NexPoint Real Estate Finance, Inc. (NYSE:NREF) Q3 2023 Earnings Call Transcript
NexPoint Real Estate Finance, Inc. (NYSE:NREF) Q3 2023 Earnings Call Transcript November 5, 2023
Operator: Ladies and gentlemen, thank you for standing by. My name is Shreva [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to NexPoint Real Estate Finance Conference Call. [Operator Instructions] I would now like to turn the call over to Kristian Thomas. Please go ahead.
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 third quarter ended September 30, 2023. 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 Originations and Investments. As a reminder, this call is being webcast 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 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 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 filed earlier today. I would now like to turn the call over to Brian Mitts.
Please go ahead, Brian.
Brian Mitts: Thanks, Kristen. I appreciate everyone's participation today. Joining me today are Matt McGraner and Paul Richards. I'm going to kick off the call briefly discuss our quarterly and year-to-date results, discuss our portfolio and balance sheet and then provide updated guidance for next quarter before turning it over to the team for a detailed commentary on the portfolio and the macro lending environment. So we'll start with Q3 results which are as follows. For the third quarter, we reported a net loss of $0.82 per diluted share compared to a net loss of $0.49 per diluted share for the third quarter of 2022. The decrease in net income was largely driven by mark-to-market adjustments on our common stock investments in Q3 '23 and a higher provision for credit losses in '23 as we transition to CECL.
Net interest income increased 14.3% to $4.8 million in the third quarter '23 from $4.2 million in the third quarter of '22. The increase was driven primarily by more originations of preferred equity investments with a slightly higher yield than in 2022 and partially offset by higher financing costs in '23. Earnings available for distribution was $0.43 per diluted share in the third quarter compared to $0.40 per diluted share in the same period of '22 and $0.50 per diluted share in Q2 of '23. Cash available for distribution was $0.47 per diluted share in the third quarter compared to $0.42 per diluted share in the same period last year and $0.53 per diluted share in the second quarter of '23. The increase in earnings available for distribution and cash available for distribution from the prior year was partially driven by deconsolidation of the Hughes investment and fewer realized losses.
We paid a regular dividend of $0.50 per share and a special dividend of $0.185 per share in the third quarter. The board has declared a regular dividend of $0.50 per share and a special dividend of $0.185 per share payable in the fourth quarter. Our dividend in the third quarter was 0.86x covered by earnings available for distribution and that's the regular dividend and 0.94x covered by cash available for distribution. Book value per share decreased 13.5% year-over-year and 7.1% quarter-over-quarter to $17.88 per diluted share primarily due to the special dividend and mark-to-market adjustments. During the quarter, we originated 6 preferred equity investments with $16.3 million of outstanding principal and 1 loan with $5 million of outstanding principal.
These 7 investments have a blended all-in yield of 11.3%. We also purchased 3 common equity securities for $1.8 million. We had one preferred investment redeemed for $3.6 million of outstanding principal that sold 1 CMBS piece for $45 million. Moving to year-to-date. We reported a net loss of $0.11 per diluted share compared to net income of $0.48 per diluted share for the same period in 2022. The decrease in net income was largely driven by higher unrealized losses in '23 as compared to '22 and a higher provision for credit losses in '23. Net interest income decreased 51.6% to $13 million year-to-date '23 from $33.8 million in the same period in '22. The decrease was driven primarily by fewer prepayments on our SFR loans and higher financing costs in '23.
Earnings available for distribution was $1.44 per diluted share in the third quarter -- or sorry, in the first 9 months of '23 compared to $1.74 per diluted share in the same period '22. Cash available for distribution was $1.54 per diluted share year-to-date compared to $2.18 per diluted share in the same period in '22. The decrease in earnings available for distribution and cash available for distribution for prior year was partially driven by higher weighted average share counts as well as lower prepayments on our SFR loans in '23. Today, we announced the launch of a $400 million Series B 9% redeemable preferred equity offering. The offering will be sold through our retail distribution team. The Series B is redeemable at the option of the holder or the issuer, us.
The issuer may be the redemption in cash or common stock in our sole discretion. Redemptions initiated by holders are limited to 2% of the total outstanding Series B per month, 5% per quarter and 20% per year. There are also penalties for redeeming prior year 4. Proceeds will be used to take advantage of accretive investment opportunities we see in the market which Matt will discuss in more detail in his prepared comments. Moving to our portfolio. Our portfolio is comprised of 89 investments with a total outstanding balance of $1.6 billion. Our investments are allocated across sectors as follows: 45.8% in single family rental, 48.1% in multifamily, 4.6% in life sciences and 1.5% in storage which represent sectors that we are involved in across our platform.
Our portfolio is allocated across investments as follows: 42.8% in senior loans, 31.2% in CMBS B-Pieces, 10.9% deferred equity investments, 8.4% mezzanine loans and 3.5% in IO strips and the remainder is in mortgage-backed securities. Assets collateralizing our investments are located geographically as follows, 21% in Georgia; 17% in Florida, 14% in Texas and 6% in California with the remaining 42% across states with less than 5% exposure, reflecting our focus on Sun Belt markets. The collateral on our portfolio is 90.9% stabilized with a 69% weighted average loan-to-value and a weighted average DSCR of 1.77x. We have $1.2 billion of debt outstanding. Of this, only approximately $300 million or 25% is short-term debt in the form of repurchase agreements that roll monthly.
Our weighted average cost of debt is 4.23% and has a weighted average maturity of 3.2 years. Our debt is collateralized by $1.6 billion of value with a weighted average maturity of 5.7 years and our debt-to-equity ratio is 2.93x book value. Moving to guidance for the fourth quarter. We are guiding earnings as follows: earnings available for distribution of $0.45 per diluted share at the midpoint with a range of $0.40 in the low end and $0.50 on the high end. Cash available for distribution of 47% diluted share at the midpoint with a range of $0.42 on the low end and $0.52 on the high end. So now, I'll turn it over to Dean to discuss our portfolio and our lending environment.
Paul Richards: Thanks, Brian. The third quarter results continue to show strong performance throughout each of our investment in asset classes, most notably our B-Pieces portfolio. 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 operator and lender to commercial real estate investments 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 in focusing on credit investments and stabilized assets, conservative underwriting at low leverage with healthy sponsors will provide consistent and stable value to our shareholders.
During the third quarter, the loan portfolio continued to perform strongly amidst a tough backdrop and is currently comprised of 89 individual assets with approximately $1.6 billion of total outstanding principal. The portfolio is geographically diverse with the bias towards the Southeast and Southwest markets. Texas, Georgia and Florida continue to be the largest portion of our portfolio at approximately 52%. From the beginning of the third quarter through today, we were able to make follow-on investments of $16.3 million to existing preferred equity investments with an all-in yield of 11.3%. We also received approximately $48 million gross of repo after disposing of the B-Piece which delivered a levered return of approximately 14%. We saw an opportunity to post a solid return on this B-piece that was short dated in a value-add wrapper and avoided the possibility of any refinance risks.
In order to assess the impact of potential interest rate changes on our CMBS portfolio, we conducted a stress test. We aimed to identify the extent to which implied yields would need to rise and portfolio marks would have to decrease to account for a $61 million decline in market value. The $61 million difference reflects the variance between our book value and the market value at the close of the previous night. Upon conducting the stress test, we observed that implied yields would need to increase by around 40% to result in an 11% decrease in the CMBS portfolio's overall value. More importantly, to recognize any real impairment, there will need to be a substantial decline of over 30% in the underlying multifamily and single-family property values.
Despite these stress test results, we maintain a strong belief in the resilience of the residential sector, especially in our current interest rate environment. We consider these investments in the verticals in multifamily and single-family properties to be safe as demonstrated by the historical performance. At the end of the quarter, we maintained a cautious approach to our repo financing with leverage standing at approximately 66% LTV. We consistently engage in communication with our repo lending partners, discussing market conditions and status of our finance CMBS portfolio. Regarding the ongoing performance of the SFR loan pool, I'm pleased to report that all SFR loans within the portfolio are currently performing very well. They exhibit robust DSCRs and have experienced notable NOI growth.
The demand for SFR continues to remain strong, contributing to this positive trend. 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. To finalize our prepared remarks before we turn it over for questions, I'd like to turn it over to Matt McGraner.
Matt McGraner: Thank you, Paul. As he just mentioned, our credit portfolio continues to hold up and performed very well despite a record rise in longer-term reference rates during the quarter. Our SFR loan and multifamily CMBS portfolios remain healthy as well as our life sciences and cGMP investments. While modestly mark-to-market in this environment, our common stock and special situation investments remain a source of opportunistic liquidity, potentially delivering a $0.60 to $0.90 of additional annual CAD once fully monetized. This past week, CBRE published a report confirming the opportunity we outlined last quarter, namely the ability to provide GAAP funding for existing multifamily assets, facing maturities and/or in need of refinancing.
In that report, CB outlined a sample set of over $20 billion in near-term maturities meeting this criteria. And given our cadence with -- and relationship with Fannie and Freddie, we are positioned to immediately take advantage of these opportunities in our 13% to 15% all-in yields. To that end, we announced some exciting news this morning that we've been working on as a firm and demonstrates the resources of the NexPoint umbrella. As Brian mentioned, we plan to utilize our talented internal NexPoint sales and distribution team to issue NREF Series B preferred to various retail RIA and institutional advisers. We believe this security provides attractive yields to investors while providing us with accretive capital to deploy into this dislocated market.
The near-term opportunities are seemingly endless. Liquidity is scarce as the banking sector is all but shut down. And if there is liquidity, most of it still requires cash in refinancings or assets that have negative leverage profiles. Again, as CBRE indicated in its recent analysis, loans originated from 2018 to 2020 will face refi test funding gap totaling upwards of $20 billion in the multifamily sector. In this environment, we believe we can originate GAAP funding with all in yields in the mid-teens, couple that with structure, guarantees and interest reserves to mitigate our downside risk. Other near-term opportunities include dislocated CMBS, cGMP, life science, first mortgages and B-note purchases was, again, 13% to 15% all-in yields.
Collectively, our current pipeline of multifamily and life science investments is north of $300 million. If we're successful in raising and deploying this capital, we do believe we will be the accretion to Invest common stock and earnings is powerful. All told and without any additional leverage, assuming we raise and deploy $300 million, we believe CAD can increase by 20% per year over the next 3 years. 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, I'd like to turn the call over to the operator for questions.
See also 15 Countries that Have the Best Weather in Africa and 30 Most Polluted States in the US.
To continue reading the Q&A session, please click here.
