NexPoint Real Estate Finance, Inc. Q2 FY2020 Earnings Call

Good day, and welcome to the NexPoint Real Estate Finance Second Quarter 2020 Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Jackie Graham. Please go ahead.

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance's conference call to review the company's results for the second quarter ended June 30. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; Matt Goetz, Senior Vice President, Investment and Asset Management; and Paul Richards, Vice President of Originations and Investment. As a reminder, this call is being webcast through the company's website at www.nexpointfinance.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, estimate, intend, may, should, 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, anticipated investment activity and guidance for financial results for the third and fourth quarter of 2020, including the company's estimated core earnings, dividend per common share, and dividend coverage ratio. They are not guarantees of future results and forward-looking statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements, including the ultimate geographic spread, duration, and severity of the COVID-19 pandemic, the effectiveness of actions taken or actions that may be taken by governmental authorities to contain the outbreak or its impact, as well as those described in greater detail in our filings with the Securities and Exchange Commission, particularly those specifically described in our registration statement on Form S-11 and quarterly reports on Form 10-Q. 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 any forward-looking statements. The statements made during this conference call speak only as of today's date, except as required by law, NRF does not take any obligation to publicly update or revise forward-looking statements. This conference call also includes an analysis of core earnings, which is a non-GAAP financial measure. This non-GAAP measure should be used as a supplement to and not a substitute for net income loss computed in accordance with GAAP. For a more complete discussion of core earnings, 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.

Thanks, Jackie. I'd like to welcome everyone to the second quarter 2020 NexPoint Real Estate Finance Quarterly Earnings Call. Today, we'll cover highlights for the second quarter of 2020 and inception to date from our IPO in February 11. I'm Brian Mitts, CFO. I'm joined by Matt McGraner, our Chief Investment Officer; Matt Goetz, our Senior VP, Investments and Asset Management; and Paul Richards, our VP of Originations. I'll give some quick highlights of our financial performance, capitalization, recent activity and guidance, and then turn the call over to Matt Goetz and Paul Richards to discuss the portfolio and some opportunities we see in the origination pipeline. We'll conclude our prepared remarks with just some comments from Matt McGraner on the markets, and specifically, our strategy NREF, particularly through the COVID times. And then also a few words on the Jernigan Capital transaction that was announced this Monday. On February 11, we priced our IPO at $19 per share, began trading on the New York Stock Exchange. In that transaction, we raised total gross proceeds of 101.7 million dollars, which we used to pay down existing debt and offering costs and began with $365 million in net assets. During the end of the first quarter, COVID hit, and I think we can all agree it threw the mortgage REIT sector into a bit of chaos. We had used the proceeds from our IPO to pay down our repo financing prior to that, which allowed us to avoid a lot of value obstruction that happened in March and April. I think we came through fairly unscathed on that front. During the second quarter and up to today, we have been finding ways to raise capital and make strategic investments. Matt, I guess, and Paul Richards will talk about those in detail. But we think that those are going to help drive earnings for the rest of the year and into next year and beyond. During the quarter, due to raising capital from some of our current OP unitholders, we raised preferred equity, we increased our repo facility, we did an exchange of OP units for an investment. So, a lot going on in the second quarter and into the third quarter. First, let me start with highlights from the second quarter, and I want to start with a move that our Board made at our Board meeting last week. They elected to increase the size of the Board from 5 members to 6. We filled the newly created vacancy by appointing Catherine Wood to that spot. We're excited to welcome Cathy. I think she'll bring a lot of unique and fresh perspectives to the Board and the company. As of today, we had a debt-to-book value of 2.4x. Our book value inclusive of the preferred equity that we raised a few weeks ago is 2.7x, excluding the preferred equity. Our debt consisted of a $788 million credit facility and $158 million of repurchase agreements. Our equity is comprised of $46 million of preferred equity, $86 million of common equity, and $263 million of redeemable non-controlling interest OP units. The $788 million facilities collateralized by $930 million of single-family rental mortgages, and it's matched in structured duration of the underlying single-family rental portfolio, with both paying Fitch rates and each having an average remaining term of 7.9 years. As of June 30, the rate on this facility is fixed at a weighted average of 2.44% against the yield on the underlying assets of a weighted average of 4.91%, or a 247 basis points spread over the cost of the debt. The $158 million repurchase balance is collateralized by $324 million of CMBS securitizations, and as of June 30, the repo balance is at a 49% advance rate on the par value of the CMBS portfolio and bears interest at 2.61% over 1-month LIBOR. On July 30, we purchased KF 81 B piece, Freddie Mac, B piece securitization for $6 million; $7 million, and today we're closing K 113, which is a B piece for $36 million. That's a fixed-rate deal, so the par value is $109 million. We're buying it for $36 million with that differential accruing over time; it's a principal-only tranche. But in addition to that, we're buying 3 tranches of IO strips for $36 million. In conjunction with these purchases, we're adding approximately $97 million of repo financing on those investments. That's included in the numbers that I just gave a second ago. Once in place, we'll have only 16.7% of our financing subject to mark-to-market. So we think that's healthy and sustainable. Some financial numbers for the second quarter and year-to-date. For the second quarter, we reported a net gain of $19.3 million, with $14 million of that attributable to the redeemable NCI OP units for net gains to common shareholders of $5.3 million or $1 per diluted share. Year-to-date, we reported a net loss of $3.6 million, with $2.5 million of that loss attributable to the redeemable and CIP units for a net loss to common shareholders of $1.1 million or negative $0.21 per diluted share. The net gain for the second quarter was driven primarily by the net interest income of $4.6 million and an unrealized mark-to-market gain on the CMBS securitization of $15.3 million, which was a reversal from the first quarter where we had a decline on our CBS securitizations. Matt Goetz and Paul Richards will provide some more color on those securities as well as the pricing around those. For the second quarter and year-to-date, we recorded loan loss provisions of $81,000, which is negligible, or $0.00 per consolidated diluted share, and $293,000 year-to-date or $0.02 per consolidated diluted share. For the second quarter, we reported core earnings of $1.9 million or $0.37 per share and $3.1 million or $0.58 per share year-to-date. We ended the quarter with a book value of $337.7 million or $18.33 per share, which was an increase of $0.61 per share from the first quarter or a 3.4% increase, which again is driven primarily by the mark-to-market unrealized gain on our CMBS securitizations. We didn't repurchase any shares in Q2, but inception to date, we repurchased 87,466 shares at an average price of $15.30 per share. We paid a dividend in the second quarter of $0.40 per share. As of June 30, we had cash of $1 million and near-term AR collections of $6.2 million for $7.2 million of liquidity. Last Monday at our Board meeting, the Board declared the dividend for the third quarter of $0.40 per share payable on September 30 to shareholders of record on September 15. On July 24, we priced a $50 million perpetual, 8.5% preferred equity security, raised $46 million in net proceeds, which in conjunction with the additional repo financing we used to close the KF 81 and K 113 Freddie Mac B piece as I mentioned earlier. For the third quarter, on guidance, we're estimating core earnings of $0.38 to $0.42 per share. And for the fourth quarter, core earnings of $0.46 to $0.50 per share. These estimates take into account the recent closings of the KF 81 and K 113, as well as the preferred offering and related financings under our repo facility, as well as the additional capital rerated DLP from current OP holders. So with that, let me turn it over to Matt Goetz and Paul Richards to discuss details of the portfolio and our acquisition pipeline.

Thanks, Brian. We view our second quarter results as being extremely positive in light of the broader difficulties currently being experienced throughout the market. Interest rates remain at historic lows while unemployment fears and political gridlock have become the new normal in this post-COVID era. Despite these headwinds and elevated volatility in the commercial mortgage REIT sector over the first and second quarter, our underlying portfolio of investments has performed extremely well. We believe this performance is due to the defensive structure of the portfolio, namely investments in stabilized residential and storage assets at low leverage with well-yield sponsors. We have zero construction loans, no heavy transitional loans, no land loans, and no for sale loans. We believe the key to our performance is our ability to manage our balance sheet and find creative solutions that benefit our investors and our borrowers. That said, we'd like to spend a few minutes discussing the current portfolio's performance as well as to discuss the opportunities we were able to take advantage of in the second quarter and immediately thereafter. The current investment portfolio is comprised of 45 individual investments with approximately $1.37 billion of total outstanding principal. As discussed previously, the portfolio is 97% residential with 63% invested in senior loans collateralized by single-family rental and 34% invested in multifamily via Agency CMBS, preferred equity and mezzanine debt. The portfolio's average remaining term is 8.2 years, which we believe is atypical in the commercial mortgage REIT space. The portfolio is 99.6% stabilized, has a weighted average loan-to-value of 66.9% and a weighted average debt service coverage ratio of 1.94x. The portfolio is geographically diverse with a bias towards the Southeast and Southwest markets. 100% of our investments are current. As mentioned in our earnings report, we currently have 1 multifamily property and 9 single-family rental loans in forbearance, representing 2% of our total consolidated investment portfolio. As most of you are aware, Freddie Mac, Fannie Mae and HUD created forbearance programs to help mitigate the negative impacts of the COVID crisis on renter households. The programs allow borrowers to forbear principal and interest for a period of time while the master servicers fund the forborne principal and interest, resulting in no disruption in cash flows to the bondholders, i.e., NREF. For reference, as of the forbearance report published by Freddie Mac on June 25, roughly $7.9 billion or 2.6% of the total Freddie Mac securitized unpaid principal balance has entered into forbearance. This is compared to 2% for NREF noted previously. In the current portfolio, we have one mezz loan located in Charleston, South Carolina, that is expected to be redeemed August 7. The $3.25 million investment was outstanding for 30 months and achieved an estimated IRR and MOIC of 14% and 1.35x respectively. Moving to the opportunities we are able to take advantage of. As previously reported, on April 23, we closed the Freddie Mac K Series B piece with a par value of $82 million, a bond equivalent yield of 10.75% and a current yield of 6.1%. The securitization has a weighted loan-to-value of 63.8%, 9.7 years of remaining term, and a 2.1x debt service coverage ratio. On May 29, we issued 564,000 common units in the operating partnership in exchange for a $10 million preferred investment as a stabilized multifamily property located in Houston, Texas. Our investment has an on rate of 11%, a loan-to-value of 84%, and has a 1.5x debt service coverage ratio through our preferred return. The sponsors have found and managed nearly 100,000 multifamily units throughout the United States and are our most select sponsors with Freddie Mac. On June 12, we made a $7.5 million mezzanine investment in a stabilized multifamily property also located in Houston, Texas. This investment also has an all-in rate of 11%, a loan-to-value of 79%, and a debt service coverage ratio through our mezzanine at 1.28. The sponsor is a repeat borrower of ours and owns and manages 20,000 units in the Southwest and Texas. On July 30, we purchased a floating-rate Freddie Mac K Series B piece with a par value of $67 million and a current yield of 1-month LIBOR plus 900 basis points. The securitized pool has a total of 42 properties with an appraised value of approximately $1.4 billion, a UPB of $896 million equating to an average loan-to-value of 65%. The total debt service coverage ratio for the securitization is 2.3x. The investment has 6.9 years of term remaining. Finally, later this afternoon, we are expecting to close a fixed-rate Freddie Mac K-Series B piece and associated interest-only bonds for a total purchase price of $72 million. The B piece's tranche D has a par value of $109 million, a bond equivalent yield of 11.4%. The securitized pool is made up of 62 loans with a total appraised value of approximately $2.1 billion. The total unpaid principal balances amount to approximately $1.5 billion, representing an average loan-to-value of 69%. The investment has 10 years of remaining term and a debt service coverage ratio of 2.2x. As mentioned, we are also purchasing 3 separate interest-only bonds for a total purchase price of $36 million. With these interest-only pieces, the total investment has an estimated current yield of 6.6% and a bond equivalent yield of 8.3%. 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.

Thanks, Matt. During the second quarter, the company was able to source and transact on attractively priced agency CMBS bonds in the secondary market. We purchased Series K 1510, K 1513, and K 97 X3 IO strips with spreads of approximately 740 basis points, 880 basis points, and 585 basis points, respectively. All three bond purchases have posted mark-to-market gains through the end of the second quarter and have continued to perform extremely well. We were able to finance these purchases with attractive repo financing at rates of approximately LIBOR plus 110 to 130 basis points. Our single-family loan book continues to perform, and our outlook on SFR remains very positive, given its compelling market fundamentals. As Matt previously mentioned, there were 9 loans that were granted forbearance at the beginning of the second quarter. We believe this was out of an abundance of caution. As of today, all 9 loans are not participating in the extended forbearance program, and all 9 loans should be on track with their scheduled repayments. Overall, our borrowers have seen strong performance and SFR as a whole has been and should continue to be one of the most resilient real estate sectors, given the heightened demand for renters to shift to less densely populated suburban areas. Lastly, we've seen secondary CMBS prices tighten significantly over the past quarter and into the third quarter. To finalize our prepared remarks, before we turn it over for questions, Matt McGraner will provide commentary on our strategy and portfolio and the recently announced JCAP deals.

Thanks, Paul. As previously disclosed, NexPoint and affiliated funds signed an agreement to acquire JCAP for $17.30 a share, with an expectation that the transaction will close sometime in the fourth quarter. We view this transaction as platform enhancing in a highly coveted property type. We share admiration for the assets and team and look forward to growing the platform. Enhancing this vertical and our expertise in the sector should bring more storage financing opportunities in the door, and we will no doubt be looking to capitalize on financing dislocation in the sector going forward and are now even more equipped to do so. Though not set in stone and depending on market conditions, we expect one of two outcomes for NREF's $40 million preferred investment in JCAP. We'll either cash it out and redeploy the proceeds into future investments such as attractive Freddie K deals or we will roll the investment into the new venture as the preferred security or subordinated debt instrument with similar low double-digit return characteristics. Again, the determining factor will be what is best for NREF and its shareholders at the time when the transaction is about to close in the fourth quarter. To wrap up before turning the call back over to Brian to reiterate what Matt and Paul stated previously, we continue to be very pleased with the performance of the underlying portfolio and our ability to source and fund accretive opportunities such as K 113 that closes today. Again, we are spending our time playing offense, not defense, on asset management and new investments. We're not managing unfunded obligations or future fundings in office, retail, hospitality, etc. We strongly believe our long-duration investments in SFR and multifamily will continue to provide transparent earnings stability for years to come, especially during and through these difficult times. Going forward, we will continue to opportunistically source new investments again, primarily in the residential and storage sectors. That’s all I have for prepared remarks, I'll turn it back over to Brian.

Thanks, Matt. I think with that, our prepared remarks are concluded. So let's turn it over for questions.

And our first question comes from Stephen Laws with Raymond James.

First, I want to start, maybe, Brian, probably for you. Around the Q4 guidance, certainly looking to see some big benefits on a full quarter basis from these new investments that you're making at attractive returns. Can you maybe talk to the risk around that guidance range for Q4? I know you mentioned a number of investments closed quarter-to-date. I think the deck has another one being closed today. How much origination after today or maybe capital deployment is necessary to reach that guidance range? And again, I appreciate you providing guidance, that puts you guys as one of the more unique companies in the space, but I'd love some color on what goes into that Q4, $0.48 midpoint.

Sure. Yes, so absolutely. As you put yourself out there a little bit when you provide guidance, but the Q4 guidance is not based on anything additional past what we've discussed here today. So once we close K-113 today, we're not assuming anything additional. We're not saying that we don't have some things on the horizon, but that's not baked into our guidance. I'd say the risk of the wiggle room is just interest rates. Most of the book is fixed, but we do have some of the floating deals and the securitizations. And that gives us a little bit of range where we're at today on LIBOR, which is primarily our index that's going to be floating. Never say never, particularly in these times. I mean, we've seen a pretty massive move down in LIBOR; I guess, theoretically, it could go below zero. But we think that there's probably a lot of that's already baked in and not a ton of movement left, but that's really what you see in the guidance in the range. And that's the real risk point.

Right. And as you mentioned, you still have a pipeline, you do still have some capital available for new investment. Can you talk about turn opportunities kind of across the places you look? I mean, what are you seeing in preferred investments, mezz? Where do you see, obviously, CMBS? You provide a lot of color around the new investments, kind of relative attractiveness of those sectors and maybe how you think about portfolio mix between the three buckets.

Sure. Yes. This is Goetz. I'll take a stab at answering those. If I don't answer one of them go and re-ask. So, I'll go forward, we're continuously evaluating opportunities. I think if we wanted to and have the capital, we could take down two or three more B pieces this year. We're also seeing preferred and mezz deals; I'd say, on average, we're underwriting a couple of hundred million bucks a month in that product. Again, most of that's on stabilized multifamily. And then in the special situations bucket, just because of our platform, we did see deals that others might not that are not really brokered, more of investment bankers or strategic opportunities where we can make investments similar to the JPAC preferred that we currently have in the book. And then in terms of pricing and yields or returns, I definitely think that, and Paul can speak to this too, because he kind of followed the secondary market. In the first quarter, you obviously saw everybody being blown out of their securities because they were over LIBOR on margin. As Mitts discussed, we feel like we have a pretty healthy leverage rate or LTV based on the market values of our current CMBS B pieces. And we think that the spreads on those are going to start to come down. You've seen it in the other tranches, the guarantee tranche and the IO strips spreads or pricing on the most recent deals has been coming down to the tune of 100, 200 basis points. So I think the next obvious tranche to move in is going to be the B pieces or the tranche deal to foresee, respectively.

Yes. I'll just add to that, Steve. It's Matt McGraner. I think that, for me, I think Matt Goetz is right. The B pieces on the K deals, buying during COVID at the spreads that we're buying, we think the mark-to-market gains in a normalized environment will be there. Add to that, kind of the structure that's in place on some of these deals. You have interest, tax, insurance escrows that are unique and have never been implemented before. So it's an added layer of security to the securitizations. And for us, being able to buy this type of security, which is double the unlevered asset yield or the cap rate on stabilized multifamily doesn't really get any better than that.

So your question about the allocation amongst the different property sectors. I think you've seen and you'll continue to see that multifamily will gain exposure vis-a-vis SFR, not because we don't like SFR, but it's definitely a newer sector. I'd say there's more opportunity just in general in the multifamily sector. And you're starting to see that either acquisition, disposition or refinancing start to pick up as we continue to go through the COVID crisis. So we'll continue to look at SFR opportunities. I think there's a lot of multifamily that's out there that, as Matt said, we underwrite a lot of it every week.

Great. And as a follow-up to that, thinking about book value recovery, certainly saw some recovery of the March 31 marks in Q2. But looking forward, I mean, based on your comments, is it correct that we should see book value benefit not only from those unrealized losses being recovered but appreciation on the new investments you've made in the last few weeks?

Yes. So prior to COVID, a lot of the seasoned B pieces were actually trading at premiums. So right now, they're probably trading at low to mid-90s. So I think as things settle down and if you see the new issuance, B pieces pricing come in, and if the future is anything like the most recent past, I think you will see an uptick in book value from a mark-to-market perspective.

And we'll take our next question from Alex Kubicek with Baird.

Just one quick question from me. Curious how attractive you guys find issuing OP units at book? Just kind of when you stack up your hierarchy of cash sources, especially if the stock continues to trade at a discount. Is there more bandwidth from both the perspective of NREF and the manager today? Just kind of wondering how you guys are thinking about that going forward.

Yes. In terms of capitalizing on new opportunities by issuing OP units to the funds, could you please clarify?

Yes. From the manager's viewpoint, is there more capital available to issue to the open market? Additionally, from NREF's perspective, how does this align with your current funding sources?

Yes. I think what you see not only in this business but across all of our businesses is that the manager and the platform will continue to support all these operations. When we issued the OP units to the funds earlier, as Matt mentioned regarding one of the transactions, we did so at a price significantly higher than what it was trading at book value. This reflects our approach to treating shareholders and capital allocation, and there is more potential for growth. There's nothing currently in the pipeline, but we'll keep supporting the business where we can.

Yes. And just to say this, Alex, you'll see this in the Q as one of the sub-events, but the funds that our current OP holders contributed about $11.5 million of cash, new cash as part of helping to finance these KF 81, 113 deals. That was at the new book value of $18.33. So to Matt's point, we'll continue to do things like that. There is additional capital available for that in the future. So it's not unlimited, but there's certainly a bucket there in those funds. And to Matt's point, we will continue to support all of our different platforms.

Our next question comes from Jade Rahmani with KBW.

Yes. Just to put a final point on the OP unit issuance. Those were issued at book value, and so were not dilutive?

Correct.

Okay. And going forward, if there were OP units to be issued, could we expect the same principle to apply in terms of issuing it at book value and not below book value?

Yes.

Okay. That's good to hear, something investors are pretty sensitive to. So it's helpful to have that clarification out there. What would you say the target leverage ratio on a consolidated debt-to-equity basis is for the company?

Yes. I mean, I don't think it's changed since the IPO. So we're always trying to hover around 2.5x to 3x.

Okay. And in terms of the philosophy around putting leverage on Freddie Mac B pieces, how are you thinking about that given the underlying value ratios are modest, but the piece of paper itself represents about 7.5% of the capital or so. So just wanted to see how you're thinking about that.

Yes, I think we feel quite confident about our current position. Looking ahead, we are negotiating for a longer-term financing solution that we hope to secure this year, despite the challenging financing conditions. Paul, I would like to ask you something. We calculated how much the B piece would have to adjust to reach a 60% or 65% loan-to-value ratio. Would you like to add anything on this?

Yes, sure. So we were running stress scenarios on our pro forma leverage scenarios. And then what we saw was bond equivalent yields on our B pieces would have to blow out to 15%, 16% type yields to where we would be levered on our current basis of 65%. We're not adding or near 65%. So you'd have to see a large widening of spreads, even more so than what we saw back in March and April of this year for us to feel any, if you will. So we feel very comfortable where we're at from a lever standpoint right now.

So Jade, it's Brian. Let me rephrase that. When we consider repo financing, which is a short-term funding method against longer-term securities, we are very cautious and deliberate about it. Currently, we are at approximately 50% or slightly below on loan-to-value with spreads wider than they were six months ago. Although they have recovered from the lows of March and April, we believe we still have sufficient cushion. Less than 17% of our total debt is marked to market, so we are being careful with that. However, we are optimistic about using this financing for Freddie Mac B pieces, as it has historically performed well, aside from the events in March and April that we managed to sidestep. We now think it's the right moment to take advantage of what we view as still significantly high spreads in the market, which are tightening as we speak. Therefore, you can expect the next Freddie Mac deal to be tighter and likely continue to improve.

Okay. In terms of the forbearance update, the 9 forbearances in single-family rental, what percentage of the portfolio was that? Is that 9 out of 27 loans, understanding that one of the loans is about half the portfolio. But what percentage in dollars or units did that relate to?

It's 2% of UPP.

2% of UPP in the single-family rental loan book or including the CMBS? Just looking at the single-family rental loan book stand-alone?

The 2% includes CMBS. The forbearance amounted to $107 million in the single-family rental sector. We believe that many of those borrowers, based on discussions with the master servicer, were taking this action as a precaution and proactively. None of them are currently participating in the extended forbearance program, so we anticipate all 9 to be resolved soon.

Yes, and just to put a fine point on the whole forbearance program that Freddie did. There is no loss to us as the loan holder in the SFR forbearance program. Freddie covers that. They've made payments to us during the forbearance period. The borrowers have up to 12 months to make whole on that, and then Freddie has talked about extending that if necessary to not put any undue pressure on the assets. So we will never see anything that comes back from that.

Okay. Were you surprised by that number of forbearance in the single-family rental portfolio. So far, the single-family rental REIT seemed to be based on collections outperforming a lot of the multifamily REITs.

No. I'll take the first part of that, and then I'll turn it over to Paul. One thing to note on the forbearance in the SFR. So it's 27 separate loans, but they're thousands of underlying loans. And so the forbearance is actually requested by the borrower. So the dollar amount is actually higher than probably what those borrowers were seeing at the individual property level. So I think that $107 million probably doesn't equate to $407 million of loans where they were worried that they would not collect rent and be able to cover the debt service.

Yes, it is relatively easy for borrowers in the SFR program to receive forbearance. It seems more like a quick reaction and a precaution on their part. I'm not surprised that not all 9 loans are participating in the extended forbearance program given what we've observed in the SFR landscape regarding collections. It's a strong sector, so we're glad to see that all 9 loans won't participate in that, and they should all be on track for repayments in the future.

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

One more follow-up, if you don't mind. I want to focus on your stabilized portfolio and higher net service coverage ratio. If we consider the occupancy rate or the forbearance number of 2%, what would those numbers need to reach before you start becoming concerned about your borrowers' ability to service their debt? What would be the inflection point for stress in terms of occupancy?

Yes, it's Matt McGraner. This is relevant to our ability to manage assets across the diverse platforms where we invest, particularly in multifamily. We've stress tested our multifamily portfolio within XRT. What we found is that for leverage levels between 65% and 75% based on current rates, debt service coverage ratios, and occupancy, economic occupancy would need to drop to the low 80s—around 82% or 83%—before it affects our debt service coverage ratios and covenants with Freddie Mac. This is significantly lower than our current position. Currently, the industry is reporting that physical occupancy remains strong at around 93% to 94%, and we are quite distant from any situation where we would be unable to cover debt service.

And at this time, there are no further questions.

Great. We'll end the call then. I appreciate everyone for their time and participation, and we'll be back in a few months. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your phone lines.