Good day and welcome to the NexPoint Real Estate Finance Q1 2022 Conference Call. Today’s conference is being recorded. At this time, I’d 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 results for the first quarter ended March 31, 2022. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt Goetz, Senior Vice President, Investment 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 www.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 take 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 as such 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, please 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. I appreciate everyone joining us this morning. I will start the call by going through our results for the first quarter. I will cover guidance briefly and then turn over to the rest of the team for them to give a detailed commentary on the portfolio, some recent activity, and some of the things that we see ahead for the remainder of the year. For the first quarter, we reported net income of $0.81 per diluted share compared to net income of $1.26 per diluted share for the first quarter of 2021. We reported earnings available for distribution of $1.23 per diluted share for the first quarter compared to $0.43 per diluted share in the same period of 2021. We reported cash available for distribution of $1.58 per diluted share compared to $0.47 per diluted share in the first quarter of 2021. Book value per share increased 1.3% quarter-over-quarter and 7.1% year-over-year to $21.78. In the first quarter, we paid a dividend of $0.50 per share, and the Board has declared a dividend of $0.50 per share in the second quarter. On the guidance for the second quarter, earnings available for distribution per diluted share, we are guiding to $0.55 per share at the midpoint of the range of $0.50 to $0.60. For cash available for distribution per diluted share, we are guiding to $0.64 per share at the midpoint with a range of $0.59 to $0.69. So with that, let me turn it over to the team to go through the portfolio and some of the recent activities.

Thanks, Brian. The first quarter continued to show strong performance across each of our investments and asset classes. The portfolio currently comprises 78 individual investments with approximately $1.6 billion in total outstanding principal. The loan portfolio is 97% residential, with 44% invested in senior loans, collateralized by single-family rentals, and 54% invested in multifamily, primarily via agency CMBS. The remaining 3% of the loan book is life sciences and self-storage. The portfolio’s average remaining term is 6.4 years, with 94% stabilized. It has a weighted average loan to value of 67.7% and an average debt service coverage ratio of 1.87x. The portfolio is geographically diverse, with a bias towards the Southeast and Southwest markets. Texas, Georgia, and Florida combined for approximately 49% of our exposure on a geographic basis. 100% of our investments are current. As mentioned in our earnings, most of our underlying loans are currently in forbearance. Moving to the opportunities we were able to take advantage of during the quarter, we originated the convertible note in the amount of $38.7 million, bringing our total convertible note exposure to ground leases to approximately $60 million. Subsequently, the sponsor repaid all the $25 million of this amount, which is converted into common equity in the company at a 12.5% discount. On January 14, we purchased $19.6 million of preferred equity collateralized by a single-tenant stabilized pharmaceutical manufacturing property, with a current yield of 10%. On January 27, we purchased $41.8 million of our preferred equity investment collateralized by a stabilized multifamily property in Las Vegas, Nevada. On January 25, three single-family rental first mortgage loans with an aggregate principal amount of $32.1 million were repaid in full with revenue achieving an IRR of 41.5%. On February 23, a $62 million single-family rental first mortgage loan was repaid in full and realized an IRR of 35.9%. In summary, we continued to find attractive investment opportunities throughout our target markets and asset classes, and we will 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 first quarter, the company was yet again active in the primary bond market. Though there were not any bond acquisitions made during the first quarter, the company participated in two Freddie Mac bond auctions. One of which was for small balance loan VPs and Freddie Mac’s program, and the other was a floating rate. Both auctions demonstrated extremely strong demand and ultimately priced well inside previous market clearing levels. Just this morning, we closed on a seasoned Freddie Mac small balance loan VPs. The VPs were purchased for approximately $39 million, which we will prudently leverage via attractively priced repo financing. The bond carries the current coupon of approximately 4.25% and is purchased at a discount. We expect to generate an all-in unlevered yield of roughly 8% and levered yields in the low to mid-teens. The weighted average life of the bond, assuming a 15% CPR, is roughly 6.5 years. As discussed in the previous quarter’s commentary, the market continues to face its inflation headwinds, along with the Fed signaling multiple half-point rate hikes. As previously mentioned, there has been insatiable demand for Freddie Mac VPs bonds and we continue to see prices tighten. We successfully leveraged on our repo at roughly 57% LTV at quarter end. Lastly, I want to briefly touch on the continued performance of the SFR loan pool in the Q1 2022 loan pay-downs. All SFR loans are currently performing and demonstrating strong measures in terms of rent growth and occupancy as the demand for single-family rental continues to shine brightly. The portfolio had a few SFR loan pay-downs in the first quarter, which generated a combined IRR north of 40% compared to the original underwriting of 9%. Due to the early prepayment tally, the investments we were able to generate additional net proceeds at the original underwriting, which was 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.

Thanks, Paul. Again, we continue to be pleased with the underlying credit performance of NREF’s portfolio, generating good value growth for the eighth consecutive quarter while providing durable cash flows for our shareholders. The recent market volatility has started to benefit NREF’s investing pipeline, creating effective chances in financing opportunities in our core property types, especially in the multifamily sector. Finally, we continue to cultivate programmatic special situations and preferred opportunities with SFR, storage, and multifamily sponsors with an underwriting pipeline today north of $400 million. I just want to thank the team for continued execution. Now I would like to turn the call over to the operator for questions.

Thank you. Our first question today comes from Stephen Laws from Raymond James. Please go ahead.

Hi, good morning. As we look at the portfolio mix, the multifamily SFR mix has sort of flipped over the last year. As you look at your investment pipeline and where you are seeing the most attractive risk-adjusted returns, where do you see that mix going say over the next 12 months?

Hey, Steve, it’s Matt McGraner. Yes, I think we continue just to have more financing opportunities within the multifamily sector. It’s just a larger market, more institutional, more transaction volume. Obviously, the Freddie Mac pipeline is going to stay there. As I mentioned briefly in the prepared remarks, as long as the agencies continue to keep spreads wider than banks and other lenders, we are seeing these GAAP financing opportunities in the multifamily sector kind of accelerate. So, our historical private preferred pipeline is about $100 million a year. That can be $200 million this year as just lower LTVs that are generated by the agencies to create that 65% to 85% stack type of financing. So, I would expect us to spend a lot of time in that market and that’s just a function of the recent volatility.

Thanks, Matt. And on the common stock investment, what’s the outlook there and if you fully redeploy that into investments today? Looking at it that way, what type of impact would that have on adding interest income or CAD to the current portfolio returns?

Yes. So the ground lease investment, I think is what you are referring to, right?

Yes.

Yes. So we decided to convert – we could have repaid – could have the whole thing repaid, but we like having some connectivity with the sponsor, number one. And then number two, probably more importantly, we think it’s a 2x over 3 years. Hopefully, investors realize that we are not just a dividend payer. We do have special situation investments like this one that create the book value growth and more total return potential than the normal merger and so on. We like that risk-adjusted profile of creating roughly another $1 or $1.50 a share for shareholders.

Great. Thanks for the color, there. You mentioned dividend; I do want to ask about that lastly. Strong coverage outlook in the supplement, it looks like continued strong coverage. Can you talk about how you think about setting the dividend and the talks about potentially increasing given the strong coverage you have in place?

Yes. Hey, Steve, it’s Brian. I think overall, we want to make sure that we can continue to cover with go-forward earnings. And obviously, it’s difficult when you are getting prepayments and things to estimate that out into the future. So as we increase earnings, we want to be cautious about increasing the dividend and try to pay to that coverage to our earnings available from distribution because we think that’s also better longer term to you than just cash available for distribution. So I think once you get a couple of quarters under our belt for the current portfolio and better understand where the prepayments are going to go, particularly in that SFR pool, where the run-up in values of SFR properties puts the borrowers in a position where they are at pretty low LTV with our loans. They can refinance those pretty easily and not very expensive either and go up to a large LTV. Thus, it makes sense for them to pay these huge prepayment penalties in some cases. But that just creates a little bit of uncertainty in the portfolio. So we want to be careful before we raise the dividend. But we will look at it as a coverage on earnings level from distribution as our sort of benchmark.

Great. I appreciate your comments, Brian.

Thank you. We will now take the question from Jade Rahmani from KBW. Please go ahead.

Thank you very much. As it relates to the multifamily outlook, how are you thinking about it in terms of valuation of the asset class from the impact of rising rates and also a potential slowdown in rent growth? For some color, the shelter index is about one-third of what the Fed looks at in terms of inflation. Given the timeline to turn over assets, I believe multifamily turnover ratios are still running low, that adjusted inflation will have a lagging effect on inflation. If the Fed really wants to get inflation under control, they have to slow down, not just the home purchase market, but also the rental market. So the question is, what are your thoughts and projections for the outlook for rent growth in multifamily as well as single-family rentals, and what impact do you think rising rates will have on cap rates?

Yes. Hey, Jade, Matt here. There’s a lot to unpack there. I think we reported in earnings two days ago, our strong same-store NOI growth that we’ve had in a couple of years. Blended lease growth, both renewals and new leases, north of 20%, the same thing occurred into April. In the Americas, just basically the same thing this morning or after the close, and most of the operators in the gateway markets have all increased guidance in terms of seeing top line and GPR growth within their revenue rolls. This year, I think we will see continued strength in underlying leases, especially and particularly in the agency and middle market agency cohort. I think the cap rates for transaction volumes, at least for now, have taken a brief pause, but there is still a lot of equity out there chasing deals. While there might be less in the buyer pool, those that are well-resourced and the institutional capital are still chasing multifamily due to the underlying growth in stability in the rents and for being one of the better inflation hedges. Capital has shifted more towards the residential sector for these reasons as inflation hedge, and I don’t see that abating. Cap rates right now have remained steady, but there is a negative debt cost at least on the agency side where cap rates are tighter than spread. That dynamic gives us some concern if any, cap rates would increase, but they haven’t yet. In the last few weeks, agencies have continued to tighten spread. I’d say that we’re still positive on multifamily relatively to almost any other property type in this current environment, especially in the middle market segment where most of our activity is. In terms of SFR, I’ll let Brian or Paul comment.

Yes, I’ll start. It’s Brian. A lot of the same dynamics, I think, with multifamily overall. We look at the portfolio itself and the underlying assets. The LTV in those deals is fairly low. It’s hard for us to report on that because we don’t get updated numbers specifically across the entire portfolio frequently. But being in the business and owning over 22,000 loans across the country in different vehicles, we do understand that market. We feel pretty optimistic about it. As mentioned earlier, it is a highly institutionalized sector. It is harder to find opportunities, and there is a significant disparity between a handful of really large players and then everyone else being relatively small and not necessarily the types of partners we want to deal with. SFR has a lot of strong fundamentals and tailwinds, but it’s hard to put money to work there. We don’t control the loss of prepayments in the current environment.

Yes. I agree with everything Brian said. The only thing I would add is the difference between homeownership versus the SFR space. We’ve seen mortgage rates go up at 5%. If we look at our home ownership costs versus renting, it’s 40% more for home price appreciation versus renting. It’s only been about 10% to 15% in growth rates. Renting on the SFR side is a little cheaper. If you look at our rental to income, it’s still 20% to 25%. There’s still room to run in that regard. So I think it’s still attractively priced from a rental standpoint.

I think lastly, Jade, I don’t know how the Fed is going to get it under control by raising rates. We’ve had this debate internally. The Fed increases will just continue to make homeownership less affordable and available to the masses. I think that the rental space, the middle market space that we operate in, will benefit from that.

Yes, thanks. I don’t know how they will either – they may need to cause unemployment to rise, and that means probably a recession, but there is a labor shortage. So it is hard to see how all of this plays out. Let’s see, on the single-family rental repayments, any partial pay-downs received from Progress Residential? With CLO spreads widening and the all-in cost to issue CLO; does that decrease any likelihood of repayment from Progress Residential?

Hey, Jade. It’s Paul. Regarding the Progress Residential of the residential loan, there were no prepayments. It’s still a long-dated bond or long-dated loans, so the prepayment is still about 20% or so. I don’t see that prepaying anytime soon given the size. Brian, anything else on that?

Yes, that’s all true.

Thanks you. In terms of the GSE multifamily outlook, do you think that they have recently picked up volumes or are still struggling to gain market share? I saw that there are some stories about them loosening underwriting, not just tightening spreads as you mentioned, but also their look-back service coverage ratios. A lot of deals haven’t penciled for them because we’re looking at old rents instead of where things are today. Do you have a sense of whether their deal flow has picked up?

Yes. I mean, you’re exactly right anecdotally there. They had a pretty terrible March in terms of production. April doesn’t seem like they are really gaining any more market share. There’s less transaction volume in April anyway, and they are definitely behind their pace. We had peak inquiry here, I think, 2.5 weeks ago. They are just trying to internally work through how they can be competitive and make sure that they still provide liquidity to the market because right now they are about a month behind last year’s run rate.

Can you give a mark-to-market book value? Is book value down based on where rates have moved thus far in 2Q?

From the CMBS side, the VPs actually did tighten given the fact that the auctions priced 200 basis points higher than the previous market clearing levels. Those tightened. The IO strips, which are more interest rate-sensitive, did have, one, amortizing and two, interest rates rising did cause a little bit of mark-to-market loss on IO strips. But all in all, I believe it was a pretty tight quarter in terms of the CMBS quarter.

Okay. So post-quarter end in the second quarter so far, is book value relatively flat, would you say? Or is it up or down? Any comment you can provide or not really?

Yes, relatively flat as of this month.

Okay, thanks very much and appreciate the color.

Thanks, Jade.

Thank you. It appears we have no further questions at this time.

Okay, great. I appreciate everyone’s time. Thank you for participating. We will talk to you this quarter. Thank you.

Thank you. This will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.