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Operator: Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Real Estate Finance Fourth Quarter 2022 Conference Call. Today’s conference is being recorded. And all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. And I will now turn the conference over to Kristen Thomas. You may begin.

Kristen Thomas: 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, 2022. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; Matt Goetz, Senior Vice President, Investment and Asset Management; and Paul Richards, Vice President, Originations and Investments. As a reminder, this call is being webcast through the company’s website at invest.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 the 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 that was filed earlier today. I would now like to turn the call over to Brian Mitts.

Please go ahead, Brian.

Brian Mitts: Thank you, Kristen. I appreciate everyone joining us today. I’m joined with our entire team here. So we’ll be giving some commentary. I’m going to start briefly discuss our results for the quarter and the year, provide guidance for the first quarter and then turn it over to the team for some detailed commentary on the portfolio and the lending environment. I’ll start with Q4 results, which are as follows. The fourth quarter, we reported a net loss of $0.16 per diluted share compared to net income of $0.92 per diluted share for the fourth quarter of 2021. The decrease in net income as a result of lower prepayments in Q4 2022 and mark-to-market adjustments on our common stock and CMBS portfolios. Interest income increased 4.8% over Q4 in 2021, driven by a 166 basis point increase in average yield on investments, offset by lower prepayments in Q4 2022.

Interest expense increased 47.5%, driven by 116 basis point increase in average borrowing rate. Earnings available for distribution was $0.49 per diluted share in Q4 compared to $0.54 per diluted share in the same period in 2021. Cash available for distribution was $0.52 per diluted share in Q4 compared to $0.63 per diluted share in the same period in 2021. Decrease in earnings available for distribution and cash flow distribution is the result of lower prepayments on our SFR portfolio in Q4. 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. The Board also declared a special dividend of $0.185 per share for the first quarter, and we intend to pay additional special dividends of $0.185 per quarter for the remainder of 2023.

Our dividend in fourth quarter was 0.98x covered by earnings available for distribution and 1.04x covered by cash available for distribution. Book value per share decreased 2.76% quarter-over-quarter to $20.11 per diluted share as a result of the mark-to-market adjustments on our common stock and CMBS portfolios. During the quarter, we originated two investments with $19 million of outstanding principal with a combined current yield of 11%. One investment partially redeemed for $10.8 million of outstanding principal. Moving to the full year results now. For the full year 2022, we reported net income attributable to common shareholders of $0.51 per diluted share compared to net income of $3.93 per diluted share for the same period in 2021. Again, this is largely driven by lower prepayments in our SFR portfolio in the period and mark-to-market adjustments.

Earnings available for distribution was $2.75 per diluted share year-to-date compared to $1.89 per diluted share in the same period of 2021, an increase of 45.5%. Cash flow available for distribution was $3.21 per diluted share year-to-date compared to $2.21 per diluted share in the same period of 2021, an increase of 45.2%. Higher year-over-year earnings available for distribution and cash available for distribution for the year were driven by higher prepayments and requisite prepaid penalties in the first and second quarter of 2022. As of today, the outstanding total portfolio stood at $1.7 billion proposed at 85 investments. Weighted average loan to value and debt service coverage ratios for our debt securities were 68.6% and 1.78x, respectively.

As of today, the company’s debt-to-book value ratio is 2.6x. Our dividend for the year was 1.38x covered by earnings available for distribution and 1.61x covered by cash available for distribution. Book value per share decreased 6.5% year-over-year to $20.11 per diluted share. Moving to guidance for the first quarter. We are guiding to earnings available for distribution and cash available for distribution as follows. Earnings available for distribution $0.47 per diluted share at the midpoint with a range of $0.42 on the low end and $0.52 on the high end. Cash available for distribution of $0.50 per diluted share at the midpoint with a range of $0.45 per share on the low end and $0.55 per share on the high end. The decrease in cash available for distribution earnings available for distribution for the fourth quarter is driven primarily by expected redemptions in the first quarter.

So with that, let me turn it over to the team for a detailed discussion of the portfolio and credit markets. Matt Goetz?

Matt Goetz: Thanks, Brian. The fourth quarter and full year 2022 results continued to show strong performance across each of our investments in asset classes. We continue to focus on investment verticals where we believe we have an advantage due to our experience in owning and operating commercial real estate, our ability to leverage information from being both an owner and operator and lender to commercial real estate investment allows us to find relative value throughout the capital stack with the goal of delivering higher-than-average risk-adjusted returns. We continue to believe our investment strategy is focusing on credit investments and stabilized assets, conservative underwriting at low leverage with well-yield sponsors will provide consistent and stable value to our shareholders.

During the fourth quarter, the loan portfolio continued to perform strongly and is currently composed of 85 individual assets with approximately $1.7 billion of total outstanding principal. As Brian mentioned, the loan portfolio is 96% residential with 43% invested in loans collateralized by single-family rental properties and 53% invested in multifamily, primarily via Agency CMBS. The remaining 4% of the loan book is life sciences and self-storage. The portfolio’s average remaining term is 5.9 years is 92% stabilized has a weighted average loan-to-value of 68.6% and an average debt service coverage ratio of 1.78x. The portfolio is geographically diverse with a bias towards the Southeast and Southwest markets. Texas, Georgia and Florida continue to be the largest portion of our portfolio at approximately 51%.

100% of our investments are current. From the beginning of the fourth quarter through today, we were able to close four new investments totaling approximately $34 million with a weighted average unlevered yield of 11.8%. In summary, we continue to find 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. I’d now like to hand the call over to Paul Richards.

Paul Richards: Thanks, Matt. During the fourth quarter, the company was not active in the primary or secondary bond market but continue to source, underwrite and evaluate potential investment targets daily. We’ve again stressed the entire CMBS portfolio by shocking cap rates and NOI growth determine how far cap rates could theoretically widen and interest rates could rise until the portfolio’s bond performance would deteriorate. The results are somewhat as expected. The vast majority of the portfolio has demonstrated strong NOI growth over the past three years and refi risk is minimal even at the stress rates. The long-dated nature of the CMBS BP’s portfolio provides an appealing backdrop. We firmly believe in the resiliency of the residential space in the current inflationary environment and the safety of these investments.

We continue to be prudently levered on our repo financing at approximately 64% LTV at quarter-end and have continuous dialogue with our repo lending partners on the state of the market and the finance portfolio. Lastly, touching on the continued performance of the SFR loan pool. All SFR loans are €“ in the portfolio are currently performing and displaying strong metrics in terms of rent growth and occupancy as the demand for SFR continues to be robust. The portfolio did not have an SFR paydowns in the fourth quarter. To finalize our prepared remarks before we turn it over for questions, I’d like to turn it back over to Brian Mitts.

Brian Mitts: Thanks, guys. Yes, so we’ll turn it over to questions now.

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Operator: Thank you. And we will take our first question from Crispin Love with Piper Sandler. Your line is open.

Crispin Love: Thanks. Good morning, everyone. First question on prepays. I don’t think I saw it in the release, but what were prepays in the quarter versus last quarter? And do you expect prepays to remain lower over the near-term?

Paul Richards: In terms of SFR, yes, I think we would expect the prepayments probably to be less prevalent in Q1 of this year, Q2 this year as rates continue to kind of start at that 4% type 10-year rate. So I think we probably won’t see as much action in terms of prepayment, but we’ll continue to evaluate.

Crispin Love: All right. Thanks. And then can you speak to your views on both multifamily and SFR right now? It seems like you’re a little bit more bullish on SFR, but just with debt cost at 8% to 9% cap rates still probably in about the 5% range. Are you seeing demand pull back a lot from borrowers? Or are there pockets or asset classes where borrowers are still active?

Matt McGraner: Yes. It’s Matt McGraner. I would say just generally, the transaction market, and this isn’t a surprise to anyone on this call, is somewhat muted. I think deal volume is down 70%, 80% from a year ago. So that also equates to lower demand for borrowings. Obviously, refinancings are few and far between also because we don’t have a stabilized 10-year terminal rate yet. So I think most participants that we’re including ourselves on the equity side are waiting for a pause or a pivot or some more clarity from the Fed. Notwithstanding that, the greater transaction €“ or excuse me, the greater performance in SFR and multi-family continue to be strong, both in our businesses, at least, we’re still seeing high-single-digit same-store NOI growth. So notwithstanding the fact that there’s no price discovery that the business is SFR and multi are still performing very well.

Crispin Love: Thanks, Matt. And then if I could just squeeze just one last one in. Can you just provide any detail on what you’re seeing on multi-family and single-family rents right now and how they’re growing on a year-on-year basis, and then, I guess, month-on-month as well.

Matt McGraner: Yes. So year-over-year market rent growth that we’re €“ I’m speaking mostly to the Sunbelt Smile. Year-over-year growth is roughly 4% to 6% so far in the first quarter. That’s a little bit skewed because there’s a pretty dramatic earn-in from the prior year leases that were signed in the 15% to 25% range. So total rent growth for the year is €“ at least in our portfolio is kind of 10% to 12%, so it’s still historically healthy. On the SFR side, there’s the same dynamic, but to a little bit lesser extent. I’d say single-family rents are year-over-year, 6% to 8% with a smaller earn-in. Quarter-over-quarter, they’re decelerating. Multi-family was €“ we finished the year low single digits for first quarter was 6%-ish. So they are decelerating. Same thing with that so far, but to a lesser extent.

Crispin Love: Thanks. I appreciate. Thanks for taking my questions.

Operator: And we will take our next question from Stephen Laws with Raymond James. Your line is open.

Stephen Laws: Hi. Good morning. Congrats on a nice year. I mean, certainly, great seeing a special dividend. It’s a pretty material size special as well. So congrats on that. When you look at your investment pipeline, I know you talked about the two equity deals you did in the last quarter. But when you look at the pipeline and where you’re seeing the best opportunities as you think about portfolio mix and how that may or may not shift over the year, how is your pipeline building? Where do you guys see the best opportunity to deploy capital kind of as you look out the next six months?

Matt McGraner: Yes, I think you’re going to see us water some grass in the life science space. We’re underwriting about $400-ish million of preferred equity in mezz opportunities. When I say mezz, it’s not true kind of 60% to 80% of the stack, but more kind of 55% to 65% of the stack. There’s a number of opportunities both in the lab kind of redevelopment and in the CGMP space that we’re spending a lot of time on. That space historically, at least on the CGMP side, not well banked. So we’re defining a niche in that space, as we speak. So I would expect that portion, if you’re looking at a pie chart, to expand from where it is. I think it’s now roughly 2% to 3% to maybe 10%, 12%. So that’s probably the overwhelming majority of what we’re doing right now, but we still have a robust pipeline in the private multifamily preferred as well.

Stephen Laws: Great. Thanks. And Brian, maybe a quick answer, but any impact of CECL as far as implementation, any change to marks or book value reserve or anything we need to consider with our models?

Brian Mitts: Yes. So in the K, we’re going to have a range of what the impact is going to be. It will be a little bit of an impact. But the implementation is proceeding well, and we’re on target. So starting this quarter, we’ll be reporting under CECL.

Stephen Laws: Great, well, I’ll look for that K. And thanks for the comment this morning.

Brian Mitts: Thank you.

Operator: And we’ll take our next question from Jade Rahmani with KBW. Your line is open.

Jade Rahmani: Thank you very much. Just to follow-up to Stephen’s question. Is there any percentage impact to book value you could comment on, on this call from CECL?

Brian Mitts: Not as of 12/31, but there’ll be a little bit of an impact starting this quarter. So I think on a go-forward basis, the CECL amount is a little bit more than our loan loss provisions is calculated without CECL.

Jade Rahmani: Okay. Thanks very much. In terms of the credit outlook for commercial real estate broadly, since the NexPoint platform can be somewhat opportunistic. Do you expect to play in any of the buckets of distress or opportunistic investment that’s playing out, whether it be office repositioning, whether it be, I think you mentioned preferreds in multifamily? But how do you feel overall about that kind of segment of the market?

Matt McGraner: Hey Jade, it’s Matt McGraner. I’d say we’re pretty hands off. I do know folks and a lot of smart folks that are playing in office, SASBs are heavy weighted office condo in retail that are pretty significantly distressed. Since we don’t have a big operating platform in office or retail or any of the higher CapEx type of property types, we’re not €“ I wouldn’t put our investors’ money in those sides of transactions at this point.

Jade Rahmani: Okay. Wanted to ask about multifamily, I think five markets constitute about 25% of the 1 million units currently under construction, including €“ growth markets such as Phoenix and Austin. What are your thoughts about the market’s ability to absorb that supply and whether it creates any issues downstream?

Matt McGraner: Yes. We see supply peaking in either Q4 this year or Q1 of next year. Largely, the units are in the Sunbelt Smile where we operate, the NXRT’s assets, albeit at a lower price point. There will be some softness in terms of occupancy and rents in our view, in the Sunbelt Smile with €“ over the next, like I said, a year or so. But after that, deliveries fall off a cliff. They’re basically going from 387,000 units delivered in the fourth quarter of this year down to 126,000 in the fourth quarter of 2024. So that’s €“ and then they’re down to €“ in Q3 of 2025 to 12,000. So that’s the data that we’re seeing. There will be kind of a short-term blip, I think, in terms of softness in these areas, mostly on the higher end type of product. But I think you want to be an owner of assets and owner of multifamily in late 2024 and 2025.

Jade Rahmani: And on the single-family for rent side, how is performance tracking relative to your expectations. There’s clearly a moderation in rent growth that we’re seeing as well as an uptick in turnover, which is driving increased expense. And then there’s also still inflation pressures on the expense side. Nevertheless, rents are still high, and occupancy is high. Any performance issues on the single-family for rent side?

Brian Mitts: Not in our portfolio nor in the loan portfolio that we have. As you mentioned, rents are still going up at a pretty good clip, and I think mitigating some of the other cost increases ever seen. So NOI growth is still relatively strong. We don’t see any issues in our portfolio with that or in the future.

Jade Rahmani: Thanks very much.

Brian Mitts: Thanks Jade.

Operator: And ladies and gentlemen, we have no further questions at this time. I will now turn the call back over to our presenters for any additional or closing remarks.

Brian Mitts: No, we’re well good. Appreciate everyone’s time and thoughtful questions. I appreciate it. We’ll talk to you next quarter.

Operator: And this concludes today’s conference call. We thank you for your participation. You may now disconnect.