Good day, and welcome to the NexPoint Real Estate Finance Second Quarter Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jackie Graham, Director of Investor Relations and Capital Markets. Please go ahead..

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance’s conference call to review the company’s results for the second quarter ended June 30.

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, Investments 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 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 assumptions, expectations 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.

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..

Thank you, Jackie, and thank you to everyone joining us today. On the call, we’re going to cover the second quarter of 2021 as well as discuss our portfolios and the acquisitions we’ve made this quarter and year-to-date and talk about our….

Brian, you are cutting off a little bit..

Hi, guys. Sorry about that..

Okay. No problem, go ahead, Brian..

$765 million senior secured facility on the SFR loan pool, a $60 million senior secured facility on the mezzanine pool, $177 million of repurchase agreements, $111.5 million of unsecured notes, $37.5 million preferred equity, $108 million of common equity at the June 30 closing price and $286 million of redeemable non-controlling interest.

As of June 30, our debt has a weighted average remaining term of 5.7 years and a weighted average rate of 2.62% and approximately 16% of our financing is subject to mark-to-market to the repos. Our debt-to-equity ratio is 2.54x at 30.

During the quarter, and actually inception to date through our ATM program, we’ve issued approximately 408,000 shares of common stock at an average price per share of $20.61, which represents approximately 1.1 premium to book value. And we had netted gross proceeds of $8.4 million through those issuances.

And year to date, we have deployed $191 million of capital into new investments. A quick overview here of the results for the second quarter as compared to last year. Net income attributable to common shareholders was $12.3 million or $0.58 a share, compared to $19.3 million or $1 per share for Q2 last year.

Core earnings were $3.4 million or $0.59 per share as compared to $1.9 million or $0.37 per share. CAD or cash available for distributions was $3.4 million and $0.59 per diluted share as compared to $2.2 million and $0.42 per diluted share. Book value on a consolidated basis was $20.38 versus $18.33 at the end of Q2 2020.

We paid a dividend of $0.475 per share in the second quarter and the Board declared a dividend of $0.475 per share payable on September 30 to shareholders record as of September 15. Our dividend is currently 1.24x covered by core earnings. Let me update our guidance for the third quarter, before I turn it over to Matt Goetz.

Core earnings per diluted share on the low end is $0.61 on the high end $0.65, for midpoint of $0.63. And our cash available for distributions per diluted share is $0.51 on the low end, $0.55 on the high end and $0.53 on the midpoint. So apologize for the technical difficulties. But let me turn over now to Matt Goetz..

Thanks, Brian. The portfolio continued to perform strongly in the second quarter, and we were able to capitalize on a few opportunities. The current investment portfolio, as Brian said, is comprised of 64 individual investments with approximately $1.58 billion of total outstanding principal.

The portfolio is still 100% residential with 57% invested in senior loans and 43% invested in multifamily via Agency CMBS, preferred equity and mezzanine debt. The portfolio’s average remaining term is 7.3 years, is 92% stabilized as weighted average loan-to-value of 66.9% and average debt service coverage ratio of 2.07x.

The portfolio is geographically diverse with bias towards Southeast and Southwest markets, and 100% of our investments are current. As mentioned in our earnings, none of our underlying loans are currently in forbearance. No change from the first quarter of 2021.

References as of the forbearance before published by Freddie Mac on June 25, roughly $5.4 billion or 1.5% of the total Freddie Mac securitized unpaid principal balances entered forbearance both metrics improving dramatically since the first quarter.

We realized a 15.25% IRR and 2.12x multiple on invested capital on the redemption of the $3.8 million preferred equity investment. And we had one $15.3 million single-family rental loan that was repaid in full. Moving to opportunities. We’re able to take advantage of [indiscernible] during the second quarter.

As discussed on our first quarter earnings call, we closed another floating rate Freddie Mac K Series B Piece for approximately $76 million and – $76 million. That investment has a current yield of average 30 day SOFR plus 625 bps. The collateral pool is made up of 37 loans and has an appraised value of approximately $1.4 billion.

We were also able to take advantage of cycling out of some K Series IO Strips that we purchased in the depths of the COVID downturn and redeployed that capital in the higher-yielding small balance IO Strips. We closed on approximately 90% of the Freddie Mac fixed rate B-Piece with a bond equivalent yield of 6.88%.

The investment has 5.5 years of remaining term is 67.3% LTV and has a current debt service coverage ratio of 1.94x. In summary, we continue to find attractive investment opportunities throughout our target markets and asset classes. And we’ll continue to evaluate these opportunities with the goal of delivering value to our shareholders.

I would now like to hand the call over to Paul Richards to discuss what we are currently seeing in the bond market repo financing and SFR portfolio..

Thanks, Matt. During the second quarter, the company was highly active in the secondary bond market as well as new issue Agency CMBS. As previously discussed, we deployed approximately $76 million on a new issue floating rate Freddie Mac B-Piece and $89 million on a combined basis for Freddie Mac IO Strips and a seasoned Freddie Mac B-Piece in Q2.

New issue agency bond pricing was relatively muted when compared to the previous quarter, with bonds pricing close to pre COVID levels. Our CMBS portfolio has greatly benefited as a direct result of the yield compression experienced since the mid-2020 and yet saw a meaningful increase in value this past quarter.

We continue to be prudently levered on our repo at roughly 45% LTV at quarter end, which includes an additional $43.7 million of repo financing to close the season B-Piece, as previously discussed.

We were also able to negotiate and achieve a lower cost of financing on our repo financing to the tune of approximately 50 basis points on a weighted average basis when compared to the previous quarter’s all-in rate. Lastly, we want to briefly touch on the continued performance of the SFR loan pool.

All loans are current and performing as the demand and enormous tailwinds for single-family rental in general continues to accelerate. We fully expect this trend to persist as tenant retention and occupancies are at all-time highs. To finalize our prepared remarks before we turn it over for questions, I’d like to turn it over to Matt McGraner..

Thank you, Paul. You heard from Matt and Paul our multifamily and SFR verticals and their underlying fundamentals are performing extremely well. Revenue and NOI growth are reaching double digits and have further accelerated into July. Our storage platform is no exception. In Q2, the NSP partners saw strong performance as well.

As a reminder, most of the NSP portfolio remains in the lease-up phase. But given the strong tailwinds in the sector, we believe the portfolio is well ahead of our pro forma expectations when we acquired Jernigan Capital back in Q4 of 2020.

Across the entire portfolio, our properties gained nearly 700 basis points in occupancy in Q2 over Q1 and saw same-store NOI growth more than double as it was up 101% versus Q1. For the quarter, we outperformed our 2021 budget by 15%, bolstered by 14.8% growth in in-place rents quarter-over-quarter.

We continue to evaluate options to monetize this investment but also believe that once stabilized, the NSP position could be worth another $3.50 to $5 per NREF share. That’s all I have for prepared remarks. Thanks to the team for continuing to execute. And now I’d like to turn the call over to the operator for questions..

Thank you. [Operator Instructions] We’ll take our first question from Stephen Laws of Raymond James..

Good morning. I appreciate the comments in the prepared remarks. Can you guys touch on the new investment pipeline and then how you think about the investment opportunities relative to prepayments? What kind of visibility do you have in prepayments coming in? Kind of like to get some thoughts on how you’re able to match those up..

Stephen, its McGraner. I think the two that we saw in this quarter were largely made up the bulk of the investments that can be prepaid that we’re unaware of.

The rest of it are the B-Piece that either amortize off as the floating rate loans are working their way through the securitization and then the single-family pool that’s fixed and has a large fees. So we don’t expect a material amount going forward of repayments.

Certainly, we’re not on the same treadmills as most of our peers to get capital back every two or three years. So our expectation is that this is, again, sort of the bulk of it and going forward, we’ll be looking to invest probably mostly in the B-Piece space..

Thanks. And kind of a follow-up on the pipeline, I guess, first, a big investment on the last day of the quarter, so certainly, maybe you could talk to what quantified the impact you think you’ll see sequentially that really didn’t – wasn’t there last quarter.

And what do you see on the Mezz side? I don’t think you guys have done a new Mezz loan maybe since January looking at the table in the deck.

So what’s that pipeline? And is it just not as attractive relative to the securities investments at this point?.

Yes, the B-Piece – it’s Goetz. The B-Piece is going at about $0.10 per share to core. But because it’s a fixed rate and zero coupon, it doesn’t add anything to CAD. So that’s why there’s a difference between – large difference between core and CAD and our guidance for next quarter..

On the Mezz side, there’s – it’s McGraner here. On the Mezz side, there are opportunities that we’re currently underwriting between the private preferred multifamily, where kind of where we made our name layering capital behind Freddie and Fannie.

Given where cap rates are, 3.5% to 4.25% and debt so cheap right now, it’s the high kind of current coupon, opportunities are gone. But you can still find opportunities that can get you a double-digit return, but most of that is going to be an uptick to the sponsor. So you might do a 4% or 5% current and another 4% or 5% accruing.

We are underwriting, I’d say, kind of $25 million-ish of that right now. And so we could do that. But it’s, I think, less attractive than like a floating rate B-Piece or a K deal that we could execute on in the third or the fourth quarter..

I appreciate the comparison there. Last question for me, as you have a preferred from a year or two ago, you’ve got a year ago, you’ve got the unsecured notes now. Obviously, you’ve been able to use the ATM for about $8 million so far.

As you think about your need for capital and outlook for growth and how you’d like to see the mix of your capital stack come together, what are your thoughts around that?.

I think to the extent we can issue equity above book value, we’ll do that first. To the extent we’re kind of at or at parity with book value, then we like the preferred market probably incrementally more than the secured note market or unsecured note market.

I think that our cost of – I don’t think I know our cost of capital and the preferred perpetual markets come down. So we’ll continue to, I guess, evaluate that in order to fund the Q3 and Q4 investments that we have visibility into, which is probably in the neighborhood of $75 million to $100 million..

Thanks for the color there. So it’s good to you have all those options to disposal. Thanks for the time today..

Thanks, Stephen..

Thank you. [Operator Instructions] We’ll take our next question from Jade Rahmani with KBW..

Thanks very much. Core EPS came in at $0.59, and I believe the prior guidance midpoint for the second quarter was $0.64.

Was the main difference between your guidance and core earnings due to timing of capital deployment? Or were there any other factors that you would note?.

Yes, it’s timing. The – it’s basically $0.04 for the repayments and then another kind of $0.02 for ATM issuances. And then we did redeploy that capital back into some accretive investments that, Paul, if you want to elaborate on, we can..

Hey, Jade. I guess, discussed recently was we redeployed capital into some Freddie BX ones as well as some just normal KDX ones. And then the big purchase was the roughly $67 million on B Piece that we purchased at the last day of the quarter..

Okay.

So in your prior guidance, you contemplated that purchase taking place earlier?.

No, I think it’s more of the fact that we got 30 day notices on the repayments from the preferreds and that we didn’t necessarily anticipate..

Okay. Okay.

And you’re not expecting something similar in the third quarter?.

No..

And what was the aggregate dollar amount of 2Q investments?.

Yes, it was about $170 million..

Okay.

In terms of the yield compression, are you seeing it broadly across that space? And does that change what you think the business’ ultimate levered ROEs are going to be?.

I think – it’s McGraner. The yields are, for sure, compressing. I don’t think that they’re going to get necessarily that much tighter in the B-Piece market. And I think that, that’s – or in the K Deal market. And that’s largely where we’re focused in terms of generating at least in the near term new investments.

We think that in sort of niche areas, self-storage and life sciences, we can get some outsized returns to bolster the ROEs and still maintain what we said when we went public. And so that’s – that would be the goal. And then just as a reminder, we don’t have to do anything new.

The current book has over seven years of duration, and the earnings visibility and transparency of these earnings that bolster our ability to pay an outsized dividend with a superior credit profile are in place from here to the next four or five years..

And just to add one thing to Matt’s comment to our financing has gone down dramatically as well, as mentioned before, repo financing has decreased roughly 50 basis points over the past quarter. And as Matt mentioned, we think we could get a better cost of capital on the preferred side as well as the unsecured note side..

Okay.

Is the expectation for the dividend to be maintained? Or is there room for a potential increase?.

Yes. I mean we’re having healthy coverage, and we have to pay out almost all of it. So there’s certainly room for increase..

Okay.

Can you remind us what the basis in NSP is?.

$44 million..

Okay.

What is the timing of any potential realization events?.

Yes, two questions. So like we’ve looked at and constantly are looking at the cap stack of the company itself. And like we’ve been talking about financing rates come in, we can rightsize that company’s balance sheet, and we’ll do that probably in the fourth quarter of 2021.

The portfolio we thought would be stabilized kind of 2024, it’s probably 2023 now. And we can certainly monetize the investment now, but we’re also excited about storage – in our storage fundamentals, believe that the NSP portfolio represents probably best-in-class urban infill, high-density storage in some of the best submarkets in the country.

And we want to be cognizant of the ability to add that $3.50 to $5 per share for NREF share accretion to book value that I think is a differentiator amongst our peers. So we’re kind of weighing all of those considerations, but I think it’s a good problem to have at this point..

Okay.

And so if the capital structure was rationalized, streamlined, the preferred would be paid off, and it would be – you said that there’ll be a gain of $3 to $5 a share potentially?.

No. If you recall, the current position is – was preferred that was contributor – that was converted into common. So the $44 million is a common special situations investment and a preferred that was converted into a common investment of the company. So we could go sell that common to a third party right now.

We could sell it to our funds or we can wait for it to stabilize and then re-IPO or sell it at that point. The $3.50 to $5 per share is a stabilized range based upon a pro forma – a discounted pro forma cap rate range that’s conservative.

And I think that we can – if we wanted to sell it today, we could probably get a couple of bucks per NREF share for sure. But I do think that that’s not going anywhere in the foreseeable future..

Got it.

So if the company was recapitalized, the capital structure streamlined, that wouldn’t necessarily mean that you guys are selling down the position or anything?.

That’s right. I mean we could convert it if we wanted to, for example, into a preferred, but that would be a yield closer to 6% or 7%. Whereas if we took the capital weighted 1.5 years and then monetize it then, and then that $44 million turns into $90 million, we relever that.

And then we’re reducing the book value and the ability to reinvest and drive earnings. So that’s an attractive option..

Okay.

And lastly, on the single-family rental side, could you give an update on Progress Residential, former Front Yard, given where rates are today, rates are today, is there the potential for that loan to be prepaid increase?.

Jade, no, it still has so much term left on the actual loan that the yield maintenance bills well over $100 million, which, of course, would – it just doesn’t make sense for them to prepay or paying yield maintenance and refinance that loan. So it’s same story as last quarter..

Thanks for taking the questions..

[Operator Instructions] We’ll take our next question from Amanda Sweitzer with Baird..

Thanks. Good morning, guys.

Can you talk more about the potential timing for some of those mezzanine investments into either life science or self storage? Are there any near-term opportunities you expect to pursue? Or is this something where you’re thinking about timing it upon the recycling of that JCAP investment?.

Yes. I think the life – Amanda, it’s Matt McGraner. I think the life sciences investments will occur in the second half of the year for sure. We’re hopefully to get one or two done. We thought we might be able to get one done in the second quarter, and it’s been pushed into the – well, probably into the third quarter, at the end of the third quarter.

But I will – I do think we’ll get some of those life sciences done this year. Self-storage is a little bit harder. We’re still working on some opportunities, aggregating enough size. We’re doing some one-off on like $10 million, $12 million underwritings on single assets that won’t really move the needle.

But the life sciences, I think, will be a bigger splash in the second half of the year..

Okay. That’s helpful.

And then are those investments on life science development projects? And how do you think about an exposure level that you’re willing to go to with life science and self storage?.

Yes. I mean, as you may know, we made a nine figure investment as a platform in one of Alan Gold’s companies, IQHQ, and have worked outside him for the last few years and have gotten familiarity with certain types of life science facilities that we’re comfortable investing in.

I’d say the near-term opportunities are sale leasebacks of either some small cell manufacturing or other smaller kind of logistical type deals that are anywhere from $30 million to $50 million to $75 million a piece that we could do some Mezz or preferred on.

And those are the types of opportunities that we’re looking at and think it’s a space that’s largely pretty interesting right now..

Yes, that is interesting. That’s all I had. Appreciate the time..

Thanks, Amanda..

Thank you. And at this time, we have no further questions in queue. I’ll turn it back to management for closing remarks..

Yes. Thanks. It’s Matt McGraner. We appreciate everyone’s time and availability this morning and look forward to speaking to you during our third quarter conference call. Thanks again..

This concludes today’s call. Thank you for your participation. You may now disconnect..