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

NexPoint Real Estate Finance, Inc. (NYSE:NREF) Q4 2024 Earnings Call Transcript February 27, 2025

NexPoint Real Estate Finance, Inc. beats earnings expectations. Reported EPS is $0.83, expectations were $0.77.

Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Real Estate Finance, Inc. Q4 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Kristen Thomas, Investor Relations. Please go ahead.

Kristen Thomas: Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance, Inc. conference call to review the company’s results for the fourth quarter ended December 31, 2024. On the call today are Paul Richards, Executive Vice President and Chief Financial Officer, and Matt McGraner, Executive Vice President and Chief Investment Officer. As a reminder, this call is being webcast through the company’s website at investors.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-Ks and the company’s other filings with the SEC for a more complete discussion of risks and other factors that could affect forward-looking statements.

The statements made during this conference call speak only as of today’s date, and except as required by law, NexPoint Real Estate Finance, Inc. 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 Matt McGraner. Please go ahead, Matt.

Matt McGraner: Thank you, Kristen. Before we dive into our prepared remarks, I’d like to take a moment to congratulate Brian Mitts on his well-earned retirement, which officially took effect on December 31, 2024. We are incredibly grateful for his years of dedication, the countless long days he put in, and the instrumental role he played in shaping NexPoint Real Estate Finance, Inc. into what it is today. While Brian has stepped back from the day-to-day operations, we are fortunate that he remains a valued member of our board, continuing to provide guidance and insight as we move forward. At the same time, I’m pleased to officially welcome Paul Richards as our new CFO. While most of you on the phone already know his capabilities, having worked closely with Brian and me for over a decade, Paul deeply understands our strategy and our approach to execution.

He’s a strong leader, and I have full confidence in his ability to continue to drive sector-leading long-term results for NexPoint Real Estate Finance, Inc. shareholders. With that, I’ll turn the call over to Paul to walk us through our fourth quarter and full-year 2024 financial results and to discuss the portfolio.

Paul Richards: Thanks, Matt. Thank you, Kristen. And welcome to everyone joining us this morning. I’m going to briefly discuss our quarterly and year-to-date results, move to our balance sheet, and lastly provide guidance for the next quarter before turning it over to Matt for a detailed commentary on the portfolio and the macro lending environment. Q4 results are as follows. For the fourth quarter, we reported net income of $0.43 per diluted share, compared to net income of $0.73 per diluted share for the fourth quarter of 2023. The decrease in net income for the quarter was due to an unrealized loss on our common stock investments and a decrease in change in net assets on CMBS VIEs between the fourth quarter of 2024 and the fourth quarter of 2023.

Interest income decreased by $15.4 million to $32.3 million in the fourth quarter of 2024 from $16.9 million in the fourth quarter of 2023. The increase was driven by an increase in interest income driven by higher rates. Interest expense decreased by $2.5 million in the fourth quarter of 2024 compared to the same period in the prior year from the deleveraging that occurred in the first quarter of this year. Earnings available for distribution were $0.83 per diluted common share in Q4 compared to $0.44 per diluted common share in the same period of 2023. Cash available for distribution was $0.47 per diluted common share in Q4 compared to $0.51 per diluted common share in the same period of 2023. The increase in earnings available for distribution was driven by the increase in net income for the quarter.

We paid a regular 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 2025. Our dividend in the fourth quarter was 0.94 times covered by cash available for distribution. Book value per share increased four basis points from Q3 2024, $16.97 per diluted common share, with the increase being primarily due to an unrealized gain on our preferred stock investments. During the quarter, we funded $16.7 million on a life science development property in Cambridge, Massachusetts, and we redeemed $9.5 million of mortgage-backed security. During the fourth quarter, we sold 1.7 million shares of our Series B cumulative receivable preferred for net proceeds of $38.8 million.

Full-year results are as follows. For the full year of 2024, we reported net income of $1.02 per diluted share compared to net income of $0.60 per diluted share for the year ended 2023. The increase in net income for the year was primarily due to an increase in net interest income. Interest income increased by $4.2 million to $72.5 million for the year ended 2024 from $68.4 million for the year ended 2023. The increase is driven by an increase in interest income driven by higher rates. Also, interest expense decreased during the year due to the deleveraging event that occurred in the first quarter. Earnings available for distribution were $1.78 per diluted share year-to-date compared to $1.88 per diluted share in the same period of 2023, for a decrease of 5.3%.

Cash available for distribution was $2.42 per diluted share year-to-date, compared to $2.05 per diluted share in the same period of 2023, for an increase of 18%. Moving to the portfolio and balance sheet. Our portfolio is comprised of 83 investments with an outstanding balance of $1.1 billion. Our investments are allocated across sectors as follows: 15.5% single-family rental, 49.7% multifamily, 31% life sciences, 1.5% self-storage, 1.8% specialty manufacturing, and lastly, 60 basis points in merino. Our fixed income portfolio is allocated across investments as follows: 10.5% senior loans, 29.3% CMBS B pieces, 19.5% preferred equity investments, 23.7% mezzanine loans, 3.9% IO strips, 12.9% revolving credit facilities, and 30 basis points in promissory notes.

The assets collateralizing our investments are allocated geographically as follows: 15% Texas, 25% Massachusetts, 8% California, 6% Georgia, 4% Florida, 4% Maryland, with the remaining across states with less than 4% exposure, reflecting our heavy preference for Sunbelt markets, with the Massachusetts and California exposure heavily weighted towards the life sciences. The collateral on our portfolio is 76.5% stabilized with a 59.2% loan-to-value and a weighted average DSCR of 1.32 times. We have $799.3 million of debt outstanding. Of this, $400.9 million or 50.2% is short-term. Our weighted average cost of debt is 6% and has a weighted average maturity of 1.4 years. Our debt is collateralized by $862.8 million of collateral with a weighted average maturity of one year.

Our debt-to-equity ratio is 1.39 times. Moving to guidance for the first quarter, we are guiding to earnings available for distribution and cash available for distribution as follows: earnings available for distribution of $0.45 per diluted common share at the midpoint, with a range of $0.40 on the low end and $0.50 on the high end. Cash available for distribution of $0.50 per diluted common share at the midpoint, with a range of $0.45 on the low end and $0.55 on the high end. Now I’d like to turn it over to Matt for a detailed discussion of the portfolio and markets.

Matt McGraner: Thank you, Paul. We continue to be pleased with our differentiated results for the quarter and the year in which there were many challenges in the commercial real estate sector. Our underlying credit profile of the portfolio remains very strong, and there is reason for more growth and optimism in 2025. For one, multifamily fundamentals continue to improve. Most industry participants, including us, are expecting an inflection as supply continues to wane. Q4 starts were just 37,000 units for the quarter, the lowest level since Q4 of 2011. We are expecting new lease growth to turn positive in the second half of the year, which should drive more transaction activity, liquidity, and opportunity to put capital to work.

Indeed, you will likely see growth in our multifamily portfolio in the next couple of quarters across construction financing, Freddie K deals, and high-quality mezzanine opportunities. Our storage exposure also remains very compelling, with same-store NOIs flat to slightly positive. In the multifamily market, we expect more growth in rates in the back half of the year. And here recently, we have built a quality pipeline of construction financing opportunities with attractive yields on costs and repeat sponsors from the Jurgen Capital Days. We expect these opportunities to reach approximately $75 million over the next couple of quarters. Life science tour activity and capital planning have also picked up, and we are seeing a flurry of activity recently, especially on the advanced manufacturing and GMP side.

We are actively underwriting $300 million of opportunities across infrastructure and pharmaceutical manufacturing today. We have liked the reshoring of the supply chain story for a while now, and the recent tariff threats that may have sparked billions of reshoring by Apple, Lilly, and others should exacerbate this trend going forward. Finally, we are pleased with the capital options available to us to fund this growth. With where we are in the balance sheet and the success we are having with the Series B raise, we still have multiple accretive avenues to fund growth, including A-note warehouses and even a bond-rated deal, an A-rated bond deal. To close, we are excited about the company’s prospects in 2025 and the continued stability of our portfolio and, of course, the opportunity to go on offense in this environment.

As always, I want to thank the team here for their hard work. And now we’d like to turn the call over to the operator for questions.

Q&A Session

Operator: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Stephen Laws with Raymond James. Please go ahead.

Stephen Laws: Hi. Good morning.

Matt McGraner: Good morning.

Stephen Laws: Matt, you may have touched on this. You did touch on it a second ago with your comments that construction, Freddie K are likely to be kind of new investments near term. Can you talk about the returns you’re seeing on those new investments, how that compares to other things in your pipeline? And you know, how you think about how accretive new investments are compared to the cost of the Series B capital as you raise more?

Matt McGraner: It’s a good question. On the Freddie K, we’re hearing from Freddie we’re most likely going to get a five-year fixed deal here in the second quarter. Be anywhere from $30 to $50 million in gross value. We would plan to lightly repo that and expect the yields to be in the 8% to 9% range. So, you know, getting with a little bit of accretive leverage, we’re kind of, you know, low to mid-teens type of return. So that still remains attractive, especially given the credit profile of Freddie K deals and deals originating in 2025. So the risk-reward there, we view as very, very attractive. On the construction side, we’re seeing really high-quality assets in developments with well-heeled developers that we can, you know, do a 60% loan to cost, you know, 300 to 400 spread.

And then we have accretive A-note lenders at the same time. So that capital takes longer to put out, but we do have some attractive A-note opportunities against Series B that we would use to fund. So like both of those investments.

Stephen Laws: Great. And then can you touch maybe a little bit on the life science investments and performance there? I mean, any key metrics or, you know, attachment points, performance, you know, that’s grown materially over the past year as a percentage of your mix of the portfolio. You know, what’s the best way for us to monitor that as we look at the metrics that you release in your public filings?

Matt McGraner: Yeah. It’s a good question. Yeah. It’s Chuck in terms of the two main life science investments. Let me start with the Massachusetts loan and AOI. It’s a $220 million commitment, of which we funded roughly $175 million. The attachment point on a loan to cost basis for that asset is, you know, roughly 25% loan to cost. You know, a stabilized debt yield, for rents in just the 80s. For that deal would be, you know, 30 plus percent. More importantly, though, the buildings are topped out, skinned, and amenities and inspect suites are going in. There’s, like I said in the prepared comments, a flurry of activity on that asset in particular. And most importantly, I have a bid for that loan, far south of where our interest rate is. It’s so for plus 900. So feel really good about that exposure. And then across the rest of the loan portfolio, we really haven’t seen the type of leasing activity, you know, in quite some time past, you know, 18 months or so.

Stephen Laws: Great. And finally, you know, update on loan performance. Any, you know, delinquent or defaulted loans or any watch list loans? I know you guys have very few of those, if any, historically curious for updated year-end.

Paul Richards: Yeah. Hey, Steve. This is Paul. We have a view in our CMBS portfolio that we’re keeping an eye on, but, you know, as you know, with these Freddie K deals, you know, we call them bulletproof paper, but we have our eye on them. Know, a few watch list loans. In terms of a few prep deals, there’s refinancing activity for one of these package deals that we have in our backyard, and we’re, you know, giving time for one of the sponsors to go through a refinancing. And so we expect that refinancing to happen, you know, I would say Q2, maybe Q3, but, you know, I think it’s probably be a Q2 event on a refinancing for a few of those prep deals. But overall, extremely strong portfolio performance and extremely happy with the results.

Stephen Laws: Great. Appreciate the comments this morning. Thank you.

Paul Richards: Thanks, Steven.

Operator: Your next question comes from the line of Jade Rahmani with KeyBanc Capital Markets. Please go ahead.

Jade Rahmani: Thank you. On the Cambridge deal, is that purely spec since it’s so large, wondering if there’s an anchor tenant or any initial leasing, when do you expect to be able to provide an update as to how that’s…

Matt McGraner: Yeah. We expect to have or the developer expects to have the CFO in Q3. There is preleasing right now, like I said, I think I mentioned upwards of 300,000 square feet on a total build of 395,000 square feet. You know, the developer is seeing both, you know, 25,000 to 50,000 square foot chunks, but there are a couple of larger requirements in the West and East Cambridge areas floating around right now that are actively touring the asset and are looking for a Q3 or Q4 move-in. So I would expect by then, we’ll have some pretty good traction and some good news to report.

Jade Rahmani: And just to clarify, is it a spec development?

Matt McGraner: Yeah. It is spec.

Jade Rahmani: Okay. Because, you know, all the data from the brokerage firms and also some of the mortgage REITs that have life science exposure has not been good in terms of leasing. I mean, I think in aggregate, the sector seems to be entering the beginnings of a stabilization. VC funding is picking up, and you’re seeing some of the large, you know, pharma companies make some leasing decisions. But by and large, we’re still missing a lot of the, you know, nascent players in the space that drove some of the leasing in spec developments. So I guess, what gives you confidence that this asset in particular will be able to buck the trend of oversupply that we’re seeing?

Matt McGraner: A couple takes because most of the literature written as far as supplies is wrong. I think ARE, you know, put out the true competitive supply to a new purpose-built life science facility, you know, in Boston. I think you would hear quotes and maybe this is what we’re referring to, of, like, 16 million square feet of new supply coming online. The reality is in the core kind of three markets where you want to be, there’s less than 2 million and probably 50% of that isn’t going to be delivered. At the same time, you’re having, and I’m seeing it, multiple requirements and tours for this facility in particular. And then, you know, notwithstanding any of the first two reasons that I think will be successful, again, I have a bid for the loan and, you know, we’re 25% loan to cost, which is less than land value in and across 27.5 acres in Cambridge. So pretty comfortable.

Jade Rahmani: And who’s the bid for the loan from? I mean, you don’t have to name who, of course, but the type of entity, is that private credit, like a debt fund or some other entity of that kind?

Matt McGraner: This is a strategic REIT.

Jade Rahmani: Okay. Got it. And then the language that says no, you always say no loans in forbearance. I guess that’s not true because of Paul’s comments that there’s a couple of deals on the watch list right now.

Matt McGraner: Yeah. It’s not necessarily they’re the watch list. It’s the borrower is refinancing into a recast loan, and we’re just giving them a 90-day period in which we’ll pick the interest so he can, you know, so he doesn’t have to pay a current, so we can get paid all.

Jade Rahmani: Do you happen to know what the delinquency rate is in the Freddie Mac K series portfolio?

Paul Richards: Overall, the delinquency rate is extremely small. Off the top of my head, I couldn’t tell you, but I’ll tell you that, you know, there’s probably out of the seven B pieces that we have or eight B pieces, there’s maybe two loans that are 30 days, 60 days delinquent. So it’s an extremely small subset.

Jade Rahmani: Okay. That’s great. Thanks so much.

Matt McGraner: Thanks, Jade.

Operator: We will now turn the call back to the management team for closing remarks.

Matt McGraner: Yeah. Thank you very much for dialing in and appreciate the opportunity to report our results. And looking forward to, you know, the second quarter and or the first quarter results here in a few months. Thank you very much.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you and have a great day.