Good morning. My name is Dee, and I will be your conference operator today. I would like to welcome everyone to the NexPoint Real Estate Finance First Quarter 2024 Earnings Call. I will now turn the call over to Kristen Thomas from 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 first quarter ended March 31, 2024. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matthew McGraner, Executive Vice President and Chief Investment Officer; and Paul Richards, Vice President of 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 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 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 Brian Mitts. Please go ahead, Brian.

Thank you, Kristen. I appreciate everyone joining us today. It's Brian Mitts here. I'm going to start by briefly going through our quarterly results and then provide guidance for the next quarter. And then I will turn it over to Matt and Paul to give commentary on the portfolio and the macro lending environment. So starting off, Q1 results are as follows. For the first quarter, we reported a net loss of $0.83 per diluted share compared to a net income of $0.37 per diluted share for the first quarter of 2023. The decrease in net income is largely driven by accelerated premium amortization on $508.7 million of SFR loan that was prepaid on January 25. Net interest income decreased to negative $12.8 million in the first quarter of 2024 from a positive $3.9 million in the first quarter of 2023. The decrease was driven primarily by the $25 million of premium that was amortized in Q1 due to the SFR loan prepayment I just mentioned. Earnings available for distribution was negative $0.46 per diluted share in Q1 compared to a positive $0.52 per diluted share in the same period of 2023 and positive $0.44 per diluted share in Q4 of '23. Again, the negative result was due to the acceleration of premium on the prepaid SFR loan. Cash available for distribution was $0.60 per diluted share in Q1 compared to $0.55 per diluted share in the same period of 2023. The increase in cash flow for distribution from the prior year was partially driven by the prepayment penalties from the SFR loan paydown. We paid a regular dividend of $0.50 per share in the first quarter, and the Board has declared a dividend of $0.50 per share payable for the second quarter of 2024. Our regular dividend in the first quarter was 1.2x covered by cash available for distribution. Book value per share decreased 14.8% from the first quarter of 2023 and decreased 6.9% from the fourth quarter of 2023 to $16.69 per diluted share, with the decrease being primarily due to the SFR loan repayment. During the quarter, we contributed to 6 preferred equity investments for the $11.5 million of outstanding principal and a weighted average yield of 10.8% and originated one loan, $44.6 million of outstanding principal at a rate of 900 basis points over SOFR. And we sold 1.2 million shares of our Series B cumulative redeemable preferred stock for net proceeds of $27.7 million. We had one senior loan redeemed for $508.7 million of outstanding principal and received $8.9 million in prepayment penalties. Our portfolio is comprised of 90 investments with a total outstanding balance of $1.2 billion. Our investments are allocated across sectors as follows: 47.2% multifamily, 46% single-payment rental, 5.2% life sciences, and 1.5% storage. Our portfolio is allocated across the following investments: 43.3% CMBS B-Pieces, 18.3% preferred equity investments, 15.2% mezzanine loans, 11.6% senior loans, 6.3% mortgage-backed securities, 4.4% I/O Strips, and 0.9% MSCR notes. The assets collateralized in our investments are allocated geographically as follows: 90% Texas, 9% Florida, 8% California, 6% Georgia, 5% Maryland, 4% Washington, and 3% Colorado, with the remainder across states of less than 2.5% exposure, reflecting our heavy preference for Sun Belt investments. The collateral in our portfolio is 86.6% stabilized with a 68.5% loan to value and a weighted average DSCR of 1.72x. We have $843 million of debt outstanding. Of this, $342 million or 41% is short-term debt. Our weighted average cost of debt is 5.9% and has a weighted average maturity of 1.7 years. Our debt is collateralized by $1.2 billion of collateral with a weighted average maturity of 5.3 years. And our debt-to-equity ratio is 2.04x. Moving to guidance. Earnings available for distribution of $0.45 per diluted share at the midpoint with a range of $0.40 per share on the low end and $0.50 per share on the high end. So with that, I'll turn it over to the team for a detailed discussion.

Thanks, Brian. The first quarter results demonstrated robust performance across all of our investment sectors, particularly in our CMBS B-Piece portfolio. Our approach focuses on areas where our dual expertise in owning and operating commercial real estate provides a distinct advantage. This dual role as both owner and lender allows us to effectively leverage information to assess and identify value across the entire capital stack, aiming to deliver risk-adjusted returns that surpass the norm. Our investment strategy continues to focus on credit investments and assets that are stable or nearly stabilized, prioritizing careful underwriting, minimal leverage, and a moderate debt basis. We also emphasize lending to reputable sponsors and consistently provide dependable value to our shareholders. In the first quarter, despite tough conditions in the commercial real estate market, our loan portfolio remained stable comprising of 90 individual assets with approximately $1.2 billion in total outstanding principal. The portfolio is geographically diverse with a bias towards the Sun Belt markets. From the beginning of the first quarter through today, the company has been very active in underwriting and deploying capital. We completed the purchase of 2 new issues 5-year fixed, with the latest one closing this past Tuesday, Freddie Mac B-Piece opportunities with extremely attractive metrics. Both securitizations have high 50% LTVs, 1.30x plus DSCR, and a diverse geographical footprint with great sponsorships. These B-Pieces will pay in all-in unlevered fixed-rate yields of 9.75% and 9.5%, respectively. And with modest leverage, we expect to generate a mid-teen levered return on very desirable collateral pools. The company also purchased a new issue SFR ABS paper in the gross amount of approximately $44 million and prudently levered to achieve low to mid-double-digit returns and high cash flow and stabilized SFR collateral pool. On the disposition loan repayment side, as mentioned, we received approximately $508 million gross of financing and around $50 million net of financing as the portfolio's largest SFR loan was repaid in full. At the end of the quarter, we continued to maintain a cautious approach to our repo financing, with leverage standing in at 60% loan-to-value range and fortifying the CMBS book by acquiring accretive AAA new issue CMBS paper. We consistently engage in communication with our repo lenders, discussing the market conditions and the status of our financed CMBS portfolio. In summary, we are consistently identifying appealing investment opportunities across our target markets and asset classes. We are committed to meticulously evaluating these opportunities to enhance shareholder value. We have strong confidence in the resilience of the residential sector, particularly given the current interest rate climate. Our investments in multifamily and single-family verticals are considered secure as evidenced by the historical performance and the current rent-to-own dynamic, providing long-term sector tailwinds. Additionally, we continue to be very enthusiastic about our investment pipeline in the Life Sciences CDMO sector. To finalize our prepared remarks before we turn it over to questions, I'd like to turn it over to Matt McGraner.

Thank you, Paul. As we mentioned earlier, we are pleased with our strong Q1 results, particularly when compared to others. Our portfolio is performing well overall. Despite some short-term supply challenges in multifamily, the fundamental performance in multifamily SFR, Storage, and Life Sciences remains stable. From a capital markets perspective, we are noticing improved liquidity, particularly in the CMBS market, with spreads indicating a risk-on sentiment. Continuous inflows of cash to fixed income investors should further support tightening spreads in the near term and help mitigate some of the ongoing higher interest rate impacts. The distress we are encountering in housing mainly involves the non-agency floating-rate bridge loans from 2021 to 2022, which we expect to be challenging for the next year. However, after this period, supply deliveries are expected to decrease rapidly, creating a more favorable supply-demand balance for landlords. Capital for residential assets continues to be abundant. In the past two months, private equity investors have priced over $15 billion of housing products at low 5 cap rates, while more than $240 billion of private equity capital remains unallocated. We are successfully ramping up our Series B preferred raise, anticipating a pace of $15 million to $20 million per month in Q2. The proceeds will be invested in a $220 million Life Science loan in Cambridge, along with additional Freddie K B-pieces. Additionally, we are underwriting over $250 million in special situation opportunities in the Residential and Life Science sectors. If any of these materialize, we plan to modestly re-leverage our balance sheet through a notes offering to match fund in the near term, locking in beneficial spreads for the company. Given all this positive activity, we expect our capital base, including the SFR loan repayment, to be redeployed in Q2 and to maintain our normal CAD run rate, which is likely to increase throughout the second half of the year. In closing, we are excited about the opportunities ahead and pleased with the company's ongoing stability, allowing us to take proactive steps in this environment. Thank you to our team for their hard work. Now, we will turn the call over to the operator for questions.

Matt, you mentioned this towards the end of your comments. I wanted to get your thoughts on CAD compared to the dividend. There has been some turnover in the first half of the year regarding recycling capital into new investments. Are you still confident that the dividend level can be supported at $0.50 by CAD and EAD? Additionally, what is your outlook on the earnings potential of a fully deployed portfolio as this capital gets redeployed?

Yes, we ended the year with a $0.51 CAD run rate in 2023, factoring in the Series B and the pipeline investments that we plan to deploy throughout 2024. We anticipated growth in that range from 15% to 20%. However, we did not account for the significant loan repayment on the front yard loan, which was approximately $510 million. This repayment reduced our CAD on an annual run rate by about $0.35, or slightly more, around $0.40 annually. Our goal is to redeploy that capital in the second quarter and return to the $0.51 run rate, then increase it through the Series B and new investments. I feel optimistic about the run rate following this capital redeployment, and that’s why we are maintaining the dividend.

Great. And I appreciate the color there. And you also provided some return numbers on the new B-Pieces, and I believe it was some loan. I appreciate that. But kind of generally as you look at your pipeline, when you look at achievable returns in securities versus mezz or pref investments, can you talk about what you're seeing relative attractiveness across those different options?

Yes. Really, everything we're underwriting, whether it's a Freddie K B-Piece with modest leverage in the mid-teens, on the construction loan side, origins, we think we can do mid-teens as well. So I think from a risk-reward perspective, those are the 2 primary areas that we'll focus on and have investment pipeline visibility into. I wouldn't say I necessarily favor securities over originating a private investment. I think we can price each pretty well and have enough opportunities to do both in abundance. I don't know, Paul, if you have any other thing to add to that?

No, I think that's exactly right.

One final one, if I may. Operating expenses, we'll get more color when the Q comes out. But any one-time OpEx that was a result of the events in Q1? Or can you talk about your expectations for run rate operating expenses moving forward?

Yes. Steve, it's Brian. There's a couple of things that contributed to that from audit overruns and some legal expenses, debt yield costs, as well as the way the stock compensation gets amortized in. We think that, with some of the forfeitures kind of being flushed through all at once. So we think that, that returns to normal run rate throughout the rest of the year. We've increased our accruals on various things where needed. So it should be more stable and kind of back to the run rate that you had seen before.

I think we'll move back to that kind of 6.5%, give or take number on the OpEx.

This is actually Jason Sabshon on for Jade. It would be helpful if you could speak to credit trends within your mezz and pref investments? And generally, what you're seeing broadly in the market in terms of multifamily credit trends?

Yes. I think in our mezz and pref books, I'd say we have one loan or one preferred investment in an asset in Atlanta, where the sponsor is trying to decide whether they want to defend the asset. Again, we're working with them to resolve certain issues in that market, especially given that Atlanta faced challenges in the second half of last year with some fraud issues and some eviction issues concerning the courts. But outside of that, everything else doesn't scare us. More broadly, as I mentioned, the biggest distress we are seeing relates to the 2021 and 2022 bridge loans and CRE CLOs. They were all floating rate in nature. Those largely have been extended and the lenders are working through extensions and issues. The near-term problem that we see developing in some submarkets as these deals are becoming zombie deals. So they're cash flow constrained because the interest rates have more than doubled. And the operators, to the extent that they're still in control of the assets, don't have the finances to maintain operations, rehab units. And so the occupancy in some of these submarkets is dipping and causing some market distress. And that's somewhat isolated again in the CRE CLO market. More broadly, the agency books are experiencing very little distress. In our K-Series, there's still really good performance and solid performance. So I think it depends on where you look, both geographically and then what wrap the loans are in. But multifamily is an asset class that you can underwrite, and people are underwriting concerning the transaction market being so robust. They're looking through the supply, because I know it will weigh in here pretty aggressively in '25 and '26, after which there's basically no deliveries. And so I think multifamily, more broadly over the next 6 to 9 months will be a little challenging. But after that, I think it will be much improved.

Great. In terms of capital deployment and investment opportunities that you find compelling, you mentioned B-Piece purchases and Life Science. Overall, regarding deployment into mezzanine, preferred, or direct loans, are there any geographic markets that you find particularly interesting? It would be helpful to hear your thoughts on this broadly.

We have specific preferences based on property types and geographical areas. Over the last ten years, our primary focus has been on residential properties in the Sun Belt. This is where we feel most at ease. Even though there may be long-term supply challenges, these markets are leading the nation in job growth and household formation, which is noteworthy since they are currently quite accessible. The multifamily residential options in the Sun Belt are not performing as well at the moment, presenting us with additional opportunities. This aligns well with our investment strategy since this is where we're most confident. Regarding Life Sciences, the focus differs depending on whether we are discussing GMP or lab spaces. We are concentrating our investments in Cambridge, where we have a site that we are familiar with and like. We still have $160 million left to invest there, which provides a solid pathway for earnings. For GMP, most opportunities are located in Vacaville, where we hold a loan, as well as in the Research Triangle and Houston. I believe these markets will continue their growth trajectory. With the trends of nearshoring and reshoring, both advanced manufacturing and pharmaceutical manufacturing are benefiting from strong long-term support. We are optimistic about our prospects in both of these market segments.

I'm just looking at your asset type exposure on Slide 9. It has shifted materially. Now, it's 65% multifamily and 22% SFR. I assume that's driven by that prepayment you talked about. But would you expect to get closer to a more even split on multifamily and SFR longer term? Or over the near term, could you expect to trend more towards multifamily with that prepayment potentially going to bridge multifamily opportunities where you've said you've seen stress and could provide gap financing there? And do you have any exposure right now in that bridge space?

Yes, to address your first question about the pie chart, we expect to focus mainly on residential properties. The split between multifamily and single-family rental will depend on the available opportunities. Currently, there are more multifamily investment options, and our activity is stronger in that area due to existing distress. So, we will likely concentrate our efforts there. However, if we come across an attractive asset-backed securities transaction or a B-Piece in such a deal, we will consider pursuing it. Overall, we anticipate that residential properties will make up around 80% of our focus. Could you please remind me of your second question?

Do you currently have any exposure to bridge multifamily, either from an organic perspective or through gap financing?

We have no direct exposure to senior bridge loans. The Atlanta asset I mentioned is secured by a CLO bridge loan, which is one of our preferred mezzanine deals in that area. What I appreciate about our business is that if we need to take control and eliminate the common equity in a mezzanine position, we have significant ownership in Atlanta with 3,000 units, along with the necessary operating capabilities in multifamily. This could potentially lead us to earn more than our actual investment over time once the market recovers. Other than that, we have no additional exposure.

Okay. Great. That's what I thought. I just want to make sure. And then can you just talk about the deployment of the continuous preferred and how that's been? What's the monthly cadence? And would you expect that to take a backseat for a little bit, just given the prepay and redeploying that capital?

Chris, this is Paul. The advantage of the Series B preferred raise is the consistent monthly run rate, which, as Matt pointed out, is around $15 million to $25 million. We can match fund this with the Cambridge Life Science asset that has monthly draws. We will be able to align these funds while also continuously investing in additional B-pieces and other structured financial instruments in the future. Therefore, I believe we can maintain a strong match for the Series B preferred throughout the rest of the year.

Yes, I appreciate. Nothing further from us. I appreciate everyone's time. And we'll talk to you next quarter. Thank you.

Ladies and gentlemen, that concludes today's call.