Q3 2024 NexPoint Real Estate Finance Inc Earnings Call

Hello, and this time I would like to welcome everyone to the next point real estate financing car-preated Q32024 earnings conference call. I'll end this in place for me to prevent any background noise. After the speakers are marks, there will be a question in the answer session.

You would like to ask a question during this time, simply press star, followed by the number one on your telephone key that you would like to withdraw your questions again just press star in the number one. I would now like to turn the call over to Kristen Thomas and best of relations you may begin.

Kristen Thomas: Thank you. Good to see everyone and welcome to next point real estate finance conference call to review the Communist results for the third quarter in the September 30, 2024. On the call today, our Brian Mitts, Executive Vice President and Chief Financial Officer, Matt McGraner, Executive Vice President and Chief Investment Officer, and Paul Richards Vice President, Regenations and Investment.

As I remind you, this call is being webcast to become these websites website at nwest.net.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements, within the means of the private security litigation format of 1995 that are based on management's current expectations of 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 risk and other factors that could affect a forward-looking statement.

The statements made during this conference call speak only as of today's date and accept as required by law, and NRF 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 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, Kristen.

Thanks Kristen, appreciate everybody's time this morning. I'm Brian Mitts, I'm joined today by Matt McGraner and Paul Richards. I'm going to start the conference

By briefly going through our quarterly results, give some portfolio and balance sheet stats, and then our guidance for the next quarter, and then I'll turn it over to Matt, the team, to go through the portfolio in detail.

Our key three results were as follows. For the third quarter, we reported net income of 74 cents per diluted share compared to net loss of 90 cents per diluted share for the third quarter 2023.

Interest income increased by $5.6 million to $23.6 million in the third quarter.

Kristen Thomas: from $18 million in the third quarter of 2023. The increase is driven by our increase in interest income, which is driven by higher rates, as well as lower interest expense from deleveraging that occurred in the first quarter of this year.

in Q3 compared to $0.43 per diluted share in the same period last year. Cash available for distribution was $0.67 per diluted common share in the third quarter compared to $0.47 for the same period last year.

The increase in earnings available for distribution was driven by the increase in net income for the quarter.

50 cents per share in the third quarter and the board has declared a 50 cent dividend per share payable in the fourth quarter 24. A regular dividend in the third quarter is 1.34 times covered by cash available for distribution.

Book value per share increased 2.6% from second quarter to $16.95 per diluted share with the increase again being primarily due to the unrealized gains on our common stocks.

During the quarter we funded 28.8 million on a life science development property in Cambridge which redeemed 9.7 million of or sorry we redeemed 9.7 million senior loans and sold an 82 million dollar CMBSB piece with a bond equivalent yield 9.2 percent.

During the third quarter, we sold 1.9 million shares of our Series B cumulative redeemable preferred shares for net proceeds of 42 million.

Moving to the portfolio and balance sheet. Our portfolio is comprised of 83 investments.

with a total outstanding balance of $1.1 billion. Our investments are allocated across sectors as follows. 17% SFR, 52.3% multifamily, 26.7% life sciences, 1.5% storage.

Kristen Thomas: 1.8% specialty manufacturing and 0.6% marina.

Our fixed income portfolio is allocated across investments as follows, 11.2% senior loans, 31% CMDSB pieces, 20.1% preferred equity investments,

1% MBS and 9.2% promissory notes.

As far as the assets collateralizing our investments, they are allocated geographically as follows.

16% Texas, 20% Massachusetts

8% California, 6% Florida, 6% Georgia, and 5% Maryland, with a remainder of 4% across other markets, but heavily in all of our portfolios is heavily.

exposed to Sunbelt markets.

The collateral on our portfolio is 77.5% stabilized.

and with 60.2% loan to value and weighted average DSCR of 1.36 times.

We have $816 million of debt outstanding. Of this $324 million or 39.7% is short-term debt. Our weighted average cost of debt is 6.1% and has a weighted average maturity of 1.4 years.

where debt is collateralized by 1.1 billion of collateral with a weighted average maturity of 3.9 years.

Our debt-to-equity ratio is 1.52 times.

Moving to guidance for the fourth quarter, we were guiding to earnings available for distribution of 79 cents per diluted share at the midpoint with a range of 75 cents on the low end and 85 cents on the high end.

We're guiding to cash 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.

So with that, let me turn it over to Matt.

Matt, go ahead.

Hey, thanks Brian. This is Paul Richards. I'm going to go before Matt, but I appreciate it. The results for the third quarter demonstrated strong performance in all of our investment sectors. We remain focused on areas where expertise in owning and managing commercial real estate gives us a significant edge.

By acting as both owner and lender, we can effectively harness information to evaluate and uncover value throughout the entire capital structure, with the goal of achieving superior risk-adjusted returns.

Our investment strategy remains centered on credit investments and assets that are either stable or nearing stabilization, with an emphasis on meticulous underwriting, low leverage, and a conservative debt structure.

We prioritize lending to reputable sponsors to ensure consistent value for our shareholders.

In the third quarter, although conditions in the commercial real estate market continue to improve, they remain somewhat challenging. Nonetheless, we successfully deployed capital into accretive investments and leveraged strong bids in the secondary bond market to recycle seasoned bonds into new opportunities.

The portfolio is geographically diverse with a strong preference for Sunbelt markets.

Kristen Thomas: Since the beginning of the first quarter, the company has been actively underwriting and deploying capital.

An additional $28.8 million was funded on the Life Science Senior Loan, which carries an interest rate of SOFR plus 900 bps.

On the disposition and loan repayment front, we capitalize on a strong bidder pool in the secondary bond market, selling a season B piece acquired during the depths of COVID at roughly 200 basis points tighter than the original purchase price.

This generated a robust gain which was redeployed into newly originated and accretive deals.

At the close of the quarter, we maintain a cautious stance on repo financing, keeping the leverage within a 63% LTV range.

We reduced our repo lines by approximately $40 million, lowering our overall debt-to-book value ratio to 1.52 times from over 2 point times.

and the first quarter. We continue to actively communicate with our repo lending partners discussing market conditions and the performance of our finance CMBS portfolio.

In summary, we continue to identify attractive investment opportunities across our target markets and asset classes with a commitment to thorough evaluation aimed at enhancing shareholder value. We remain confident in the resilience of the residential sector, especially in the current interest rate environment. Our investments in the multifamily and single-family segments are well-positioned, supported by historical performance and a favorable rent-versus-own dynamic that provides long-term momentum for the sector. Additionally, we are highly optimistic about our investment pipeline in the life sciences and CDMO sector.

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. Yes, we're very pleased with the quarter. Credit quality remains attractive and stable, and we're also pleased with the increase in book value quarter over quarter, which is a great sign for the business. Absorption of record levels of multifamily supply continue to exceed our expectation.

and transaction activity is also picking up. Leasing in the life sciences sector is also increasing with particular strength in Q3 and the Kindle and LMA submarkets which is a positive for our four-hour alewife loan.

Our storage business and exposure also had a nice quarter. The portfolio has recently achieved 90 plus percent occupancy across the entirety of the portfolio, a significant milestone for the portfolio as it moves into stabilized operations and had an 11 percent increase year-over-year during the quarter in occupancy.

We also closed on a highly accretive SASB financing in early October that recapitalized all of the company's outstanding debt stack with a fixed rate execution and strong interest from the market at tighter pricing than anticipated.

So instead of monetizing perhaps our storage assets in 2026, we could be in a position to monetize them in 2025.

Going forward you'll likely see us be more active in the multifamily sector of the next couple of quarters as we're underwriting approximately 250 million dollars of opportunities for senior bridge loans, CMBS, and even construction financing within the sector.

Finally, we're pleased with the capital options available to us as we fund this growth. With where the balance sheet is and the success we're having with the Series B raise, we have multiple creative avenues to fund growth, including A-note warehouses and even a rated bond deal.

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 call over to the operator for questions.

All right, perfect. Thank you. And just as a reminder, if you would like to ask a question, please press star followed by the number one.

All right, our first question comes from the line of Crispin Love from Piper Stanley, please go ahead

Hi, this is Brad Capuzion for Crispin Love. Just on the portfolio exposure shifts continuing, multifamily exposure decrease again while life sciences now makes up more than a quarter of the portfolio. How do you expect this to progress and would you expect stability with current exposures or continued increases in life sciences? Thank you.

Yeah, I think the life science exposure is both because we've deployed, you know, a number of opportunities over the last, you know, quarter or two, but also the paybacks or the capital that's coming back to us has come from the residential sector. So it's kind of like.

are in residential. I, like I said in my prepared remarks, see that increasing over the next couple of quarters, but ultimately we'd like to see, you know, life sciences be about a quarter to a third of the portfolio on a, you know, fully levered basis, so.

Thank you, appreciate it. And then just the last question for me on credit quality, LTVs and debt service coverage ratios, they'll screen.

Speaker Change: attractive to others in the industry, but do you see these, do you see the debt service coverage ratios decrease in the quarter? Can you just dig into that a little deeper and what the key drivers were there?

Yeah, of course. So, you know, you have seen...

The DSCRs decreased minimally over the past few quarters.

It's kind of twofold. One has to do with, you know, just some of the opportunities that we are in, such as the repositioning of the L-Life loan or the one senior loan that's SOPR plus 900 that Matt's discussed. That, of course, doesn't hold the DSCR right now.

you know it's been really leaps up right now and also you've seen some slippage you know in the multi and SFR but not much but those are the two main components of why it's seen you know a little bit of a drop-off in the DSCR

But we don't, in the future, we expect that to maintain or even, you know, provide even better coverage in the future.

Yeah, and just to add to Paul's comments, this is Matt, you know about the the property balance sheets and multifamily. We're starting to see throughout the CNBS and K-Deals and even even our own portfolio stabilizing as you know the front end of the curve shifts down caps and you know other hedges get

you know, less expensive. And as you know that the, you know, the servicers and including especially the agencies have been

mandating cash flow sweeps to escrow for replacement caps.

Kristen Thomas: on the floating rate side. So as those escrow mandates kind of shift and credit and liquidity become more available within multifamily and the broader commercial real estate sector as the Fed continues to ease, we expect the.

We expect this to only improve the coverage ratios.

Thank you for taking my questions.

Speaker Change: You bet.

Our next question comes from the line of Jay Grimani from KBW. Please go ahead.

Thanks very much. Do you have an update as to how book value is trending interquarter given the spike in rates?

Yeah, there really hasn't been much.

movement I would say in our CMBS book it's been you know flat you know somewhat positive it's it's pretty

pretty mute right now in terms of growth or decline. We're sticking to where our current book value is, which we discussed at the end of Q3.

Good to hear. Thanks a lot. In terms of the...

Interest rate dynamics, you know, it's catching a lot of people by surprise. Everyone thought Fed lowers rates and then bond market cooperates and we're not seeing that. In fact, multifamily

starting to see some hiccups here and there. For example, Fannie Mae in their 10Q noted an uptick in delinquencies, quite a sizable uptick in fact, and they booked a really large reserve.

Speaker Change: one-third of it related to seniors housing. They did attribute all of the increase to floating rate loans. So just wanted to see what your thoughts are as to credit performance in multifamily, if you're seeing any issues creep up, and how you're thinking about the outlook.

Speaker Change: It's, you know, we've seen some re-trades in the transaction market.

in a bit of a pause as we head into the election. I think that's going to clear up some of it.

but you know overall the the underlying you know dynamics within the multifamily sector I can't speak to senior seniors housing because we're not

You know, that's not really a part of our business, but within multifamily, obviously, we're an owner of 30,000 units and can tell you that, you know, absorption continues to be really.

really promising. As we're sitting here in the eye of the supply storm today in Q3 and then Q4, I think our overall outlook on multifamily is increasingly positive, just given the way that the rent and OIs and occupancy levels and demand have held up during these challenging times, both in the capital market side, but also in the supply wave. But again, as we've stated,

Speaker Change: over the past year, to the extent people have listened. You know, really in 2025, it's great. In 2026, it's even better on the residential side, when landlords should have increasing pricing power, just due to the, you know, really, you know.

Speaker Change: lack of deliveries for 2026. It's going to be a pretty special time, I think.

In terms of deals that you're looking at right now, how would you characterize competition in the debt space?

You know, a ton of capital on the sidelines looking to be active, but really a dearth of good deals, lots of refi activity, and many of those have problems, but the acquisition market being quite muted. How would you characterize the state of play and competition?

[inaudible] I'm sorry. I'm sorry. I'm sorry.

Yeah, I'd say yeah, I think you're alluding to there's a there's a number of players out there on debt funds A lot of capital has been raised tons of capital been raised on the debt fund side And you know, we are seeing a ton of competition Particularly for for you know stabilized deals but

or even in the multifamily sector, you're seeing a lot of groups bunch up around SOFR Plus.

Speaker Change: you know 250 to 300 and so you know that's

Speaker Change: that's tough to, you know, it's tough to underwrite.

The opportunities that we're hitting on are mostly repeat sponsors that have a business plan that we understand as an equity owner and we're able to kind of differentiate ourselves by our relationship.

and being there throughout the past, you know, few years for these guys and working through issues and, you know, just...

differentiating ourselves from a platform perspective based on relationships, I think is the way we're winning deals. And also on the CMBS side, we're getting increasingly involved in the HRR deal flow with the bigger banks and underwriters.

Obviously we continue to be a flex sponsor with Freddie Mac and enjoy that relationship.

We like our opportunities to be selective, and the good news is for us, we don't have to do anything. We have a stable book value, great credit quality that's out-earning our dividend coverage, and we can be opportunistic and selective, and that's a good place to be in right now.

Speaker Change: Thanks a lot.

Thanks, Jay.

And as a reminder, if you would like to ask a question, please press star and the number one. Our next question comes from the line of Stephen Laws from Raymond James. Please go ahead.

Hi, morning. Congrats on the last quarter and strong guidance for Q4. I appreciate the details you guys provide.

I want to touch base, I guess, first, Matt, to start get an idea of how unfunded commitments are funding down. You know, how much, is that the number, the $29 million shown in the supplement, is that what was funded off your unfunded commitments or is that just a portion of it?

And can you talk about if there is any growth on that unfunded side? And I guess not to get too long-winded, but how do you think about raising capital through the Series B issuance? And is that really the capital that's going in to fund these commitments? How do you handle matching that up, or how do you think about that?

Speaker Change: Yeah, the 29 or 30 was...

was AL wife and that's you know that's a funded commitment that we have you know another

Call it a hundred million or ninety million to fund The draw schedule is is increasingly being

Speaker Change: you know, accretive to us both in terms of timing and the activity.

Speaker Change: So, with the Series B raised, you know, that's matching somewhat dollar for dollar on that asset. The extent we see or are able to hit on a number of these other opportunities.

Speaker Change: To go into your question, we had great meetings and are working on an ANO facility with a couple of banks.

particularly on the multifamily residential side and even the life sciences side that we could throw loans into and and have a great net interest margin. So we'd like that kind of as a second option to pair with with the Series B and then you know going you know going forward if we have any other deals pop up then you know we recently have been in discussions with the rating agencies S&P, Fitch, Moody's on you know on kind of a high-yield bond deal.

Speaker Change: given where the company's balance sheet is and how under levered we are. We think we could take advantage of that as well. So there's a number of you know creative ways that we can fund growth and you know, this is kind of unique I think in the sector right now to be able to do that. Yeah, what is the coupon on that?

Speaker Change: Series B

Speaker Change: Clipping a pretty good, you know, 500 bits of spread as you raise capital there and deploy, you know, so for plus 500.

Speaker Change: So that's really creative. What is the cap? I mean is there a limit on how much Series B you can raise or what is the authorization there?

Speaker Change: Yeah, so we, I think the shelf is 400 million total and we've raised about a hundred of that.

Great. Switching gears a little bit, and you could touch on this a little bit, but on the multifamily side, you mentioned kind of seeing an increase in pipeline or maybe RESI investments.

Can you talk about what's in the pipeline? Are you looking at preferred equity investments? Are you looking at MES loans? Are you looking at B pieces out of deals? Is it kind of a little bit of everything? I'm just curious kind of where you're seeing the best opportunities as you look to, you know, get more active on that RESI investment pipeline.

Yeah, you bet. So, we're working with a repeat sponsor on a portfolio of

Speaker Change: It'd be

half-purchase, half-refinancing of the existing, you know, kind of garden-style portfolio in the Southwest and you know, Arizona and Texas and in Georgia. That's about a hundred million dollars. And then, you know, on the construction side, we're looking at a 75-ish million dollar financing there, and then the remainder is, you know, Freddie B, Freddie K. So it's kind of, you know, $175.75

of Senior Loans, CNBS, and Construction.

Fantastic. Appreciate the color this morning and thanks for your comments.

Thanks, Stephen.

That is all the questions that we have in the queue, so I would like to turn it back over to management for closing remarks.

Speaker Change: Yeah, Matt, Paul, I don't know if you guys have anything else, but...

Yeah, I appreciate everyone's...

time this morning and look forward to talking to you again next quarter.

Speaker Change: Thank you.

Speaker Change: That concludes today's conference. Have a pleasant day, everyone.