Q2 2024 NexPoint Real Estate Finance Inc Earnings Call
Thank you for standing by. My name is Amy and I will be your conference operator for today.
Operator: At this time, I would like to welcome you to the Nexpoint Real Estate Finance Q2 2024 Earnings Conference Call. Please note that all lines have been placed on mute to prevent any background noise. It is now my pleasure to turn the call over to Kristen Thomas, Investor Relations. Please begin. Thank you.
At this time, I would like to welcome you to the NextPoint Real Estate Finance Q2 2024 Earnings Conference Call.
Please note that all lines have been placed on mute to prevent any background noise. It's now my pleasure to turn the call over to Kristen Thomas, Investor Relations. Please begin.
Kristen Thomas: Thank you, good day everyone, and welcome to the Nexpoint Real Estate Finance conference call to review the company's results for the second quarter ended June 30th, 2024.
Kristen Thomas: Thank you. Good day, everyone, and welcome to Nextpoint Real Estate Finance conference call to review the company's results.
Speaker Change: For the second quarter ended June 30th, 2024. 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.
Kristen Thomas: 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 webcast through the company's website at www.nrf.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 Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs.
As a reminder, this call is being webcast through the company's website at www.NRF.NextPoint.com.
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 of risks and other factors that could affect such forward-looking statements. The statements made during this conference call speak only as of today's date, and, except as required by law, NREC does not undertake any obligation to publicly update or revise any forward-looking statements.
Speaker Change: Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs.
Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's annual report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect the forward-looking statements.
The statements made during this conference call speak only as of today's date, and except as required by law, NREF does not undertake any obligation to publicly update or revise a date forward looking statement.
Kristen Thomas: This conference call also includes an analysis of non-GAAP financial measures. 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 Mitts. Please go ahead, Brian. Thank you.
Speaker Change: This conference call also includes an analysis of non-GAAP financial measures. 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 Mitts. Please go ahead, Brian.
Brian Mitts: Thank you, Kristen, and I appreciate everyone joining us today. I'm going to briefly discuss our quarterly results and then give our guidance for the next quarter before turning it over to the team for a detailed commentary on the portfolio, the macro, and the environment. Q2 results are as follows. For the second quarter, we reported a net income of $0.40 per diluted share compared to a net income of $0.33 per diluted share for the second quarter of 2023.
Brian Mitts: The increase in net income for the quarter was due to the change in net assets related to consolidated CMBS BIEs, including the sale of CMBS BPs for a realized gain of $6.2 million. Additionally, interest income increased by $2.5 million to $6.7 million in the second quarter, from $4.2 million in the second quarter of 2023. The increase was driven by an increase in interest income, which is driven by higher rates as well as lower interest expense from the deleveraging that occurred in the first quarter of this year.
Brian Mitts: Thank you, Kristen, and appreciate everyone joining us today. I'm going to briefly discuss our quarterly results and then give our guidance for the next quarter before turning it over to the team for a detailed commentary on the portfolio and the macro and the environment.
Brian Mitts: Earnings available for distribution was 68 cents per diluted share in Q2, compared to $0.50 per diluted share in the same period 2023. Cash available for distribution was $0.64 per diluted share in Q2, compared to $0.53 per diluted share in the same period 2023. The increase in earnings available for distribution was driven by an increase in net income for the quarter.
Speaker Change: Q2 results are as follows. For the second quarter, we reported a net income of $0.40 per diluted share compared to net income of $0.33 per diluted share for the second quarter of 2023.
Speaker Change: The increase in net income for the quarter was due to the change in net assets related to consolidated CMBS DIEs, including the sale of CMBS BPs for a realized gain of $6.2 million.
Speaker Change: That interest income increased by $2.5 million to $6.7 million in the second quarter and $4.2 million in the second quarter of 2023. The increase was driven by an increase in interest income.
Speaker Change: which is driven by higher rates as well as lower interest expense from deleveraging that occurred in the first quarter this year. Earnings available for distribution was 68 cents per diluted share in Q2.
Speaker Change: compared to $0.50 per diluted share in the same period 2023. Cash available for distribution was $0.64 per diluted share in Q2.
Speaker Change: compared to 53 cents per diluted share in the same period of 2023.
Speaker Change: The increase in earnings available for distribution is driven by the increase in net income for the quarter.
Brian Mitts: We paid a regular dividend of $0.50 per share in the second quarter, and the board has declared a dividend of $0.50 per share payable for the third quarter of 2024. Our regular dividend in the second quarter was 1.28 times covered by cash, but available for distribution. Book value per share decreased 1.1% from Q1 2024 to $16.51 per diluted share, with the decrease being primarily due to the decrease in fair value marks on our common stock investments.
Speaker Change: We paid a regular dividend of $0.50 per share in the second quarter and the board has declared a dividend of $0.50 per share payable for the third quarter of 2024. Our regular dividend in the second quarter was $1.28 times covered by cash available for distribution.
Speaker Change: Bug value per share decreased 1.1% from Q1 2024 to $16.51 per diluted share, with the decrease being primarily due to the decrease in fair value marks on our common stock investments.
Brian Mitts: During the quarter, we funded $55.1 million on a drawable first mortgage on the Life Science Development property in Cambridge. We originated a $150 million promissory note financing $67.5 million, which yields 16.5%, and purchased a $31.9 million CMBS BP with a bond equivalent of 9.5%. During the quarter, we sold 1.5 million shares of our Series B Cumulative Preferred or Redeemable Preferred for net proceeds of $32.6 million. Our portfolio is comprised of 85 investments with a total outstanding balance of $1.2 billion.
Speaker Change: During the quarter, we sold 1.5 million shares of our Series B Cumulative Preferred or Redeemable Preferred for net proceeds of $32.6 million.
Speaker Change: Our portfolio is comprised of 85 investments with a total outstanding balance of $1.2 billion. Our investments are allocated across
Brian Mitts: Our investments are allocated across... sectors as follows, 18.8% in single-family rental, 56.9% in multifamily, 22.2% in life sciences, 1.5% in storage, and 0.6% in marina. Our fixed income portfolio is allocated across investments as follows, 11.5% senior loans, 36.7% EMBS, 50 pieces. 20.7% Preferred Equity Investments, 19.5% Mezzanine Loans, 4.2% IO Strips, 1.6% MBS, and 5.8% provincial nodes. That's us collateralizing our investments are allocated geographically as follows: 17% in Texas, 14% in Massachusetts, 8% in California, 7% in Florida, 6% Georgia, 4% Maryland, with the remainder across states with less than 4% exposure, reflecting our heavy preference for Sunbelt Mark.
Speaker Change: Sectors as follows, 18.8% in single-family rental, 56.9% in multifamily, 22.2% life sciences, 1.5% in storage, and 0.6% in marina.
Speaker Change: Our fixed income portfolio is allocated across investments as follows, 11.5% senior loans, 36.7% CNBS, 50 pieces.
Paul Richards: Collateral on our portfolio is 80.3% stabilized with a 62.3% loan to value and a weighted average DSCR of 1.52 times. We have $861 million in debt outstanding. Of this, $281 million, or 32.6%, is short-term debt. Our weighted average cost of debt is 6.2%, and it has a weighted average maturity of 1.6 years. Our debt is collateralized by $1.1 billion of collateral with a weighted average maturity of 4.9 years, and our debt to equity ratio is 1.78 times.
Speaker Change: We have 861 million debt outstanding. Of this, 281 million, or 32.6%, is short-term debt. Our weighted average cost of debt is 6.2%, and has a weighted average maturity of 1.6 years.
Speaker Change: Our debt is collateralized by $1.1 billion of collateral, with a weighted average maturity of 4.9 years. And our debt to equity ratio is 1.78 times.
Paul Richards: Moving to guidance for the second quarter, we are guiding to earnings available for distribution and cash available for distribution as follows: earnings available for distribution of $0.50 per diluted share at the midpoint, with a range of $0.45 on the low end and $0.55 on the high end. Tasks available for distribution of 45 cents since the literature is at the midpoint with a range of 40 cents on the low end and 50 cents on the high end. So with that, I'd like to turn it over to Paul for a discussion of our portfolio.
Speaker Change: So with that, I'd like to turn it over to Paul for.
Paul Richards: The second quarter results exhibited strong performance across each of our investment sectors. Our approach continues to center on areas where our expertise in owning and operating commercial real estate provides a distinct advantage. This dual role as both owner and lender allows us to effectively leverage information to assess and identify value across the entire capital stack, aiming to deliver outside risk-adjusted returns. 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 debt basis.
Paul Richards: The second quarter results exhibited strong performance across each of our investment sectors. Our approach continues to center on areas where our expertise in owning and operating commercial real estate provides a distinct advantage.
Paul Richards: We also emphasize lending to reputable sponsors to consistently provide dependable value to our shareholders. In the second quarter, despite improving yet still less than ideal conditions in the commercial real estate market, we were able to deploy capital in accretive investments as well as take advantage of strong bids in the secondary bond market and recycle more seasoned bonds into other opportunities. Our loan portfolio continues to remain stable, comprising 85 individual assets with approximately $1.2 billion in total outstanding principal. The portfolio is geographically diverse with a preference for Sunbelt Markets.
Paul Richards: From the beginning of the first quarter through today, the company has been very active in underwriting and deploying capital. During the quarter, we completed the purchase of a new issue, five-year fixed Freddie Mac B Peace investment with attractive metrics. The securitization has a high 50% LTV, 1.3X plus DSCR, and a diverse geographical footprint with great sponsorships. The B Peace will yield an all-in unlevered fixed rate of 9.5%, and by utilizing reasonable leverage, we expect to generate a mid-team leverage return on a strong collateral pool.
Paul Richards: The company also funded an additional $55 million of life science senior loans, which bears an interest rate of SOFR plus $900. On the disposition loan repayment side, as mentioned, we sold a bond, which generated a very healthy gain, which was redeployed into newly originated and accreted deals. At the end of the quarter, we remained committed to maintaining a cautious approach to repo financing, with the leverage standing in the 60% loan-to-value range and delevering our repo lines by approximately $60 million and further decreasing our overall debt-to-book value ratio to 1.78x from over 2.0x from the prior quarter.
Paul Richards: As mentioned, we sold a bond which generated a very healthy gain, which was redeployed into newly originated and accreted deals.
Paul Richards: At the end of the quarter, we remain committed in maintaining a cautious approach to repo financing with the leverage standing in the 60% loan-to-value range and delevering our repo lines by approximately $60 million.
Matt McGraner: We consistently engage in communications with our repo lending partners, discussing market conditions and the status of our financed CNBS portfolio. In summary, we are consistently identifying appealing investment opportunities across our target markets and asset classes. We are committed to meticulously evaluating these opportunities to enhance shareholder value. We have strong confidence in the resilience of the residential sector, particularly given the current industry climate. Our investments in the multifamily and single-family verticals are considered secure, as evidenced by the historical performance and current rent versus ownership dynamic, providing a long-term sector tailwind.
Paul Richards: We consistently engage in communications with our repo lending partners discussing the market conditions and the status of our finance CNBS portfolio. In summary, we are consistently identifying appealing investment opportunities across our target markets and asset classes.
Matt McGraner: Additionally, we continue to be very enthusiastic about our investment pipeline in the life science CDMO sector. To finalize our prepared remarks before we turn it over to questions, I'd like to turn it over to Matt McGraner.
Matt McGraner: Appreciate it, Paul. As he just mentioned, Q2 was an active investment quarter in which we originated $200 million worth of deals across multifamily and life science verticals. The $150 million bridge loan originated during the quarter is emblematic of great opportunities in the market to earn outsized risk-adjusted returns. We are seeing wonderful opportunities to make senior-secured loans on new construction, redevelopment, and increasingly last-mile TI funding in the life sciences sector at great rates.
Paul Richards: Appreciate it, Paul. As he just mentioned, Q2 was an active investment quarter in which reoriginated $200 million worth of deals across multi-family and life science verticals.
Speaker Change: The $150 million bridge loan originated during the quarter is emblematic of great opportunities in the market to earn outsized, risk-adjusted returns.
Paul Richards: We are seeing wonderful opportunities to make senior-secured loans on new construction, redevelopment, and increasingly last-mile TI funding in the life sciences sector at great bases. These loans are underwriting to mid-50% LTVs with all-in mid-double-digit returns.
Matt McGraner: These loans are underwriting to mid-50% LTVs with all-in mid-double-digit returns. The other material investments made during the quarter were in the Freddie Mac K program, where multifamily credit quality and underlying performance continue to outperform expectations, even in the face of record supply.
Paul Richards: The other material investments made during the quarter were in the Freddie Mac K program where multifamily credit quality and underlying performance continues to outperform expectations even in the face of record supply.
Matt McGraner: Same-store NOI growth continues to improve in the residential sector broadly, with demand being quite exceptional during the first half of the year. So supply is expected to peak in the second half of the year, and I'd like to share a couple of stats from our research tracking starts and deliveries. Annual starts in the multifamily sector are now at their lowest level in 10 years, approximately 280,000 units per year.
Speaker Change: Same-store NOI growth continues to improve in the residential sector broadly, with demand being quite exceptional during the first half of the year. Supply is expected to peak in the second half of the year, and I'd like to share a couple of stats from our research tracking starts and deliveries.
Matt McGraner: The year-over-year drawdown that starts from 2023 is approximately 40%. 2Q24 quarterly starts came in at just 38,000 units nationally, which would represent an annual run rate of 150,000 new units or 50% of the trailing 10-year average. Trailing 12-month starts are way down from the peak across all major metros, including Sunbelt Markets, down anywhere from 40% to 60% versus 2020's peak. Finally, RealPage forecasts a return to normal 2-4% annual organic rent growth in 2025.
Paul Richards: 2Q24 quarterly starts came in at just 38,000 units.
Paul Richards: nationally, which would represent an annual run rate of 150,000 new units or 50% of the trailing 10-year average. Trailing 12-month starts are way down from the peak across all major metros including Sunbelt Markets, down anywhere from 40 to 60 percent versus 2020's peak.
Paul Richards: Finally, RealPage forecasts a return to normal 2-4% annual organic rent growth in 2025.
Matt McGraner: Meanwhile, we remain pleased with our solid Q2 results, especially on a relative basis. Our portfolio continues to perform exceptionally well, and despite these short-term supply challenges in multifamily, underlying performance in multifamily, SFR, storage, and life sciences remains stable. 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 we'd like to turn the page.
Speaker Change: Meanwhile, we remain pleased with our solid Q2 results, especially on a relative basis. Our portfolio continues to perform exceptionally well, and despite these short-term supply challenges in multifamily, underlying performance in multi-SFR storage and life sciences remains stable.
Operator: Thank you. The floor is now open to questions. As a reminder, if you would like to ask a question, please press star and the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one. We'll pause for just a moment to compile the Q&A list. The first question comes from the line of Stephen Laws with Raymond James. Your line is now open.
Speaker Change: Thank you. The floor is now open for questions. As a reminder, if you would like to ask a question, please press star and the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one. We'll pause for just a moment to compile the Q&A roster.
Stephen Laws: Good morning. Good morning.
Stephen Laws: Nice quarter. Appreciate the comments and the guidance, as always. You know, I wanted to touch base just how you think about, you know, the capital raising with the perpetual series B, as well as the funding of the life sciences investment. Do those two things sort of match up as the drawdown matches the capital raising? And then, you know, outside of that, where do you stand on redeploying the capital that was supporting the large repayment that occurred in Q1?
Speaker Change: Hi, good morning. Nice quarter, appreciate the comments and the guidance as always.
Speaker Change: You know, I wanted to touch base just how you think about, you know, the capital raising with the Perpetual Series B, as well as the funding of the life sciences investment.
Speaker Change: Do those two things sort of match up as...
Speaker Change: as the drawdown matches the capital raising. And then outside of that, where do you stand on redeploying the capital that was supporting the large repayment that occurred in Q1?
Matt McGraner: Hey Stephen, I'll start. It's Matt. Good morning.
Paul Richards: Yeah, hey Stephen, I'll start. It's Matt. Good morning. On the capital raising front with the Series B, it's actually matching up pretty well. We're raising roughly...
Matt McGraner: On the capital raising front with the Series B, it's actually matching up pretty well. We're raising roughly $15 million or so, approximately a month, and that fairly matches draws of about $15 to $20 million a month. So from a timing perspective, it's actually working out really well, and one reason why we think the... why we are forecasting guidance covering our dividend going into the second half of the year and feel good about that.
Speaker Change: You know, $15 million or so approximately a month, and that fairly matches draws of about $15 to $20 million a month. So from a timing perspective, it's actually working out really well, and one reason why we think the, or why we are forecasting guidance covering our dividend going into the second half of the year, and feel good about that.
Matt McGraner: And then in terms of redeploying the payback from the loan payoffs, we've largely de-levered by that, and we're reviewing several capital markets options on how best to re-lever the balance sheet and match new investments with those opportunities. But for now, the Series B is kind of making it easier and consistent for us to redeploy the capital and match fund the Cambridge loan.
Speaker Change: And then in terms of
Speaker Change: redeploying the the payback from
Speaker Change: the loan payoffs. You know, we've largely de-levered by that, and then we're reviewing, you know, several capital markets options on how best to re-lever the balance sheet and match those and match new investments with those opportunities.
Paul Richards: But for now, the Series B is kind of, you know, making it easier and consistent for us to redeploy the capital and match fund the Cambridge loan.
Stephen Laws: And as a follow-up, you know, I wanted to talk about the kind of, I hate to say, transition, but you know, a little bit of a shift in the portfolio and probably the right time in the cycle to do it. I imagine, you know, it's a little less stabilized, a little lower DSCR, but it's also seen the LTV drop a good bit. So it seems like you're looking at, you know, maybe taking advantage of, you know, financing market inefficiencies and some people that have left the sector. But can you talk about kind of where you're seeing the most attractive risk-adjusted returns and kind of, you know, what's driving that focus as you put new money to work today?
Speaker Change: Great. And as a follow-up, you know, I wanted to talk about the kind of
Speaker Change: I hate to say transition, but a little bit of a shift in the portfolio and probably the right time in the cycle to do it. I imagine it's a little less stabilized, a little lower DSCR, but it's also seen the LTV drop a good bit. So it seems like you're looking at
Speaker Change: maybe taking advantage of financing market inefficiencies and some people that have left the sector. But can you talk about kind of where you're seeing the most attractive risk-adjusted returns and kind of what's driving that focus as you put new money to work today?
Matt McGraner: Yeah, I mean, I think you're alluding to our activity increasing in the life sciences sector. And from our vantage point, it is just that.
Speaker Change: Yeah, I mean, I think you're alluding to our activity increasing in life sciences sector and from our vantage point, it is just that. It's a retrenchment of a number of different types of lenders into the space.
Matt McGraner: It's a retrenchment of a number of different types of lenders into the space at a time when you're really seeing, you know, not a hockey stick, but a resurgence of growth. You know, ARE's quarter in the second quarter, they had released over a million square feet, 300,000 square feet in new development. We're seeing some of the same things across our investments in life sciences without really any lender support. And so, you know, you have projects that were started in 2021 or 22 that raised a ton of capital.
Speaker Change: at a time when you're really seeing not a hockey stick, but a resurgence of growth.
Speaker Change: ARE's quarter, in the second quarter, they had releasing of over a million square feet.
Speaker Change: 300,000 square feet in new development, we're seeing some of the same things across our investments in life sciences without really any lender support.
Speaker Change: You know, you have projects that were started in 20, 21, 22 that raised a ton of capital. We can come in and prime that capital that's been raised and fund the last dollars to finish out some of these TIs and other, you know, warm shell components.
Matt McGraner: We can come in and prime that capital that's been raised and fund the last dollars to finish out some of these TIs and other, you know, warm shell components and be at a basis of, you know, $7, $800 a square foot on projects that are finished that are worth $1,500 to $1,600 a square foot. All in with rates that are, you know, probably mispriced in a normalized environment. You know, meanwhile, on the multifamily side, you have, you know, a ton of liquidity coming into that space, and spreads have, you know, dramatically come in.
Speaker Change: and be at a basis of.
Speaker Change: $700, $800 a square foot on projects that are finished that are worth $1,500 to $1,600 a square foot.
Speaker Change: all in with rates that are probably mispriced in a normalized environment. Meanwhile, on the multifamily side, you have a ton of liquidity coming into that space and spreads have dramatically come in. We just announced yesterday, or two days ago, with...
Matt McGraner: We just announced yesterday or two days ago with NXRT, you know, a $1.5 billion refinancing at a borrower spread of 109 basis points over SOFR. So that should give you some indication, oh, as well as the Blackstone AIRC CMBS deal that's about to go off or just did, it was upsized by almost a third from 2.1 billion, I think to 2.9 billion. So the market is really there for certain property types right now, and we want to take advantage of where it's not and have enough conviction and belief and see it on the ground that liquidity will return probably in 2025 and certainly 2026, and we can make investments today that will bear fruit over the long term for our shareholders. I appreciate the comments this morning.
Speaker Change: and XRT, a $1.5 billion refinancing at a borrower spread of 109 basis points over SOFR.
Speaker Change: You know so that that should give you some indication as well as the Blackstone AIRC
Speaker Change: CNBS deal that's about to go off or just...
Speaker Change: just did, it was upsized biomass.
Speaker Change: [inaudible]
Speaker Change: you know probably in 25 and certainly 26 and we can make investments today that will bear fruit over the long term for our shareholders.
Stephen Laws: I appreciate the comments this morning, Matt.
Speaker Change: Appreciate the comments this morning, Matt. Thanks, Susan.
Jade Rahmani: Your next question comes from Jade Rahmani with KVW. Your line is now open.
Speaker Change: Your next question comes from Jade Romani with KVW. Your line is now open.
Jade Rahmani: Thank you very much. What are you seeing in terms of multifamily deal flow? Are you seeing any pickup from the agencies, and what do you think is driving their behavior this year?
Matt McGraner: I missed the second part of the question, Jade. Can you repeat that for me?
Jade Romani: Thank you very much. What are you seeing in terms of multifamily deal flow? Are you seeing any pickup from the agencies and what do you think is driving their behavior this year?
Jay: I missed the second part of the question, Jay. Can you repeat that for me?
Jay: And what do you think is driving their behavior this year? They seem somewhat conservative on multi-family lending.
Jade Rahmani: Yeah, I think from our perspective, it's just the deal flow. I guess the first part of your question answers the second part of the question.
Jay: Yeah.
Jay: I think, you know, from our perspective, it's just the deal flow, I guess the first part of your question answers the second part of the question.
Matt McGraner: The deal flow is still very, very muted. Negative leverage persists. Cap rates for good quality product that agencies would typically finance are still five, or we bid on a deal in South Florida that ended up going off at a 4.5% cap rate. So leverage is still negative in most cases, which is having some impact on deal flow.
Speaker Change: The deal flow is still very muted. Negative leverage persists. Cap rates for good quality product that agencies would typically finance are still 5. We bid on a deal in South Florida that ended up going off at a 4.5% cap rate. So leverage is still negative in most cases, which is having some impact to deal flow. That being said, you did see the KK Arlen R deal go off and obviously the $20 billion worth of private equity and multi-family transactions in the first quarter.
Jay: So large deals are getting done. I would say individual, you know, smaller deals, you know, are still, you know, down, I think.
Jay: Thank you all.
Speaker Change: I saw this, it's 40% again year over year down in transaction volume. So I think it's from an agency standpoint, not that they're being overly conservative and Paul, I'll kick this to you after this for your comments.
Matt McGraner: If you have anything to add to that, Yeah, I think, you know, in the past, you saw a lot of 10-year fixes and 7-year floats. What we've been seeing, new originations, have been more of the 5-year fix, you know, as we close on 2 from this year alone. So, you know, a shorter term, but, you know, if you look at treasury rates today, they're, you know, the 5-year's down to 3.85, and, you know, if that sticks, I think you might see some more deal flow as treasuries continue to rally for DealFlo.
Paul Richards: So, you know, a shorter term, but, you know, if you see treasury rates today, they're, you know, five years down to 385, and, you know, if that sticks, I think you might see some more deal flow.
Paul Richards: as Treasuries continue to rally, but as of right now, it seems like it's unthawing but still a little, as Matt pointed out, a little tight in the agency space.
Matt McGraner: The NXRT refinancing, that's at 100 to 110 base points, Brett.
Matt McGraner: It was 109 basis points higher than SOFR.
Matt McGraner: It was 109 basis points over SOFR.
Jade Rahmani: And so, in your mind, when you look at the weighted average cost of capital and maybe some expectation of rate moderation, what do you think the, how do you look at the all-in cost of capital of that debt ceiling?
Matt McGraner: Well, that deal is sort of different because we have a billion 250 of swaps at an average blend of 1.36%, so borrowing cost is just an additional 109 basis points over that, but the swaps are burning off in 26, so for that company it's amazingly accretive and keeping the flexibility on a floating rate to buy and refinance and have zero defeasance or yield maintenance penalties, so that's a one-off situation, but it does, I think, illustrate the agencies, Freddie in particular, rolling up their sleeves, digging in and trying to come up with a bespoke solution to one of their select sponsors.
Speaker Change: a billion 250 of swaps at an average blend of 1.36 percent so borrowing cost is just an additional 109 basis points over that but the swaps are burning off in 26 so for that company it's you know
Jade Rahmani: And more broadly, when you look at a multifamily acquisition, maybe for NXRT, you know, you've mentioned bidding on something that sold at a four and a half. Let's say you were bidding maybe at a five-ish. How are you looking at, you know, levered returns in that kind of situation?
Speaker Change: And more broadly, when you look at a multifamily acquisition, maybe for NXRT, you know, you've mentioned bidding on something that sold at a four and a half. Let's say you were bidding maybe at a five-ish. How are you looking at, you know, levered returns in that kind of situation?
Matt McGraner: Yeah, I mean, it depends on who you are. And in our case, we're, you know, a public company that has an implied cap rate sitting out there at six and a quarter. And, you know, the transaction market is still tight at, the private transaction market is still tight at, you know, 5% or lower cap rates. So, you know, we have the opportunity to sell assets there and buy back stock.
Matt McGraner: And, you know, that's what we continue to do. But in terms of underwriting new levered returns, you know, the way that we look at it historically is to try to go in at a plus or minus 5% cap rate and move that cap rate to a six and a half, or seven over the course of three or four years by, you know, adding value and, you know, renovating units and then deciding whether to sell or refinance.
Speaker Change: Yeah, that's what we, you know, continue to do, but in terms of underwriting new levered returns.
Paul Richards: you know the way that we look at it historically is try to you know go in plus or minus 5% cap rate and move that cap rate to a six and a half seven over the course of three or four years by you know adding value and you know renovating units and then and then deciding whether to sell or refinance
Jade Rahmani: Okay. And then lastly, on the book value per share, do you have a post-quarter or inter-quarter update? You know, how do you think it compares with the quarter-end book value?
Jade Rahmani: Are you talking about from 6.30 to today, or not? Yeah.
Speaker Change: Are you talking about from 6.30 to today or? Yeah, yeah, just the mark-to-market impact of where book value might be, if there's been any improvement based on spreads.
Matt McGraner: Yeah, yeah, just the mark to market impact of where book value might be if there's been any improvement based on spread.
Matt McGraner: Yeah, that's a great question. We are seeing more of a reflation this past month on market-to-market, just from treasury rates alone on our market-to-market book of CMDS. So yeah, you are seeing an uptick in those values, so I would say that we have clawed back some percentage points this past month just on the market value of those CMVS positions. It's a good question, Jade, and in addition, I wanted to mention that part of the book value decline was from our storage portfolio, and I think we're doing a pretty big refinancing there on some of the debt that we'll expect to accrete to value for the storage portfolio in a SAASB later on in the year, probably in the third quarter, if not the late third quarter, early Q4.
Speaker Change: and a SASB later on in the year probably.
Matt McGraner: And that portfolio, I'm pleased to report, is, for the first time in history, given it was all development back in 17, 18, 19, is now 90% stabilized, 90% leased, and occupied, and it's performing well. So we'd expect some reflation in that mark as well.
Paul Richards: probably in the third quarter, if not there.
Jade Rahmani: Thank you. Just on the preferred issuance, I know that you're now excluding potential dilution from the share count, and just to, you know, reduce any confusion, what do you think of that? Do you believe that those shares would eventually be settled in cash? And so it makes sense to exclude the dilution. Yeah.
Matt McGraner: Yeah, another good question. So there's a couple factors in how we came to that methodology.
Matt McGraner: First and foremost, there's a two-year lockout for the company to even redeem shares. The second point is there's a mechanism where only 20% of the actual outstanding shares can be redeemed per year. So there's a cap on it, so there wouldn't be any event where the full prep would be fully redeemed at any one point in time. There are also large penalties for investors to redeem. That stair steps down over time, but currently, there's, I believe, an 11% penalty for investors to redeem at this point in time. And the last point, I think you guys have seen in NXRT, NREF, all our vehicles; our plan is never to dilute the company when we're trading below book value. It's just not helpful.
Speaker Change: There's also large penalties for investors to redeem. That stair steps down over time, but currently there's, I believe, an 11% penalty for investors to redeem at this point in time. And the last point, I think you guys have seen in NXRT, NREF, all our vehicles.
Matt McGraner: And so we would look to settle in cash in the future. So that's why we came to the conclusion of using this specific share account versus a fully diluted account with the Series B shares included. Thanks.
Jade Rahmani: Thanks very much. That's helpful. Thanks, Jade.
Speaker Change: Thanks very much, that's helpful. Thanks, Jude.
Operator: Again, if you'd like to ask a question, press star and the number one on your keypad. At this time, there are no further questions. I would like to turn the call back over to the management team for closing remarks.
Speaker Change: Again, if you'd like to ask a question, press star and the number 1 on your keypad.
Matt McGraner: Thank you. Thank you. Oh, sorry, Matt. Go ahead. No, go ahead. I appreciate it. Thanks.
Matt McGraner: Go ahead. I appreciate it. Thanks for everyone's time. We'll talk to you next quarter.
Speaker Change: Thank you. Sorry, Matt, go ahead. No, go ahead. Appreciate it. Thanks. Thanks for everyone's time. We'll talk to you next quarter.
Operator: That concludes the call for today. Thank you so much. You may now disconnect.
Speaker Change: [inaudible]
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