Q4 2023 NexPoint Real Estate Finance Inc Earnings Call
Operator: Good morning, my name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nexpoint Real Estate Finance fourth quarter 2023 conference call. All lines have been placed on mute to prevent any background noise.
Good morning, My name is Dennis and I will be your conference operator today at.
At this time I would like welcome everyone to the next point real estate finance fourth quarter 'twenty twenty-three conference call. All lines have been placed on mute to prevent any background noise.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Kristen Thomas, Investor Relations. Please go ahead.
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 then one on more telephone keypad to withdraw your question Press Star one again.
I would now let's turn the conference over to Kristin Thomas Investor Relations. Please go ahead.
Kristen Thomas: Thank you. Good day, everyone, and welcome to Nexpoint Real Estate Finance conference call to review the company's results for the fourth quarter ended December 31, 2023. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer, Matt McGraner, Executive Vice President and Chief Investment Officer, and Paul Richards, Vice President of Originations and Investments. As a reminder, this call is being broadcast through the company's website at www.nref.nexpoint.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 Legation Reform Act of 1995 that are based on management's current expectations, assumptions, Listeners should not place a new reliance on any forward-looking statements in our encouraged review of the Cummings Annual Report on Form 10-K and the Cummings other filings with the SEC for more complete discussion of risks and other factors that could affect the forward-looking, The statements made during this conference call speak only as of today's date, and except as required by law, NREF does not undertake any obligation to publicly update or revise any forward-looking, This conference call also includes an analysis of non-GAAP financial ledgers. For a more complete discussion of these non-GAAP financial ledgers, 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 good day, everyone and welcome to the 19 real estate Finance conference call to review the company's results for the fourth quarter ended December 31, 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, and Paul Richard Vice President.
The nation's animals.
As a reminder, this call is being webcast through the company's website at.
<unk> 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.
1995 that are based on management's current expectations assumptions and beliefs.
Listeners should not place undue reliance on any forward looking statements and I encourage you to come in annual report on Form 10-K, and the company's other filings with the SEC for 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 can be accessed.
Sorry by law in rough 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.
For a 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. Please go ahead Fred.
Brian Dale Mitts: Thank you, Kristen. I appreciate everyone joining us this morning. I'm going to briefly discuss our quarterly and year-to-date results, and then I'll go through some portfolio metrics, talk about the balance sheet a little bit, and then provide guidance for the next quarter. I'll turn it over to Matt and Paul to discuss the portfolio in a little more depth in the macro lending environment. So, starting with our fourth-quarter results, they were as follows. We reported a net income.
Thank you Kristen I appreciate everyone. Joining us this morning, I'm going to briefly discuss our quarterly and year to date results and then I'll go through some portfolio metrics talk about the balance sheet, a little bit and then provide guidance for next quarter, but I'll turn it over to Matt and Paul to discuss the.
Portfolio, a little more depth in the macro demand environment.
So starting with our fourth quarter results. There were as follows reported net income.
Brian Dale Mitts: $0.74 per diluted share compared to a net loss of $0.17 per diluted share for the fourth quarter of 2022. The increase was largely driven by market-to-market adjustments on our common stock, investments, and changes in our net assets related to our consolidated CMVS VIE. Net interest income increased to $3.8 million for the fourth quarter of 23 from $0.3 million in the fourth quarter of 22.
74 cents per diluted share compared to a net loss of 17 cents per diluted share for the fourth quarter of 2022.
The increase was largely driven by mark to market adjustments on our common stock investments and changes in our net assets related to our consolidated <unk>.
Net interest income increased to $3 8 million for the fourth quarter of 23 from <unk> 3 million in the fourth quarter of 'twenty two.
Brian Dale Mitts: The increase is driven primarily by more originations preferred equity investments with higher yields and partially offset by higher financing costs in 2023. Earnings available for distribution was $0.44 per diluted share in the fourth quarter, compared to $0.42 per diluted share in the same period of 2022 and $0.43 per diluted share in the third quarter of 2023. Cash available for distribution was $0.51 per diluted share in the fourth quarter compared to $0.45 per diluted share in the fourth quarter of 2022. The increase in earnings available for distribution and cash available for distribution for the prior year was partially driven by originations of additional private preferred investments. We paid a dividend of 50 cents per share in the fourth quarter, and the board has declared a dividend of 50 cents per share payable for the first quarter of 2014.
Greece was driven primarily by more originations preferred equity investments with higher yields and partially offset by higher financing costs in 2023.
Earnings available for distribution was <unk> 44 per diluted share in the fourth quarter compared to 42 cents per share.
Per diluted share in the same period 2022, and 43 cents per diluted share in the third quarter of 23.
Cash available for distribution was 51 cents per diluted share in the fourth quarter compared to 45 per diluted share in the fourth quarter of 'twenty two.
The increase in earnings available for distribution and cash available for distribution to the prior year was partially driven by originations of additional private preferred investments.
We paid a dividend of <unk> 50 cents per share in the fourth quarter and the board has declared a dividend of <unk> 50 per share payable for the first quarter of 'twenty four.
Our dividend.
Fourth quarter was <unk> eight times <unk> 88 times covered by earnings available for distribution and 1.02 times covered by cash flow distributions.
Brian Dale Mitts: Our dividend in the fourth quarter was.88 times covered by earnings available for distribution and 1.02 times covered by cash available for distribution. Book value per share decreased 10.4% year-over-year and increased.7% quarter-over-quarter to $17.93 per diluted share, with the decrease year-over-year being primarily due to the $0.74 of special dividends paid out during the year and the increase from the prior quarter being primarily driven by mark-to-market increases.
<unk> per share decreased 10, 4% year over year, and increased <unk>, 7% quarter over quarter to $17 93 per diluted share with the decrease year over year being primarily due to the 74 special dividends paid out during the year and the increase from prior quarter being primarily driven by Mark to.
Market increases.
Brian Dale Mitts: During the quarter, we contributed to five preferred equity investments with $16.5 million of outstanding principal and originated one loan with $15.3 million of outstanding principal. These six investments had a blended all-in yield of 11.5%. We had three senior loans redeemed for $29.5 million of outstanding principal, and one preferred investment was redeemed for $3.5 million of outstanding principal. So moving to year-to-date results, they are as follows.
During the quarter, we contributed to five preferred equity investments was $16 5 million of outstanding principal and.
Originated one loan $15 3 million outstanding principal these six investments at a blended all in yield of 11, 5%. We had three senior loans redeemed $29 5 billion of outstanding principal.
And one for investment redeemed $3 5 million of outstanding principal.
So moving to year to date results are as follows.
Brian Dale Mitts: Reported net income of $0.60 per diluted share compared to net income of $0.22 per diluted share in 2022. The increase was largely driven by changes in net assets related to our consolidated CMBS VIEs, as compared to 2022. Net interest income decreased 55.5% to $16.8 million, and $37.7 million in 2022. The decrease was driven primarily by prepayments on our SFR loans and CMBS portfolio and higher financing costs in 2023. Earnings available for distribution was $1.51 per diluted share in 2023 compared to $2.50 per share in 2022. Cash available for distribution was $1.67 per diluted share compared to $2.97 per diluted share in 2020. The decrease in earnings available for distribution and cash available for distribution for the year was partially driven by higher weighted average share counts, increased financing costs, as well as our prepayments on SFR loans in 2026.
<unk> net income of <unk> 60 per diluted share compared to net income of <unk> <unk> per diluted share in 2022. The increase was largely driven by changes in net assets related to our.
<unk> <unk> as compared to 2022.
Net interest income decreased 55, 5% to $60 8 million $37 7 million in 2020 to the.
The decrease was driven primarily by prepayments on our S far loans see MBS portfolio and higher financing costs of 23.
Earnings available for distribution was $1 51 per diluted share in 2023 compared to $2 50 per share in 2022.
Cash available for distribution was $1 67 per diluted share compared to $2 97 per diluted share in 2022.
The decrease in earnings available for distribution and cash available distribution for the year was partially driven by higher weighted average share counts increased financing costs as well as our prepayments on <unk> loans in 2023.
Brian Dale Mitts: Moving to the portfolio, our portfolio is comprised of 87 investments with a total outstanding balance of $1.6 billion. Our investments are allocated across the following sectors: 47.2% multifamily, 46% single family, 5.2% life sciences, and 1.5% storage. Our portfolio is allocated across the following investment categories: 41.4% senior loans, 30.8% CMBS B pieces, 12.5% preferred equity investments, 8.5% mezzanine loans, 3.5% I.O. strips, and 3.3% MBS and MSCR notes. The assets clouded by our investments are allocated geographically as follows: 20% Georgia, 17% Florida, 15% Texas, 7% California, 4% Maryland, 5% Minnesota, and 3% North Carolina, with 29% across states with less than 2.5% exposure.
Moving to the portfolio our portfolio is comprised of 87 investments with a total outstanding balance of $1 6 billion.
Our investments are allocated across the following sectors 47, 2% multifamily, 46% single family five 2% life Sciences, 1.5% storage.
Our portfolio is allocated across the following investment categories 41, 4% senior loans.
38% <unk> B pieces 12, 5% preferred equity investments eight 5% mezzanine loans, three 5% Io strips and three 3% MBS at MSCI nodes.
The assets Collateralize, our investments are allocated geographically this falls to.
20%, Georgia, 17%, Florida, 15% taxes, 7%, California, and 4%, Maryland, 5%, Minnesota, and 3% North Carolina with 29% across states with less than two 5% exposure.
Brian Dale Mitts: All this reflects our heavy preference for Sunbelt Investments. Collateral in our portfolio is 89.9% stabilized with a 68.8% loan to value and a weighted average DSCR of 1.72 times. Moving to the balance sheet, we have $1.3 billion of debt outstanding. Of this, $304 million, or 24%, is short-term debt.
All of this reflecting our heavy preference for sunbelt investments.
The collateral on our portfolio is 89, 9% stabilized to 68, 8% loan to value and a weighted average the SCR 172 times.
Moving to the balance sheet, we had $1 3 billion debt outstanding of this $304 million or 24% of short term debt. Our weighted average cost of debt is four 3% and has a weighted average maturity of three one years.
Brian Dale Mitts: Our weighted average cost of debt is 4.23%, and it has a weighted average maturity of 3.1 years. Your debt is collateralized by $1.7 billion in collateral, with a weighted average maturity of 5.6 years. Our death-to-equity ratio is 2.9 times.
Or does collateralized by $1 7 billion collateral.
<unk> average maturity of five six years.
Debt to equity ratio is two nine times.
Brian Dale Mitts: A couple other notes, in December we launched a continuous offering of Series B 9% for equity. Today, through February, we've raised $30 million in gross proceeds, which will be used to make accretive investments with low to mid-double-digit yields. In Q1 of 24, we received a prepayment on an SFR senior loan of $509 million in principal, of which $466 million was used to repay the debt associated with the loan. We also received a prepayment penalty of $9 million.
A couple of other notes in December we launched a continuous offering of series B, 9% deferred equity today, we've through February we raised $30 million of gross proceeds which will be used to make accretive investments with low to mid double digit yields.
In Q1 of 24, we received a prepayment on in <unk> senior loan of $509 million of principle of which 466 billion was used to repay the debt associated with alone. We also received a prepayment penalty of $9 million with the net proceeds of 52 million will be redeployed.
Brian Dale Mitts: The net proceeds of $52 million will be redeployed into accretive investments with much higher yields than the repaid senior loan. Moving to guidance, before I turn it over to the rest of the team, earnings available for distribution for the first quarter of 24 are negative 45 cents per diluted share at the midpoint, with a range of negative 50 cents on the low end and negative 40 cents on the high end.
I'd into accretive investments with much higher yields than the repay senior loan.
Moving to guidance for I'll turn it over to the rest of the team earnings available for distribution for the first quarter 'twenty four is negative <unk> 45 per diluted share at the midpoint with a range of negative 50, and the low end and negative <unk> 40 on the high end.
Paul Richards: Earnings available for distribution will be negative for the quarter as a result of the $25 million reversal, which is an unamortized premium associated with the previously mentioned senior SFR loan that was prepaid in January. Cash available for distribution is $0.58 per diluted share at the midpoint, with a range of $0.53 on the low end and $0.63 on the high end. So with that, I will turn it over to Paul. Thanks, Brian
Earnings available for distribution will be negative for the quarter as a result of the $25 million reversal.
Amortize premium associated with the previously mentioned senior FSFR loan levels.
Prepaid in January.
Cash available for distributions of 58 cents per diluted share at the midpoint with a range of 50 <unk> on the low end and <unk> 63 on the high end.
So with that let me turn it over to.
Paul Thanks, Brian.
Paul Richards: The results from the fourth quarter showcased our overall strong performance across all of our investments and asset categories, especially within our CMBS BP portfolio. Our strategy remains centered on investment areas where our expertise in owning and operating commercial real estate gives us a unique edge. This dual role as both owner and lender in the commercial real estate market enables us to effectively utilize information, allowing us to underwrite and recognize value throughout the capital stack, with our aim of achieving superior risk-adjusted returns that exceed the average. Our investment approach remains centered on credit investments and stable and near-stabilized assets, emphasizing cautious underwriting, low leverage, and relative debt basis, along with lending to healthy sponsors, to deliver steady and In the fourth quarter, despite challenging commercial real estate conditions, our loan portfolio maintained steady performance, consisting of 87 individual assets with approximately $1.6 billion in total outstanding principal. The portfolio is geographically diverse with a bias towards the Sunbelt Markets.
The results for the fourth quarter showcase our overall strong performance across all of our investments in asset categories, especially within our <unk> portfolio. Our strategy remains centered on investment areas, where expertise of owning and operating commercial real estate gives us a unique edge. This dual role of both owner and lender in the commercial real estate market enables.
So effectively utilized information, allowing us to underwrite and recognized value throughout the capital stack with our aimed at achieving superior risk adjusted returns that exceed the average our investment approach remains centered on credit investments as stable and near stabilized assets emphasizing costs underwriting low leverage and relative debt basis, along with the lending.
To healthy sponsors to deliver steady and reliable value to our shareholders in the fourth quarter. Despite challenging commercial real estate conditions, our loan portfolio maintained steady performance consisting of 87 individual assets was approximately $1 6 billion in total outstanding principal.
The portfolio is geographically diverse with a bias towards the Sun belt markets, Texas, Georgia, and Florida continued to be our largest portion of our portfolio at approximately 52% as of year end, though our Atlanta, Georgia exposure has significantly decreased by more than 10% as our largest SFO our whole loan was repaid in full as of Q1 of this year from the.
Paul Richards: Texas, Georgia, and Florida continue to be our largest portions of our portfolio at approximately 52% as of year end, though our Atlanta, Georgia exposure has significantly decreased by more than 10% as our largest SFR whole loan was repaid in full as of Q1 of this year. From the beginning of the fourth quarter through today, the company has been very active in underwriting and employing capital. We executed on making both follow-on and new investments of $31.8 million of preferred equity investments with an all-in yield of 11.5% in both our SFR and Life Science programs. We also completed the purchase of a new issue, five-year fix, Freddie Mac BP's Opportunity, with extremely attractive specifications. The overall securitization has a 59% LPV, a 1.34 DSCR, and a diverse geographical footprint. The BPs will pay an all-in unlevered fixed rate of 9.75%.
Beginning of the fourth quarter through today. The company has been very active in underwriting and deploying capital we executed on making both follow on our new investments of $31 8 million of preferred equity investments with an all in yield of 11, 5% in both our <unk> and life Science verticals. We also completed the purchase on a new issue five year fix.
Freddie Mac, the pes opportunity with extremely attractive specs. The overall securitization has a 59% LTV of one three for the SCR and the diverse geographical footprint. The bp's will pay it all an unlevered fixed rate of 975% with modest leverage we expect to generate mid teen Levered returns.
In a very desirable collateral pool. The company has also purchased new issue <unk> ABS paper and the gross amount of approximately $44 million and.
And prudently lever to achieve low to mid double digit returns on a low LTV high cash flowing stabilized as of our property Cool lastly, and navigator will touch more on this exciting investment during his prepared remarks, the company closed on a $218 million draw. Both first mortgage life science loan. This past January this specific loan carrier.
Paul Richards: With modest leverage, we expect to generate a mid-teen levered return on a very desirable collaborative pool. The company has also purchased new issue SFR ABS paper in the gross amount of approximately $44 million and prudently leveraged to achieve low to mid-double digit returns on a low LTV, high cash flowing, stabilized SFR property. Lastly, and Matt McGraner will touch more on this exciting investment during his prepared remarks, the company closed on a $218 million drawable first mortgage life science loan this past January. This specific loan carries an attractive 27% detachment point on current as-is appraisal valuation and provides SOFR plus 900 pricing. On the disposition loan repayment side, as mentioned, we received approximately $500 million gross financing and around $60 million in net up financing on the portfolio's largest SOFR loan was repaid in full, and a few smaller SOFR loans generating an attractive overall IRR for investors. At the end of the quarter, we maintain a cautious approach to our repo financing, with leverage standing at approximately 63% loan-to-value.
And attracted 27% attachment point on a current as appraisal valuation and provides sofa plus 900 pricing on the disposition and loan repayment side as mentioned, we received approximately $500 million gross financing and around $60 million and net net our financing on the portfolio of FSFR and the.
Portfolio <unk> loans was repaid in full and a few small eschar loans generating attractive overall IRR for investors at the end of the quarter, we maintain our cautious approach to our repo financing with leverage standing at approximately 63% loan to value we consistently engage in communication with our repo lending partners discussing the market conditions.
Status of our finance the MBS portfolio 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. We maintain a strong belief in the resilience of the residential sector, especially in the current interest rate environment. We continue.
We consider investments in the multifamily and single family verticals to be safe as demonstrated by the historical FRS and are extremely excited about our life science CDMA investment pipeline to finalize our prepared remarks before we turn it over for questions I'd like to turn it over to navigator. Thank.
Paul Richards: We consistently engage in communication with our repo lending partners, discussing the market conditions and status of our CNBS portfolio. 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. We maintain a strong belief in the resilience of the residential sector, especially in the current interest rate environment.
Thank you Paul.
As he just mentioned we're pleased with the solid Q4 and full year 2023 results, especially on a relative basis. Our portfolio continues to perform very well and despite short term supply challenges the challenges in multifamily underlying performance in multi FSFR storage in life Sciences remained relatively.
Table.
As we announced last quarter and as Brian mentioned, we have successfully launched and Rep series B preferred and to date have raised approximately $30 million over the past couple of months at this current run rate paired with the pipeline investments that Paul just mentioned, we expect to increase cash available for distribution by 15% to 20% over the next 12 months Wi Fi.
Matthew Ryan McGraner: We consider investments in the multifamily and single-family verticals to be safe, as demonstrated by their historical performance, and are extremely excited about our life-sized CDMO investment pipeline. To finalize our prepared remarks before we turn it over to questions, I'd like to turn it over to Matt McGraner. Thank you, Paul.
This loan originated in January as Paul mentioned, we'll alone provide $200 million of fundings over the next 12 months, we expect to fund we respect to match fund draws on this investment with proceeds from our series B raise providing maximum accretion to shareholders. In addition to large FSFR loan payoff will create additional capital to deploy into our $300 million.
<unk> investment pipeline, but it also deleveraged us by a full turn and now sit below two times levered at the lowest of any commercial mortgage REIT. This delevering creates additional optionality in terms of sources of capital to the extent, we wanted to re lever some of the balance sheet and to fund opportunistic investments.
Matthew Ryan McGraner: And as he just mentioned, we're pleased with the solid Q4 and full year 2023 results, especially on a relative basis. Our portfolio continues to perform very well, and despite short-term supply challenges in multifamily, underlying performance in multi-SFR storage and life sciences remains relatively stable. As we announced last quarter and as Brian mentioned, we have successfully launched an NREF Series B preferred and, to date, have raised approximately $30 million over the past couple of months. At this current run rate, paired with the pipeline investments that Paul just mentioned, we expect to increase cash available for distribution by 15-20% over the next 12 months. The Lifeline Fund, which originated in January, as Paul mentioned, will alone provide $200 million of funding over the next 12 months.
To close we are excited about these opportunities in the coming quarters and pleased with the Companys continued stability and the opportunity to go on offense in this environment as always want to thank the team for their hard work now I would like to turn the call over to the operator for questions.
Yes.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one the onto your telephone keypad.
Your first question is from the line of Crispin Love with Piper Sandler. Please go ahead.
Thanks, Good morning, everyone.
Let's talk about some of the opportunities that you've already begun to see or expect to see over the next several quarters and bridge multifamily.
You started offering craft for mouse.
Borrowers in that space and just how is that progressing our progress that our borrowers seeking you out are you are you working with our vendors to help and do you expect it to be a key way for borrowers they get agency Takeouts down the road.
Matthew Ryan McGraner: We expect to match fund draws on this investment with proceeds from our Series B raise, providing maximum accretion to shareholders. In addition, the large SFR loan payoff will create additional capital to deploy into our $300 million plus investment pipeline. But it also de-levers us by a full turn, and we now sit below two times levered, the lowest of any commercial mortgage rate.
Yes, Chris.
Matt Great question.
We have we have started seeing both portfolio deals and individual one off deals seeking for.
Cash and refinancing.
Both on the agency and other serious CRE CLO side borrowers.
Operator: This de-levering creates additional optionality in terms of sources of capital, to the extent we wanted to re-lever some of the balance sheet in order to find opportunities to invest. To close, we're excited about these opportunities in the coming quarters and pleased with the company's 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 I'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, simply press star then the number one on your telephone keypad. For the first questions from the line of Crispin Love with Piper Sandler, please go ahead. Thanks. Good morning, everyone.
Borrowers are seeking money to fund replacement caps.
Are you are seemingly okay with being diluted seemingly okay with the terms that we're providing in terms of risk mitigation and.
Mezz and liens and maybe the ability to take over the assets, they're being realistic as well on cap rates. So we're getting a better a better debt yield.
We otherwise normally would.
We have $300 million of investment pipeline I would consider this to be.
An additional 100 $150 million of opportunity for us this year and they are beginning to come more fast and furious than they were in the fourth quarter.
Okay.
Jim.
Crispin Elliot Love: First, can you talk about some of the opportunities that you've already begun to see or expect to see over the next several quarters in bridge multifamily? Have you started offering PREP or MEZ to borrowers in that space? And just how is that progressing? Are borrowers seeking you out?
Our strategy of operating a proper mise the bark.
Very interesting, but but what do you view kind of the key risks here and bars are likely strapped with high Ltvs.
So I'm curious what kind of ltvs are coming in.
Matthew Ryan McGraner: Are you working with other lenders to help? And do you expect this to be a key way for borrowers to get agency takeouts down the road? Yeah, hey Crispin, it's Matt.
Just any breath Bob Thank you.
Pink in the strategy.
Yes.
I mean, we're going to make sure that we can prime enough equity.
Matthew Ryan McGraner: Great question. We have started seeing both portfolio deals and individual one-off deals seeking cash-in refinancing dollars, both on the agency and on the CRE CLO side. Borrowers are seeking money to fund replacement caps, and they're seemingly okay with being diluted, seemingly okay with the terms that we're providing in terms of risk mitigation and meds and liens and the ability to take over the asset. They're being realistic as well on cap rates, so we're getting a better debt yield than we otherwise normally would. We have $300 million in the investment pipeline. I would consider this to be an additional $100 to $150 million opportunity for us this year, and they're beginning to come more fast and furious than they were in the fourth quarter. Okay, and just in this strategy of operating a PrEP or MEZ for bars, I find it very interesting, but what do you view as kind of the key risks here as these bars are likely stressed with high LTVs and low DSCRs?
We can own the asset.
The in place cap rate that we think we can either sell the asset.
Refi into agency now candidly some of those are few and far between and we haven't hit on one yet.
But we are we are underwriting we will target to be.
No more than probably 80% of the stacks on as is valued today.
The structure of the investment, but because of the cash flows.
In 2024, given the supply will be challenged.
We carry a little bit more of a.
Lower current pay but the all in pricing on that can still reach mid teens. So we're selective again, we haven't necessarily hit online yet, but we are seeing opportunities come in the door on a daily basis from sponsors from.
The large commercial real estate services companies investment banks et cetera. So we do expect to be active this year in that strategy.
Matthew Ryan McGraner: So I'm curious what kind of LTVs you're coming in at and just if there are any risks that you think in this strategy. I mean, we're going to make sure that we can prime enough equity such that we can own the asset at an in-place cap rate that we think we can either sell the asset or refi into agency. Now, candidly, some of those are few and far between, and we haven't hit on one yet, but we are underwriting. We will target to be no more than probably 80% of the stack as valued today. The structure of the investment, because of the cash flows, will probably be challenged in 2024, given supply, will be challenged, and will probably carry a little bit more of a lower current pay, but the all-in pricing on that can still reach mid-teens. So we're selective.
Great that all makes sense, Matt and then just one last question for me just on the accelerated amortization of the premium with a prepayment on the senior loan you mentioned in the first quarter, which I think you can drive that negative EBITDA in the quarter can you give any more detail there.
What drove the prepayment on that our loan is there and is there anything out of the ordinary went back loan our borrowers specifically.
No I wouldn't say so.
It's been reaching out to us for several years too.
We did restructure it.
And I think they just got to a point now where they found other financing.
Or.
Equity capital and we are willing to prepay it.
But I don't think theres anything knowing that the company.
That had the one that there is any issues.
With that I think.
Matthew Ryan McGraner: Again, we haven't necessarily hit on one yet, but we are seeing opportunities come in the door on a daily basis from sponsors, from the large commercial real estate services companies, investment banks, et cetera. So we do expect to be active this year in that strategy. Great, thank you. That all makes sense, Matt. And then just one last question for me, just on the accelerated amortization of the premium with the prepayment on the senior loan you mentioned in the first quarter, which I think you expect to drive the negative EAD in the quarter. Can you give any more detail there?
I would add to that I think it's a sign of a healthy ABS market NSF are right.
The sponsors are well heeled sponsor.
Very active very well known in the ABS space and just.
Yes.
While we are sad to see it go and provides us with new capital and I think it's a healthy sign for liquidity and commercial real estate in general.
Awesome. Thank you I appreciate you all taking my questions.
Thank you.
Your next question is from the line of Stephen laws with Raymond James. Please go ahead.
Okay.
Hi, good morning, Congrats on a nice close to the year looking for the results.
Matthew Ryan McGraner: What drove the prepayment on that SFR loan? And is there anything out of the ordinary with that loan or borrower specifically? No, I wouldn't say so.
I want to make sure I get.
Yes, I want to make sure I understand kind of the CAD is the nuclear the year. Thank you mentioned in your comment.
The opportunity for a brief 15% to 20% growth over the next 12 months.
Matthew Ryan McGraner: I mean, they've been reaching out to us for several years to restructure it, and I think they have just got to a point now where they have found other financing or, you know, have equity capital and are willing to prepay it. But I don't think there's anything, knowing that the company that had the loan, that there's any issues with that. I think I'd add to that: I think that it's a sign of a healthy ABS market in SFR, right? The sponsor is a well-heeled sponsor, you know, very active, very well-known in the ABS space, and just, it's, you know, while, you know, we're sad to see it go, it provides us with new capital, and I think it's a healthy sign for, you know, liquidity and commercial real estate in general. Thank you. I appreciate you all taking the time to answer my questions. Your next question is from the line of Stephen Laws with Raymond James. Please go ahead. Hi, good morning.
We think about moving through the year. This Q1 benefit from the $9 million repayment penalty and then we'll see a trough in <unk>.
Two is kind of you.
While returning capital fully redeployed how do we think about.
Chad.
Migration for you this year.
Yes, good question.
The.
The series B.
The way, we look at that as well with our construction loan for in life science in the pipeline that Paul just mentioned.
It's about four to five it's about <unk> <unk> per $25 million of series B raise thats accretive to CAD. So as we move through the year, that's where I'm picking up that 15% to 20%.
And perhaps it could be more accretion.
<unk> again is well taken on the pay off you will see.
Stephen Albert Laws: Congratulations on a nice close to the year. I'm looking forward to your results. I want to make sure I get – yeah, I want to make sure I understand kind of the CAD as we move through the year. Matt, I think you mentioned in your comments the opportunity for 15 to 20 percent growth in the next 12 months. You know, as we think about moving through the year, does 2.1 benefit from the $9 million repayment penalty, and then we'll see a drop in 2.2 as you get the return capital fully redeployed? How do we think about, you know, the CAD, you know, migration through this year? That's a good question.
Little bit enhanced in the first quarter and then.
Our job is to redeploy that in the second quarter and make sure that we're fully funded.
But again.
Comfortable with the ability to be still being able to grow.
Cash available for distribution, while Delevering a full term.
I appreciate those comments and when you think about the new investment pipeline and redeploying that capital.
Given the large discount to book how do you how do you think about any stock repurchases. Another someone that's there just given the liquidity but.
Can you talk about how you think about the returns you would actually on stock repurchases versus the industrial forces them to Florida.
Matthew Ryan McGraner: The Series B, the way we look at that is, with our construction loan in life science and the pipeline that Paul just mentioned, it's about $0.04 to $0.05, about $0.05 per $25 million of Series B raised that's accretive to CAD. So as we move through the year, that's where I'm picking up that 15% to 20%, and perhaps it could be more accretion. Your point, again, is well taken on the payoff.
Yes.
We have an obligation to fund.
175 to 200 million Bucks of commitments.
To the extent that we are comfortable.
Managing cash and funding those investments in getting other repayments, we have excess cash as an absolute.
Certainty that we will look to buy back stock.
At these levels.
We're going to again kind of first and foremost fund what we have to fund and then with the excess capital and to the extent that our series B.
Matthew Ryan McGraner: You will see a little bit of an increase in the first quarter, and then our job is to redeploy that in the second quarter and make sure that we're fully funded. But again, I'm comfortable with the ability to still be able to grow cash available for distribution while delivering a full term. Appreciate those comments, and you know, when you think about the new investment pipeline and redeploying that capital, given the large discounts above, you know, how do you think about any stock repurchases? I know there's some limits there just given the liquidity, but can you talk about how you think about the returns you'd have to see on stock repurchases versus new investments versus new data? Yeah, we have an obligation to fund another $175 million in commitments to the extent that we are comfortable managing cash and funding those investments and getting other repayments. When we have excess cash, it's an absolute certainty that we'll look to buy back stock at these levels. [inaudible] Great, I appreciate the comment, Chris. You know what I mean.
Our series B preferred raise ramps, which we expected to.
I like our chances to be in a position to buy back stock. If we continue to trade at discounts.
Yes.
Great I appreciate the comments this morning.
Yes.
Thank you Tim.
Your next question is from the line of Jade Rahmani with <unk>. Please go ahead.
Thank you very much on the antiviral repayment was supposed to be at 20% prepayment penalty.
Hey, Jade its Paul.
So of course this matters based on Youll maintenance calculation. So when rates were low back a year and a half ago and we discussed that the prepayment Hell news a lot higher now that rates have trade back up.
Of that five 5% land the prepayments how need was.
A lot less than what it was back when the rate market was a lot lower.
Okay.
So theres going to be a $9 million prepayment penalty.
Matthew Ryan McGraner: Thanks, Stephen. Your next question is from the line of Jade Rahmani with KBW. Please go ahead.
Correct.
That's correct.
And that's factored into the earnings, but there is more than an offset to reverse the unamortized premium.
Jade Joseph Rahmani: Thank you very much. On the SFR repayment, wasn't there supposed to be a 20% prepayment penalty? Hey, Jade. It's Paul.
Vector.
Okay do you know what pro forma book value should be.
Paul Richards: Yeah, so of course, it just matters based on yield maintenance calculations. So when rates were low back, you know, a year and a half ago, and we discussed that the prepayment penalty was a lot higher. Now that rates have traced back up to, you know, that 5% land, the prepayment penalty is a lot less than what it was back when the rate market was a lot lower. So there's going to be a $9 million prepayment penalty, correct? That's correct, and that's factored into the earnings, but there's more than an offset to reverse the unamortized premium. That's correct.
For the reversal of the unamortized premium.
Yes, it's around so the reversal of the image of the unamortized premium its about little less than one dollar a failure.
So we should expect book value to decline by a dollar.
In a vacuum that if that was the only variable yes of course.
So it could be mark to market movements et cetera on the MBS book.
Okay.
Do you know to date, where the mark to market is on San BS.
Yes.
Flat to relatively up a little bit it's not going gangbusters by any means but it's some some mountain doing well from a mark to mark basis, but overall up a little bit through.
Paul Richards: Okay, do you know what the pro forma book value should be for the reversal of the unamortized premium? Yeah, it's around, so the reversal of the unamortized premium is about, you know, a little less than a dollar of book value. So we should expect book value to decline by a dollar. In a vacuum, if that was the only variable, yes, you know, of course there could be mark-to-mark movements, etc.
Through January so we'll get marketing in February coming out, but then of course in March and see how that cielo works being active jade.
Cvs and ABS markets in the first couple months of the year, we've seen spreads.
Come in quite a bit as the.
The indices rise and as with more liquidity returns.
As we sit here today, we feel like the market was strong.
Okay.
So that will hopefully be a partial offset to the book value impact.
Paul Richards: on the CNDS. Okay. Do you know to date where the mark-to-market is on CNBS? Check out the link in the description below.
Yeah, I mean again soon.
In terms of.
In terms of the trade offs, we did delever.
Our $500 million.
Which is good.
I was going through.
Paul Richards: We'll get marks in February coming up, and then, of course, in March and see how that works. Being active, Jade, in the CNBS and ABS markets in the first couple months of the year, we've seen spreads come in quite a bit as the indices rise and as more liquidity returns. So as we sit here today, we feel like the marks will be strong.
Howard Hughes as transcript and their comments about the construction market construction loan market really caught my attention I mean, they basically said they have never seen a market like this where even getting a multifamily loan is challenging the banks are being told to do not do.
Paul Richards: Okay, so that'll hopefully be a partial offset to the book value impact. Yeah, I mean, again, too, we like, you know, in terms of the trade-offs, we did deleverage by $500 million, which is good. I was going through Howard Hughes's transcript, and their comments about the construction market, the construction loan market, really caught my attention. I mean, they basically said they'd never seen a market like this where even getting a multi-family loan is challenging. The banks are being told to not do office work. It's totally redlined and to pull back everywhere else.
Office, it's totally red lined and to pull back everywhere else.
So how do you all feel about that and on the life science and it sounds like it is a construction loan based on the magnitude of future fundings in the attachment point being so low yes, that's a pro forma LTC estimate.
It's construction an area youre looking to get more active in.
Yes.
So I'd say two things one.
The $220 million construction loan.
Matthew Ryan McGraner: So how do you all feel about that? And on the left, science sounds like it is a construction loan based on the magnitude of future funding and the attachment point being so low, you know, that's a pro forma LPC estimate. So is construction an area you're looking to get more active in? Yeah, I think so. And I'd say two things.
On 27 acre site in Cambridge, where the sponsors.
<unk> yields.
Yes repeat sponsor of ours and has.
Roughly $420 million in equity into the project.
This opportunity was born out of banks pulling back.
Matthew Ryan McGraner: One, the $220 million construction loan is on a 27-acre site in Cambridge where the sponsor is a well-heeled repeat sponsor of ours and has roughly $420 million in equity into the project. This opportunity was born out of banks pulling back and trying to syndicate the senior mortgage. We were, in fact, going to do the MES on this loan. And so when the banks pulled back, we just stepped in and did a senior mortgage at basically the same rate, a lower detachment point, creating a pretty attractive risk-return profile. The project was also already funded in terms of equity, and two of the three buildings were built.
Trying to trying to syndicate the senior mortgage.
We're in fact going to due to the Mezz on this loan and so when the bank when the banks called pulled back we just stepped in and did a senior senior mortgage of foods.
Basically the same rate lowered attachment point, creating a pretty attractive risk return profile.
The project was also already funded in terms of equity.
Two of the three buildings were built.
The third is about the top out so from a risk reward.
This one was a good one.
Matthew Ryan McGraner: The third is about to top out, so from a risk-reward perspective, this one was a good one. Our storage platform has, through the past decade, through our storage team led by John Good, had a construction development pipeline whereby they would fund construction loans to developers of self-storage and take a profit's participation interest. I would expect us to get more active in that space as well as the multifamily space as well, because, as you mentioned, this bodes well for multifamily and really all property types of performance in 25 and 26. But over the past nine to 18 months, if you're a developer, you're hurting and can't find access to capital. So it is a good time to invest. It is on our radar, and we've already been doing it. You're funny, that's a good note.
R.
Our storage platform.
Through the past.
Decade.
Through through our stores team led by John Good.
Hi.
Construction development pipeline, whereby they would fund construction loans.
To developers of self storage and take a profit participation interest.
I would expect us to get more active in that space as well as the multifamily space as well because as you mentioned.
This bodes well for multifamily in really all.
Property types performance and 25% to 26 by the past.
Nine to 18 months.
If you're a developer you are hurting in Canada can't find access to capital so.
It is a good time it is our it is on our radar.
<unk> and we've already been doing it so.
Your.
<unk> is a good news.
On the <unk>.
Matthew Ryan McGraner: On the life science front, is there a tenant already signed up? Because I know there's quite a lot of supply expected to hit this year and next. Yeah, that's a rumor.
Life Science is there a tenant already signed up because I know there is quite a lot of supply expected to hit this year and next year.
Yes.
That's a rumor.
Matthew Ryan McGraner: A lot of the supply hitting has been pushed out to 27 and 28. I think half of what was planned to deliver over the next 12 months won't be delivered. So if you would dig into the numbers, and we're happy to share those with you, I think the supply in life sciences is fairly overstated. This particular project is one of the last to be developed in Cambridge before the moratorium hits. And the location, the size, and the ability to take full blocks are 395,000 square feet total. We expect it to be very attractive, and again, it will open its COs in 2025. It's not like this is a far-fetched project. So we expect leasing velocity to do very well here. But as of today, there is none.
A lot of the supply hitting it has been pushed out to <unk> 27, and 28 I.
I think hopper Lois was planned to deliver over the next 12 months.
Won't deliver so if you dig into the numbers and we're happy to share those with you.
I think the supply in life Sciences is fairly overstated.
This particular project is.
One of the last to be developed in Cambridge.
Before before a moratorium.
Hits in.
The the location.
The size the ability to take full blocks of 395000 square feet total, we expect to be very attractive and again it opens.
In 2025 solid doses.
Far out projects.
We expect leasing velocity.
Do very well here, but as of today there is no tenant.
Matthew Ryan McGraner: But our basis is below. I would just add one thing. Our basis is land value.
But our business is below our base I would just add one thing our basis is land value.
Matthew Ryan McGraner: Okay. And then on multi-family, you know, lots of noise, lots of CLO reports showing delinquencies, there's a lot of scrutiny on some of your peers, mortgage repeat peers, but at the same time, you know, the GSEs are showing pretty low delinquencies in their stabilized servicing portfolios that, you know, others like Walker and Dunlop manage. So, can you just give us a sense, since you're so active even on the equity side, of what's going on on the ground with multi-family, some of the supply challenges, and yet, you know, what looks like pretty decent credit performance? Yeah, you bet. I think you've got to bifurcate agency versus non-agency and, just, I guess, generally in multifamily. Right now, Q1, Q2, Q3 is the eye of the storm, the supply storm, so to speak, and then supply wanes throughout 24 and into 25, and the dynamic really flips in the landlord's favor.
Sure.
Okay.
And then on.
On multifamily lots of lots.
Lots of noise lots of them.
CLO reports showing delinquencies, there's a lot of scrutiny on some of your peers mortgage REIT peers, but at the same time, the <unk> are showing pretty pretty low delinquencies and that stabilized servicing portfolios that others like Walker Dunlop manage.
Can you just give us a sense.
So active even on the equity side of what's going on on the ground with multifamily.
Supply challenges and yet you know what looks like pretty pretty decent credit performance.
Okay.
Yes, you bet.
<unk>.
I think.
I think you've got to bifurcate agency versus non agency.
And.
Just I guess generally in multifamily right now Q to Q1 Q2 Q3 is the eye of the storm of supply storm so to speak.
And then as supply wanes throughout 'twenty, four and into 25 it gets.
The dynamic really flips in the landlords favor.
Matthew Ryan McGraner: On the ground, the CRE CLO loans, obviously, probably lower quality collateral, are hitting air pockets. Their cash flow is starved. They're almost zombie deals to the extent that there is no cash flow to fund operations or rehabs or business plans that were conducted or created a couple years ago, so those deals are challenged, and I'm not going to say you can't work through them.
On the ground.
The CRE CLO loans.
Obviously, probably low lower quality collateral.
Our hitting air pockets.
Their cash flows start there.
They are.
Yes.
Zombie deals to the extent that there is a cash flow to fund operations or Rehabs, our business plans that were conduct conducted or.
It created a couple of years ago. So.
Those deals are challenged.
I'm not going to say, we can't work through it multifamily that used to work for but those are those are where youre seeing the most weakness the agency portfolios, including our own have held up a lot better.
Matthew Ryan McGraner: Multi-family is the easiest to work through, but those are where you're seeing the most weakness. The agency portfolios, including our own, have held up a lot better, and that makes sense, right? They're particularly better sponsors, maybe well-located to go through a bunch of different layers of underwriting, and they're more diversified, and so I think those deals will continue to be fine and be able to be refinanced, especially as we get through the next three or four quarters, which I think once the Fed decides to actually pivot, that'll ease some pressure on the system, and then getting through the supply will also help, so a little bit of a rough time in the next two or three quarters, but I do think there's light at the end of the tunnel.
That makes sense right, particularly.
Better sponsors.
Maybe well located to go through a bunch of different layers of underwritings.
In a more diversified and so.
Those deals will continue to be fine.
And be able to be refinanced, especially as we get through the next three or four quarters, which I think things once we once the fed decides to actually pivot.
That will though some some pressure on the system and then getting to apply will also help so but a little bit of.
A rough time in the next two or three quarters, but I do think there is light at the end of the tunnel.
Matthew Ryan McGraner: Thanks a lot. Thanks, everyone. This concludes the Q&A session of today's call. I will now turn the call back to the management team for closing remarks. Yeah, I appreciate everybody's time. Great questions today.
Thanks, a lot.
Thanks, Ed.
Okay.
This concludes the Q&A session of today's call I will now turn the call back to the management team for closing remarks.
I appreciate everybody's time and great questions today.
We look forward to speaking again soon thank you.
Yes.
Operator: We'll look forward to speaking again soon. Thank you. This includes the Nexpoint Real Estate Finance fourth quarter 2023 conference call. Thank you for your participation. You may now disconnect. Thanks for watching!
This includes the next point real estate Finance fourth quarter 2023 conference call. Thank you for your participation you may now disconnect.
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Yes.
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