NexPoint Real Estate Finance, Inc. (NYSE:NREF) Q4 2022 Earnings Call Transcript February 23, 2023
Operator: Ladies and gentlemen, good morning. My name is Abby, 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 2022 Conference Call. Today’s conference is being recorded. And all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. And I will now turn the conference over to Kristen Thomas. You may begin.
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, 2022. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; Matt Goetz, Senior Vice President, Investment and Asset Management; and Paul Richards, Vice President, Originations and Investments. As a reminder, this call is being webcast through the company’s website at invest.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.
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 the 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 statements. This conference call also includes 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. I appreciate everyone joining us today. I’m joined with our entire team here. So we’ll be giving some commentary. I’m going to start briefly discuss our results for the quarter and the year, provide guidance for the first quarter and then turn it over to the team for some detailed commentary on the portfolio and the lending environment. I’ll start with Q4 results, which are as follows. The fourth quarter, we reported a net loss of $0.16 per diluted share compared to net income of $0.92 per diluted share for the fourth quarter of 2021. The decrease in net income as a result of lower prepayments in Q4 2022 and mark-to-market adjustments on our common stock and CMBS portfolios. Interest income increased 4.8% over Q4 in 2021, driven by a 166 basis point increase in average yield on investments, offset by lower prepayments in Q4 2022.
Interest expense increased 47.5%, driven by 116 basis point increase in average borrowing rate. Earnings available for distribution was $0.49 per diluted share in Q4 compared to $0.54 per diluted share in the same period in 2021. Cash available for distribution was $0.52 per diluted share in Q4 compared to $0.63 per diluted share in the same period in 2021. Decrease in earnings available for distribution and cash flow distribution is the result of lower prepayments on our SFR portfolio in Q4. We paid a dividend of $0.50 per share in the fourth quarter, and the Board has declared a dividend of $0.50 per share payable for the first quarter. The Board also declared a special dividend of $0.185 per share for the first quarter, and we intend to pay additional special dividends of $0.185 per quarter for the remainder of 2023.
Photo by Francesca Tosolini on Unsplash
Our dividend in fourth quarter was 0.98x covered by earnings available for distribution and 1.04x covered by cash available for distribution. Book value per share decreased 2.76% quarter-over-quarter to $20.11 per diluted share as a result of the mark-to-market adjustments on our common stock and CMBS portfolios. During the quarter, we originated two investments with $19 million of outstanding principal with a combined current yield of 11%. One investment partially redeemed for $10.8 million of outstanding principal. Moving to the full year results now. For the full year 2022, we reported net income attributable to common shareholders of $0.51 per diluted share compared to net income of $3.93 per diluted share for the same period in 2021. Again, this is largely driven by lower prepayments in our SFR portfolio in the period and mark-to-market adjustments.
Earnings available for distribution was $2.75 per diluted share year-to-date compared to $1.89 per diluted share in the same period of 2021, an increase of 45.5%. Cash flow available for distribution was $3.21 per diluted share year-to-date compared to $2.21 per diluted share in the same period of 2021, an increase of 45.2%. Higher year-over-year earnings available for distribution and cash available for distribution for the year were driven by higher prepayments and requisite prepaid penalties in the first and second quarter of 2022. As of today, the outstanding total portfolio stood at $1.7 billion proposed at 85 investments. Weighted average loan to value and debt service coverage ratios for our debt securities were 68.6% and 1.78x, respectively.
As of today, the company’s debt-to-book value ratio is 2.6x. Our dividend for the year was 1.38x covered by earnings available for distribution and 1.61x covered by cash available for distribution. Book value per share decreased 6.5% year-over-year to $20.11 per diluted share. Moving to guidance for the first quarter. We are guiding to earnings available for distribution and cash available for distribution as follows. Earnings available for distribution $0.47 per diluted share at the midpoint with a range of $0.42 on the low end and $0.52 on the high end. Cash available for distribution of $0.50 per diluted share at the midpoint with a range of $0.45 per share on the low end and $0.55 per share on the high end. The decrease in cash available for distribution earnings available for distribution for the fourth quarter is driven primarily by expected redemptions in the first quarter.
So with that, let me turn it over to the team for a detailed discussion of the portfolio and credit markets. Matt Goetz?
Matt Goetz: Thanks, Brian. The fourth quarter and full year 2022 results continued to show strong performance across each of our investments in asset classes. We continue to focus on investment verticals where we believe we have an advantage due to our experience in owning and operating commercial real estate, our ability to leverage information from being both an owner and operator and lender to commercial real estate investment allows us to find relative value throughout the capital stack with the goal of delivering higher-than-average risk-adjusted returns. We continue to believe our investment strategy is focusing on credit investments and stabilized assets, conservative underwriting at low leverage with well-yield sponsors will provide consistent and stable value to our shareholders.
During the fourth quarter, the loan portfolio continued to perform strongly and is currently composed of 85 individual assets with approximately $1.7 billion of total outstanding principal. As Brian mentioned, the loan portfolio is 96% residential with 43% invested in loans collateralized by single-family rental properties and 53% invested in multifamily, primarily via Agency CMBS. The remaining 4% of the loan book is life sciences and self-storage. The portfolio’s average remaining term is 5.9 years is 92% stabilized has a weighted average loan-to-value of 68.6% and an average debt service coverage ratio of 1.78x. The portfolio is geographically diverse with a bias towards the Southeast and Southwest markets. Texas, Georgia and Florida continue to be the largest portion of our portfolio at approximately 51%.
100% of our investments are current. From the beginning of the fourth quarter through today, we were able to close four new investments totaling approximately $34 million with a weighted average unlevered yield of 11.8%. 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. I’d now like to hand the call over to Paul Richards.
Paul Richards: Thanks, Matt. During the fourth quarter, the company was not active in the primary or secondary bond market but continue to source, underwrite and evaluate potential investment targets daily. We’ve again stressed the entire CMBS portfolio by shocking cap rates and NOI growth determine how far cap rates could theoretically widen and interest rates could rise until the portfolio’s bond performance would deteriorate. The results are somewhat as expected. The vast majority of the portfolio has demonstrated strong NOI growth over the past three years and refi risk is minimal even at the stress rates. The long-dated nature of the CMBS BP’s portfolio provides an appealing backdrop. We firmly believe in the resiliency of the residential space in the current inflationary environment and the safety of these investments.
We continue to be prudently levered on our repo financing at approximately 64% LTV at quarter-end and have continuous dialogue with our repo lending partners on the state of the market and the finance portfolio. Lastly, touching on the continued performance of the SFR loan pool. All SFR loans are in the portfolio are currently performing and displaying strong metrics in terms of rent growth and occupancy as the demand for SFR continues to be robust. The portfolio did not have an SFR paydowns in the fourth quarter. To finalize our prepared remarks before we turn it over for questions, I’d like to turn it back over to Brian Mitts.
Brian Mitts: Thanks, guys. Yes, so we’ll turn it over to questions now.
See also David Tepper’s Top 10 Dividend Stock Picks and 12 Most Promising Solar Stocks According to Analysts.
To continue reading the Q&A session, please click here.