Q1 2024 NexPoint Real Estate Finance Inc Earnings Call
Operator today at this time I would like to welcome everyone to the next point real estate Finance first quarter 2024 earnings call. All lines have been placed on mute to prevent any background nice after the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply fresh start and the number one.
On your telephone keypad, if you would like to withdraw your question. We asked the pound key. Thank you I would now like to turn the call over to Kristin Thomas Investor Relations. Please go ahead.
Kristen Thomas: Thank you good day, everyone and welcome to next where real estate Finance conference call to review the company's results for the first quarter ended March 31, 2024 on the call today are Brian Mitts Executive Vice President and Chief Financial Officer, Matthew Greater Executive Vice President and Chief Investment Officer, and Paul Richard Vice.
Kristen Thomas: Our net originations and investments as a reminder, this call is being webcast through the company's website at <unk> Dot net dot com.
Kristen Thomas: Before we begin I would like to remind everyone that this conference call contains forward looking statements with the meaning of the private Securities Litigation Reform Act of 1995 that are based on management's current expectations assumptions and beliefs.
Kristen Thomas: 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.
Kristen Thomas: The risks and other factors that could affect the forward looking statements.
Kristen Thomas: The statements made during this conference call speak only as of today's date.
Kristen Thomas: I think as far as by law interest does not undertake any obligation to publicly update or revise any forward looking statements.
Kristen Thomas: This conference call also includes analysis of non-GAAP financial measures for a more complete discussion of these non-GAAP financial measures.
Kristen Thomas: The company presentation that was filed earlier today I would now turn the call over to Brian. Please go ahead.
Brian: Thanks, Kristen I appreciate everyone joining us today.
Brian: Brian Mitts here I'm going to start my first I'll go on to our quarterly results and then provide guidance for next quarter.
Brian Dale Mitts: And then I'll turn it over to Matt and Paul to.
Brian Dale Mitts: Your commentary on the portfolio and the macro environment.
Brian Dale Mitts: So started off Q1 results were as follows for the first quarter, we reported a net loss of 83 cents per diluted share compared to net income of 37 cents per diluted share for the first quarter of 2023.
Speaker Change: The decrease in net income is largely driven by accelerated premium amortization on $508 7 million.
Speaker Change: So far alone that's prepaid on January 25th.
Brian: Net interest income decreased to negative $12 8 million in the first quarter 2024 from three point a positive $3 9 million in the first quarter of 2023 decrease was driven primarily by the $25 million of premium it was amortized in Q1 due to the <unk> loan prepayments I just mentioned.
Brian: Earnings available for distribution was negative 46 cents per diluted share in Q1 compared to a positive <unk> two cents per diluted share in the same period of 2023 and <unk>.
Brian: <unk> 40 positive 44 cents per diluted share Q4 'twenty three.
Brian: Again, the negative result was due to the acceleration of premium on the pre paid us so far with <unk>.
Brian: Cash available for distribution of <unk> 60 per diluted share in Q1 compared to 55.
Brian: Per diluted share in the same period of 2023.
Brian: Decrease in cash Bill for distribution from the prior year was partially driven by the prepayment penalties from the S. A horrible on Paypal.
Brian: We paid a regular dividend of <unk> 50 per share in the first quarter.
Brian: Ward has declared a dividend of <unk> 50 per share payable for the second quarter of 2024.
Brian: Our regular dividend in the first quarter was 1.2 times covered by cash available for distribution.
Brian: Book value per share decreased 14, 8% from the first quarter of 2023.
Brian: And decreased six 9% from the fourth quarter of 2023 to $16.69 per diluted share with the decrease being primarily.
Brian: Due to the SLR loan prepayments.
Brian: During the quarter, we contributed two six preferred equity investments of $11 $5 million of outstanding principle, and a weighted average yield of 10, 8% and originated one loan $44 $6 million of outstanding principal at a rate of 900 basis points over sofa and.
Brian: We sold $1 2 million shares of our series B cumulative redeemable preferred stock for net proceeds of $27 7 million.
Brian: One senior loan redeemed for 500 points.
Brian: $508 $7 million of outstanding principal and received $8 9 million in prepayment penalties.
Brian: Our portfolio is comprised of 90 investments with total outstanding balance of $1 2 billion.
Brian: Our investments are allocated across sectors as follows 47, 2% multifamily, 46% single family rental five 2% life Sciences, and one 5% storage.
Brian: Our portfolio is allocated across the following investments 43, 3% of <unk> B pieces 18, 3% preferred equity investments 15, 2% mezzanine loans 11, 6% senior loans six 3% mortgage backed securities for.
Brian: 4% Io strips and 0.9% MCR nodes.
Brian: The assets collateralized and our investments are allocated geographically as follows 19.
Brian: Texas, 9%, Florida, 8%, California, 6%, Georgia, 5%, Maryland, 4%, Washington, and 3%, Colorado with remainder cross state surplus of two 5% exposure.
Brian: This reflected in our heavy preference for sunbelt investments.
Brian: Collateral on our portfolio was 86, 6% state wise with the 68, 5% loan to value and a weighted average <unk> 117 times.
Brian: We have $843 million of debt outstanding of this $342 million or 41% of short term debt. Our weighted average cost of debt is five 9% and has a weighted average maturity was seven years.
Brian: Our data is collateralized by $1 $2 billion of collateral with a weighted average maturity of five three years and our debt to equity ratio is two points here are four times.
Brian: Moving to guidance our earnings available for distribution of <unk> 45 cents per diluted share at the midpoint with a range of <unk> 40 per share on the low end of <unk> 50 per share on the high end.
Brian: Cash available for distribution of <unk> 40 per diluted share at the midpoint with a range of 35 per share on the low end and 45 per share on the high end.
Speaker Change: So now I will turn it over to the team for detailed discussion. Thanks, Bryan the first quarter results demonstrated robust performance across all of our investment sectors, particularly in our <unk> portfolio. Our approach focuses on areas, where our dual expertise in owning and operating commercial real estate provides a distinct advantage. This dual role as the owner.
Bryan: And lender allows us to effectively leverage information to assess and identify value across the entire capital stack aiming to deliver risk adjusted returns that surpassed the norm. Our investment strategy continues to focus on credit investments and assets that are stable or nearly stabilized prioritizing careful underwriting minimal leverage and a moderate that basis, where.
Bryan: Also emphasize lending to reputable sponsors and consistently provide tangible value to our shareholders in the first quarter. Despite tough conditions in the commercial real estate market. Our loan portfolio remains stable comprising of 90 individual assets with approximately $1 2 billion in total outstanding principle.
Bryan: The portfolio is geographically diverse with a bias towards the Sun belt markets from the beginning of the first quarter through today. The company has been very active in underwriting and deployed capital. We completed the purchase of two new issue five year fixed with the latest one closing this past Tuesday, Freddie Mac dp's opportunities with extremely attractive metrics, both securitizations at <unk>.
Bryan: Hi, <unk>, hi, 50%, Ltvs, and 130 X plus the SCR and our diverse geographical footprint with great sponsorships. The pieces will take all in unlevered fixed rate yield of 975% to 95, 1%, respectively with my bandwidth modest leverage we expect to generate a mid teen Levered returns.
Bryan: And very desirable collateral pools.
Bryan: Company also purchased a new issue as of our ABS paper in the gross amount of approximately $44 million and prudently leveraged to achieve loaded mid double digit returns.
Bryan: Hi, casually and stabilized as of our collateral pool on the.
Bryan: <unk> loan repayment side as mentioned, we received approximately $508 million gross of financing and around $50 million net of financing as a portfolio as borrowers FSFR loan every painful at the end of the quarter. We continued to maintain a cautious approach to our refinancing with leverage standing in a 60% loan to value range and fortifying the CBS book by acquire.
Bryan: <unk> accretive AAA, new issue Cvs paper, we consistently engage in communication with our repo lenders discussing the market conditions and the status of our financing MBS portfolio. In summary, we are consistently identifying appealing investment opportunities across our target markets and asset classes. We are committed to continuously evaluating these opportunities to enhance shareholder value.
Bryan: We have strong confidence in the resilience of the residential sector, particularly given the current interest rate climate, our investments in multifamily and single family verticals are considered secure as evidenced by the historical performance and the current rent to own dynamic providing long term secular tailwind. Additionally, we continue to be very enthusiastic about our it investment.
Bryan: Pipeline and the life science CMO sector to finalize our prepared remarks before we turn it over to questions I'd like to turn it over to Matt or greater.
Matt: Thank you Paul as he just mentioned we remain pleased with our solid Q1 results, especially on a relative basis, our portfolio continues to perform very well and despite short term challenges.
Matt: In supply of multifamily the underlying performance in multifamily <unk> storage and life Sciences remained relatively stable.
Matt: From a capital markets perspective, we are seeing improved liquidity led by the <unk> CBS market with a risk on signal from spreads continuous material inflows of cash to fixed income investors should further support spread tightening over the near term and should offset some of the higher for longer shocks.
Matt: The distress, we do see in housing mostly lies in the 2021% to 2022 vintage non agency floating rate bridge loan market. We believe these loans and the underlying properties will be challenging over the next 12 months or so but afterwards deliveries do start to rapidly dissipates and should create a more favorable supply demand balance in the landlords favor.
Matt: And that said capital for residential assets continues to be plentiful in real time.
Matt: Over the last 60 days private equity investors have aggressively priced over $15 billion of housing product in the low five cap rate range and Meanwhile, over $240 billion of private equity dry powder still remains on the sidelines.
Matt: We continue to successfully ramp our series B preferred raise and expect that that pace will be $15 million to $20 million per month in the second quarter proceeds will continue to be deployed into the $220 million of life science loan in Cambridge, as well as additional Freddie Freddie K B pieces.
Matt: In addition, we are currently underwriting over $250 million worth of special situations opportunities across the residential and life science sectors to the extent any of these do hit we would look to modestly re lever the balance sheet via notes offering to match fund the near term or the term and lock in accretive spreads for the company.
Matt: Given all this positive activity, we expect our current capital base, including the <unk> loan repayment to be redeployed in the second quarter and continue on our normal CAD rate run rate, our cash run rate range and growing throughout the second half of the year.
Matt: To close we're 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.
Speaker Change: As always thanks, thanks to the team here for their hard work and now I would like to turn the call over to the operator for questions.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and trying to queue. If you would like to withdraw your question simply press Star one again exact called upon to ask your question and our listening via loud speaker on your device.
Matt: Please be kept a handset and ensure that your phone is not the mute when asking your question again. It is star one to join the queue and your first question comes from the line of Stephen laws from Raymond James. Please go ahead.
Stephen Albert Laws: Hi, good morning.
Stephen Albert Laws: Matt you May have mentioned this.
Stephen Albert Laws: Did mentioned it kind of towards the end of at the very end of your comments I wanted to.
Stephen Albert Laws: Get your outlook.
Stephen Albert Laws: CAD versus dividend, obviously, some noise or not noise, but some turnover here in the first half.
Stephen Albert Laws: First half of the year with regards to recycling the capital into new investments.
Stephen Albert Laws: Still have comfort with the dividend level that CAD and <unk> can kind of.
Stephen Albert Laws: Supporting the 50 set level and what's your outlook is as you get this capital redeployed as far as the earnings power of a fully deployed portfolio.
Speaker Change: Yes of course.
Stephen Albert Laws: We ended the year I guess 50 51.
Stephen Albert Laws: Of CAD run rate in 'twenty three.
Stephen Albert Laws: The series B and the pipeline investments that we know we have to.
Stephen Albert Laws: To deploy throughout the 2024 year.
Stephen Albert Laws: We thought we could grow that range from 15% to 20%.
Stephen Albert Laws: The kind of what we didn't see was the big loan repayment on the front yard line, which was five $510 million roughly.
Stephen Albert Laws: That with detracted from CAD on our annual run rate of about <unk>.
Stephen Albert Laws: 35.
Stephen Albert Laws: On an annual or a little bit more 40, since our annual basis. So.
Stephen Albert Laws: Our job is to redeploy that capital here in the second quarter and get US back on that 50, 150, 51 run rate and then increase vis vis the series B and the new investments to Matt to match, so feel pretty good about.
Stephen Albert Laws: The run rate post this redeployment of capital and so that's why we're sticking with the sticking with the dividend.
Speaker Change: Great I appreciate the color there.
Speaker Change: You also provided some return.
Speaker Change: Numbers on the new B pieces and I believe it was small and she got it I appreciate that but kind of generally as you look at your pipeline when you look at <unk>.
Speaker Change: <unk> returns from Securities versus Mazur press investments can you talk about what youre seeing relative attractiveness across those different options.
Speaker Change: Yes.
Speaker Change: Really everything we're underwriting and whether you know whether it's a Freddie K b piece with.
Speaker Change: Modest leverage is in the mid teens.
Speaker Change: The construction loan side originations, we think we think we can do.
Speaker Change: Yes, mid teens as well so I think from a risk reward perspective those are the two.
Speaker Change: Primary areas that will focus on and have investment pipeline visibility.
Speaker Change: Yes.
Speaker Change: Say necessarily favor securities over.
Speaker Change: Originating a private investment.
Speaker Change: I think we can price each piece pretty well.
Speaker Change: There are enough opportunities to do both in spades I don't know Paul if you have any other.
Paul Richards: No that's exactly right.
Paul: One final one if I may operating expenses will get more color when the Q comes out but.
Paul Richards: The one time Opex that was the result of the.
Paul Richards: The events in Q1 or can you talk about your expectations for run rate operating expenses moving forward.
Speaker Change: Yeah, Hey, Steve It's Brian.
Brian Dale Mitts: There is a couple of things that contributed to that program.
Brian Dale Mitts: Audit overruns in some legal expenses that yield cost.
Brian Dale Mitts: As well as the way.
Brian Dale Mitts: The stock compensation gets amortized in.
Brian Dale Mitts: We say and one of the with Mac ethylene and some of the forfeitures kind of gets flushed through all at once so we think that that returns to us.
Brian Dale Mitts: Normal run rate throughout the rest of the year.
Brian Dale Mitts: We've increased our accruals on various things where where needed.
Speaker Change: It should be.
Speaker Change: More stable and kind of back to the run rates we've seen before.
Speaker Change: I think we will move back to that kind of six five give or take.
Speaker Change: Number one the Opex, yes.
Speaker Change: Yes, that's right awesome I appreciate that Brian Thanks for the comments this morning.
Brian Dale Mitts: Thanks, David.
Brian Dale Mitts: Our next question comes from the line of Jade Rahmani from K B W. Please go ahead.
Brian Dale Mitts: Hi, This is actually Jason snapshot on for Jade.
Jason: It would be helpful. If you could speak to credit trends within your mezzanine investments and.
Jason: Generally what you're seeing broadly in the market in terms of multifamily credit trends.
Jason: Yeah.
Jason: Yes, I think.
Jason: And our.
Jason: And our medicine prep books.
Jason: Yes.
Jason: I would say we havent won.
Jason: One loan or one perhaps investment in an asset in Atlanta.
Jason: <unk> sponsored trial.
Jason: To decide whether they want to defend the asset again, we're working with them to.
Jason: Yes.
Jason: To resolve certain issues in that market.
Jason: Especially given just atlanta's was kind of challenging the second half of last year anyway.
Jason: Some fraud issues and some.
Jason: Eviction issues with respect to the courts, but outside of that everything else.
Jason: It doesn't it doesn't scare us more broadly as I mentioned, the the biggest distressed we are seeing.
Jason: Related to the 2021 and 2022.
Jason: Bridge loans and CRE CRE CLO is.
Jason: They were all floating floating rate nature.
Jason: Yes, those largely have been extended and those lenders are working through.
Jason: Extensions and issues.
Jason: The near term problems that we see developing in some in some submarkets as these deals are becoming zombie deals. So.
Jason: Their cash flow constrained because all of the interest rates.
Jason: More than doubled and.
Jason: The operators to the extent that they are still in control of the assets.
Jason: Or don't have any money to keep operations up rehab units and so the occupancy in some of these submarkets are dipping and causing some.
Jason: Sub market distress.
Jason: Somewhat isolated again in the CRE CLO market more broadly the agency books are.
Jason: Experiencing very little distressed.
Jason: In our in our case series.
Jason: There is there is still really good performance and solid performance. So I think it depends on where you look both geographically and then what.
Jason: What what wrapper the loans are in but multifamily is a.
Jason: Asset class that you can underwrite and people are underwriting with respect to.
Jason: The transaction market being so robust there.
Jason: Looking through the supply because.
Jason: Because they know it'll it'll wane here pretty aggressively and 25 and 26 after which there is basically no deliveries and so I think multifamily more broadly over the next next six to nine months will be a little bit challenging, but but after that I think.
Speaker Change: Yeah, I think it will be much improved.
Speaker Change: Great. Thank you.
Speaker Change: So in terms of capital deployment and.
Jason: Investment opportunities that you find compelling.
Jason: You talked to that the Bp's purchases, and then life science, but I guess.
Jason: Overall for deployment into.
Jason: Measure pressure or direct loans are there any geographic markets that you find more interesting.
Speaker Change: Just would be helpful as well just hearing broadly your thoughts.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: We have a pension depending on the property side for.
Speaker Change: We have certain geographical areas, our bread and butter over the past decade has been sunbelt smile residential so that's where we feel most comfortable and even though there is supply issues.
Speaker Change: The long term.
Speaker Change: These markets lead the lead the country in job growth and household formation.
Speaker Change: Which is interesting because right now it's like.
Speaker Change: Somewhat on sale right multifamily residential opportunities in the sunbelt.
Speaker Change: More.
Speaker Change: The operating performance is weaker in the Sunbelt right now for sure so that creates a little bit more opportunity. So that's good for our underwriting because thats where were most comfortable life sciences. It depends if you're talking GMP or lab lab work, we're concentrating our investment there in Cambridge.
Speaker Change: And a site that we.
Speaker Change: We like in no no really well.
Speaker Change: We still have another $160 million to fund.
Speaker Change: On that.
Speaker Change: As a good earnings runway.
Speaker Change: But GMP or most of those opportunities are.
Speaker Change: Yes.
Speaker Change: In <unk>, where are we are alone or.
Speaker Change: The research triangle or Houston so.
Speaker Change: I think those markets will continue to see growth and certainly with near shoring and reassuring.
Speaker Change: The advanced manufacturing and pharmaceutical manufacturing industries have.
Speaker Change: Pretty pretty strong secular tailwind behind it.
Speaker Change: So we're excited about both of those places in the market.
Speaker Change: Great. Thank you.
Speaker Change: You bet.
Speaker Change: Our next question comes from the line of Chris <unk> from Piper Sandler. Please go ahead.
Chris: Thanks, Good morning, I appreciate you taking my question.
Chris: Just looking at your asset type exposure on slide nine shifted materially now, 65% multifamily, 22% ssrs and Thats driven by that prepay you talked about but would you expect to get closer to a more even split.
Chris: Family and <unk> longer term or over the near term could you expect to trend more towards multifamily and what that prepayment potentially doubling bridge multifamily opportunities, where you said, where you said you've seen stress could provide GAAP financing there and do you have any exposure right now in that space.
Chris: Yes.
Speaker Change: Yes, I think to tackle your first question the Pie chart.
Speaker Change: Yes.
Speaker Change: I think we're predominantly going to be residential and whether thats multifamily or FSFR will depend on the opportunities.
Speaker Change: Theres just more multifamily paper out there.
Speaker Change: And our flows more active there is more distress there at the moment, so that's probably where we'll be focusing a lot more of our efforts.
Speaker Change: To the extent that we find.
Speaker Change: Yes transaction or a bps in an ABS transaction that looks attractive.
Speaker Change: We will take it will take to it but I think largely the pie chart being being somewhat.
Speaker Change: 88% residential will continue.
Speaker Change: Sorry, what was your second part of your question.
Speaker Change: Do you have some.
Speaker Change: That kind of that bridge multifamily.
Speaker Change: <unk> right now either from kind of an organic basis or kind of that gap financing.
Speaker Change: Yes, so we.
Speaker Change: We have no direct.
Speaker Change: Senior bridge loan exposure, the one Atlanta asset that I mentioned was was behind the CRE.
Speaker Change: CLO bridge loan.
Speaker Change: The debt that would be kind of our.
Speaker Change: One of our one of our loan kind of preferred mezz deals in that space, but again, the beauty of the platform and what.
Speaker Change: Yes.
Speaker Change: What I like about the business as it is.
Speaker Change: To the extent that we have to take.
Speaker Change: Takeover and wipe out the common equity and a mezz position, yes, we're big owners in Atlanta.
Speaker Change: With 3000 units owned and we have been operating verticals in multifamily. So that's a situation, where we may wind up making more making more money than our actual investment over time once the market heals.
Speaker Change: But beyond that now.
Speaker Change: Okay, Great. That's what I thought I just wanted to make sure and then can you just talk about the deployment of that continuous preferred and how that's been what the monthly cadence would you expect that to take a backseat for a little bit just given the prepay and redeploying that capital.
Speaker Change: Hey, Chris This is Paul I think.
Paul: The beauty about the series B preferred raise that there's this constant run rate as Matt mentioned in call. It 15, 2000 $25 billion, a month, which we're able to and will continue to match fund with that.
Paul: The Cambridge life Science asset.
Paul: That has monthly draws so we'll be able to match fund those as well as <unk>.
Paul: <unk> deploying capital onto the additional pieces.
Paul: Other types of paper or structured paper in the future. So I think we will be able to match fund pretty pretty well throughout the remainder of the year with a series E preferred.
Speaker Change: Great. Thank you I appreciate you all taking my questions.
Speaker Change: Thanks, Chris.
Speaker Change: I'm showing there are no more questions I'll now turn the call back over to the management team of <unk>.
Speaker Change: Max.
Max: Yes first of all nothing further from us per se of everyone's time.
Max: We'll talk to you next quarter. Thank you.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Max: [music].
Max: Yes.
Max: [music].
Speaker Change: Thank you.
Max: [music].