Good day, and welcome to the NexPoint Real Estate Finance third quarter conference call. Today's call is being recorded. At this time, I would like to turn the call over to Jackie Graham. 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 third quarter ended September 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; Paul Richards, Vice President, Originations and Investments; and David Willmore, Vice President of Finance.

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 management's -- 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 take -- 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. I appreciate everyone joining us today. I'm going to jump right into our results for the quarter. And then I'll turn it over to the team to give some more detailed commentary on the portfolio and macro environment.

Net income for the quarter was $1.17 per diluted share compared to net income of $0.52 per diluted share for the second quarter of 2020. Earnings available for distribution was $0.71 per diluted share in the third quarter compared to $0.42 per diluted share in the third quarter of 2020 or an increase of 69%.

Cash available for distribution was $0.70 per diluted share in the third quarter compared to $0.42 per diluted share in the third quarter of 2020 for an increase of 55.6%. Book value per share increased 3.2% quarter-over-quarter to $21.04.

We recognized the mark-to-market gain of $1.4 million on the company's investment in NexPoint Storage and $12.8 million on the company's CMBS and IO strip portfolio. During the quarter, we purchased 6 CMBS IO strips with a notional value of $115.1 million for $13.1 million.

During the quarter, 2 single-family rental loans were repaid totaling $22.6 million in proceeds plus yield maintenance penalties of $3.3 million. On September 17, we originated a $32.8 million, 4.58% bridge loan on a multifamily asset in Florida, the takeout to agency debt. The loan was repaid after quarter end on November 1.

On September 29, we originated a preferred equity investment for $3 million, yielding 10%. After quarter end, on October 26, we originated a $9.75 million mezzanine loan, yielding 11%. We ended the quarter with 68 investments totaling approximately $1.6 billion. Across portfolio, our weighted average coupon is 5.99%.

Our weighted average remaining term on investments is 6.9 years, our weighted average loan-to-value is 66.8% and our weighted average DSCR is 2x.

The value of the collateral used to calculate the 66.8% weighted average loan-to-value is outdated as we know that the values for multifamily and single-family rental assets have moved pretty dramatically over the past few years and even the past few months.

So Paul and Matt during their comments will talk about those revised numbers that we've calculated using estimates on the increases in that collateral value.

At September 30, our debt capital consisted of $745 million of senior secured facilities on the single-family rental loans, $60 million of senior secured facility on the mezzanine pool, $223 million of repurchase agreements and $111.5 million of unsecured notes.

Our debt has a weighted average remaining term of 5.2 years and a weighted average rate of 2.59%. As of September 30, 20% of our financing is subject to mark-to-market through the repurchase agreements. Our debt-to-equity ratio was 2.29x at September 30.

On August 18, we issued 2.1 million shares of common equity at $21 per share, raising gross proceeds of $43 million. We paid a dividend of $0.475 per share in the third quarter, and the Board has declared a dividend of $0.475 per share payable on December 30.

Our dividend is 1.49x covered by earnings available for distribution and 1.47x covered by CAD. Let me update our guidance here for the fourth quarter or give guidance for the fourth quarter, and then I'll turn it over to the team.

For the fourth quarter, we are issuing guidance for earnings available for distribution as $0.50 on the low end, $0.60 on the high end, $0.55 at the midpoint. For cash available for distribution, we are issuing guidance of $0.46 on the low end, $0.56 on the high end with $0.51 on the low end. So with that, let me turn it over to, I think, Matt Goetz.

We'll start with Matt Goetz and then give that to Paul Richards..

Thanks, Brian. The third quarter of 2021 results continued to show a strong performance across each of our investments and asset classes. 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 on our investment strategy, focusing on credit investments and stabilized residential and storage assets, conservative underwriting at low leverage with well-heeled sponsors will provide consistent and stable value to our shareholders.

We are also excited to begin investing in the life sciences real estate sector on both the preferred and debt basis. The life sciences sector presents the opportunity to put capital to work in one of the most exciting and fastest-growing real estate sectors over the last 20 years.

Compelling life science real estate fundamentals, mainly limited supply and/or no availability in existing buildings and growing demand are driven by demographic tailwinds and a requirement for continued innovation to solve evolving health care needs.

Life science real estate plays a critical role as specialized space is required to support scientific research development and, ultimately, the manufacturing of novel drugs and therapeutics. The life sciences sector, as evidenced by Alexandria Real Estate's share price has outperformed R&D by over 104% over the last 15 years.

During the third quarter, the portfolio continued to perform strongly, and we are able to capitalize on a number of opportunities during the third quarter and immediately thereafter. The current investment portfolio is comprised of 68 individual investments with approximately $1.6 billion of total outstanding principal.

The loan portfolio is 100% residential with 52% invested in senior loans, collateralized by single-family rental and 48% invested in multifamily via agency CMBS, preferred equity and mezzanine debt.

The portfolio's average remaining term is 6.9 years, is 93% stabilized and has a weighted average loan-to-value of 66.7% and an average debt service coverage ratio of 2.02x. As Mitts said, Paul Richards will expand on the LTV metrics and what we believe appear to be high compared to the current market level valuations.

The portfolio is geographically diverse with the bias towards Southeast and Southwest markets, 100% of our investments are current. As mentioned in our earnings, some of our underlying loans are currently in forbearance, no change from the second quarter of 2021.

For reference, as of the forbearance report published by Freddie Mac on September 25, roughly $7.5 billion or 2.4% of the total Freddie Mac securitized unpaid principal balance has entered forbearance. During the quarter, we realized 40% plus IRRs on 2 single-family rental loan repayments in a total amount of $22.6 million.

Moving to the opportunities, we were able to take advantage of -- during the quarter, we purchased 6 CMBS IO strips, as Mitts said, with an aggregate notional amount of $115.1 million for $13.1 million in net cash proceeds with estimated current yields of approximately 14%.

On September 17, we made a bridge loan in the amount of $32.8 million at a rate of roughly 4.5% with 50 basis points going in, which was subsequently repaid on November 1. We also closed approximately $12.75 million of preferred and mezz on multifamily in the Georgia market -- or in the Atlanta market at approximately 11% all-in rates.

In summary, we continue to find attractive investments 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'd now like to hand the call over to Paul Richards to discuss what we are currently seeing in the bond market repo financing and the portfolio at large..

Thanks, Matt. During the third quarter, the company was highly active in the secondary bond market. As previously discussed, we deployed a combined $115.1 million notional value or $13.1 million in net cash on Freddie Mac IO strips in Q3.

Again this quarter, the company's CMBS portfolio has greatly benefited as a direct result of the yield compression experienced since the mid-2000 and yet again saw a meaningful increase in value, especially in the bonds purchased during COVID. We continue to be sensibly levered on the repo at a roughly 54.6% LTV at quarter end.

As mentioned previously, we undertook the project of applying adjustments to the underlying collateral value at our SFR, mezz and CMBS portfolios. In the case of our SFR portfolio, we applied the Case-Shiller National Home Price Index based on the first payment date on each loan through August 31, 2021, which was the last data point available.

In our multifamily, both mezz and CMBS assets, we applied the U.S. national apartment price per unit index based on securitization date on CMBS and loan origination date for the mezzanine portfolios through September 30, 2021, which was the last data point available on the original appraisal values.

The combined results yielded a pro forma portfolio LTV of 51.9%, which is approximately 15% less than the stated LTV of 66.8%. These results demonstrate an even more robust credit profile backdrop and an even more attractive risk return profile.

Lastly, to briefly touch on the continued performance of the SFR loan pool, all loans are current and performing as the demand and immense tailwinds for single-family rental, in general, continues to accelerate. We fully expect this trend to persist as tenant retention and occupancies are still at all-time highs.

To finalize our prepared remarks, before we turn it over to questions, I'd like to turn it over to Matt McGraner..

Thank you, Paul. We're making progress restructuring the capital stack for NexPoint Storage Partners, formerly JCAP, and expect to have an update during the first quarter of 2022. We're optimistic that these capital allocation moves will produce higher returns for NSP and ultimately NREF.

We're also excited, as Matt said, about entering the life sciences space on the credit side, making an inaugural 35 -- approximately $35 million investment upcoming this quarter in a pharmaceutical manufacturing facility with a high-quality sponsor.

We're currently underwriting a half a dozen more opportunities in this sector and expect to transact on several of them in the first half of 2022. Overall, as Paul mentioned, the underlying credit quality and fundamentals of multifamily, self-storage and single-family rental continue to accelerate and perform remarkably well.

NREF's business is doing exactly what it was best designed to do, mainly produce a consistent durable cash flow stream for investors backed by the highest quality assets in the commercial mortgage REIT sector. I want to congratulate the team for continuing to source and monitor high-quality investments.

And with that, I'd like to turn the call over to the operator for questions..

[Operator Instructions]. We'll take our first question from Amanda Sweitzer with Baird..

I wanted to start on the guidance ranges, obviously, a little bit wider than normal, given the equity issuance and redeploying those proceeds.

But can you give an update on the near-term acquisition pipeline and the volume of potential opportunities that you could close in the year-end?.

Yes, Amanda, it's Matt. The guidance is a little bit wider because we have received a potential smaller payoff in the SFR, which the timing of we don't know what that is. So we made it a little bit wider.

Couple that with the pharmaceutical investment, I was just mentioning, hasn't closed yet and the timing of sometime this quarter, we just don't know when. So we could potentially outperform that number, but we wanted to be appropriately conservative..

Okay. That's helpful.

And then following up on that comment on repayments, beyond that SFR alone as well as the bridge loan being repaid, any other near-term loan repayments that you expect in the fourth quarter?.

No..

Okay. That's helpful. And then finally, it sounds like you'll have a more fulsome update early next year. But any updated thoughts on the potential book value per share upside from the self-storage common stock? I think last quarter, you said $3.50 to $5..

Yes, it's still in that range. We are optimistic in the higher end of that range, but I think that's still a good range for it..

We'll take our next question from Stephen Laws with Raymond James..

Just to follow up on the pipeline question, it looks like you had a couple of deals closed here at the end of the year, mezz loan, I think, a bridge loan as well, close to another mezz loan in October.

I know that the opportunities you mentioned in life science, but can you talk about just your pipeline of kind of these investments? When you're looking to add any more CMBS B pieces? How your pipeline of mezz is building and how you think about deploying capital across your different investment options?.

Yes. We have -- we think we'll have a K deal that will close in the fourth quarter. It's a 10% thickness deal for about $65 million, which we'll use some repo on. But roughly, we'll call it, $35 million or $30 million of equity..

And then obviously, compared to life sciences, but....

Go ahead..

Yes. No, I was just going to follow that up with -- given these opportunities, how do you think about available capital, additional -- sorry, available liquidity, additional capital needs? I know you've got the ATM, although I think you're probably a little limited given the trading volume.

But can you talk about your outlook on liquidity having just come off the secondary? And when you think fully deployed and look to grow the balance sheet again?.

Yes. Stephen, it's Matt McGraner. I think the next kind of tool and the toolkit we would use is potentially reopening the notes offering that we did over the summer and pricing it tighter. We've gotten indications from our bankers, so we could do that.

And we think that, that would be over the near term and most -- probably the most accretive, coupled with some repo financing. We just equitized the balance sheet a little bit more. But we think that with those 2 tools, really not even having to tap the unsecured notes, we can be fully deployed by the end of the fourth quarter this year..

Great. Appreciate the color there, Matt. Lastly, operating expenses, you guys have shown some really good expense control here, largely flat through this year on a quarterly basis.

Can you talk about the outlook there? Is this a good run rate? Or how should we think about those expenses as you grow the platform?.

Yes. I mean, I think that one of the benefits of the NexPoint platform is that this isn't the sole company and doesn't have to keep the lights on. And so we've created a fee structure that we think is helpful and conservative. And we don't think that expenses should carry too much higher.

So this is a pretty -- I think, a pretty good run rate for the next 12 months or so and agree. We focus on that a lot. One of the things, too, I think is helpful and differentiated about our portfolio is that we're not constantly getting that capital back. Yes, we get a small repayment here or there, but largely the earnings stream is fixed.

So we're not on that treadmill where we have to keep kind of repaying and eroding book value. Couple that with production offices, we have one office here in great networks through owner-operator and the banks and commercial services company -- commercial real estate services company.

So yes, I think we're pretty pleased, and we'll continue to monitor these expenses at this level..

Great. Well, congrats on another nice quarter, and appreciate your time this morning..

Thanks, Stephen..

[Operator Instructions]. We'll go next to Jade Rahmani with KBW..

The main reason that 4Q guidance for earnings is below 3Q, the equity offering and timing of capital deployment?.

Yes, that's right, Jade..

Okay.

In terms of going to deploy capital into things like mezzanine loans and preferred equity, what's your comfort level with the competition in that market space?.

Yes, we feel pretty comfortable. I mean a lot of the people that we're making investments with, we've -- there are repeat clients that we have relationships with for 10 years. And we kind of pride ourselves on being easy to work with, creative, nimble, fast. So everything that a sponsor needs to get a deal closed, we don't have to feed a big machine.

And at this size that we're currently at, there still aren't a ton of people playing in that $9 million to $20 million equity check, in terms of mezz and preferred. So we don't run into a ton of competition.

That said, there is competition at the higher levels and especially for the B pieces, but we have a robust pipeline on the smaller mezz and preferred investments..

And can you quantify the magnitude of yield compression that you're seeing, maybe by product area?.

Jade, it's Paul. On the CMBS side, on the BP side, yes, from some of the COVID bonds that we bought back in 2020 in the May area, we were buying -- we think we bought at roughly 11% bond equivalent yields, and we've seen price on those compressed down to mid-6s. So you see meaningful yield compression on those types of bonds.

So we're quite pleased with that, and we think there's probably still room to run just given the demand out there for those types of bonds..

And on the preferred and mezz side, just -- since we're still playing in a smaller dollar amount, we're still able to get 10%, 11%, 12% all-in rates on that paper..

With no additional questions in queue at this time, I'd like to turn the call back over to our speakers for your additional or closing remarks..

Yes. I think we're good over here. I appreciate everyone's time, and we'll be back in touch. Thank you..

That will conclude today's call. We appreciate your participation..