NexPoint Real Estate Finance, Inc. Q2 FY2025 Earnings Call

Thank you for being here. My name is Kate, and I will be your conference operator today. I would like to welcome everyone to the NexPoint Real Estate Finance Q2 2025 Earnings Call. I will now hand the call over to Kristen Griffith from Investor Relations. Please proceed.

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance conference call to review the company's results for the second quarter ended June 30, 2025. On the call today are Paul Richards, Executive Vice President and Chief Financial Officer; and Matt McGraner, Executive Vice President and Chief Investment Officer. 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 Paul Richards. Please go ahead, Paul.

Thank you, Kristen, and welcome, everyone, joining us this morning. I'm going to briefly discuss our quarterly results, move to our balance sheet, and lastly, provide guidance for the next quarter before turning it over to Matt for detailed commentary on the portfolio and the macro lending environment. Q2 results are as follows. For the second quarter, we reported a net income of $0.54 per diluted share compared to net income of $0.40 per diluted share for the second quarter of 2024. The increase in net income for the quarter was due to an increase in interest income between the second quarter 2025 to the second quarter 2024. Interest income increased by $4.6 million to $22.8 million in the second quarter of 2025 from $18.2 million in the second quarter of 2024. The increase was driven by an uptick in interest income driven by increased income from investments. Interest expense decreased $700,000 in the second quarter of 2025 compared to the same period in the prior year from the deleveraging that occurred in the second quarter of '24. Earnings available for distribution was $0.43 per diluted common share in Q2 compared to $0.68 per diluted common share in the same period of 2024. Cash available for distribution was $0.46 per diluted common share in Q2 compared to $0.64 per diluted common share in the same period of 2024. The increase in earnings available for distribution was driven by the increase in net income for the quarter. We paid a regular dividend of $0.50 per share in the second quarter, and the Board has declared a dividend of $0.50 per share payable for the third quarter of '25. Our dividend in the second quarter was 0.92x covered by cash available for distribution. Book value per share increased 1% from Q1 '25 to $17.40 per diluted common share, with the increase primarily due to unrealized gain on the preferred stock investments. During the quarter, we funded $39.5 million on life science preferred, and we purchased $15.3 million CMBS IO with a bond equivalent yield of 7.24%. Moving to our balance sheet and portfolio. Our portfolio is comprised of 86 investments with a total outstanding balance of $1.1 billion. Our investments are allocated across the sector as follows: 49.5% multifamily, 32.7% life science, 15.5% single-family rental, 1.6% storage, 0.7% marina and 0.1% specialty manufacturing. Our fixed income portfolio is allocated across investments as follows: 28.3% CMBS BPs, 24.9% mezz loans, 18.7% preferred equity investments, 12.9% revolving credit facilities, 10.4% senior loans, 4.5% IO strips and 0.1% promissory notes. The assets collateralizing our investments are allocated geographically as follows: 27% Massachusetts, 15% Texas, 6% California, 6% Georgia, 4% Maryland, 4% Florida, with the remainder across states with less than 4% exposure, reflecting our heavy presence and preference for Sunbelt markets with the Massachusetts and California exposure heavily weighted towards life science. The collateral on our portfolio is 74% stabilized with a 58.5% loan-to-value and a weighted average DSCR of 1.44x. We have $815.6 million of debt outstanding with a weighted average cost of 5.9%. Our debt is collateralized by $865.4 million of collateral with a weighted average maturity of 3.8 years. Our debt-to-equity ratio is 1.14x. Moving to our guidance for the third quarter. We are guiding to earnings available for distribution and cash available for distribution as follows: earnings available for distribution of $0.42 per diluted common share at the midpoint with a range of $0.37 on the low end and $0.47 on the high end. Cash available for distribution of $0.50 per diluted common share at the midpoint with a range of $0.45 on the low end and $0.55 on the high end. Now I'd like to turn over to Matt for a detailed discussion of the portfolio and markets.

Thank you, Paul. As he mentioned, we're happy to report another strong quarter despite a challenging macro environment. I want to take a few minutes to discuss our verticals and what we're observing before I talk about our pipeline. In the residential sector, supply pressures have somewhat eased but still pose concentrated challenges, particularly in Sunbelt markets. According to RealPage, the second quarter of 2025 marked the first quarterly decline of over 20 basis points in inventory growth in over 15 years, as new deliveries decreased after peaking in late 2024. Despite this slowdown, over 400,000 units were delivered in the last 12 months, maintaining heightened competition and lease-ups. The outcome is that after one more quarter of significant deliveries in the third quarter of 2025, the national delivery outlook contracts to a Great Financial Crisis level output of just 77,000 units per quarter, which supports our view on accelerating fundamentals in the multifamily sector in 2026, 2027, and 2028. On a more positive note, demand exceeded expectations in the first half of the year. Net absorption surged and the national stabilized occupancy rate improved to 94.6% in July. Although new lease rates remain modestly negative in most of our markets as operators take a defensive stance, we are optimistic that rental rates will continue to rise as the supply picture improves. In the storage sector, the REITs projected flat to very low single-digit revenue growth and flat to negative 1.5% NOI growth in 2025. First-quarter earnings were slightly better than anticipated, but guidance remained unchanged. Commentary following the Nareit meeting in June indicated rising occupancies and improving rates; however, the sluggish housing market continues to affect self-storage demand. Home sales are at a multiyear low and mortgage rates are still high, dampening the 2025 peak leasing season. Nevertheless, the REITs are pushing street and web rates, which could support second-quarter results, and they have done so thus far. REITs with exposure to major markets, such as Extra Space, Public Storage, and SmartStop, are outperforming in terms of occupancy, exceeding their 2025 projected averages, while operators in secondary and tertiary markets are underperforming. In terms of supply outlook, new development remains below equilibrium at under 2.5% of existing supply, and with limited bank financing, high land and construction costs, and elevated interest rates, supply continues to be constrained. This discipline in supply should help restore pricing power as housing activity picks up. Finally, in the life science sector, lab leasing remains difficult, especially due to uncertainties around tariffs and NIH funding under the new administration. However, we're pleased to report significant momentum at our Alewife project, closing in on a 245,000 square foot lease with an AI biologics company for a 15-year deal, yielding a debt return of just over 8% for this portion of the project. We anticipate a formal announcement in the first half of the third quarter and are excited about this upcoming development. Additionally, as Paul mentioned, we were able to make an accretive disposal last week, enhancing our liquidity to support our pipeline. Currently, our active pipeline of originations exceeds $235 million, mostly concentrated in the residential sector. We expect this added pipeline activity to result in an increase in our cash available for distribution run rate in the high single digits. In conclusion, our portfolio's underlying credit profile remains robust at the top of the commercial mortgage REIT sector. Moreover, we consistently maintain one of the lowest leverage profiles among commercial mortgage REITs, which provides us with various capital options to pursue growth. We are excited about our growth and remain cautiously optimistic about the overall market dynamics as we enter the second half of the year. I want to thank the team for their hard work, and I will now turn the call over to the operator for questions.

Your first question comes from the line of Jade Rahmani with KBW.

Can you comment on credit trends within the Freddie Mac B-Piece portfolio? Both GSEs talked about a slight uptick in delinquency trends within their portfolio.

Yes, our B-Piece portfolio remains strong when compared to other CRE CLOs from the 2021 and 2022 vintages. Our B-piece spans from 2018 to 2025, and we have solid collateral with a good mix of diversified fixed and floating deals. While there are a few problem loans, overall, especially on the fixed side, the portfolio has shown a sturdy credit profile. In the floating rate vintages from the 2021 pool, there are some loans we are monitoring, but currently, we have no major concerns. Matt, do you have anything to add?

Yes. I think given the amount of liquidity in the market for resi in particular, we're optimistic that some of the troubled assets just broadly across all K deals and even in our portfolio are going to be able to catch a bid here in the second half of the year, and the borrowers will be able to have liquidity options available to them, whether it's more agency or the debt funds are getting more aggressive, in particular, on the multifamily sector. So with the liquidity profile, I think everyone is waiting out the kind of the first half of 2025, looking forward to 2026 and expect the overall delinquency picture to improve going into the back half of the year, even though we're still in a challenging supply environment.

On the Life Science side, can you talk about pro forma for that lease that you mentioned? What the occupancy would be at that point? I mean...

Yes, it's about two-thirds of the first phase of the project, which corresponds to our loan. As I mentioned, two-thirds will be leased after the deal announcement.

So once that happens, how much duration will there be remaining on this loan?

Roughly 2.5 years.

But importantly, we're already seeing and in talks with back leverage and A note lenders. And with the lease, we have a lot more financing options to us to probably be taken out before that.

This project appears to be quite distinct from or resilient against the pressures currently affecting the life science sector as a whole. For instance, several mortgage REITs have downgraded life science loans to risk level 5 and set aside reserves this quarter.

Yes. The good news for us is that we started this loan in early 2024, rather than in 2020, 2021, or 2022. This, combined with the sponsor's $400 million of equity compared to our $218 million mortgage, and the lease we secured, places us in a different position than our peers.

I wanted to ask your thoughts on the seniors housing space. The thought is that COVID really outweighed the favorable demographic trends underpinning that sector because there were huge inflation in operating costs and a lot of delinquent tenants that remained in occupancy. The inflation rate has moderated and the delinquencies are being reversed. So the fundamental outlook for that sector is much improved. Do you agree with that? And are you interested in adding exposure to that? What are your thoughts generally?

Yes, I completely agree. Just look at Welltower's strong performance over the past few years. They are also expanding into build-to-rent and specialized projects for the aging population, which is attracting significant capital. We have invested in the build-to-rent sector, and senior housing projects with high amenities are also drawing good capital and favorable cap rates. I believe this is a promising area to focus on. We have explored a few purpose-built senior build-to-rent opportunities, but we haven't secured any yet. However, I see it as an appealing market with potential throughout this decade. So yes, we are definitely interested in this space.

I'll stay tuned for that. You all have been pretty nimble at identifying those kinds of opportunities. So I imagine it's something you'll look at.

Yes, I agree, thanks Jade.

I will now turn the call back to the management for closing remarks.

Thank you very much for everyone's time today, and we look forward to speaking to you after the third quarter. Goodbye.

Ladies and gentlemen, that concludes today's call. You may now disconnect. Thank you.