Good morning. My name is Dennis, and I will be your conference operator today. I would like to welcome everyone to the NexPoint Real Estate Finance Fourth Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. I would now like to turn the conference over to Kristen Thomas, Investor Relations. 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 fourth quarter ended December 31, 2023. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Paul Richards, Vice President of Originations and Investment. As a reminder, this call is being broadcast through the company’s website at nref.nexpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s current expectations, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company’s annual report on Form 10-K and the company’s other filings with the SEC for a more complete discussion of risks and other factors that could affect the forward-looking statements. The statements made during this conference call speak only as of today’s date and, except as required by law, NREF does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures, see the company’s presentation filed earlier today. I would now like to turn the call over to Brian. Please go ahead, Brian.

Thank you, Kristen. I appreciate everyone joining us this morning. I’m going to briefly discuss our quarterly and year-to-date results, and then we’ll go through some portfolio metrics, talk about the balance sheet a little bit, and then we’ll provide guidance for the next quarter. Then I’ll turn it over to Matt and Paul to discuss the portfolio in a little more depth and the macro lending environment. So starting with our fourth quarter results, they were as follows. Reported net income of $0.74 per diluted share, compared to a net loss of $0.17 per diluted share for the fourth quarter of 2022. The increase was largely driven by mark-to-market adjustments on our common stock investments and changes in our net assets related to our consolidated CMBS VIEs. Net interest income increased to $3.8 million for the fourth quarter of 2023 from $0.3 million in the fourth quarter of 2022. The increase was driven primarily by more originations of preferred equity investments with higher yields and partially offset by higher financing costs in 2023. Earnings available for distribution was $0.44 per diluted share in the fourth quarter, compared to $0.42 per diluted share in the same period of 2022 and $0.43 per diluted share in the third quarter of 2023. Cash available for distribution was $0.51 per diluted share in the fourth quarter, compared to $0.45 per diluted share in the fourth quarter of 2022. The increase in earnings available for distribution and cash available for distribution from the prior year was partially driven by originations of additional private preferred investments. We paid a 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 2024. Our dividend in the fourth quarter was 0.88 times covered by earnings available for distribution and 1.02 times covered by cash available for distribution. Book value per share decreased 10.4% year-over-year and increased 0.7% quarter-over-quarter to $17.93 per diluted share, with the decrease year-over-year being primarily due to the $0.74 special dividends paid out during the year and the increase from the prior quarter being primarily driven by mark-to-market increases. During the quarter, we contributed to five preferred equity investments with $16.5 million of outstanding principal and originated one loan with $15.3 million outstanding principal. These six investments had a blended all-in yield of 11.5%. We had three senior loans redeemed for $29.5 million of outstanding principal and one preferred investment redeemed for $3.5 million of outstanding principal. Moving to year-to-date results, we reported net income of $0.60 per diluted share, compared to net income of $0.22 per diluted share in 2022. The increase was largely driven by changes in net assets related to our consolidated CMBS VIEs as compared to 2022. Net interest income decreased 55.5% to $16.8 million from $37.7 million in 2022. The decrease was driven primarily by prepayments on our SFR loans and CMBS portfolio and higher financing costs in 2023. Earnings available for distribution was $1.51 per diluted share in 2023, compared to $2.50 per diluted share in 2022. Cash available for distribution was $1.67 per diluted share, compared to $2.97 per diluted share in 2022. The decrease in earnings available for distribution and cash available for distribution for the year was partially driven by higher weighted average share accounts, increased financing costs, as well as our prepayments on SFR loans in 2023. Moving to the portfolio, our portfolio is comprised of 87 investments with a total outstanding balance of $1.6 billion. Our investments are allocated across the following sectors: 47.2% multifamily, 46% single-family, 5.2% life sciences, and 1.5% storage. Our portfolio is allocated across the following investment categories: 41.4% senior loans, 30.8% CMBS B-Pieces, 12.5% preferred equity investments, 8.5% mezzanine loans, 3.5% I/O strips, and 3.3% MBS and MSCR notes. The assets collateralizing our investments are allocated geographically as follows: 20% Georgia, 17% Florida, 15% Texas, 7% California, 4% Maryland, 5% Minnesota, and 3% North Carolina, with 29% across states with less than 2.5% exposure, all reflecting our heavy preference for Sun Belt investments. The collateral on our portfolio is 89.9% stabilized with a 68.8% loan-to-value ratio and a weighted average DSCR of 1.72 times. Moving to the balance sheet, we have $1.3 billion of debt outstanding. Of this, $304 million, or 24%, is short-term debt. Our weighted average cost of debt is 4.23% and has a weighted average maturity of 3.1 years. Our debt is collateralized by $1.7 billion collateral with a weighted average maturity of 5.6 years. Our debt-to-equity ratio is 2.9 times. A couple of other notes: in December, we launched a continuous offering of Series B 9% deferred equity. To-date, we’ve raised $30 million of gross proceeds, which will be used to make accretive investments with low-to-mid double-digit yields. In Q1 of 2024, we received a prepayment on an SFR senior loan of $509 million in principal with expected earnings available for distribution being negative for the quarter due to a $25 million reversal of an unamortized premium associated with the previously mentioned senior SFR loan that was prepaid in January. Cash available for distributions was projected at $0.58 per diluted share at the midpoint, with a range of $0.53 on the low end and $0.63 on the high end. So, with that, let me turn it over to Paul.

Thanks, Brian. The results from the fourth quarter showcased our overall strong performance across the entire portfolio. Our strategy remains centered on investment areas where expertise in owning and operating commercial real estate gives us a unique edge. This dual role as both owner and lender in the commercial real estate market enables us to effectively utilize information, allowing us to underwrite and recognize value throughout the capital stack, with our aim in achieving superior risk-adjusted returns that exceed the average. Our investment approach remains centered on credit investments in stable and near-stabilized assets, emphasizing cautious underwriting, low leverage, and relative debt basis, along with lending to healthy sponsors to deliver steady and reliable value to our shareholders. In the fourth quarter, despite challenging commercial real estate conditions, our loan portfolio maintained steady performance, consisting of 87 individual assets with approximately $1.6 billion in total outstanding principal. The portfolio is geographically diverse with a bias towards Sun Belt markets. Texas, Georgia, and Florida continue to account for approximately 52% of our portfolio as of year-end, though our Atlanta, Georgia, exposure has significantly decreased by more than 10% as our largest SFR whole loan was repaid in full as of Q1 of this year. From the beginning of the fourth quarter through today, the company has been very active in underwriting and employing capital. We executed on making both follow-on and new investments of $31.8 million in preferred equity investments with an all-in yield of 11.5% across both our SFR and life science verticals. We also completed the purchase of a new issuance, a five-year fixed, Freddie Mac B-Piece opportunity with extremely attractive specifications. The overall securitization has a 59% LTV, a 1.34 DSCR, and a diverse geographical footprint. The B-Piece will pay an all-in unlevered fixed rate of 9.75%, and with modest leverage, we expect to generate a mid-teen levered return on what is a very desirable collateral pool. The company has also purchased new issue SFR ABS paper in the gross amount of approximately $44 million, prudently leveraged to achieve low-to-mid double-digit returns on a low LTV, high cash flowing, stabilized SFR property pool. Lastly, and Matt McGraner will touch more on this exciting investment during his prepared remarks, the company closed on a $218 million drawable first mortgage life science loan this past January. This specific loan carries an attractive 27% attachment point on current as-is appraisal valuation and provides SOFR plus 900 pricing. On the disposition loan repayment side, as mentioned, we received approximately $500 million gross financing and around $60 million net of financing on the portfolio’s largest SFR loan being repaid in full, generating attractive overall IRR for investors. At the end of the quarter, we maintain a cautious approach to our repo financing with leverage standing at approximately 63% loan-to-value. We consistently engage in communication with our repo lending partners discussing market conditions and status, evaluating attractive investment opportunities throughout our target markets and asset classes. We will continue to evaluate these opportunities with the goal of delivering value to our shareholders. We maintain a strong belief in the resilience of our investments moving forward. I'd like to turn it over to Matt.

Thank you, Paul. As he just mentioned, our portfolio continues to perform very well, and despite short-term supply challenges in multifamily, the underlying performance in multi-SFR, storage, and life sciences remains relatively stable. As we announced last quarter, and as Brian mentioned, we have successfully launched an NREF Series B preferred and to-date we expect to increase cash available for distribution by 15% to 20% over the next 12 months. The life science loan originated in January that Paul mentioned will alone provide $200 million of fundings over the next 12 months. We expect to match fund draws on this investment with proceeds from our Series B raise, providing maximum accretion to shareholders. In addition, the large SFR loan payoff will create additional capital to deploy into our $300 million-plus investment pipeline. However, it also de-leverages us by a full turn, allowing us to now sit below 2 times leverage, the lowest of any commercial mortgage rate. This de-leveraging creates additional optionality in terms of sources of capital to the extent we want to re-leverage some of the balance sheet to fund opportunistic investments. To close, we’re excited about these opportunities in conjunction with the company’s continued stability and the opportunity to go on the offensive in this environment. As always, I want to thank the team for their hard work. And now I’d like to turn the call over to the Operator for questions.

Your first question is from Crispin Love with Piper Sandler. Please go ahead.

Thanks. Good morning, everyone. First, can you talk about some of the opportunities that you’ve already begun to see or expect to see over the next several quarters in bridge multifamily? Have you started offering pref or mezzanine to borrowers in that space, and just how is that progressing? Are borrowers seeking you out, are you working with other lenders to help, and do you expect this to be a key way for borrowers to get agency takeouts down the road?

Yeah. Hey, Crispin. It’s Matt. Great question. We have started seeing both portfolio deals and individual one-off deals seeking cash-in refinancing dollars, both on the agency and on the CRE CLO side. Borrowers are seeking money to fund replacement caps. They’re seemingly okay with being diluted, seemingly okay with the terms we’re providing in terms of risk mitigation, mezz, and liens, and the ability to take over the asset. They’re being realistic as well about cap rates, so we’re getting a better debt yield than we otherwise normally would. We have a $300 million investment pipeline. I would consider this to be an additional $100 million to $150 million opportunity for us this year, and they’re beginning to come in more rapidly than they were in the fourth quarter.

Okay. And just in this strategy of operating a pref or mezz to borrowers, I find it very interesting, but what do you view as kind of the key risks here as these borrowers are likely strapped with high LTVs and low DSCRs? So I’m curious what kind of LTVs you’re coming in at and just if there’s any risk that you think in this strategy?

Yeah. We’re going to make sure that we can prime enough equity such that we can own the asset at an in-place cap rate that we think we can either sell the asset or refinance into agency. Now, candidly, some of those are few and far between, and we haven’t hit on one yet, but we are underwriting. We will target to be no more than probably 80% of the stack on as-is value today. The structure of the investment, because of the cash flows, certainly in 2024, given supply will be challenged. We’ll probably carry a little bit more of a lower current pay. But the all-in pricing on that can still reach mid-teens. So we’re selective. Again, we haven’t necessarily hit on one yet, but we are seeing opportunities come in the door on a daily basis from sponsors and from the large commercial real estate services companies, investment banks, etc. So we do expect to be active this year in that strategy.

Thank you, Matt. I have one final question regarding the accelerated amortization of the premium related to the prepayment on the senior loan you mentioned in the first quarter, which you anticipate will result in negative EAD for the quarter. Could you provide additional details on that? What prompted the prepayment on the SFR loan, and is there anything unusual about that loan or the borrower?

No. I wouldn’t say so. I mean, they’ve been reaching out to us for several years to restructure it, and I think they just got to a point now where they found other financing or had equity capital and were willing to prepay it. But I don’t think there’s anything, knowing the company that had the loan, that there’s any issues with that.

I think it's important to note that this indicates a healthy asset-backed securities market in single-family rentals. The sponsor is well-established, very active, and well-known in the asset-backed securities space. While we are disappointed to see it leave, it does provide us with new capital, and I believe it reflects positively on liquidity and commercial real estate overall.

Awesome. Thank you. I appreciate you all taking my questions.

Thank you.

Your next question is from the line of Stephen Laws with Raymond James. Please go ahead.

Hi. Good morning. Congrats on a nice close to the year. I am looking Q4 results. I want to make sure I get…

Thank you.

Yeah. I want to make sure I understand kind of the CAD as we move through the year. Matt, I think you mentioned in your comments the opportunity for a 15% to 20% growth in the next 12 months. As we think about moving through the year, does Q1 benefit from the $9 million repayment penalty and then we’ll see a drop in Q2 as kind of you get a return capital fully redeployed? How do we think about the CAD migration through this year?

Yeah. That’s a good question. The Series B, the way we look at that is with our construction loan in the life science and the pipeline that Paul just mentioned, it’s about $0.04 to $0.05, about $0.05 per $25 million of Series B raised that’s accretive to CAD. So as we move through the year, that’s where I’m picking up that 15% to 20%, and perhaps, it could be more accretion. But your point, again, is well taken on the payoff. You will see a little bit of enhancement in the first quarter and then, our job is to redeploy that in the second quarter and make sure that we’re fully funded. But again, I’m comfortable with the ability to still grow cash available for distribution while delivering a full return.

Appreciate those comments. And when you think about the new investment pipeline and redeploying that capital, given the large discounts above, how do you think about any stock repurchases? I know there are some limits there just given the liquidity, but can you talk about how you think about the returns you’d expect from stock repurchases versus new investments that you made?

Yeah. We have an obligation to fund another $175 million to $200 million of commitments, to the extent that we are comfortable managing cash and funding those investments, and getting other repayments. If we have excess cash, it’s an absolute certainty that we’ll look to buy back stock at these levels. We’re going to, again, kind of first and foremost fund what we have to fund, and then with the excess capital and to the extent that our Series B preferred raise ramps, which we expected to, I like our chances to be in a position to buy back stock if we continue to trade at a discount.

Great. I appreciate the comment. Thanks, Matt.

Thanks, Stephen.

Your next question is from the line of Jade Rahmani with KBW. Please go ahead.

Thank you very much. On the SFR repayment, wasn’t there supposed to be a 20% prepayment penalty?

Hey, Jade. It’s Paul. Yeah. So, of course, it just matters based on yield maintenance calculations. So when rates were low back a year and a half ago and we discussed that, the prepayment penalty was a lot higher. Now that rates have increased to around the 5% range, the prepayment penalty was a lot less than what it was back when the rate market was a lot lower.

So there’s going to be a $9 million prepayment penalty, correct?

That’s correct.

And that’s factored into the earnings, but there’s more than an offset to reverse the unamortized premium.

That’s correct.

Okay. Do you know what pro forma book value should be for the reversal of the unamortized premium?

The reversal of the unamortized premium is just under $1 of book value.

So we should expect book value to decline by a $1?

In a vacuum, if that was the only variable, yes. Of course, there could be mark-to-market movements, etc., on the CMBS book.

Okay. Do you know to-date where the mark-to-market is on CMBS?

It’s flat to relatively up a little bit. It’s not going game busters by any means, but it’s some bonds have been doing well on a mark-to-market basis, but overall, up a little bit through January. So, we’ll get marks in February coming up, and then, of course, in March and see how that works.

Being active in the CMBS and ABS markets in the first couple months of the year, we’ve seen spreads come in quite a bit as the indices rise and as more liquidity returns. So, as we sit here today, we feel like March will be strong.

Okay. So that’ll hopefully be a partial offset to the book value impact.

Yeah. I mean, again, we liked that we de-leveraged by $500 million, which is good.

So, I was going through Howard Hughes’s transcript and their comments about the construction market, construction loan market, really caught my attention. I mean, they basically said they’ve never seen a market like this, where even getting a multifamily loan is challenging. The banks are being told to not do office. It’s totally redlined and to pull back everywhere else. So, how do you all feel about that? And on the life science sounds like it is a construction loan, based on the magnitude of future fundings and the attachment point being so low. That’s a pro forma LTC estimate. So, is construction an area you’re looking to get more active in?

Yeah. I think so, and I’d say, two things. One is the $220 million construction loan is on a 27-acre site in Cambridge, where the sponsor is a well-heeled repeat sponsor of ours and has roughly $420 million in equity into the project. This opportunity was born out of banks pulling back, trying to syndicate the senior mortgage. We were, in fact, going to do the mezz on this loan. And so, when the banks pulled back, we just stepped in and did a senior mortgage at basically the same rate, lower attachment point, creating a pretty attractive risk-return profile. The project was also already funded in terms of equity. Two of the three buildings were built. The third is about to top out. So, from a risk-reward perspective, this one was a good one. Our storage platform has, for the past decade, through our storage team, led by John Good, had a construction development pipeline whereby they would fund construction loans for developers of self-storage and take a profit participation interest. I would expect us to get more active in that space, as well as the multifamily space. Because, as you mentioned, and this bodes well for multifamily and really all property types' performance in 2025 and 2026. However, over the past nine months to 18 months, if you’re a developer, you’re hurting and can’t find access to capital. So, it is a good time, it is on our radar, and we’ve already been doing it.

On the life science, is there a tenant already signed up, because I know there’s quite a lot of supply expected to hit this year and next year.

Yeah. That’s the rumor. A lot of the supply hitting has been pushed out to 2027 and 2028. I think half of what was planned to deliver over the next 12 months won’t deliver. So, if you dig into the numbers, and we’re happy to share those with you, I think the supply in life sciences is fairly overstated. This particular project is one of the last to be developed in Cambridge before a moratorium hits, and the location, the size, the ability to take full blocks of 395,000 square feet total, we expect to be very attractive. And again, it opens its COs in 2025. It’s not like this is a far-out project. So, we expect leasing velocity to do very well here. But as of today, there is no tenant. However, our basis is below land value.

Okay.

I would just add one thing. Our basis is land value.

In the multifamily sector, there are various reports showing an increase in delinquencies, which has led to scrutiny of some of our mortgage REIT counterparts. However, the GSEs are reporting relatively low delinquencies in their stabilized servicing portfolios managed by firms like Walker and Dunlop. Could you provide insight into the current conditions in the multifamily market, addressing the supply challenges while highlighting what appears to be strong credit performance?

You bet. I think it's important to differentiate between agency and non-agency. In multifamily right now, the first three quarters of the year are a challenging period due to supply issues. However, supply is expected to decrease throughout 2024 and into 2025, shifting the dynamics in favor of landlords. On the ground, CRE CLO loans, particularly those with lower quality collateral, are facing difficulties. Their cash flows are struggling, leading to situations where there is insufficient cash flow to support operations, renovations, or business plans established a few years ago. These deals are facing significant challenges, and while working through them is possible, multifamily properties are generally easier to navigate. This segment is experiencing the most weakness. In contrast, agency portfolios, including ours, have shown greater resilience, which is understandable as they typically involve stronger sponsors, well-located properties, and thorough underwriting processes. I believe these deals will continue to perform well and can be refinanced, especially as we move through the next three or four quarters. I expect improvements once the Federal Reserve decides to make a pivot, which will relieve some pressure on the system, along with the easing of supply challenges. So while the next two or three quarters may be tough, I do believe there is optimism ahead.

Thanks a lot.

Thanks, Jade.

This concludes the Q&A session of today’s call. I will now turn the call back to the management team for closing remarks.

Yeah. I appreciate everybody’s time. Great questions today. We’ll look forward to speaking again soon. Thank you.

This concludes the NexPoint Real Estate Finance fourth quarter 2023 conference call. Thank you for your participation. You may now disconnect.