Earnings Call Transcript - NREF Q3 2025

Operator, Operator

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 Q3 2025 Earnings Call. I will now turn the call over to Kristen Griffith from Investor Relations. Please proceed.

Kristen Griffith, Investor Relations

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, 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.

Paul Richards, Executive Vice President and Chief Financial Officer

Thanks, 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 a detailed commentary on the portfolio and the macro lending environment. Third quarter results are as follows: for the third quarter, we reported a net income of $1.12 per diluted share compared to net income of $0.74 per diluted share for the third quarter of 2024. The increase in net income for the quarter was due to an increase in unrealized gains on preferred stock and stock warrant investments between the third quarter 2025 and the third quarter 2024. Earnings available for distribution was $0.51 per diluted share in Q3 compared to $0.75 per diluted share in the same period of 2024. Cash available for distribution was $0.53 per diluted share in Q3 compared to $0.67 per diluted share in the same period of 2024. We paid a regular dividend of $0.50 per share in the third quarter, and the Board has declared a dividend of $0.50 per share payable for the fourth quarter of 2025. Our dividend in the third quarter was 1.06x covered by cash available for distribution. Book value per share increased 8% from Q2 2025 to $18.79 per diluted share, with the increase being primarily due to unrealized gain on our preferred stock investment and stock warrants. During the quarter, we funded $42.5 million on a life science preferred. During the quarter, the company funded $6.5 million on the loan that pays a monthly coupon of SOFR plus 900 basis points. The company sold a multifamily property for $60 million that resulted in a $3.7 million gain and raised $65.7 million in gross proceeds from the Series B preferred stock raise. On October 27, 2025, NREF announced a fourth quarter dividend of $0.50 per common share. Moving to the portfolio and balance sheet, our portfolio is comprised of 88 investments with a total outstanding balance of $1.1 billion. Our investments are allocated across sectors as follows: 47.3% multifamily, 33.9% life sciences, 15.9% single-family rental, 1.8% storage and 1.1% marina. Our fixed income portfolio is allocated across investments as follows: 27% CMBS B-Pieces, 26.5% mezz loans, 18.6% preferred equity investments, 12.4% revolving credit facilities, 10% senior loans, 4.2% IO strips and 1.3% promissory notes. The assets collateralizing our investments are allocated geographically as follows: 28.1% Massachusetts, 15.5% Texas, 8% Georgia, 5.3% California, 4.2% Maryland, 4% Florida, with the remainder across states with less than 4% exposure, reflecting our heavy preference for Sunbelt markets with Massachusetts and California exposure heavily weighted towards life science. The collateral on our portfolio is 87.4% stabilized with 54.9% loan-to-value and a weighted average DSCR of 1.41x. We have $720.9 million of debt outstanding with a weighted average cost of 5.3%. Our debt is collateralized by $633.2 million of collateral with a weighted average maturity of 3.9 years and a debt-to-equity ratio of 0.93x. After the quarter, we paid off our $36.5 million senior unsecured notes with a new senior unsecured note offering of $45 million. The coupon on the new notes is 7.875%, a slight increase to the 7.5% notes we issued in October of 2020 when interest rates were near 0%. The new notes carry a term of 2 years with the prepayment options, providing flexibility in this declining rate environment. We're pleased with this execution and look forward to terming out the remaining senior unsecured notes in the first half of '26. Lastly, we have been making great strides in our Series B preferred raise, which has almost hit the $400 million offering limit. Given the heightened demand, we are now in the process of launching a Series C preferred, which will be a $200 million offering at an 8% coupon, where we will continue to deploy capital at 400 basis point plus spreads at the cost of this capital. Moving to guidance for the fourth quarter, we are guiding an earnings available for distribution and cash available for distribution as follows: earnings available for distribution of $0.48 per diluted share at a midpoint with a range of $0.43 on the low end and $0.53 on the high end. 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. Now I would like to turn it over to Matt for a detailed discussion of the portfolio and markets.

Matthew McGraner, Executive Vice President and Chief Investment Officer

Thank you, Paul, and I appreciate the team's hard work on asset management and sourcing as we conclude another successful quarter. I'd like to take a few minutes to discuss our key verticals and then our pipeline. In the residential sector, we are nearing the end of a record national new multifamily supply cycle. CoStar reported that annual net deliveries peaked at 695,000 units in the trailing 12-month period ending in the fourth quarter of 2024. This is compared to an average of 351,000 units delivered annually over the previous five years from 2014 to 2019, and 282,000 units on average since 2001. CoStar forecasts net deliveries will reach 697,000 units in 2024, followed by 508,000 units in 2025 before seeing a substantial decline in 2026 by 49% and another 20% in 2027. Deliveries in Q3 2025 are down 17% quarter-over-quarter, marking the last quarter with more than 100,000 units delivered. There is an expectation for an increase in third quarter deliveries, but a significant drop is anticipated in Q4 2025, now forecasted at just 69,000 units, down 52% year-over-year and 41% quarter-over-quarter. This signals the start of an extended period where deliveries are expected to be below the long-term national average. The forecasts for deliveries in 2027 and 2028 have also been revised down. CoStar now expects deliveries of 234,000 units in 2027, a 17% decrease from last December's forecast of 283,000 units, and in 2028, a forecast of 230,000 units, reduced from the earlier expectation of 308,000 units, a 27% drop. Overall, cautious optimism best describes our rental market outlook, and we believe that 2026 will bring positive revenue for the first time in several years. Regarding storage, second quarter earnings for the REITs were consistent with guidance and in line with sell-side estimates. We expect Q3 same-store revenue will be flat year-over-year, with same-store NOI slightly declining. This mirrors our full-year outlook for the sector: stable revenue and a 50 to 150 basis points decline in NOI. The peak leasing season was again shorter and more erratic compared to the pre-COVID era, with April and May performing well while June and July saw lesser results. As previously noted, the sector has been negatively affected by stagnation in the housing market, a major demand driver for self-storage. However, there is better news regarding rates. After about eight quarters of falling rates, with some plummeting as much as 20% from COVID highs, rates are starting to rise again. John Good, the CEO of our storage platform, attended EXR's Partners Conference last week, where it was reported that rates increased across their 4,000 stores from June through September. While there is a lag effect with rising rates, this trend suggests that revenue growth in 2026 will surpass that of 2025 and that NOI growth should return. Supply remains low; facilities under construction are less than 3% of existing supply, the benchmark for equilibrium. Yardi predicts that deliveries in the coming years could be as low as 1% of new supply, which should enhance pricing power within the industry, enabling revenue and NOI growth to return to the traditional 3% to 5% range. Additionally, experienced developers have reported that securing bank financing remains challenging and costly, compounded by persistent inflation in materials, which has deterred some from moving forward with new supply. Elevated interest rates compared to the 2015 to 2020 development cycle further support revenue growth heading into 2026. In the life sciences sector, our Alewife project has secured a long-term lease with Lila Sciences, a pioneering AI and life science company, for 245,000 square feet, with options for future expansion. This lease solidifies the project and provides a robust foundation for leasing momentum, potentially catalyzing a new AI cluster at Alewife. This arrangement opens up additional capital market opportunities for both NREF and the borrower as it represents one of many positive developments we are witnessing in our life science investments. I am also very pleased with our current pipeline and the array of capital options to capitalize on these opportunities. Currently, the pipeline includes over $350 million of investments: $120 million in multifamily, $75 million in BTR, $45 million in small bay industrial storage, and $80 million in life sciences and advanced manufacturing loans. In summary, our credit profile remains robust at the top of the commercial mortgage REIT sector. We continue to maintain one of the lowest leverage profiles among commercial mortgage REITs, providing us with various capital options to pursue accretive growth and fund our promising pipeline of investments. With our solid dividend coverage, low leverage, stable book value, and available capital options, you can expect us to buy back stock when opportunities arise while pursuing these new investments. We are enthusiastic about our growth and cautiously optimistic about the overall market conditions as we approach 2026. Thank you to the team for their hard work, and now we would like to turn the call over to the operator for your questions.

Operator, Operator

Your first question comes from the line of Jason Sabshon with KBW.

Jason Sabshon, Analyst

It would be helpful to hear just your updated view on the life science sector. We're seeing soft tenant demand and oversupply in some markets. And then specifically, as it relates to NREF's exposure, just your thoughts there. And if there's any color you can provide on leasing at the asset, that would be helpful.

Matthew McGraner, Executive Vice President and Chief Investment Officer

Yes, definitely. The positive aspect of our life sciences portfolio is that we didn't begin making life science loans until 2024. Most of the challenges in the sector arose from projects funded shortly after COVID during a period of extreme liquidity and excitement. Weakness, as seen in Alexandria's reports, primarily relates to their B assets in noncore markets. However, they are experiencing strong leasing and solid tenant demand in key markets like San Diego, San Francisco, and their master planned communities in Cambridge and Boston, which is where we have our exposure. We are concentrating on first-to-fill assets, including the Alewife project, which has a roughly 30% loan-to-cost ratio and represents the bulk of our life sciences exposure. The good news is that the first lease with Lila, supported by Mag 7 style investors, is expected to create a cluster effect at the project. We are already getting additional interest in leasing. As the project is currently two-thirds occupied and the tenant is expected to take space by the end of the year, we have several options to leverage the liquidity provided by this lease. We could A note it, refinance, or even sell the loan, especially since it's priced at SOFR 900, which is undervalued now for a stabilized life science project. Overall, this lease reinforces our precision-based investments and allows us to opportunistically benefit at a time when liquidity in the space was minimal, and I am very proud that one of our initial investments in life science is yielding results for both the company and our shareholders.

Jason Sabshon, Analyst

Great. Now shifting to multifamily, it's clear from your remarks that the supply backdrop is improving. However, we have noticed some pressure in the bridge lending area. Could you share your preference for deploying capital into senior loans compared to mezzanine, preferred, or equity ownership? Also, what are your thoughts on the current softness we've observed in the bridge space?

Matthew McGraner, Executive Vice President and Chief Investment Officer

Yes, I believe most of the challenges in the bridge space stem from the floating rate bridge loans that were issued in 2021 and 2022 with 2- or 3-year maturities that cannot be refinanced at present. Many people are choosing to extend their loans, which I think is a reasonable strategy, as I mentioned earlier. There is a light at the end of the tunnel; it's not a matter of if it will improve, but when. Recently, August and September showed some disappointing results in the multifamily sector, but we are now beginning to see new lease growth emerging in most of the major metropolitan areas. Notably, new lease growth is gaining traction in markets with historically limited supply, like San Francisco, New York, and Chicago. The Sunbelt region remains challenging, but there is strong job growth demand for multifamily housing there. It may take a bit longer to see this impact, likely in the second or third quarter of 2026, when we expect new lease growth to increase in the Sunbelt. This is a reason for optimism. If you have a bridge loan and can afford to wait, whether you are a borrower or a lender, it’s wise to position yourself to take advantage of the upcoming new lease growth. There is certainly some pressure, but I believe it's manageable. Unlike sectors such as office or hospitality, which face significant capital expenditure challenges, the multifamily and residential markets will rebalance as they are significantly undersupplied. Once we see new lease growth starting next year, capital will come back into the market. The cost of equity financing will again play a crucial role, and I anticipate a significant increase in transaction volumes by 2026. So, while it is still a bit tough now, there are positive signs for the future.

Operator, Operator

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

Matthew McGraner, Executive Vice President and Chief Investment Officer

Thank you all for your participation today, and look forward to speaking next quarter. Thanks again here for the team at NexPoint, and good day.

Operator, Operator

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