NexPoint Real Estate Finance, Inc. (NYSE:NREF) Q1 2024 Earnings Call Transcript May 4, 2024
NexPoint Real Estate Finance, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Dee, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Real Estate Finance First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Kristen Thomas, Investor Relations. Please go ahead.
Kristen Thomas: Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance conference call to review the Company’s results for the first quarter ended March 31, 2024. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matthew McGraner, Executive Vice President and Chief Investment Officer; and Paul Richards, Vice President Originations and Investments. As a reminder, this call is being webcasted through the Company’s website at nref.nexpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities 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 more a 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 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.
Brian Mitts: Thank you, Kristen. I appreciate everyone joining us today. It’s Brian Mitts here. I’m going to start by briefly going through our quarterly results and then provide guidance for the next quarter. And then I will turn it over to Matt and Paul to give commentary on the portfolio and the macro lending environment. So starting off, Q1 results are as follows. For the first quarter, we reported a net loss of $0.83 per diluted share compared to a net income of $0.37 per diluted share for the first quarter of 2023. The decrease in net income is largely driven by accelerated premium amortization on $508.7 million of SFR loan that was prepaid on January 25. Net interest income decreased to negative $12.8 million in the first quarter of 2024 from a positive $3.9 million in the first quarter of 2023.
The decrease was driven primarily by the $25 million of premium that was amortized in Q1 due to the SFR loan prepayment I just mentioned. Earnings available for distribution was negative $0.46 per diluted share in Q1 compared to a positive $0.52 per diluted share in the same period of 2023 and positive $0.44 per diluted share in Q4 of ’23. Again, the negative result was due to the acceleration of premium on the prepaid SFR loan. Cash available for distribution was $0.60 per diluted share in Q1 compared to $0.55 per diluted share in the same period of 2023. The increase in cash flow for distribution from the prior year was partially driven by the prepayment penalties from the SFR loan paydown. We paid a regular dividend of $0.50 per share in the first quarter, and the Board has declared a dividend of $0.50 per share payable for the second quarter of 2024.
Our regular dividend in the first quarter was 1.2x covered by cash available for distribution. Book value per share decreased 14.8% from the first quarter of 2023 and decreased 6.9% from the fourth quarter of 2023 to $16.69 per diluted share, with the decrease being primarily due to the SFR loan repayment. During the quarter, we contributed to six preferred equity investments for the $11.5 million of outstanding principal 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 SOFR. And we sold 1.2 million shares of our Series B cumulative redeemable preferred stock for net proceeds of $27.7 million. We had one senior loan redeemed for $508.7 million of outstanding principal and received $8.9 million in prepayment penalties.
Our portfolio is comprised of 90 investments with a total outstanding balance of $1.2 billion. Our investments are allocated across sectors as follows: 47.2% multifamily, 46% single-payment rental, 5.2% Life Sciences and 1.5% storage. Our portfolio is allocated across the following investments: 43.3% CMBS B-Pieces, 18.3% preferred equity investments, 15.2% mezzanine loans, 11.6% senior loans, 6.3% mortgage-backed securities, 4.4% I/O Strips and 0.9% MSCR notes. The assets collateralized in our investments are allocated geographically as follows: 90% Texas, 9% Florida, 8% California, 6% Georgia, 5% Maryland, 4% Washington and 3% Colorado, with the remainder across states of less than 2.5% exposure. This reflecting our heavy preference for Sun Belt investments.
The collateral in our portfolio is 86.6% stabilized with a 68.5% loan to value and a weighted average DSCR of 1.72x. We have $843 million of debt outstanding. Of this, $342 million or 41% is short-term debt. Our weighted average cost of debt is 5.9% and has a weighted average maturity of 1.7 years. Our debt is collateralized by $1.2 billion of collateral with a weighted average maturity of 5.3 years. And our debt-to-equity ratio is 2.04x. Moving to guidance. Earnings available for distribution of $0.45 per diluted share at the midpoint with a range of $0.40 per share on the low end and $0.50 per share on the high end. Cash available for distribution of $0.40 per diluted share at the midpoint with a range of $0.35 per share on the low end and $0.45 per share on the high end.
So with that, I’ll turn it over to the team for a detailed discussion.
Paul Richards: Thanks, Brian. The first quarter results demonstrated robust performance across all of our investment sectors, particularly in our CMBS B-Piece 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 both owner 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 surpass 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 debt basis. We also emphasize lending to reputable sponsors and consistently provide dependable value to our shareholders.
In the first quarter, despite tough conditions in the commercial real estate market, our loan portfolio remained stable comprising of 90 individual assets with approximately $1.2 billion in total outstanding principal. 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 deploying capital. We completed the purchase of two: new issues five-year fixed, with the latest one closing this past Tuesday, Freddie Mac B-Piece opportunities with extremely attractive metrics. Both securitizations have high 50% LTVs, 1.30x plus DSCR and a diverse geographical footprint with great sponsorships. These B-Pieces will pay in all-in unlevered fixed rate yields of 9.75% and 9.5%, respectively.
And with modest leverage, we expect to generate a mid-teen levered return on very desirable collateral pools. The Company also purchased a new issue SFR ABS paper in the gross amount of approximately $44 million and prudently levered to achieve low to mid-double-digit returns and high cash flow and stabilized SFR collateral pool. On the disposition loan repayment side, as mentioned, we received approximately $508 million gross of financing and around $50 million net of financing as the portfolio’s largest SFR loan was repaid in full. At the end of the quarter, we continued to maintain a cautious approach to our repo financing, with leverage standing in at 60% loan-to-value range and fortifying the CMBS book by acquiring accretive AAA new issue CMBS paper.
We consistently engage in communication with our repo lenders, discussing the market conditions and the status of our financed CMBS 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 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 sector tailwinds. Additionally, we continue to be very enthusiastic about our investment pipeline in the Life Sciences CDMO sector.
To finalize our prepared remarks before we turn it over to questions, I’d like to turn it over to Matt McGraner.
Matthew McGraner: Thank you, Paul. As we 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 in supply in multifamily, the underlying performance in multifamily SFR, Storage and Life Sciences remain relatively stable. From a capital markets’ perspective, we are seeing improved liquidity led by the CMBS 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. 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 in the underlying properties will be challenging over the next 12 months or so. But afterwards, deliveries do start to rapidly dissipate and should create a more favorable supply-demand balance in the landlord’s favor. And that said, capital for residential assets continues to be plentiful in real time. 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. 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 Life Science loan in Cambridge as well as additional Freddie K B-pieces.
In addition, we are currently underwriting over $250 million worth of special situation 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 in the near term — or the term and lock in accretive spreads for the Company. Given all this positive activity, we expect our current capital base, including the SFR loan repayment to be redeployed in the second quarter and continue on our normal CAD rate run rate — our CAD run rate range and growing throughout the second half of the year. 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, thanks to the team here for the hard work. And now we’d like to turn the call over to the operator for questions.
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