It's kind of my view.
Great.
You hear your thoughts about so I appreciate the comments and.
So Brian I wanted to touch base operating expenses, any onetime or elevated items in there for the quarter or how do we think.
All of that.
Moving that line item moving forward.
Yes, so legal fees were a little elevated in the third quarter.
Just some of these these various.
Issues that we're dealing with around the Hughes deconsolidation.
Converting to seasonal.
And just the risk ratings that we're dealing with.
So.
As well as some of the outside accounting firm.
Fees that we have.
We expect that to go back.
It's a normal in the fourth quarter and not really be a long term impact.
Great I appreciate the color there. Thank you for your time this morning.
Thanks Sue.
Your next question comes from the line of Jade Rahmani with kw, I'm, sorry, K B W.
Ed.
Thank you very much.
What do you think the most interesting opportunities are today to deploy capital is it within multifamily in those preferred equity and Mezz pieces and what would be your target Levered returns.
Okay.
Yes, Thanks Jade.
I think it's multifamily I mean, ultimately that's where we were an owner of 30000 units and already have the infrastructure and then.
See that this is kind of refi and gap funding wave is coming down the line.
And it's an ear is a near term opportunity and so we think that we'll be able to jump on that thats, probably it's probably my favorite.
But all in all in yields are I'd say double double the unlevered asset yield so we will be targeting.
Yes.
<unk>, 14%, maybe some points and 10 points out and then against structure and the legal documents.
To allow us to take the asset if anything does go bad.
But in the stack, we'll probably be searching for 55% to 75% of what we believe value is today.
And the Freddie Mac P. Pes pulls you one are there any indications of deterioration.
<unk> body and it varies a lot by average loan size, but what are you seeing there on credit.
I think.
Tickets Paul for specifics because I think it's germane to what we sold.
During the quarter, but I think.
Most of our most of our sales that we view one are kind of pre this this run up in cap rates over 'twenty, one 'twenty two we're yet.
Going off of $3 five 4% cap rate. So a lot of what we a lot of bonds that we do own.
Don't have any of those issues are underwritten at a different time, but there are yes. There are some are some of the <unk>.
Potentially have a little bit more troubled with popular expand on them, yes. The one deal that we sold this past quarter was a value add wrapper and it was a three plus one plus one type of our two plus one plus one.
Duration of underlying loan terms so.
We saw that there could be some issues in the incoming our near term future Hall, one year, or so where that could be refinance risks and we have we got to really get bid near par on it and we delivered a 14% levered IRR on that bond. So we thought was an appropriate time to.
Get out of that specific bond since it didnt mimic.
CRE, CLO and away and redeploy that capital into.
There are other types of high yielding investments.
Okay.
So if you had to.
Venture a guess what.
What do you think.
Six months from now delinquency or default rates and your Freddie Mac.
Bp's portfolio will be.
And at our portfolio I don't I don't think it would be meaningful at all I mean I think.
Probably near whatever the long term averages I think 30 basis points or so of default.
That's not.
That's not losses multifamily is the first to snap back so.
You tell me in.
Six months.
If we do get some relief on the short end of the curve I expect the liquidity in our multifamily markets, a snapback pretty pretty violently in pretty quickly and that's what we saw during the during Covid is an example, and so.
It's always the first to return in it.
If rates are higher for longer I think I think my answer might change, but if you do get some relief from the short end I think I think that'll be welcome liquidity back to back to the market and potentially you'll see some a lot of a lot of refinance activity.
Thanks for taking the questions.
Thanks, Joe.
There are no further questions at this time I will now turn the call back over to the management team.
I appreciate it I think that our apps are suffering today I appreciate everyone's time and participation questions.
We will be in touch thank you.
Thank you ladies and gentlemen. This concludes today's conference call you may now disconnect.
Thank you.
Okay.
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