Please stand by. Good day, everyone, and welcome to the NexPoint Real Estate Finance Q3 2022 Conference Call. Today's call is being recorded. Now at this time, I'd like to turn the call over to Kristen Thomas. Please go ahead.
Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance Conference Call to review the company's results for the third quarter ended September 30th, 2022. On the call today are Matt McGraner, Executive Vice President and Chief Investment Officer, Brian Mitts, Executive Vice President and Chief Financial 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 risk 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 Matt McGraner. Please go ahead, Matt.
Actually, it'll be Brian. Thanks, Kristen, and appreciate everyone joining today. I'm gonna kick things off going through our Q3 and year-to-date results. Then I'll touch on guidance for the fourth quarter and then turn it over to the team for some detailed commentary. Q3 results are as follows. Third quarter, we reported net loss of $0.54 per diluted share compared to net income of $1.17 per diluted share for the third quarter of 2021. This decrease in net income is a result of lower prepayments in Q3 and mark-to-market adjustments on the CMBS portfolio. Interest income increased 14% over Q3 2021, driven by a 76 basis point increase in average yield on investments.
Interest expense increased 37%, driven by $102 million of additional borrowings and a 98 basis point increase in average rate. Earnings available for distribution was $0.48 per diluted share in Q3, compared to $0.51 per diluted share in the same period of 2021. Cash available for distribution was $0.50 per diluted share in Q3, compared to $0.62 per diluted share in the same period of 2021. The decrease in earnings available for distribution and cash available for distribution was the result of lower prepayments in Q3. We paid a dividend of $0.50 per share in the third quarter, and the board has declared a dividend of $0.50 per share for the fourth quarter.
Our dividend in the third quarter was 0.96 x covered by Earnings Available for Distribution and 1 x covered by Cash Available for Distribution. Book value per share decreased 4.2% quarter-over-quarter to $20.68 per diluted share, partially as a result of the mark-to-market adjustments to the CMBS portfolio. During the quarter, we originated or purchased nine investments with $113 million of outstanding principal to the combined current yield of 8.3%. Four investments were redeemed or sold with $27.5 million of outstanding principal for a total net loss of $731,000. Year-to-date results are as follows.
For the nine months ended September 30th, 2022, we reported net income attributable to common shareholders of $0.71 per diluted share compared to net income of $3.02 per diluted share for the same period of 2021. This decrease was largely driven by mark-to-market adjustments in our CMBS portfolios. Earnings available for distribution was $2.25 per diluted share year to date, compared to $1.35 per diluted share in the same period of 2021, an increase of 67.5%. Cash Available for Distribution was $2.69 per diluted share year to date, compared to $1.57 per diluted share in the same period of 2021, an increase of 72.1%.
Higher year-over-year Earnings Available for Distribution and Cash Available for Distribution for the year were driven by higher prepayments and requisite prepayment penalties in the first and second quarters. Our dividend for the year was 1.5 times covered by Earnings Available for Distribution and 1.8 times covered by Cash Available for Distribution. Now let's move to guidance for the fourth quarter. Fourth quarter guidance regarding Earnings Available for Distribution and Cash Available for Distribution as follows. Earnings Available for Distribution, $0.53 per diluted share at the midpoint, with a range of $0.48-$0.58. Cash Available for Distribution, $0.52 per diluted share at the midpoint, with a range of $0.47-$0.57.
The increase in Cash Available for Distribution and Earnings Available for Distribution from the third quarter is driven primarily by new investments in the portfolio. With that, let me turn it over to the team for the detailed commentary.
Thanks, Brian. The third quarter continued to show strong performance across each of our investments and asset classes. As of today, the portfolio is currently comprised of 83 individual investments with approximately $1.7 billion of total outstanding principal. The loan portfolio is 96% residential, with 42% invested in senior loans collateralized by single-family rental and 54% invested in multifamily, primarily via agency CMBS. The remaining 4% of the loan book is life sciences and self-storage. The portfolio's average remaining term is 5.6 years, is 93% stabilized, has a weighted average loan to value of 68.1% and an average debt service coverage ratio of 1.76 times. The portfolio is geographically diverse with a bias towards the Southeast and Southwest. Texas, Georgia and Florida combined for approximately 49% of our exposure on a geographic basis.
All of our investments are current. Moving to the opportunities we were able to take advantage of during this quarter and shortly thereafter. Through today, we were able to close 11 new investments totaling $132 million with a weighted average unlevered yield of 9% and an average levered yield of 11.2%. $9 million of mezzanine investments were made collateralized by a stabilized self-storage property located near Miami, Florida with an unlevered yield of 11%. $21.5 million in three separate preferred equity investments collateralized by stabilized multifamily properties located in Plano and Fort Worth, Texas and Kirkland, Washington at a weighted average estimated yield of 13.3%.
A $15 million preferred equity investment also closed, collateralized by a stabilized life sciences CDMO property outside of Minneapolis, Minnesota, at a yield of 10%. The tenant is a well-capitalized group and signed a long-term lease at the property. $1.5 million of MSCR notes with an estimated levered yield of 13.8% closed, and $85.1 million of CMBS, including the Freddie Mac B-piece with an average unlevered yield of 7.6% and levered yield of 12.9% closed shortly after the quarter. In summary, we continue to find attractive investments 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.
Thanks, Matt. During the third quarter, the company was active in the primary bond market and was awarded a $75 million Freddie Mac floating rate B-piece, an attractive yield at SOFR + 525 and a levered yield in the low to mid-teens, which was prudently levered via attractive priced repo financing. The bond boasts a great geographical presence, prudent underlying loan leverage, and as always, excellent sponsorship. We've stressed the entire CMBS portfolio by shocking cap rates and NOI growth to determine how far cap rates could theoretically widen and interest rates could rise until the bond performance would deteriorate. The results were somewhat as expected. The vast majority of the portfolio has shown strong NOI growth over the past few years, and refi risk is minimal even at these stress rates.
We continue to be sensibly leveraged on the repo at roughly 60% LTV at quarter end and have constant dialogue with our great repo lending partners on the state of the market and the repo CMBS portfolio. Lastly, touching on the continued performance of the SFR loan pool and the Q3 2022 loan paydown. All SFR loans are current, performing and demonstrating strong metrics in terms of rent growth and occupancies as the demand for single-family rental growth is still red-hot. The portfolio had one SFR loan payoff in the third quarter, which generated an IRR of 22% as compared to the original underwritten IRR of only 9%. Due to the early prepayment penalty, the investment was able to generate outsized net proceeds than the original underwriting and in roughly one-third of the original investment time horizon.
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. As the team has mentioned, NREF's credit investments in primarily stabilized shorter-term lease duration assets with lower CapEx that could have and should continue to maintain dynamic pricing power in today's inflationary environment. Underlying NOIs embedded in our stabilized SFR, multi and storage collateral continue to outperform other property types, providing a resilient base of earnings for distribution and stable yields to our investors. Though moderately decelerating from historical peaks earlier this year, same-store NOI growth in multifamily, SFR and storage are still pushing high single to low double digits. On the origination front, the team continues to put capital to work in our core property types at accretive yields.
In addition, we believe this market is right for us to generate more of our special situation, tactical type of investments for well-heeled sponsors to take advantage of the lack of liquidity in the private markets. Especially as it relates to multifamily portfolio transactions and single-family rental, particularly in the build-to-rent space. We're also pleased with the lack of transitional assets or business plans within our portfolio. Indeed, we're thankfully not speaking to you today discussing transitional business plans on office or other longer-term duration assets. Finally, it's an exciting time for our business in that our portfolio enjoys a stable and transparent earnings stream for the next five-plus years. From which we can utilize our deep relationships and frankly, our own investment platforms across multi, SFR, storage and life sciences to continue to generate outsized risk-adjusted returns to our investors.
That's all I have for prepared remarks. Now we'd like to turn the call over to the operator to answer any of your questions.
Thank you. If you'd like to ask a question, simply press the star key followed by the digit one on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal through to our equipment. Once again, star one. We'll pause for a moment. We'll first hear from Stephen Laws of Raymond James.
Hi, good morning.
Morning.
Morning. I guess maybe Matt McGraner, or maybe start with the bigger picture question. You know, with mortgage rates going to, you know, 7% where they are, can you talk about, you know, what impact you expect that to have on your SFR and multifamily? You know, kind of as this rolls through, do you expect higher renewal rates? You know, how do you expect to look at occupancy or expect increases there? You know, maybe talk about the, you know, buying a home becoming less affordable and how that benefits your SFR and multifamily investments.
Yeah. I think it's you're alluding to it, but it's you're exactly right. Everything the Fed's doing right now isn't making home affordability any easier. Across the multifamily loan book and then our own equity portfolio, we're seeing retention rates go from, you know, 45%-50%, climbing to 55%-56% in sort of the affordability workforce space, which is largely what our SFRs portfolio makes up as well. Same thing on the SFR piece. You know, our platform there, VineBrook, and our other platforms continue to see really high retention, especially again in that affordable space.
You know, I would expect with the lack of construction financing out there, you know, the supply is gonna even decrease for you know, for developers. New starts have fallen off of a cliff, you know, in the second half of the year. We think multifamily supply peaks in late 2023. 2024 and 2025 will probably be pretty good years for both equity investors in this space and on the credit side.
Great. Thanks, Matt. You know, when we think about new investments, you know, when you look at things on a relative attractiveness, you know, money going to work in mezz, I appreciate Matt Goetz highlighting the new investments, you know, some new private equity investments, preferred equity investments too, I think. You know, can you talk about how those stack up from a return standpoint versus considering stock repurchases, just given the, you know, the weakness here ahead of the quarter and where book value came in north of $20?
Yeah. I think the idea is probably to balance it in a barbell strategy and do both. You know, thankfully, as you might recall, in Q2, we had $150 million of pipeline for the rest of the year. Roughly $115 million of that has been soaked up. We're pretty pleased with the growth profile over the next 12 months from external investments. To the extent that we stay, you know, at 75% of book value, that might be our first, you know, our first use of free cash flow, you know, on the margin. Otherwise, you know, I think it'd be a barbell.
Great. My last question for now. You know, on the two common stock investments, you know, can you give us an update on those and, you know, how you're thinking about investment timeline and returns or, you know, considerations of reallocating anything into, you know, cash flowing, you know, debt investments?
Yeah. I'll start with the storage piece, and I'll kick it to Paul to talk about the ground lease investment. On the storage side, you know, we're seeing within our own portfolio pretty dramatic same-store NOI growth, you know, eclipsing 25+%, and then in 2022. 2023, we think, you know, could be, you know, low teens as well, rents in kind of the same realm. We just closed on the senior side of the portfolio at SASB right after Labor Day with JP Morgan at accretive levels. We're sorting out the capital stack. That was the first piece.
The second piece is ongoing with Extra Space Storage discussions in terms of, you know, delevering their preferred, and I would expect that we would have a resolution there, you know, by year-end, at an accretive level for the common equity. So pretty pleased with how the portfolio is performing and also pleased with the cap stack maneuvering that we've been able to achieve, you know, so far this year in this environment. Paul, you wanna talk about GLR?
Yeah, definitely. On our ground lease investment, right now, you know, they're rolling on all cylinders right now. They have dry powder that they're deploying at 4.5%+ cap rates on stabilized ground leases or stabilized assets. They have a very good runway into the rest of this year and next year to take advantage of what's going on in the marketplace, which is, you know, a lack of liquidity on the credit side. They're able to fill that gap with these types of investments. I think that they really hit their stride at the right time. With this dry powder, it's gonna be a good next 12-18 months.
I think, you know, in terms of exit, call it three-four years, maybe two-four years. But I think there's also a market possibly for an exit too, since we have such a small piece of the equity as well. It's, you know, I think it's a great time to be in this investment.
Yeah.
Thanks.
Just to add to that, Stephen, you know, these are both kind of bite-size check sizes in really great portfolios to the extent that we found the special side or other use of proceeds that we thought was more accretive. We have a number of, you know, external parties and quite frankly, you know, internal parties to monetize, you know, these two assets. You know, pretty good optionality.
Great. Really appreciate the color on both of those investments. Thank you.
Thanks, Stephen.
Next, we'll hear from Steve Delaney of JMP Securities.
It's nice to be on with you on the call and also to be active from a research perspective. I was wondering, you guys have had a great track record with the Freddie Mac K-Series. We've been reading lately, just trying to keep up with all the problems in the CLO market, that Freddie is starting to crank up this Q-series again, with multifamily bridge loans. Just wondered if you're looking at that. I know you prefer stabilized rather than transitional properties. As this develops and expands, could you see yourself getting involved in the Q-series as well as with the K that you've done so well with?
Yeah. Thanks, Steve. This is Matt McGraner. A pleasure to talk to you and appreciate the coverage. We have had a long history, as you noted, with Freddie Mac and have iterated with them on a number of entrepreneurial and creative things that they've tried to do. We'll continue to do that with the Q series. I think it's in the early stages. You know, to the extent that we think it's attractive investment for this portfolio, we will look at it. You know, on the other things that we're doing with them, we, I think, largely still prefer the stabilized property types, you know, the K series.
Got it. You know, with the K series, you know, obviously those are fixed rate term loans, mostly 10 years, I guess. This move up in coupons, I suspect when we see reports from Walker & Dunlop, Arbor Realty, et cetera, that we're gonna see a dramatic slowdown. Is it your expectation when you're sort of looking at the portfolio out into 2023 anyway that there's gonna be a big drop in issuance?
Yeah. I think that largely, you know, the K-series that we've done have been floating, so we're actually benefiting from the SOFR-
Oh. Yeah. Okay.
Yeah, the LIBOR moves. You're right. You hit on a theme that's going on right now. To the extent that there's refi activity or purchase activity, most sponsors are floating today.
Gotcha.
You know, given that they don't wanna put on, you know, fixed rate debt at, you know, 5.5%-6% levels, and that's, you know, pretty material negative leverage, if you know, if you believe cap rates are still, you know, sub 5, 4.5%-5%, which we do. Most of the product, I think, over the next, you know, six months to nine months will be skewed on the floating side, would be my guess.
Yeah, makes sense. You know, it depends on your view on the Fed, but you know, our thinking here is that we're gonna get a pivot sometime in the second half of 2023, and we'll just then see how far we move back down the hill, so to speak.
Yeah.
Yeah. Just one last quick one. You know, we've got a major disruption as we've been talking about. We don't know how long it will last. Hopefully not. Let's just say you know, this mess continues well through 2023. Do you think you could see some situations where there will be needs for rescue financing by borrowers or even seeing banks capitulate and be selling some loans at an attractive discount? I know we're not there now, but is that something you would be prepared to take advantage of if this thing gets really bad?
Yeah. You know, if you go back to COVID, there was a great opportunity that lasted about three weeks to buy.
Yeah.
-dislocated, uh-
Yes
... securities. We did as much as we possibly could, but there was just so much capital on the sidelines that soaked it up, pretty.
Yeah
... pretty quickly. I do think an interesting research project for someone would be to go pull gateway office assets that are, you know, 40 years old or longer that are held by either CMBS or banks, you know, at the bases of whatever the per square foot basis of the loan is that I think probably are in trouble or will be in trouble. Yeah, that could be an interesting set of weakness. I don't think you'll see us dip into that space, but I do think that's probably where signs of distress probably first illuminate.
Yeah. That's where we're seeing all the four and five rated loans with the commercial mortgage rates, that's for sure, is the office space. Well, listen, thank you so much for the comments this morning.
Thanks, Steve.
Next, we'll hear from Jade Rahmani of KBW.
Thanks very much. Do you have any view on home prices and where you think they will go in 2023? You know, what would your guess or estimate be for magnitude of home price decline?
Yeah. Hey, Jade. Brian Mitts . From an SOFR perspective, I think you got to distinguish it from, you know, housing itself. Obviously, housing prices I think are gonna decline and, or decelerate and increase if,
If not decline. I think from the SFR perspective, we're seeing, you know, really strong rent growth and high occupancies. I think Invitation Homes has reported already. As Matt mentioned, within our private portfolio, which is quite large, we haven't seen a deceleration of rents. We've seen good NOI growth. I think that we're not gonna see the same type of decline in asset values in that context. I think SFR has still got great fundamentals. I think if you look across our loan portfolio at the underlying assets, that's very similar. We may see a little retracement just depending on kinda where cap rates go and where they're at is kinda anyone's guess at this point. Just the transaction volume is pretty thin across really all sectors.
It certainly hasn't moved in tandem with interest rates. I think that, you know, I can see the same type of value degradation in SFR as you will in housing in general.
Okay. They did report Invitation Homes, and their stock is down 8.5% today. Just,
Yeah.
So definitely-
Well,
Weakness in their results.
Yeah. Their expenses I think were quite high and surprised to the downside on a Core FFO or FFO decrease in their guidance. I think, you know, the public markets and private markets for SFR I think are very disconnected as well.
Okay. Where do you think multifamily either prices in absolute nominal terms or cap rates go also? Similar question.
AJ, it's Matt McGraner. I think we're marketing ourselves on the equity side portfolio, you know, Sunbelt portfolio today, and bids are coming in in spot cap rates around 4.5%, levels. There's a couple of data points out in the market on larger portfolios, you know, $500 million-plus that are non-Sunbelt or partially Sunbelt that are eclipsing 5%, you know, 5% today. You know, kinda, you know, taking those two data points from what we see, and there's not a lot of transaction activity as you know, but, you know, if you gotta sell, it's probably a 4.5%-5% cap rate today. And then the bid sheets.
The bid sheets aren't as deep as they were, you know, certainly in the first half of the year.
To finance that, you'd be in the sixes on a cost of debt or high fives?
It depends if you go fixed or floating. If you go floating, you're probably 200 over, you know, over the SOFR rate. Yeah, on a floating basis. Then on a fixed rate basis, the spreads to the 10-year have largely been 150-175 is what we're seeing. In this business on the agency side, they'll tighten spreads probably 20-30 basis points on both floating and fixed.
20-30 basis points?
Yeah.
Okay. What do you think the IRR is on those kinds of deals?
On a leverage basis, you know, high, probably high single digits on a five-year hold, if you have growth. If not, it's you know, certainly less than that. There's too much negative leverage right now in the multifamily space, so you know, something's gotta give. On an unlevered basis, where we think you'll probably see most of the activity in the latter half of the year or in the first half of the year are these core funds that are buying you know, core plus products. I think that you know, they're underwriting to an unlevered you know, probably 6% or 7% return over a 10-year hold.
Thank you. Operator, are there any other questions?
There are no further questions at this time. I'll turn the call back over to our presenters for any additional or closing comments.
Yeah. Appreciate everyone's participation today, and I look forward to speaking to you next quarter. If you have any other questions, feel free to reach out to the team here, and we'll be happy to answer them. Thank you.
That does conclude today's conference. Thank you all for your participation. You may now disconnect.