Hello, at this time, I would like to welcome everyone to the NexPoint Real Estate Finance, Inc. Q3 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Kristen Thomas, Investor Relations. You may begin.

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance conference call to review the company's results for the third quarter ended September 30, 2024. 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, 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. Except as required by law, the company 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.

Thanks, Kristen. I appreciate everybody's time this morning. I'm Brian Mitts. I'm joined today by Matt McGraner and Paul Richards. I'm going to start the conference by briefly going through our quarterly results, give some portfolio and balance sheet statistics, and then our guidance for the next quarter. Our Q3 results were as follows: For the third quarter, we reported net income of $0.74 per diluted share compared to a net loss of $0.90 per diluted share for the third quarter of 2023. The increase in net income for the quarter was due to unrealized gains on our common stock investments as well as an increase in net interest income. Interest income increased by $5.6 million to $23.6 million in the third quarter from $18 million in the third quarter of 2023. The increase was driven by our increase in interest income, which is a result of higher rates as well as lower interest expense from deleveraging that occurred in the first quarter of this year. Earnings available for distribution was $0.75 per diluted common share in Q3 compared to $0.43 per diluted share in the same period last year. Cash available for distribution was $0.67 per diluted common share in the third quarter compared to $0.47 for the same period last year. The increase in earnings available for distribution was driven by the increase in net income for the quarter. Our Board has declared a $0.50 dividend per share payable in the fourth quarter of 2024. Our regular dividend in the third quarter is 1.34x covered by cash available for distribution. Book value per share increased 2.6% in the second quarter to $16.95 per diluted share, with the increase being primarily due to the unrealized gains on our common stocks. During the quarter, we funded $28.8 million on a Life Science development property, Cambridge, which redeemed $9.7 million of senior loans and sold an $82 million CMBS B-piece with a bond equivalent yield of 9.2%. During the third quarter, we sold 1.9 million shares of our Series B cumulative redeemable preferred shares for net proceeds of $42 million. Moving to the portfolio and balance sheet, our portfolio is comprised of 83 investments, with a total outstanding balance of $1.1 billion. Our investments are allocated across sectors as follows: 17% SFR, 52.3% multifamily, 26.7% Life Sciences, 1.5% storage, 1.8% specialty manufacturing, and 0.6% marina. Our fixed income portfolio is allocated across investments as follows: 11.2% senior loans, 31% CMBS B-pieces, 20.1% preferred equity investments, 23.2% mezzanine loans, 4.2% I/O strips, 1% MBS, and 9.2% promissory notes. As far as the assets collateralizing our investments, they are allocated geographically as follows: 16% Texas, 20% Massachusetts, 8% California, 6% Florida, 6% Georgia, and 5% Maryland, with the remainder 4% across other markets, but all of our portfolio is heavily exposed to Sunbelt markets. The collateral in our portfolio is 77.5% stabilized, with a 60.2% loan-to-value and weighted average DSCR of 1.36 times. We have $816 million of debt outstanding. Of this, $324 million or 39.7% is short-term debt. Our weighted average cost of debt is 6.1% and has a weighted average maturity of 1.4 years. Our debt is collateralized by $1.1 billion of collateral with a weighted average maturity of 3.9 years. Our debt-to-equity ratio is 1.52 times. Moving to guidance for the fourth quarter, we are guiding to earnings available for distribution of $0.79 per diluted share at the midpoint, with a range of $0.75 to $0.83. We're guiding to cash available for distribution of $0.50 per diluted share at the midpoint, with a range of $0.45 on the low end and $0.55 on the high end. So with that, let me turn it over to Matt.

Thanks, Brian. This is Paul Richards. I appreciate it. The results for the third quarter demonstrated strong performance in all of our investment sectors. We remain focused on areas where we can effectively harness information to evaluate uncovered value throughout the entire capital structure, with the goal of achieving superior risk-adjusted returns. Our investment strategy remains centered on credit investments and assets that are either stable or nearing stabilization, with an emphasis on meticulous underwriting, low leverage, and a conservative debt structure. We prioritize lending to reputable sponsors to ensure consistent value for our shareholders. In the third quarter, although conditions in the commercial real estate market continue to improve, they remain somewhat challenging. Nonetheless, we successfully deployed capital into accretive investments and leveraged strong bids in the secondary bond market to recycle seasoned bonds into new opportunities. The portfolio is geographically diverse with a strong preference for Sunbelt markets. Since the beginning of the first quarter, the company has been actively underwriting and deploying capital. An additional $28.8 million was funded on the Life Science senior loan, which carries an interest rate of SOFR plus 900 basis points. On the disposition and loan repayment front, we capitalized on a strong bitter pool in the secondary bond market, selling a seasoned B-piece acquired during the depths of COVID, at roughly 200 basis points tighter than the original purchase price. This generated a robust gain, which was redeployed into newly originated and accretive deals. At the close of the quarter, we maintained a cautious stance on repo financing, keeping the leverage within a 63% LTV range. We reduced our repo lines by approximately $40 million, lowering our overall debt to book value ratio to 1.52 times from over 2 times in the first quarter. We continue to actively communicate with our repo lending partners discussing market conditions and the performance of our finance CMBS portfolio. In summary, we continue to identify attractive investment opportunities across our target markets and asset classes, with a commitment to thorough evaluation aimed at enhancing shareholder value. We remain confident in the resilience of the residential sector, especially in the current interest rate environment. Our investments in the multifamily and single-family segments are well positioned, supported by historical performance and a favorable rent versus own dynamic that provides long-term momentum for the sector. Additionally, we are highly optimistic about our investment pipeline in the Life Sciences and 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. Yes, we're very pleased with the quarter. Credit quality remains attractive and stable, and we're also pleased with the increase in book value quarter-over-quarter, which is a promising sign for the business. Absorption of record levels of multifamily supply continues to exceed our expectations, and transaction activity is also picking up. Leasing in the Life Sciences sector is also increasing with a particular strength in Q3 in the Kendall and LMA submarkets, which is a positive for our Life Loan. Our storage business and exposure also had a nice quarter. The portfolio has recently achieved over 90% occupancy across the entirety of the portfolio, a significant milestone for the portfolio as it moves into stabilized operations, and had an 11% increase year-over-year during the quarter in occupancy. We also closed on a highly accretive SASB financing in early October that recapitalizes all of the company's outstanding debt stack with a fixed rate execution and strong interest from the market at tighter pricing than anticipated. So instead of monetizing perhaps our storage assets in 2026, we could be in a position to monetize them in 2025. Going forward, you’ll likely see us be more active in the multifamily sector in the next couple of quarters, as we're underwriting approximately $250 million of opportunities for senior bridge loans, CMBS, and even construction financing within the sector. Finally, we’re pleased with the capital options available to us as we fund this growth with where the balance sheet is and the success we're having with the Series B raise. We have multiple accretive avenues to fund growth, including A-note warehouses and even A-rated bond deals. To close, we’re excited about these opportunities in the coming quarters. I'm pleased with the company's continued stability and the opportunity to go on offense in this environment. As always, I want to thank the team for their hard work. Now we'd like to turn the call over to the operator for questions.

Our first question comes from the line of Crispin Love from Piper Sandler. Please go ahead.

This is Crispin Love from Piper Sandler. Regarding the ongoing shifts in portfolio exposure, we see a decrease in multifamily exposure while Life Sciences now represents over a quarter of the portfolio. How do you anticipate this trend will evolve? Do you foresee stability with current exposures or further increases in Life Sciences? Thank you.

Yeah. I think the Life Science exposure is both a result of deploying a number of opportunities over the last couple of quarters, but also the paybacks or the capital that's coming back to us from the residential sector. So it's kind of like shrinking the overall pie size and probably skews it a little bit. But as we sit here today, 1.5 times levered in the portfolio exposure to multifamily where it is. I would, in residential, like I said in my prepared remarks, expect to see that increase over the next couple of quarters. But ultimately, we'd like to see Life Sciences be about a quarter to a third of the portfolio on a fully levered basis.

Appreciate it. And then just the last question for me. On credit quality, LTVs and debt service coverage ratios still seem attractive to others in the industry, but do you see the debt service coverage ratios decrease in the quarter? Can you just dig into that a little deeper and what the key drivers were there?

Yeah, of course. So you have seen the DSCRs decrease minimally over the past few quarters. It's kind of twofold. One has to do with just some of the opportunities that we are in, such as the repositioning of the A life loan number one senior loan that's SOFR plus 900 that Matt discussed. That, of course, doesn't hold the DSCR right now because it's being leased up. And also, you've seen some slippage in the multifamily sector, but not much, and those are the two main components of why we've seen a little bit of a drop-off in the DSCR. But we don’t expect that to continue in the future; we expect that to maintain or even provide even better coverage in the future.

And just to add to Paul's comments, the property balance sheets in multifamily are starting to stabilize throughout the CMBS and K deals, and even in our own portfolio as the front end of the curve shifts down, caps, and other hedges get less expensive. As you know, servicers, including especially the agencies, have been mandating cash flow sweeps to escrow for replacing the caps on the floating rate side. So as those escrow mandates shift and credit and liquidity become more available within multifamily and the broader commercial real estate sector as the Fed continues to ease, we expect this to improve the coverage ratios.

Thanks for taking my question.

Our next question comes from the line of Jade Rahmani from KBW. Please go ahead.

Thanks very much. Do you have an update as to how book value is trending intra-quarter, given the spike in rates?

Sure, Jade. Yeah, there wasn't much movement. I would say, in our CMBS book, it's been flat to somewhat positive. It's pretty muted right now in terms of growth or decline. We're sticking to where our current book value is, which we discussed at the end of Q3.

Good to hear. Thanks a lot. In terms of the interest rate dynamics, it's capturing a lot of people by surprise. Everyone thought that lower rates and then bond market cooperates, and we're not seeing that. In fact, multifamily is starting to see some hiccups here and there. For example, Fannie Mae in the 10-Q noted an uptick in delinquencies, quite a sizable uptick, in fact. And they booked a really large reserve, one-third of it related to seniors housing. They did attribute all of the increase to floating rate loans. So just wanted to see what your thoughts are on credit performance in multifamily, if you're seeing any issues creep up and how you're thinking about the outlook?

Yeah, it's been a roller coaster over the last quarter or so. At the start of the quarter, everyone was feeling better about life, and then with the recent run-up in yields on treasuries, we've seen some retrades and transaction market in a bit of a pause as we head into the election. I think that's going to clear up some of it. But overall, the underlying dynamics within the multifamily sector remain promising. As we're sitting here in the eye of the supply storm today in Q3 and then Q4, I think our overall outlook on multifamily is increasingly positive, just given the way that rents, NOIs, and occupancy level demand have held up during these challenging times, both in the capital market side and in the supply wave. But again, as we've stated, over the past year to the extent people have listened, really in 2025 gets great and 2026 is even better on the residential side when landlords have increasing pricing power due to the lack of deliveries for 2026. It's going to be a pretty special time, I think.

In terms of deals that you're looking at right now, how would you characterize competition in the debt space? It seems like there's a ton of capital on the sidelines looking to be active, but there's really a dearth of good deals, lots of refinancing activity, and many of those have problems, but the acquisition market is quite muted. How would you characterize the state of play and competition?

Yeah, I'd say there are a number of players out there on the debt fund side. A lot of capital has been raised on the debt fund side. We are seeing a lot of competition, particularly for stabilized deals. Even in the multifamily sector, you're seeing many groups congregate around SOFR plus 250 to 300. That's tough to underwrite. The opportunities that we're hitting on are mostly repeat sponsors that have business plans we understand as equity owners, and we're able to differentiate ourselves by our relationship and being there throughout the past few years for these guys, and working through issues differentiates our platform. Also, on the CMBS side, we're getting increasingly involved in the HRR deal flow with the bigger banks and underwriters. We continue to be a select sponsor with Freddie Mac and enjoy that relationship. So we like our opportunities to be selective. The good news is for us; we don’t have to do anything. We have a stable book value, we have great credit quality, that's outperforming our dividend coverage, and we can be opportunistic and selective, and that’s a good place to be in right now.

Thanks a lot.

Thanks, Jade.

Our next question comes from the line of Stephen Laws from Raymond James. Please go ahead.

Hi, good morning. Congrats on last quarter and strong guidance for Q4. I appreciate the details you guys provide. Want to touch base, I guess, first, Matt, to start, get an idea of how unfunded commitments are funding down? How much – is that the number, the $29 million shown in the supplement, is that what was funded off your unfunded commitments? Or is that just a portion of it? And can you talk about if there's any growth on that unfunded side? And I guess not to get too long-winded, how do you think about raising capital through the Series B issuance? And is that really the capital that's going in to fund these commitments? How do you handle matching it up? How do you think about that?

Yeah. The $29 million or $30 million was funded, and that represents a committed amount, with an additional call it $100 million or $90 million to fund. The draw schedule is increasingly being accretive to us both in terms of timing and the activity. So with the Series B, it's matching somewhat dollar for dollar on that asset. To the extent we’re able to capitalize on several other opportunities, we had great meetings and are working on an A note facility with a couple of banks that really slices an AB note structure specifically on the multifamily residential side and even the Life Sciences side that we could throw loans into and achieve a great net interest margin. So we like that kind of as a second option to pair with the Series B. If any other deals arise, we have been in discussions with the rating agencies, S&P, Fitch, and Moody's, on a high-yield bond deal given where the company's balance sheet is and how under-levered we are. We think we could take advantage of that as well. So there are numerous accretive ways that we can fund growth. This is somewhat unique in the sector right now to be able to do that.

Yes. What is the coupon on that Series B?

9%.

Okay. Pretty good. Clipping a pretty good 500 basis points of spread as you raise capital there and deploy SOFR plus...

Yeah, exactly.

So that's really accretive. What is the cap? I mean, is there a limit on how much Series B can raise? Or what is the authorization there?

Yeah. I think the SOFR is $400 million total, and we've raised about $100 million of that.

Great. Switching gears a little bit, and you could touch on this a little bit. But on the multifamily side, you mentioned kind of seeing an increase in pipeline or maybe residential investments. Can you talk about what's in the pipeline? Are you looking at preferred equity investments? Are you looking at mezzanine loans? Are you looking at B pieces out of deals? Is it a little bit of everything? Just curious about where you're seeing the best opportunities as you look to get more active on that residential investment pipeline?

Yeah, you bet. So we're working with a repeat sponsor on a portfolio that involves a half purchase, half refinancing of the existing kind of garden-style portfolio in the Southwest, covering Arizona, Texas, and Georgia. That’s about a $100 million deal. Then on the construction side, we're looking at a financing of around $75 million. The remainder consists of Freddie B and Freddie K opportunities, so it's kind of $175 million to $75 million of senior loans, CMBS, and construction financing.

Fantastic. Appreciate the color this morning.

Thanks, Stephen. That is all the questions that we have in the queue. So I would like to turn it back over to management for closing remarks.

Yeah. Matt, Paul, if you have anything else, please go ahead.

No. I appreciate everyone's time this morning and look forward to talking to you again next quarter.

That concludes today's conference. Have a pleasant day, everyone.