NexPoint Real Estate Finance, Inc. (NREF) CEO James Dondero on Q1 2022 Results – Earnings Call Transcript

NexPoint Real Estate Finance, Inc. (NYSE:NREF) Q1 2022 Earnings Conference Call April 28, 2022 11:00 AM ET

Company Participants

Jackie Graham – Investor Relations

James Dondero – Chairman, President and Chief Executive Officer

Matt McGraner – Executive Vice President and Chief Investment Officer

Brian Mitts – Executive Vice President and Chief Financial Officer

Matt Goetz – Senior Vice President, Investment and Asset Management

Paul Richards – Vice President, Originations and Investments

Conference Call Participants

Stephen Laws – Raymond James

Jade Rahmani – KBW

Operator

Good day and welcome to the NexPoint Real Estate Finance Q1 2022 Conference Call. Today’s convention is being recorded. At this time, I’d like to show the convention over to Jackie Graham. Please go forward.

Jackie Graham

Thank you. Good day, everybody and welcome to NexPoint Real Estate Finance’s convention name to overview the corporate outcomes for the primary quarter ended March 31, 2022.

On the decision right this moment are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt Goetz, Senior Vice President, Investment and Asset Management; and Paul Richards, Vice President, Originations and Investments. As a reminder, this name is being webcast by means of the corporate’s web site at www.nref.nexpoint.com.

Before we start, I want to remind everybody that this convention name accommodates ahead-trying statements inside the which means of the Private Securities Litigation Reform Act of 1995 which can be based mostly on administration’s present expectations, assumptions and beliefs. Listeners shouldn’t take undue reliance on any ahead-trying statements and are inspired to overview the corporate’s annual report on Form 10-Okay and the corporate’s different filings with the SEC for a extra full dialogue of dangers and different components that might have an effect on the ahead-trying statements. The statements made throughout this convention name converse solely as of right this moment’s date and as reminiscent of required by legislation, NREF doesn’t undertake any obligation to publicly replace or revise any ahead-trying statements. This convention name additionally consists of an evaluation of non-GAAP monetary measures. For a extra full dialogue of those non-GAAP monetary measures, please see the corporate’s presentation that was filed earlier right this moment.

I’d now like to show the decision over to Brian Mitts. Please go forward, Brian.

Brian Mitts

Thank you, Jackie. Appreciate everybody becoming a member of us this morning. I’ll begin the decision by going by means of our outcomes for the primary quarter. I’ll cowl steerage briefly after which flip over to the remainder of the crew for them to offer an in depth commentary on the portfolio, some current exercise, a few of the issues that we see forward for the rest of the 12 months.

For the primary quarter, we reported internet earnings of $0.81 per diluted share in comparison with internet earnings of $1.26 per diluted share for the primary quarter of 2021. We reported earnings obtainable for distribution of $1.23 per diluted share for the primary quarter in comparison with $0.43 per diluted share in the identical interval of 2021. We reported money stage for distribution of $1.58 per diluted share in comparison with $0.47 per diluted share within the first quarter of 2021. Book worth per share elevated 1.3% quarter-over-quarter and seven.1% 12 months-over-12 months to $21.78. In the primary quarter, we paid a dividend of $0.50 per share and the Board has declared a dividend of $0.50 per share within the second quarter.

On the steerage for the second quarter, earnings obtainable for distribution per diluted share, we’re guiding to $0.55 per share on the midpoint of the vary of $0.50 to $0.60. And for money variable for distribution per diluted share, we’re guiding to $0.64 per share on the midpoint with a spread of $0.59 to $0.69.

So with that, let me flip it over to the crew to undergo the portfolio and a few of the current actions.

Matt Goetz

Thanks, Brian. The first quarter continued to indicate robust efficiency throughout every of our investments and asset lessons. The portfolio is at the moment comprised with 78 particular person investments with roughly $1.6 billion in complete excellent principal. The mortgage portfolio is 97% residential, with 44% invested in senior volumes, collateralized by single-household rental, 54% invested in multifamily, primarily by way of company CMBS. The remaining 3% of the mortgage ebook is life sciences and self-storage. The portfolio’s common remaining time period is 6.4 years, with 94% stabilized. It has a weighted common mortgage to worth of 67.7% and a median debt service protection ratio of 1.87x. The portfolio is geographically numerous with the bias in the direction of the Southeast and Southwest markets. Texas, Georgia and Florida mixed for about 49% of our publicity on a geographic foundation. 100% of our investments are present. As talked about in our earnings, most of our underlying loans are at the moment in forbearance.

Moving to the alternatives we had been capable of benefit from in the course of the quarter. During the quarter, we originated the convertible notice within the quantity of $38.7 million bringing our complete convertible notice publicity to floor leases to roughly $60 million. Subsequent to quarter finish, the sponsor repaid all of the $25 million of this quantity, which is transformed into widespread fairness within the firm at a 12.5% low cost.

On January 14, we bought $19.6 million of most popular fairness collateralized by single-tenant stabilized pharmaceutical manufacturing property, with a present yield of 10%. On January 27, we bought $41.8 million of our most popular fairness funding collateralized by a stabilized multifamily property in Las Vegas, Nevada. On January 25, 3 single household rental first mortgage loans with an combination principal quantity of $32.1 million had been repaid in full inside income reaching an IRR of 41.5%. On February 23, a $62 million single-household rental first mortgage mortgage was repaid in full and realized an IRR of 35.9%.

In abstract, we continued to search out engaging funding alternatives all through our goal markets and asset lessons and we are going to proceed to guage these alternatives with the purpose of delivering worth to our shareholders.

I’d now like at hand the decision over to Paul Richards.

Paul Richards

Thanks, Matt. During the primary quarter, the corporate is but once more energetic within the main bond market. Though there weren’t something within the bond acquisitions we made in the course of the first quarter, the corporate participated in two Freddie Mac bond auctions. One of which was a small steadiness mortgage VPs and Freddie Mac’s [indiscernible] program and the opposite, which was a floating price, each auctions demonstrated extraordinarily robust demand and finally priced properly inside earlier market clearing ranges.

Just this morning, we closed on a seasoned Freddie Mac small steadiness mortgage VPs. The VPs was bought for about $39 million, which we are going to prudently lever by way of attractively priced repo financing. The bond carries the present coupon of roughly 4.25% and is bought at a reduction. We anticipate to generate an all-in unlevered yield of roughly 8% and levered yields within the low to mid-teenagers. The weighted common lifetime of the bond, assuming a 15% CPR is roughly 6.5 years.

As mentioned within the earlier quarter’s commentary, the market continues this 12 months its inflation headwinds, together with the Fed signaling a number of half level price hikes. So as beforehand talked about, there was insatiable demand for Freddie Mac VPs bonds and we proceed to see the worth – we proceed to see value tighten. We proceed to efficiently lever on our repo at roughly 57% LTV at quarter finish.

Lastly, I wish to briefly contact on the continued efficiency of the SFR mortgage pool within the Q1 2022 mortgage pay-downs. All SFR loans are at the moment performing and demonstrating robust measures by way of lease progress and occupancies because the demand for single-household rental continues to shine brightly. The portfolio has had a number of SFR mortgage pay-downs within the first quarter, which generated a mixed IRR north of 40% in comparison with the unique underwriting of 9%. Due to the early prepayment tally, the investments we’re capable of generate extra internet proceeds on the authentic underwriting, which was roughly one-third of the unique funding time horizon.

To finalize our ready remarks earlier than we flip it over for questions, I’d like to show it over to Matt McGraner.

Matt McGraner

Thanks, Paul. Again, we proceed to be happy with the underlying credit score efficiency of NREF’s portfolio, producing good worth progress for the eighth consecutive quarter, whereas offering sturdy money flows for our shareholders. The current market volatility has began to bear fruit for NREF’s investing pipeline, creating efficient probability in gasoline financing alternatives in our core property sorts, particularly within the multifamily sector. And lastly, we proceed to domesticate programmatic particular state of affairs and most popular alternatives with SFR, storage, multifamily sponsors with an underwriting pipeline right this moment north of $400 million.

Just wish to thank the crew for continued execution. And now I want to flip the decision over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first query right this moment comes from Stephen Laws from Raymond James. Please go forward.

Stephen Laws

Hi, good morning. As we have a look at the portfolio of combine, the multifamily SFR combine has kind of flipped during the last 12 months. As you have a look at your funding pipeline and the place you might be seeing essentially the most engaging threat-adjusted returns, the place do you see that blend going say over the following 12 months?

Matt McGraner

Hey, Steve, it’s Matt McGraner. Yes, I believe we proceed simply to have extra financing alternatives inside the multifamily sector. It’s only a bigger market, extra institutional, extra transaction quantity. Obviously, the Freddie Mac pipeline goes to remain there. And as I discussed sort of briefly within the ready remarks, so long as the companies sort of preserve spreads wider than banks and different license, we’re seeing these GAAP financing alternatives within the multifamily sector sort of speed up. So, our historic personal most popular pipeline is about $100 million a 12 months. That may be $200 million this 12 months as simply decrease LTVs which can be generated by the companies to create that 65% to 85% of stack sort of financing. So, I’d anticipate us to spend so much of time in that market and that’s only a operate of the current volatility.

Stephen Laws

Thanks, Matt. And on the widespread inventory funding sort of what’s the outlook there and for those who totally redeploy that into investments right this moment? If you had been to sort of have a look at it that method, what sort of influence would which have on including curiosity earnings or CAD to the present portfolio returns?

Matt McGraner

Yes. So the bottom lease funding, I believe is what you might be referring to, proper?

Stephen Laws

Yes.

Matt McGraner

Yes. So we determined to transform – we might have repaid – might have the entire thing repaid, however we just like the – possible being some on the market and simply have some connectivity with the sponsor, primary. And then quantity two, most likely extra importantly, we expect it’s a 2x over 3 years. So our – hopefully, buyers realized that we’re not only a dividend payer. We do have particular state of affairs investments like this one which create the ebook worth progress and extra complete return potential than the conventional merger etcetera. We like that threat-adjusted profile of making roughly one other $1 or $1.50 a share for shareholders.

Stephen Laws

Great. Thanks for the colour, there. You talked about dividend, I do wish to ask about that lastly. Strong protection outlook within the complement, it appears like continued robust protection. Can you discuss how you concentrate on setting the dividend and talks about doubtlessly growing given the robust protection you could have in place?

Brian Mitts

Yes. Hey, Steve, it’s Brian. I believe general, we wish to guarantee that we will proceed to cowl with go-ahead earnings. And clearly, it’s troublesome when you find yourself getting prepayments and issues to essentially estimate that out into the longer term. So as we improve earnings, we wish to be cautious about growing the dividend and attempt to pay to that protection to our earnings obtainable from distribution as a result of we expect that’s additionally higher long term to you than simply money obtainable for distribution. So I believe when you get a few quarters below our belt for the present portfolio and higher perceive the place the prepayments are going to go, notably in that SFR pool, the place I believe simply the run-up in values of SFR properties places the debtors able the place they’re at a reasonably low LTV with our loans. They can refinance these fairly simply and never very costly both and go as much as a big LTV. And so it is sensible for them to pay these big prepayment penalties in some instances. But that simply creates a bit little bit of uncertainty within the portfolio. So we simply wish to watch out earlier than we elevate the dividend. But we are going to have a look at it as a protection on earnings stage from distribution is our kind of benchmark.

Stephen Laws

Great. I admire feedback, Brian.

Operator

Thank you.[Operator Instructions] We will now take the query from Jade Rahmani from KBW. Please go forward.

Jade Rahmani

Thank you very a lot. As it pertains to the multifamily outlook, how are you desirous about it by way of valuation of the asset class from the influence of rising charges and in addition a possible slowdown in lease progress? For some colour, I believe the shelter index is about one-third of what the Fed appears at by way of inflation. And given the time line to show over property, and I imagine multifamily turnover ratios are nonetheless working low, that adjusted inflation may have a lagging impact on inflation. And so if the Fed actually desires to get inflation below management, they must decelerate, not simply the house buy market, but in addition the rental market. So query is, what are you considering and projecting for the outlook for lease progress in multifamily in addition to single-household for lease and what influence do you suppose housing – sorry, rising charges may have on cap charges.

Matt McGraner

Yes. Hey, Jade, Matt right here. Lots of unpack there. I believe we reported in earnings 2 days in the past, our robust identical-retailer NOI progress that we’ve had in a few years. Blended lease progress, each renewals and new leases, north of 20%, identical factor that occurred into April. In Americas, simply principally the identical factor this morning or sure after the shut and a lot of the operators in kind of I suppose even the gateway markets have all sort of elevated steerage by way of simply seeing high line and GPR progress inside their rev rolls. This 12 months, I believe is – we are going to see continued energy in underlying leases, particularly and notably within the company and center market, the company cohort. I believe the cap charges for the transaction volumes, at the very least for now, have sort of – to take a short pause, however there may be nonetheless a ton of fairness on the market chasing offers. And whereas there may be much less kind of within the purchaser pool, so to talk, these are properly healed and the institutional capital remains to be chasing multifamily due to this underlying progress in stability within the rents and an ideal – not excellent, however near as excellent as you may get for an inflation hedge.

Capital has been – extra capital, institutional capital has been allotted in the direction of the residential sector for these causes as an inflation hedge, and – so I don’t see that abating. Cap charges proper now have remained regular. There is a adverse debt price at the very least on the company facet, the place cap charges are tighter than unfold. And in order that dynamic offers us some concern. If any, the cap charges would improve, however they haven’t but. And as I’m positive you’re conscious, in the previous couple of weeks, the companies have continued to tighten unfold. So sure, I’d say that we’re nonetheless constructive, clearly, on a relative foundation to a multifamily, extra so than most likely every other property sort on this present setting, particularly when it’s within the center market section, which is essentially the place most of our exercise is. In phrases of SFR, I’ll let Brian or Paul remark.

Brian Mitts

Yes, I’ll begin. It’s Brian. It’s lots of the identical dynamics, I believe, with multi – and general, I believe we have a look at the portfolio itself and the underlying property. And once more, the LTV in these offers is pretty low. It’s laborious for us to report on that as a result of we don’t get up to date numbers particularly throughout the whole portfolio steadily, however being within the enterprise and proudly owning over 22,000 loans ourselves throughout the nation in numerous automobiles, we do perceive that market. And so we really feel fairly optimistic about it. But as we talked about earlier, it’s a loss institutionalized sector, it’s more durable to search out alternatives, and there’s a large disparity between a handful of actually massive gamers after which everybody else is fairly small and never essentially the kinds of companions we wish them into from these automobiles. So I believe so far as the sector goes, like SFR, it’s received lots of robust fundamentals and tailwinds, but it surely’s laborious to place cash to work there. And clearly, we don’t management the loss prepayments within the present setting. Paul, if you wish to…

Paul Richards

Yes. I imply, I agree with all the pieces, Brian simply mentioned. Just the one factor I’d add could be distinction between homeownership versus within the SFR house. We’ve seen mortgage charges go up at 5%. And if we have a look at our house possession prices versus renting, it’s 40% extra HPA versus renting. It’s solely been about 10% to fifteen% in progress charges. So it’s a bit cheaper lease on the SFR facet. I believe for those who have a look at our rental to earnings, it’s nonetheless 20%, 25%. So there may be nonetheless room to run in that regard. So I believe it’s nonetheless attractively priced from a rental standpoint.

James Dondero

I believe lastly, Jay, I don’t understand how the Fed goes to get it below management by elevating charges. We’ve had this debate internally. And I imply the Fed will increase will simply proceed to make house possession much less reasonably priced and obtainable to the plenty. So I believe that the rental house, the center market house that we function in, the place majority of our investments are, properly it is advisable profit from that.

Jade Rahmani

Yes, thanks. I don’t understand how they’ll both – they could must trigger unemployment to rise, and meaning most likely a recession, however there’s a labor scarcity. So laborious to see how all of this performs out. Let’s see, on the only-household rental repayments, any partial pay-downs obtained from Progress Residential. And with CLO spreads widening and the all-in price to situation CLO in order that lower any probability of reimbursement from Progress Residential?

Paul Richards

Hey, Jade. It’s Paul. On the progress residential of the resi mortgage that – sure, no prepayments on that. It’s nonetheless an extended-dated bonds. So or lengthy-dated loans, so the prepayment remains to be, name it, 20% or so. Yes, I don’t see that prepaying anytime given the dimensions. So Brian, the rest on that?

Brian Mitts

Yes, that’s all true.

Jade Rahmani

Thanks you. In phrases of the GSE multifamily outlook, do you suppose that they’ve just lately picked up volumes or they’re nonetheless struggling to achieve market share? I noticed just lately that there are some tales about them loosening underwriting, not simply tightening spreads, as you talked about, but in addition their look again that service protection ratios. Numerous offers haven’t penciled for them as a result of we’re previous rents as a substitute of the place issues are right this moment. Do you could have a way of whether or not their deal movement has picked up?

Matt McGraner

Yes. I imply, you’re precisely proper anecdotally there. They had a reasonably horrible March by way of manufacturing. April doesn’t appear to be they’re actually gaining any extra market share this much less transaction quantity in April anyway. And they’re positively behind their tempo. We had peak in right here, I believe, 2.5 weeks in the past. And they had been, I suppose, simply making an attempt to internally work by means of how they are often aggressive and guarantee that they nonetheless present liquidity to the market as a result of proper now, they’re a few month behind final 12 months’s run price.

Jade Rahmani

Can you give a mark-to-market ebook worth? Is ebook worth down based mostly on the place charges have moved to date in 2Q?

Matt McGraner

From the CMBS facet, the VPs truly did tighten given the truth that the auctions priced 200 foundation factors greater than the unique market taking part in ranges or the earlier market taking part in ranges. Those tightened. The IO strips which in fact are extra rate of interest delicate. Those did have, one, amortizing and two, rates of interest rising did trigger a bit little bit of mark-to-market loss on IO strips. But all in all, I imagine it was a reasonably tight quarter by way of the CMBS quarter.

Jade Rahmani

Okay. But so put up quarter finish within the second quarter to this point, is ebook worth comparatively flat, would you say or is it up or down? Any remark you possibly can present or not likely?

Matt McGraner

Yes, comparatively flat as of this month.

Jade Rahmani

Okay, thanks very a lot and admire the colour.

Matt McGraner

Thanks, Jade.

Operator

Thank you. [Operator Instructions] It seems we’ve got no additional questions at the moment.

Brian Mitts

Okay, nice. Appreciate everybody’s time. Thank you for taking part. We will discuss to you this quarter. Thank you.

Operator

Thank you. This will conclude right this moment’s convention name. Thank you in your participation, women and gents. You might now disconnect.