Good day and welcome to the NexPoint Real Estate Finance Fourth Quarter Conference Call. Today’s conference is being recorded. At this time, I would like to turn the presentation over to Ms. Jackie Graham. Please go ahead, ma’am..

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance’s conference call to review the company’s results for the fourth quarter ended December 31.

On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; and Matt McGraner, Executive Vice President and Chief Investment Officer; Matt Goetz, Senior Vice President, Investments & Asset Management; and Paul Richards, Vice President, Originations & Investments.

As a reminder, this call is being webcast through the company’s website at t 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.

Forward-looking statements can often be identified by words such as expect, anticipate, intend, and similar expressions, and variations or negatives of these words.

These forward-looking statements include, but are not limited to, statements regarding the company’s business and industry in general, investment activity, estimated IRRs, guidance for financial results for the first quarter of 2021 including the company’s estimated net income, core earnings, dividend per common share, cash available for distribution and dividend coverage ratio for the first quarter of 2021.

They are not guarantees of future results and are subject to risks, uncertainties, assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements.

Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company’s registration statement on Form S-11 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 analysis of core earnings and CAD, which are non-GAAP financial measures. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss computed in accordance of GAAP.

For a more complete discussion of core earnings and CAD, see the company’s presentation that was filed earlier today. I would now like to turn the call over to Brian. Please go ahead, Brian..

Thank you, Jackie, and welcome to everyone joining us for the fourth quarter 2020 NexPoint Real Estate Finance earnings call.

I’ll just quickly highlight of our financial performance, capitalization, actions during the year and guidance for Q1 2021 and then turn the call over to Matt Goetz and Paul Richards to discuss the portfolio and opportunities we see. We’ll conclude our prepared remarks with some closing comments from Matt McGraner.

Let me start with highlights in 2020. In February, we completed our IPO of $19 per share raising approximately $110 million [Ph]of gross proceeds and using net proceeds to pay down 100% of our financing. In mid-March, as a result of the pandemic credit markets froze up creating panic signs in margin call on repo lines.

This had an adverse effect on mortgage REIT stocks including NREF that’s dropped to a low of $6.34 per share, although NREF had no repo financing at the time. Book value dropped to $19.13 per share last to low of $17.72 at the end of second quarter.

In May markets began to recover, we drew on our repo lines to make attractive and higher increasing investments employing that increases. In July we launched preferred equity offering raising $46 million gross proceeds using the net proceeds to acquire two more [Indiscernible] stock trade and then NREF PA.

In October we launched a private unsecured notes offering raising gross proceeds of $36.5 million. The net proceeds were used to purchase a pool of multifamily mezzanine loans from Freddie Mac.

As of December 31, our capital stack consisted of $781 million facility on the SFR loans, $60 million facility on the mezzanine pool, $151 million of REPO financing, $36.5 million of unsecured notes, $27.5 million preferred equity, $90.7 million of common equity with $276 million redeemable non-controlling interests.

The $781 million credit facility is collateralized by $854 million in SFR mortgages and max construction duration in the underlying SFR portfolio is roughly fixed rates. Each has a weighted average remaining term of 7.4 years.

The rate on the facility at December 31 is fixed at a weighted average of 2.44% against the yield on another one half has and 4.9% or 246 basis points throughout the cost is at. The $60 million facility is collateralized by $98 million of multifamily mezzanine loans.

As of December 31, the rate on the facility fits at a weighted average of 30 basis points against the yield on underlying assets of a weighted average 7.46% or 716 basis points prior the cost of the debt. In both, the weighted average remaining term is 8.8 years.

The $160 million repurchase or REPO balance is collateralized by $372 million of securitizations for our 51% LTV and carrying interest at 0.329 annualized. For the December 31, 60% of our financing is subject to mark-to-market. The low level at 2.57 times debt to equity.

We raised average cost of debt to 2.49% and the weighted average term of 6.4 years with ample liquidity of $30 million of unrestricted as of December 31. For 2020, which was a short year since we went public in early February, we had net income attributable to common shareholders of $3.6 million, or $0.47 per share.

Core earnings $2.9 million or $0.54 per share. We reported a loan loss provision for the year of $320,000. As of December 31, we repurchased 327,422 shares at an average price of $14.61 per share representing a discount for current price at 25%.

We paid a dividend of $0.40 per share in the fourth quarter Monday, the Board declared a dividend of 47.5 cents per share payable on March 31 to shareholders of record as of March 15 and it’s representing 18.5% increase in dividend.

For the first quarter, we are issuing core guidance – core earnings guidance of $2.9 million at the midpoint, $2.8 million on the low end and $3 million on the high end. That equate to $0.54 per diluted share with the midpoint $0.52 per diluted share on the low end, and $0.56 per share on a high end.

And at the midpoint, that will give us a good range covers on the 47.5 cents or 1.14 times coverage. With that let me turn it over to Matt Goetz and Paul Richards to discuss the portfolio. .

Thanks, Brian. Our fourth quarter and full year results continue to favor growth and strength in what we believe is a most resilient commercial real estate property types throughout all market cycles.

We believe this trend will continue into the near future and as more and more gateway residents look to move to less densely populated markets, which should continue to strengthen our targeted and underlying asset classes.

While we can’t predict potential legislation - the future path of COVID-19, and the effects each might have on the commercial real estate sector, we believe our defensive strategy, namely credit investments in stabilized residential and storage assets, conservative underwriting at low leverage with well-healed sponsorships should provide consistent and stable value to our shareholders.

Strong development strength is evidenced by Freddie Mac across recent – and securitization which was transacted at yields at pre-COVID levels in 250 to 275 basis points described our last fixed and floating rate VPs investments.

That said, we’d like to spend a few minutes discussing the current portfolio’s performance as well as discuss the opportunity we are able to take advantage of in the fourth quarter and immediately thereafter. The current investment portfolio comprised of 62 individual investments with approximately $1.4 billion in total outstanding principal.

The loan portfolio is 100% residential with 60% invested in senior loans, collateralized by single-family rentals and 40% invested in multi-family via agency CMBS, preferred equity and mezzanine debt. The portfolio’s average remaining term is 7.6 years with $3 billion on the commercial mortgage REIT space.

The portfolio is 96.1% stabilized with a weighted average loans value of 68.3% and weighted average debt service coverage ratio of 2.04 times. The portfolio is geographically diverse with a bias towards the Southeast and Southwest markets and a 100% of our investments are current.

As mentioned in our earnings, none of the underlying loans are currently in forbearance similar to last quarter report reference as is the forbearance portfolios by Freddie Mac on October 25, roughly $7.6 billion or 2.4% of total Freddie Mac’s securitized unpaid principal balances entered into forbearance, both metrics improving slightly since the third quarter.

As you know, the new administration has extended the forbearance of portfolios in moratoriums more rated for federally backed mortgages until June 30th of this year. As of now, we don’t expect any material impact to our portfolios evidenced by the strength of the portfolios’ debt service coverage ratio and loan leveraging strong sponsorships.

One mezzanine investments, located in Columbus redeemed December 11. The $10 million investment was outstanding for 65 months in and it used an IRR and ROC at 1.6 times, or 1.6% to 1.63 times respectively. As a reminder, we have zero construction loans, no heavy transitional loans, no land loans and not for sale loans.

Moving to the opportunities, we’re able to take advantage of during an immediately after the fourth quarter. As Brian mentioned, we have been able to deploy proceeds from our unsecured senior notes offering and redemption into accretive investments for all of our stakeholders.

On October 28, we purchased a portfolio of 18 individual mezzanine loans collateralized by stabilized multifamily properties for $99 million plus accruing interest. We received approximately 50% from the financing and underwritten the portfolio to providing us IRR of 17.3%.

On January 21, 2021, we closed the 26.4 mezzanine investments with multibillion dollars sponsorship for a multifamily redevelopment in Los Angeles, California. 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’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 asset bond portfolio..

Thanks, Matt. During the fourth quarter, the company was not as active in the secondary or to issue – new issue agency CMBS market since we are able to deploy capital and purchasing accretive mezzanine loans from both from Freddie Mac was equally as attractive loan financing that Brian and Matt mentioned.

New issue of agency bond pricing came in tighter through the fourth quarter and the beginning of 2021 with both floating rate and bonds continued to gotten up in value. As mentioned on the Q3 earnings call, management expected the spreads to tighten as the world continued to – a high retail stability.

Since this was the culture as we have seen spreads on bonds on both floating rate and fixed rate – slightly 250 plus basis points from new listed pricing. Now the application of these new listed pricing and markets base into Q4 2020 book value we fully expect and have seen markets starting to seeing against the floating increase.

We continue to increase these levers on the REPO at 51% LTV at quarter end implying we are taking approximately downward market value movement of $75 million on our current $370 million CMBS portfolio before LTV increase of 55% taking it one step further, this would imply 29% decline in market value and spreads widening roughly 750 basis points on the REPO book market new issue pricing.

Lastly, we want to briefly touch on recent news on Front Yard Residential entering into a definitive merger agreement with Ares and Pretium and how these transactions closed in January of this year. We still view this as a credit positive for the company and expect its performance to be optimal just as for the entire pool.

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

Thanks, Paul. I’d like to end with a couple brief thoughts. First I am proud of the team and the results we generated in 2020 in a tough credit and operating conditions. The team’s ability to capitalize on the market dislocation last year is already bearing fruits as you can see with the significant increase in the book value this quarter.

We are also proud to deliver on our expectations for the year and to our ideal investors. We appreciate your trust. We are pleased and proud as Brian mentioned to substantially increase the dividend by double-digits while maintaining a true coverage delivering on yet another promise to our shareholders.

As we get in 2021, we expect to continue to do what we’ve been doing and that is leveraging the core verticals to continue to source attractive opportunities to forge in commercial and residential asset classes. So that’s all we have for prepared remarks and I would like to turn the call over to the operator for questions..

[Operator Instructions] And we will take our first question from Stephen Laws with Raymond James. .

Hi, good morning. I guess, first off, you are all doing good while in fact given the weather. But, congrats on a nice quarter and strong dividend increase.

Brian, can you maybe talk about the capacity for new investments, where do you see leverage moving? And I guess, part of that discussion, it’s also the portfolio mix changed to a good bit sequentially and wanting now to get to you touch on maybe where you see that mix shifting over the course of 2021?.

Yes. I’ll cover the half of your question and then I’ll pull Matt, Matt jump in sort of where the portfolio go in the future. We had success last year in creating and raising capital through deferred equity, unsecured notes and then using that with the REPO mix and that market recovered.

And it seems that there is a pretty big outsize from the yield out there. So we think we continue in lot of the communities and probably higher prices than we did in July quarter and October.

And so, we have a number of things that you are looking at and I think I would talk about that but I think you can frame those and we are proactive about sourcing the ability to fund anything that comes down. .

Yes. Hey, Stephen, this is McGraner. I think you will see, because we are in the Freddie Mac close you know, we’ll see probably primarily our first investments this year. These been significant ones be in multifamily in the commercial mortgage-backed security space.

They are also – and you know that it created and we work closely with them on the opportunities like the – like the mezzanine investment we made. And so that’s probably where we were focused on resulting in increase in the multifamily portion of the book. So, that’s primarily what we – where we will be spending most of our time now. .

And Steve, as Matt mentioned, sort of what we had said during last year, and we - priorities fit for that, what happened with the COVID, one of the things we’ve been talking about was being patient and thoughtful in terms you can get the stock price up above the book and then initially having a decline in book value – it declines up above the IPO, book value all indicates we are using pricing on CMBS book in January and into February, expect book value to continue to increase.

But we take that in – that increase is very, very helpful in getting the stock price up and keeping to put up good earnings numbers and making further investments. So, what we may say in that – like to raise common equity to and you was asking to both. .

One, he asked for trading the wealth that’s still in place today. .

Sure, sure. I guess, just to follow-up, sourcing on this new investment competition you are seeing in the market, I think, Paul touched a little bit on spreads tightening where we see those today back to – at the pre-COVID levels.

Can you talk a little bit about returns on new investments on CMBS and also the competition you are seeing for new mezz and other type investments you are looking to add?.

Yes, it’s Goetz. On the CMBS front, yes, like I said, the strengths on a repeats toward its transactions went off at 250 and 275 basis points inside our last purchases which are, I think are 25 basis points above the low level.

In terms of competition in the CMBS space for the Freddie Mac repeat hit, it’s still rendered just because of the high bar that it set for becoming a select sponsor and BTH bids. So probably about 20 active bidders in that space and they give with you an auction maybe once or twice a quarter and then after that the securitization is due to spikes.

In the mezz world, you are doing more debt funds, but in the state that we play in we are reconnecting our $5 million or $10 million mezz investment on our multifamily asset in the Southeast or Southwest. We don’t have a ton of competition.

The bigger players are looking to put up a lot more money and it’s not really worth the time to spend it on $5 million and $10 million loans. .

Great. Appreciate the comments today. .

Thank you. .

And we will now take our next question from Amanda Sweitzer with Baird. .

Thanks. Good morning all.

Do you have any update you can share on your plan for the self-storage common stock investment? And could that be a potential source of funds this year?.

Yes. Hey Amanda. It’s Matt McGraner. There is – we’ve been working a number of funds or actively working with a number funds to recap that. We think that can be a 2021 source of funds, highly likely that you can do that for sure. .

Okay. That’s helpful.

And then following up on the mezz investment you made in January, can you just talk a bit more about how you got comfortable with exposure, little bit different where than where you’ve investing in the past and then that’s slightly higher LTV for the largest portion of that investment?.

Yes. I think for us, in terms of markets and gateway markets we are not at a huge gateway market fan. As you know, from your coverage certainly that back in – LA it’s a different bucket and [Indiscernible] across the multifamily spectrum during COVID.

And then in terms of the underlying, we’ve been really watching this mezzanine pool I think for over a year. So we’ve been working with Freddie Mac. They kind of put it on – put on whole negotiating with us during COVID and then we think to back up.

But we monitored this book through COVID right through the years and we were comfortable enough through the course of 12 to 14 months watching the performance of the pool that ultimately excited that we can close on it and save lot of things. .

That’s helpful. And then, it’s small, but in your book value bridge you noted $0.03 per share of realized loss in the fourth quarter.

Is that is related to the Georgia preferred equity redemption or something else during the quarter?.

It’s due to a spin out the disappeared flow that we bought at a premium. So we felt that premium put into lots. .

That makes sense. Thanks for all the comments. .

Thanks, Amanda. .

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

Thank you very much.

Given where your credit spreads are in the CMBS space, do you have a range of mark-to-market book value you might be able to provide? Should we be assuming the 19.48 is up something around perhaps 4%?.

Hey, Jade, it’s Paul. Yes, looking at January’s numbers, yes, I would say that, 3% to 4% increase would be correct and given where pricing and that gets to start before it could be higher in February, March that’s still seen to be on where our brokers come out with the March, but I think that’s a fair assessment. .

Thank you.

What should we expect from the pace of capital deployment this year either on an annual or quarterly basis in terms of how those equity capital and cash there is available to deploy into new investments?.

Yes. Hey, it’s McGraner. I think what we are targeting is the $100 million this year so $25 million a quarter would be an optimistic goal for us. And once we think it’s doable as longer with each funnel and other preferred and that discussed earlier while opportunities further which we are actively sourcing and you saw them. .

Thank you.

On the credit front, when I look at Freddie Mac versus Fannie Mae, it’s clear that in Freddie Mac there is a noticeable increase or greater proportion of loans in forbearance, about 2.4% of securitized EPB which is about 1200 loans or $7.7 billion of collateralized of November, yes, in the NREF portfolio you cite that there are no loans in the portfolio that have come in for forbearance.

Can you talk about what would explain the difference between the NREF portfolio and Freddie Mac’s overall securitized book?.

Yes. So, fortunate the NREF portfolio was purchased – I think we bought through repeats since - and get three repeats s and obviously the mezz book was all the different, but the three repeats this has the additional interest reserves and so the credit underwriting was much stronger first having securitization. .

And then this is our stack and insurance accrual reserves that aren’t common and everybody implemented before through the preferred. .

So even though there is about 2.4% of the Freddie Mac securitized loans in forbearance, there is still in the Freddie Mac repeats portfolio, but – portfolios that NREF owns.

There are no loans within those pools that are in forbearance?.

That’s correct. Back in the second quarter, there were a number of loans in the BP portfolio and in the portfolio that were in forbearance. Those have exited forbearance. So, at one point we did have loans in forbearance but we don’t anymore. .

Great. Thank you for that. On the resi portfolio, I am wondering if it’s your expectation that ultimately Pretium and Ares which thought resi plan to refinance that debt either through securitization and some other means, perhaps they could capitalize the tenancy which I believe is 10%.

So, do you – will be able to create probably a higher earnings stream, a higher ROE on a go forward basis though if they eventually plan to exit that. And that’s they could capitalize the interest, to capitalize the cost to exit that piece of debt refinance a cheaper and show a higher earnings stream and then have a more graceful exit.

So, what your expectation with respect to that investment?.

Yes. Hey, it’s Brian. I’ll let Paul talk about the actual numbers here, but, we were discussing with Pretium and they’ve indicated they don’t intend to refinance that and then Paul, once don’t you get through the numbers in detail we’ll sit and watch. .

Hey, Jade. Yes, we calculated the actual prepayment penalties that they have to use to break to loan. It’s roughly 25% to 30% given where rates are right now. We can provide roughly $130 million to 150 million of yield as you deepen. With that, even when we have [Indiscernible] yes, for example, we are trying.

If so it would make sense at the breakeven – get toward the breakeven. I’ve given those numbers. .

Okay.

And if that were to happen, it seems that you – I would assume that huge gain to book value to get that prepayment penalty up, that’s the season and be able to deploy it elsewhere sort of call it a good new item, if that did happen?.

Expecting to occur. .

Thank you very much. .

Thanks, Jade. .

[Operator Instructions] And it appears there are no further telephone questions. I’d like to turn the conference back over to our presenters for any additional or closing remarks. .

Yes, thank you for everybody join the call. And I reiterate on that closing comments. We are happy with 2020 and happy that we were able to perform as we said we were during our IPO road show and close to doing that into 2021. So thank you and we’ll talk next time. .

And once again, that does conclude today’s conference. We thank you all for your participation. You may now disconnect..