Good day, and welcome to the NexPoint Real Estate Finance Q4 2021 Quarterly Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference 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 and full year ended December 31, 2021.

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 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 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. Appreciate everyone joining us today. I’m going to discuss our results for the quarter of the year and then turn it over to the team for detailed commentary. Net income for the year was $3.93 per diluted share compared to net income of $1.74 per diluted share for 2020.

Earnings available for distribution was $1.89 per diluted share in 2021 that’s compared to $1.46 per diluted share in 2020, or an increase of 29.5%. Cash available for distributions was $2.21 per diluted share in 2021 compared to $1.67 per diluted share in 2020, or an increase of 32.7%.

Net income for the quarter was $0.90 per diluted share compared to net income of $1.32 for per diluted share Q4, 2020. Earnings available for distribution was $0.54 per diluted share in Q4, 2021 compared to $0.44 per diluted share Q4, 2020 and $0.51 per share in Q3, 2021, or an increase of 22.7% and 5.9% respectively.

Cash available for distribution was $0.63 per diluted share in fourth quarter 2021 compared to $0.47 per diluted share in the fourth quarter of 2020 and $0.62 per diluted share in third quarter of 2021 or an increase of 34% and 1.6% respectively. Book value per share increased 2.2% quarter-over-quarter and 10.4% year-over-year to $21.51.

We recognize the mark to market gain of 9.1 million on the company’s investment, Nexpoint storage and 900,000 on the company’s CMBS and IO strip portfolio. During the quarter we originated a purchase the following investments. We purchased a $61.3 million floating rate Freddie Mac K-Series B-Piece with an estimated yield of 525 basis points over SOFR.

We originated mezzi convertible notes with an aggregate principal amount of 40.8 million. Matt and Brian will discuss this investment in his remarks. We originated preferred equity investment for 30 million yielding 10%. We originated another preferred equity investment of 3.8 million yielding 10%.

We originated a third preferred equity investment for 5 million yielding 10.5%. After quarter end we funded an additional 41.8 million to this investment. We ended the quarter with 74 investments totaling approximately $1.7 billion. During the quarter two single family rental loans are repaid totaling 20.2 million with penalties of 3.6 million pay.

The gross proceeds received 80.6 million was used to pay down the Freddie Mac senior facility. As of February 17, 2022 across the portfolio, weighted average coupon is 6.32%. Weighted average remaining term on investments is 6.5 years. Weighted average loans value is 67.9% and weighted average DSCR is 1.99 times.

The values used for the collateral that we use in the LTV calculations, the value of the time the loan was purchase originated. Values for multifamily of our assets move dramatically over the past few years and months.

Paul will talk about these revised weighted average loans values using our estimates of the changes in the underlying collateral value during his prepared remarks. As of December 31, our debt capital consists of the following. 726.3 million of senior secured facility on single family rental loans.

59.9 million of senior secured facility on the mezzanine pool. 286.3 million repurchase agreements. 171.5 million of unsecured notes and 32.5 million of mortgages payable.

As of February 17, 2022 our debt has a weighted average remaining term of 4.8 years and a weighted average rate of 2.79% which provides a 353 basis point spread our investment income or the cost for debt. As of December 31, 23.9% of our financing is subject to mark-to-market. Our debt to equity ratio was 2.5 times at December 31.

We paid a dividend of $47.5 per share in the fourth quarter, and the board has declared a dividend of $0.50 per share payable on March 31, the first quarter of 2022. For dividends 1.14 times covered by earnings available for distribution and 1.3 times covered by tax available for distribution.

Today we’re issuing guidance for earnings available for distribution, tax available for distribution for the first quarter of 2022 as follows.

Earnings available for distribution per diluted share of $1.22 and cash available for distribution per diluted share of $1.57, increases over the prior quarter and prior year driven by prepayment penalties on the single family rental loans that we have received for this quarter.

Now let me turn it over to the rest of the team to provide their commentary. Matthew Goetz..

Thanks Brian. The fourth quarter and full year 2021 results continue to show strong performance across each of our investment and asset classes. We continue to focus on investment verticals where we believe we have an advantage due to our experience in earning 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 focusing on credit investments in stabilized assets conservative underwriting at low leverage with well heeled sponsors will provide consistent and stable value to our shareholders.

During the fourth quarter the loan portfolio continued to perform strongly and is currently composed of 69 individual investments with approximately 1.7 billion of total outstanding principal.

The loan portfolio is 98% residential with 45% invested in senior loans collateralized by single family rental homes, and 53% invested in multifamily via agency CMBS preferred for mezzanine, 2% of the loan book is in life sciences.

The portfolio’s average remaining term 6.5 years is 91% stabilized has a weighted average loan to value of 67.9 and an average debt service coverage ratio of almost three times.

As Brian mentioned in his earlier remarks and Paul described further later on, we believe the market amount and value of the entire book is approximately 52% as new appraisals have not been performed on a large portion of assets, since they originated in 2018 or 2019.

The portfolio is geographically diverse, the buyers towards the southeast and southwest markets Texas, Georgia and Florida combined for approximately 50% of our loan exposure on a geographic basis. 100% of our investments are current.

As mentioned in our earnings, number of underlying loans are currently in forbearance for references of the multifamily forbearance report published by Freddie Mac on a monthly basis.

There are 243 forborne loans totaling 2.1 billion of outstanding UPV, equating to 90 basis points of the total Freddie Mac securitized loan population by loan account and 60 basis points of securitized unpaid principal balance. Moving to the opportunities, we were able to take advantage of during this quarter.

During the quarter we originated two mezzanine notes on stabilized multifamily assets located in Dallas, Texas and Bentonville, Arkansas, with an aggregate principal amount of 20.4 million. The sponsors on the two transactions are repeat borrowers and have extensive experience in evaluating multifamily sector.

The properties are 98% and 95% occupied and weighted average debt service coverage ratio of 1.92 times. Our mezz investments have an average current yield of 6.5% and an all in unlevered estimated yield of approximately 11%.

On November 8, we purchased 30 million in preferred equity collateralized by a single tenant stabilized pharmaceutical manufacturing property with a current yield of 10%. On December 9, we purchased 60.13 million of Freddie Mac K-Series B-Piece with an estimated yield of SOFR + 525 bps.

This originated at a tighter spread than our previous a series floating investments as it represents the bottom 10% versus 7.5% of the debt capital stack has an underwriting debt service coverage ratio of over 2.3 times, with strong sponsorship on an underlying loans.

During the quarter, we also originate a convertible note an amount of 20.5 million for a well heeled sponsor focused on ground leases with an estimated yield of 9% with future upside and loan to value of 18%.

Two of the single family rental book repaid with the total principal balance of 20.2 million the combined IRR realized on these investments was 31.4%. Paul Richards will go into more detail on how the capital was creatively reinvested in his prepared remarks shortly.

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 would now like to hand the call over to Paul Richards..

Thanks Matt. During the fourth quarter, the company was again active in the primary bond market. As previously discussed, we deployed $61.3 million on a Freddie Mac floating rate and SOFR for plus 525.

Even as the market has experienced inflation headwinds, which have caused the market to price in multiple rate hikes, there has been an insatiable demand for Freddie Mac VP bonds, we’ve continued to see pricing tightening as evidenced by the last auction with spreads on the small balance loan VP coming in tighter than pre-pandemic levels.

We continue to be sensibly levered on a repo at roughly 57.5 LTV at quarter end. Lastly, we want to briefly touch on the continued performance of the SFR loan pool and the Q1, 2022 loan pay down. All loans are current and performing as the demand -- tailwinds for single family rental continues to pick up speed.

We fully expect this trend to persist at 10 of retention. New lease and release growth rates and occupancies are at all time highs creating a tremendous backdrop especially for us as a lender to high quality institutional SFR sponsors.

The portfolio has had two SFR loan pay down in the first quarter of 2022, which has generated a combined IRR of roughly 35% first the original underwritten IRR of only 9%.

Due to the earliest prepayment penalties, the investments were able to generate an additional $7 million of net proceeds than the originally underwritten and in approximately one-third of the original investment time horizon. To finalize our prepared remarks before we turn it over for questions, I like to turn it over to Matthew McGraner. .

Thanks, Paul. We’re obviously pleased with our fourth quarter and full year results for 2021 and look forward to another strong year in 2022. I wanted to quickly touch on a special situation investment we made late in the fourth quarter that Matt Goetz just mentioned.

A sophisticated ground is sponsoring its supply chain and COVID related to financing delays and needed a quick and efficient financing solution late in the year.

We responded in the span of two weeks in late December and met the sponsors’ needs originating 75 million convertible notes, yielding advantage and 9% with an ability to convert to a common equity the 12.5% discount.

The attachment point of our investment in the company’s assets is roughly 18% LTV and creates a profound risk reward investment for interest both in terms of yield and total return potential. Finally, we’re in the middle of refinancing Nexpoint storage partners’ capital stack as we speak.

We’ve chosen a lender to refinance to senior debt portion at a more favorable rates and proceeds and expect these efforts along with strengthening itself sort of self storage sector generally to be integrated to the common equity held by [Indiscernible].

We expect to close this financing in Q2 and will provide an update during our next quarterly results. That’s all we have for prepared remarks today. And now I’d like to turn the call over to operator for questions..

Thank you. [Operator Instructions] We’ll go ahead and take our first question from Stephen Laws with Raymond James..

Hi, good morning. First of all, congrats on a nice quarter and certainly another dividend increase you guys delivered to investors. Can you talk maybe Brian, a little bit about the guidance looks like a big Q1? What items are being pulled in? I think your EAP is like 40%, 45% of next year’s total guide is in Q1.

So can you talk a little bit about what’s going to drive the onetime items in Q1 to benefit earnings?.

Yes, most of that increase is related to prepayment penalties, the prepayment SFR loans. And it’s just a function of how that’s calculated and the calculation of that metric. It’s something that the SEC has been focused on across the sector.

So with these prepayments that we’re seeing, and we’ll probably continue to see this given the strength in the single family sector we may see more of that down the road. That’s what’s driving most of that decrease for the first quarter.

Obviously, the remainders, the new debts that we’ve made, we discussed and then a creatively reinvesting the payments that we’re getting, prepayments are getting on with SFR bonds, is currently structured, those are some of our lowest yielding investments, we’re climbing us back into higher yielding, feels like the ground lease that Matt mentioned..

So piggybacking on that, Brian when you think about the guidance you guys just issued for the full year how conservative or how did you go about thinking calculating expected contributions maybe not in the next three months, but say, second half of this year and your guidance?.

Yes. We didn’t make any assumptions around prepayments, or one time type of thing. So we tried to give a more smooth out stabilize, return profile, just based on the investments that we have.

Obviously people make those prepayments, we generally view that as a positive, and then we can clip a big penalty and recognize that immediately, but then redeploy that in higher yielding investments.

And we’d run those analysis and scenarios that show if the entire book repaid in 2022 what that would look like and what we could drive earnings and it’d be hugely accretive to book value and our earnings available for distribution and cash fill for distribution..

Great. Switching over the portfolio one item, common stock investment looks like it depreciated nicely in Q4.

But can you talk about your intentions with that when you may look to say recently harvest those games and recycled capital in the cash flowing investments? Any timing to that?.

So we were probably going to close the refinance to the senior debt in May and then following that, we’re going to restructure the extra space preferred. And we expect to blend that down to creating kind of enhanced profile of the common equity of the value, the yield to the common equity to make it as valuable as we can.

And then once we do that, I think we either look to recap that out or if we think it’s better to hold for an exit upon re-IPO in 2023 which we think is viable. We’ll do that. So look for an update in the second half of the year, probably in Q2 and we’ll have better visibility into it.

But either one of those outcomes I think would be greatly appreciated for this company..

Right. Yes. That’s helpful, Matt. Appreciate you taking my questions this morning. Take care..

[Operator Instructions] We can go ahead and take our next question from Jade Rahmani with KBW..

Thank you very much. Can you say more about the ground lease investment? What kind of entity this was and in the capital structure this is, is this secured by investment by a portfolio by some kind of equity interest.

If you could elaborate that would be helpful?.

Yes. Sure, happy to. It’s a private REIT that was formed I think around early 2020. They went out, they raised capital of 140 for a offering, raised about 110 million of equity, went and started originating deals through 2021 and hit the extra money managing this vehicle in the fourth quarter with some additional via follow on for the 144 offering.

We came in and they had to close those deals. So we effectively bridge that with this instrument at the corporate level. So we funded the company, and the company then funds these investments.

And so, like we said we’d like this risk reward, we’d like to nine assets that they were originating ground leases on a significant portion of our multifamily, which is obviously one of our bread and butter. So just jump on it.

And we think it’s a great, great investment again, both with yield and total return potential to the extent that we wanted to hold it..

It was just a preferred equity investment?.

No it is through that, this is convertible notes..

I guess any update on the progress residential, single family rental portfolio.

It seems that has not started to prepay? And if not, when might you expect that to occur?.

We haven’t gotten any word from them or any communications or indications. So it’s hard to tell. I mean, it’s a big number that they would have to prepay. It’s part of the progress deal. And they are definitely issuers of securitizations. Having said that that market has gotten a lot wider here recently.

So it really depends on what progress and party want to do with that portfolio. If they want to repay, we would immediately start to look for places to put in.

I think we have plenty of places that we can roll that and Paul if you’ve got any indication from them anything different?.

No, that’s what you said is exactly what my thoughts are. And it’s roughly a $75 million to $80 million prepayment penalty. And as it currently stands, so it’s still half year [Indiscernible]..

So far prepayments you’re getting what is the refinancing going into? Are they planning to start -- lenders or something else?.

You are breaking up a little bit but I think we got the gist of the question. I think they’re just going into either securitizations, or in some cases, they are just getting another bank that essentially isn’t necessarily cheaper than what they’re rolling out of. But because of the value run up so much that they’re getting additional proceeds.

I think their analysis is it’s worth paying the prepayment penalty and maybe getting a cheaper rate or somewhere similar, but getting a lot higher LTV on their investments. A lot of these investments are underwritten a 60%, 65%. And today they can finance those 80, 85 even higher in some cases LTV. So I think the math is working out in their favor.

And that’s where they’re rolling it into..

And the spread widening you mentioned in the security market.

What do you think is driving that? Is it a supply issue based on the magnitude of issuance in January that we saw or something else?.

Hey Jade it’s Paul. Yes I think that’s right. I think we saw a very large increase in supply in Q4 last year and a continuing in Q1 of this year. Also the interest rate shock on the five and seven years, so that didn’t help either. I think you’ll probably see and then this LTVs in general are 88.5% in some cases on these deals.

So they are higher, as Brian alluded to, versus bank debt or in this case, we have a 65% LTV loan with them currently. So those are all factors kind of contributing to the spreads widening reasonably. .

Okay, I guess.

Is there a range of earnings post the first quarter or return to the first quarter? Can you tell us what earnings would be excluding the outsize repayment income just to have an anchoring earnings expectation beyond these accelerated?.

We can get that number and kind of pull out the prepayment stock. We want to be careful to, like I said, SEC has been monitoring disclosures of these different metrics pretty closely. So we want to make sure that we’re in line with that and not providing something that’s kind of outside of what they were looking for..

Does the dividend increase contemplating any benefit from the prepayment income? Because I assume well, reading the language of the press release, it says an increase in the quarterly dividend. It doesn’t cite just specifically the first quarter. So that implies that this is a recurring, the dividend is going to be $0.50 for the foreseeable future.

Is any part of the dividend increase to the SFR early prepayment income?.

No. It’s meant to be a consistent dividend. So it’s a special dividend and wasn’t driven by any prepayment numbers..

So it’s fair to assume that recurring earnings might be something close to that?.

That’s right. .

Okay. Let’s see. A couple of second couple of things. Yes. Thanks so much. Really appreciate your time..

It appears there are no further questions at this time. I would like turn the conference back to the speakers for any additional and closing remarks..

Yes thank you. I appreciate everyone’s time and appreciate the questions. We’ll be in touch next quarter. Thank you..

And this concludes today’s call. Thank you all for your participation. You may now disconnect..