Thank you for standing by. My name is Amy and I will be your conference operator for today. At this time, I would like to welcome you to the NexPoint Real Estate Finance Q2 2024 Earnings Conference Call. Please note that all lines have been placed on mute to prevent any background noise. It is now my pleasure to turn the call over to Kristen Thomas, Investor Relations. Please begin.

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, 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 webcasted 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 more a 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. I'm going to briefly discuss our quarterly results and then give our guidance for the next quarter, before turning it over to the team for a detailed commentary on the portfolio and the macro lending environment. Q2 results are as follows. For the second quarter, we reported net income of $0.40 per diluted share compared to net income of $0.33 per diluted share for the second quarter of 2023. The increase in net income for the quarter was due to the change in net assets related to consolidated CMBS [indiscernible], including the sale of CMBS BPs for a realized gain of $6.2 million. Net interest income increased by $2.5 million to $6.7 million in the second quarter from $4.2 million in the second quarter of 2023. The increase was driven by an increase in interest income, which was driven by higher rates as well as lower interest expense from deleveraging that occurred in the first quarter this year. Earnings available for distribution was $0.68 per diluted share in Q2 compared $0.50 per diluted share in the same period of 2023. Cash available for distribution was $0.64 per diluted share in Q2 compared to $0.53 per diluted share in the same period of 2023. 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 2024. Our regular dividend in the second quarter was 1.28 times covered by cash flow available for distribution. Book value per share decreased 1.1% from Q1 2024 to $16.51 per diluted share, with the decrease being primarily due to the…

Thanks Brian. The second quarter results exhibited strong performance across each of our investment sectors. Our approach continues to center on areas where 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 outside risk adjusted returns. 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 to consistently provide dependable value to our shareholders. In the second quarter, despite improving yet still less than ideal conditions in the commercial real estate market, we were able to deploy capital in accretive investments as well as take advantage of strong bids in the secondary bond market and recycle more seasoned bonds into other opportunities. Our loan portfolio continued to remain stable, comprising of 85 individual assets with approximately $1.2 billion in total outstanding principal. The portfolio is geographically diverse with a preference towards Sunbelt markets. From the beginning of the first quarter through today, the company has been very active in underwriting and deploying capital. During the quarter, we completed the purchase of a new issue five-year fixed Freddie Mac B-Piece investment with attractive metrics. The securitization has high 50% LTV, 1.3 x plus DSCR and a diverse geographical footprint with great sponsorships. The B-Piece will yield an all-in unlevered fixed rate of 9.5% and with utilizing reasonable leverage we expect to generate a mid-teen lever return on a strong collateral pool. The company also funded an additional $55 million of life science senior loan which bears an interest rate of silver [ph] plus 900. On the disposition…

I appreciate it Paul. As he just mentioned, Q2 was an active investment quarter in which we originated $200 million worth of deals across multifamily and life science verticals. The $150 million bridge loan originated during the quarter is emblematic of great opportunities in the market turn outsized, risk adjusted returns. We are seeing wonderful opportunities to make senior secured loans on new construction, redevelopment and increasingly last mile TI funding in the life sciences sector at great [indiscernible]. These loans are underwriting to mid-50% LTVs with all-in mid-double-digit returns. The other material investments made during the quarter were in the Freddie Mac KB [ph] program, where multifamily credit quality and underlying performance continues to outperform expectations even in the face of record supply. Same-store NOI growth continues to improve in the residential sector broadly, with demand being quite exceptional during the first half of the year. Supply is expected to peak in the second half of the year and I'd like to share a couple of stats from our research tracking starts and deliveries. Annual starts in the multifamily sector are now at their lowest level in 10 years, approximately 280,000 units per year. The year-over-year drawdown in starts from 2023 is approximately 40%. 2Q 2024 quarterly starts came in at just 38,000 units nationally, which would represent an annual run rate of 150,000 new units or 50% of the trailing 10-year average. Trailing 12-month starts are way down from the peak across all major metros including Sunbelt markets, down anywhere from 40% to 60% versus 2020s peak. Finally, real page forecasts return to normal 2% to 4% annual organic rent growth in 2025. Meanwhile, we remain pleased with our solid Q2 results, especially on a relative basis. Our portfolio continues to perform exceptionally well and despite these short-term supply challenges in multifamily, underlying performance in multi-SFR storage and life sciences remain stable. To close, we're excited about these opportunities in the coming quarters and 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. And now we'd like to turn the call over to the operator for questions.

Hi. Good morning.

Good morning.

Nice quarter. I appreciate the comments and the guidance as always. I wanted to touch base just how you think about the capital raising with the perpetual Series B, as well as the funding of the life sciences investment? Do those two things sort of match up as the drawdown matches the capital raising? And then outside of that, where do you stand on redeploying the capital that was supporting the large repayment that occurred in Q1?

Yes. Hey Steve, and I'll start. It's Matt. Good morning. On the capital raising front with the Series B, it's actually matching up pretty well. We're raising roughly $15 million or so approximately a month in that. And that fairly matches draws of about $15 million to $20 million a month. So from a timing perspective, it's actually working out really well. And one reason why we think that, why we are forecasting guidance covering our dividend going into the second half of the year and feel good about that. And then in terms of redeploying the payback from the loan payoffs, we've largely delevered by that. And then we're reviewing several capital markets options on how best to re-lever the balance sheet and match new investments with those opportunities. But for now, the Series B is kind of making it easier and consistent for us to redeploy the capital and match fund the Cambridge loan.

Great. And as a followup, I wanted to talk about the kind of, I hate to say transition, but a little bit of a shift in the portfolio and probably the right time in the cycle to do it. I imagine it's a little less stabilized, a little lower DSCR, but it's also seen the LTV drop a good bit. So it seems like you're looking at maybe taking advantage of financing market inefficiencies and some people that have left the sector. But can you talk about kind of where you're seeing the most attractive risk adjusted returns and kind of what's driving that focus as you put new money to work today?

Yes, I mean, I think you're alluding to our activity increasing in life sciences sector and from our vantage point, it is just that. It's a retrenchment of a number of different types of lenders into the space at a time when you're really seeing not a hockey stick, but a resurgence of growth in the second quarter they had releasing of over a million square feet, 300,000 square feet in new development. We're seeing some of the same things across our investments in life sciences without really any lender support. And so you have projects that were started in 2020, 2021, 2022 that raised a ton of capital. We can come in and prime that capital that's been raised and fund the last dollars to finish out some of these TIs and other warm shell components and be at a basis of $700 to $800 a square foot on projects that are finished that are worth $1500 to $1600 a square foot all-in with rates that are probably mispriced in a normalized environment. Meanwhile, on the multifamily side, you have a ton of liquidity coming into that space and spreads have dramatically come in. We just announced yesterday or two days ago with NXRT, a $1.5 billion refinancing at a borrower spread of 109 basis points over so far. So that should give you some indication as well as the Blackstone ARRC [ph] CMBS deal that's about to go off or just did. It was upsized by almost a third from $2.1 billion I think, to $2.9 billion. So the market is really there for certain property types right now and we want to take advantage of where it's not and have enough conviction and belief and see it on the ground. Liquidity will return probably in 2025 and certainly 2026 and we can make investments today that will bear fruit over the long-term for our shareholders.

I appreciate the comments this morning Matt, thanks.

Your next question comes from Jade Rahmani with KBW. Your line is now open.

Thank you very much. What are you seeing in terms of multifamily deal flow? Are you seeing any pickup from the agencies? And what do you think is driving their behavior this year?

I missed the second part of the question Jade, can you repeat that for me?

And what do you think is driving their behavior this year? They seem somewhat conservative on multifamily lending.

Yes, I think from our perspective, it's just the deal flow. I guess the first part of your question. I'll answer the second part of the question. The deal flow is still very, very muted. Negative leverage persists. Cap rates for good quality product that agencies would typically finance are still 5% or we bid on a deal in South Florida that was 4.5% cap rate, ended up going off at a 4.5% cap rate. So leverage is still negative in most cases, which is having some impact to deal flow. That being said, you did see the KKR-Lennar deal go off, and obviously the $20 billion worth of private equity multifamily transactions in the first quarter. So large deals are getting done. I would say individual smaller deals are still down. I think the last status was 40%, again, year-over-year down in transaction volume. I think it's from an agency standpoint, not that they're being overly conservative. And, Paul, I'll kick this to you after this for your comments. But it's just, there's just not a lot of products. When we went to them with our pool of multifamily loans, the $1.5 billion, they were pretty excited about the opportunity because they haven't seen the bulk, if you will. Paul, I don't know if you have anything to add to that.

Yes, I think in the past you saw a lot of 10-year fix, seven year floats. We've been seeing new originations have been more than five-year fixed, as we close on two from this year alone. So, a shorter-term, but if you see treasury rates today, they're five years down to 385. And if that sticks, I think you might see some more deal flow as treasuries continue to rally. But as of right now, it seems like it's unfalling, but still a little like, as Matt pointed out, a little tight in the agency space for deal flow.

The NXRT refinancing that 100 to 110 basis points better.

It was 109 basis points over [indiscernible].

And so in your mind, when you look at the weighted average cost of capital and maybe some expectation of rate moderation, what do you think the -- how do you look at the all-in cost of capital of that debt deal?

Well, that deal is sort of different because we have $1.250 billion of swaps at an average blend of 1.36%. So borrowing cost is just an additional 190 basis points over that. But the swaps are burning off in 2026. So for that company it's amazingly accretive in keeping flexibility on a floating rate to buy and refinance and have zero defeasance or yield maintenance penalty. So that's a one off situation. But it does, I think illustrate the agencies, Freddie in particular, rolling up their sleeves, digging in and trying to come up with a bespoke solution to one of those, their select sponsors.

And more broadly, when you look at a multifamily acquisition, maybe for NXRT, you mentioned some bidding on something that sold at a 4.5. Let's say you were bidding maybe at a 5-ish. How are you looking at levered returns in that kind of situation?

Yes, I mean I think it's all, it depends on who you are and in our case, we're a public company that has an implied cap rate sitting out there at 6.25. And the transaction market is still tight. The private transaction market is still tight at 5% or lower cap rate. So we have the opportunity to sell assets there and buy back stock and that's what we continue to do. But in terms of underwriting new levered returns, the way that we look at it historically is try to go in plus or minus 5% cap rate and move that cap rate to a 6.5 to 7 over the course of three or four years by adding value and renovating units and then, and then deciding whether to sell or refinance.

Okay. And then lastly on the book value per share, do you have a post quarter or intra quarter update? How do you think it compares with quarter end book value?

Are you talking about from 6/30 to today or…?

Yes, yes. Just the mark to market impact of where book value might be if there's been an improvement based on spreads?

Yes, hey that's a great question. We are seeing more of a reflation this past month on mark to market just from treasury rates alone on our mark to market book on CMBS. So yes, you are seeing an uptick in those values. So I would say that we have clawed back some percentage points this past month just on the mark to market of those CMBS. It's a good question, Jade. And then in addition, I wanted to mention that part of the book value decline was from our storage portfolio a bit. I think we're doing a pretty big refinancing there on some of the debt that we'll expect to accrete to value for the storage portfolio in a SASB later on in the year, probably in the third quarter, if not in the third quarter, late third quarter or early Q4. In that portfolio, I'm pleased to report is for the first time in history, given it was all development back in 2017, 2018, 2019, is now 90% stabilized, 90% leased and occupied, and is performing well. So we'd expect some reflation in that market as well.

Thank you. Just on the preferred issuance, I know that you're now excluding potential dilution from the share count, and just to reduce any confusion, how do you think of that? Do you believe that those shares would eventually be settled in cash and so it makes sense to exclude the dilution?

Yes, that's another good question. So there are a couple of factors of how we came to that methodology. First and foremost, there's a two-year lockout for the company to even redeem shares. The second point is there's a mechanism where only 20% of the actual outstanding prep can be redeemed per year, so there's a cap on it. So there wouldn't be any event where the full prep would be fully redeemed at any one point in time. There are also large penalties for investors to redeem. That stair steps down over time, but currently there's, I believe, an 11% penalty for investors to redeem at this point in time. And the last point, I think that you guys have seen in NXRT, NREF all our vehicles. Our plan is never to dilute the company when we're trading below book value. It's just not helpful. And so we would look to settle in cash in the future. So that's why we came to the conclusion of using this specific share count versus a fully diluted with the Series B shares included.

Thanks very much. That's helpful.

Thanks, Jade.

[Operator Instructions] At this time, there are no further questions. I would like to turn the call back over to the management team for closing remarks.

Thank you. Sorry Matt, go ahead.

No, go ahead. I appreciate it. Thanks for everyone's time. We'll talk to you next quarter.

That concludes the call for today. Thank you so much. You may now disconnect.