NexPoint Real Estate Finance, Inc. (NYSE:NREF) Q4 2023 Earnings Call Transcript

NexPoint Real Estate Finance, Inc. (NYSE:NREF) Q4 2023 Earnings Call Transcript February 29, 2024

NexPoint Real Estate Finance, Inc. misses on earnings expectations. Reported EPS is $0.44 EPS, expectations were $0.45. NREF 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 Dennis, 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 2023 Conference 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 conference 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 fourth quarter ended December 31, 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 of Originations and Investment. As a reminder, this call is being broadcast 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 the 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 as — 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.

Please go ahead, Brian.

Brian Mitts: Thank you, Kristen. I appreciate everyone joining us this morning. I’m going to briefly discuss our quarterly and year-to-date results, and then we’ll go through some portfolio metrics, talk about the balance sheet a little bit and then we’ll provide guidance for the next quarter, then I’ll turn it over to Matt and Paul to discuss the portfolio in a little more depth and the macro lending environment. So starting with our fourth quarter results, they were as follows. Reported net income of $0.74 per diluted share, compared to net loss of $0.17 per diluted share for the fourth quarter of 2022. The increase was largely driven by mark-to-market adjustments on our common stock investments and changes in our net assets related to our consolidated CMBS VIEs. Net interest income increased to $3.8 million for the fourth quarter of 2023 from $0.3 million in the fourth quarter of 2022.

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Q&A Session

The increase was driven primarily by more originations of preferred equity investments with higher yields and partially offset by higher financing costs in 2023. Earnings available for distribution was $0.44 per diluted share in the fourth quarter, compared to $0.42 per share — per diluted share in the same period of 2022 and $0.43 per diluted share in the third quarter of 2023. Cash available for distribution was $0.51 per diluted share in the fourth quarter, compared to $0.45 per diluted share in the fourth quarter of 2022. The increase in earnings available for distribution and cash available for distribution from the prior year was partially driven by originations of additional private preferred investments. 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 of 2024.

Our dividend in the fourth quarter was 0.8 times, sorry, 0.88 times covered by earnings available for distribution and 1.02 times covered by cash available for distribution. Book value per share decreased 10.4% year-over-year and increased 0.7% quarter-over-quarter to $17.93 per diluted share with the decrease year-over-year being primarily due to the $0.74 special dividends paid out during the year and the increase from prior quarter being primarily driven by mark-to-market increases. During the quarter, we contributed to five preferred equity investments with $16.5 million of outstanding principal and originated one loan with $15.3 million outstanding principal. These six investments had a blended all-in yield of 11.5%. We had three senior loans redeemed for $29.5 million of outstanding principal and one preferred investment redeemed for $3.5 million of outstanding principal.

So moving to year-to-date results, they are as follows. We reported net income of $0.60 per diluted share, compared to net income of $0.22 per diluted share in 2022. The increase was largely driven by changes in net assets related to our consolidated CMBS VIEs as compared to 2022. Net interest income decreased 55.5% to $16.8 million, $37.7 million in 2022. The decrease was driven primarily by prepayments on our SFR loans and CMBS portfolio and higher financing costs in 2023. Earnings available for distribution was $1.51 per diluted share in 2023, compared to $2.50 per share in 2022. Cash available for distribution was $1.67 per diluted share, compared to $2.97 per diluted share in 2022. The decrease in earnings available for distribution and cash available distribution for the year was partially driven by higher weighted average share accounts, increased financing costs, as well as our prepayments on SFR loans in 2023.

Moving to the portfolio, our portfolio is comprised of 87 investments with a total outstanding balance of $1.6 billion. Our investments are allocated across the following sectors, 47.2% multifamily, 46% single-family, 5.2% life sciences, 1.5% storage. Our portfolio is allocated across the following investment categories, 41.4% senior loans, 30.8% CMBS B-Pieces, 12.5% preferred equity investments, 8.5% mezzanine loans, 3.5% I/O strips, and 3.3% MBS and MSCR notes. The assets collateralizing our investments are allocated geographically as follows, 20% Georgia, 17% Florida, 15% Texas, 7% California, 4% Maryland, 5% Minnesota and 3% North Carolina, with 29% across states with less than 2.5% exposure. All this reflecting our heavy preference for Sun Belt investments.

The collateral on our portfolio is 89.9% stabilized with a 68.8% loan-to-value and a weighted average DSCR of 1.72 times. Moving to the balance sheet, we have $1.3 billion of debt outstanding. Of this, $304 million or 24% is short-term debt. Our weighted average cost of debt is 4.23% and has a weighted average maturity of 3.1 years. Our debt is collateralized by $1.7 billion collateral with a weighted average maturity of 5.6 years. Our debt-to-equity ratio is 2.9 times. A couple other notes. In December, we launched a continuous offering of Series B 9% deferred equity. To-date, we have — through February, we’ve raised $30 million of gross proceeds, which will be used to make accretive investments with low-to-mid double-digit yields. In Q1 of 2024, we received a prepayment on an SFR senior loan of $509 million to principal [Audio Gap] per diluted share at the midpoint with a range of — earnings available for distribution will be negative for the quarter as a result of the $25 million reversal as an unamortized premium associated with the previously mentioned senior SFR loan that was prepaid in January.

Cash available for distributions were $0.58 per diluted share at the midpoint, with a range of $0.53 on the low end and $0.63 on the high end. So, with that, let me turn it over to Paul.

Paul Richards: Thanks, Brian. The results from the fourth quarter showcased our overall strong performance across all [Technical Difficulty] portfolio. Our strategy remains centered on investment areas where expertise in owning and operating commercial real estate gives us a unique edge. This dual role as both owner and lender in the commercial real estate market enables us to effectively utilize information, allowing us to underwrite and recognize value throughout the capital stack, with our aim in achieving superior risk-adjusted returns that exceed the average. Our investment approach remains centered on credit investments and stable and near-stabilized assets, emphasizing cautious underwriting, low leverage and relative debt basis, along with the lending to healthy sponsors to deliver steady and reliable value to our shareholders.

In the fourth quarter, despite challenging commercial real estate conditions, our loan portfolio maintained steady performance, consisting of 87 individual assets with approximately $1.6 billion in total outstanding principal. The portfolio is geographically diverse with a bias towards the Sun Belt markets. Texas, Georgia and Florida continue to be our largest portion of our portfolio at approximately 52% as of year-end, though our Atlanta, Georgia, exposure has significantly decreased by more than 10% as our largest SFR whole loan was repaid in full as of Q1 of this year. From the beginning of the fourth quarter through today, the company has been very active in underwriting and employing capital. We executed on making both follow-on and new investments of $31.8 million of preferred equity investments with an all-in yield of 11.5% in both our SFR and life science verticals.