Good day, and welcome to NexPoint Real Estate Finance First Quarter 2020 Conference Call. Today's call is being recorded. At this time, it is my pleasure to turn the conference over to Ms. Jackie Graham, Investor Relations. Ma'am, please begin.

Thank you. Good day, everyone, and welcome to NexPoint Real Estate Finance's conference call to review the company's results for the first quarter ended March 31. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Matt Goetz, Senior Vice President, Investment and Asset Management. As a reminder, this call is being webcast through the company's website at www.nexpointfinance.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. Forward-looking statements can often be identified by words such as expect, anticipate, intend and similar expressions and variations or negatives of these words. These forward-looking statements include, but are not limited to, statements regarding the company's business and industry in general and guidance for financial results for the second quarter of 2020. They are not guarantees of future results and are subject to risks, uncertainties, assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's registration statement on Form S-11 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. 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 core earnings, which is a non-GAAP financial measure. This non-GAAP measure should be used as a supplement to and not a substitute for net income loss in accordance with GAAP. For a more complete discussion of core earnings, 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, Jackie. I want to welcome everyone to our inaugural NREF, NexPoint Real Estate Finance, quarterly earnings conference call. Today, we'll cover the highlights in the first quarter of 2020, which given that our IPO is February 11, that will be somewhat of a brief part. Also, given sort of the unprecedented events we've seen with the COVID situation and how that's impacted everyone, we'll spend a fair amount of time on Q2 and kind of what's happened post-COVID. I am Brian Mitts, Chief Financial Officer. I'm joined by Matt McGraner, who's our Chief Investment Officer; as well as Matt Goetz, who's our Senior VP in charge of Investments and Asset Management. I'm going to give some quick highlights of our financial performance and capitalization, which we think are considerable strengths for this company, certainly as compared to other mortgage REITs and debt funds. And I'll turn the call over to Matt McGraner and Matt Goetz to discuss the portfolio, our strategy and some of the opportunities that we see ahead. As mentioned, we IPO-ed the company on February 11. Pricing is $19 per share, began trading on the New York Stock Exchange, raised total gross proceeds of $100.7 million. And after offering costs, we used the proceeds to pay down debt. So I think once we launched, within a month, we were in the COVID situation. And I think during that period that pretty much decimated the mortgage REIT industry for a month, we did fairly well. We had no margin calls, no liquidity issues, no credit problems. I think today, we're positioned to take advantage of whatever unfolds. And Matt and Matt will go into more detail around that. Let me talk about our capitalization. As of March 31, we had a debt-to-book value ratio of 2.49x.…

Thanks, Brian. Before turning the call over to Matt Goetz to discuss the business, I'd like to highlight a few themes and reinforce some important characteristics that we believe differentiate NREF and are as relevant now, if not more than when we went public just a couple of months ago. First, we own a differentiated purpose-built portfolio of investments concentrated in the most resilient property types: multifamily, single-family rental and self-storage. In good times and in bad, proven throughout prior downturns, these property types have exhibited resiliency and typically become liquid and recover earlier in cycles. Our underlying collateral consists of stabilized properties with 93% average occupancies, in-place cash flows and a locked-in earnings stream of over 7.5-plus years of duration. Consider for a moment that economic occupancy would need to fall to 70% on average before the underlying borrowers could not cover debt service. Contrast this with a peer group that owns or has originated loans on undergoing transitional business plans or redevelopment or worse, buildings that are closed, hotels or retail centers, for example, and therefore, we have relatively more conviction in the underlying cash flows to sustain book value and provide consistent distributions to investors. Our 3 property types are sectors in which we have deep operating expertise as owners and investors as well: multifamily with NXRT, obviously, SFR with VineBrook Homes and self-storage through our publicly traded partnership with Jernigan Capital. We also believe the underlying credit portfolio is attractive, particularly at $0.60 on the dollar book value. And recall that over 95% of our portfolio consists of investments in loans in the affordable housing sector, both single family and multifamily. Rather than discussing retail, office or hospitality loans, again, of which we have 0 exposure, our recent conversations with investors center around whether there's more…

Thanks, Matt. As Matt just discussed, our diverse geographic exposure is mainly located in the Southeast and Southwest United States. We have $1.1 billion in current principal investment outstanding. 75% of our portfolio is senior loans; 20% is roughly CMBS; 3.5% is preferred stock, which is the JCAP Series A preferred; 1.6%, preferred equity; and 0.3% is mezzanine debt. Historically speaking, multifamily securitizations in the Freddie Mac B-Piece or K-Series transactions have had low losses. Annual defaults have reached 1% of loans outstanding, only 3x since 1994. Since 2009 through February of 2020, there have been only $18.8 million in losses on roughly $360 billion of issuances. Single-family rental, although it's a relatively new asset class that was really institutionalized in the wake of the global financial crisis, we think it's going to exhibit the same resiliency akin to multifamily, specifically Class B. The current portfolios capitalized by secured credit facility with Freddie Mac that Brian mentioned is matched in both duration and structure of the underlying loans and has 8.1 years of average weighted term to maturity and a locked-in spread of 250 basis points. In total, our portfolio has 7.7 years of average remaining term, 99.7% stabilized, 64.5% weighted average loan-to-value and a 1.78 debt service coverage ratio. We closed Freddie Mac B-Piece on April 23 to fixed rate deal K-107. It is a weighted average coupon with the B-Piece balance being $82 million. Again, it's the lowest 7.5% of the stack. The weighted average coupon is 3.5%. But since you're buying it at a -- purchasing it at a discount, the current yield on the equity is 6.1%. The underlying pool is $1.1 billion in outstanding mortgages, with a weighted average interest rate of 3.6%. Amortizing debt service coverage ratio is 1.73x. Average loan to value is…

Yes. Thanks, Matt. I think we'll, at this time, turn it over to any questions.

[Operator Instructions] Our first question comes from Alex Kubicek with Baird Wealth Management.

Is a 40% advance rate you guys have taken out on the CMBS B-Piece portfolio a good gauge for how far you guys plan to take that in the current environment? Just any insight on your guys' decision as you guys move into the coming months there would be helpful.

Yes. It's Matt McGraner. I think that's right. There's no need to really push that at this point. And then furthermore, it's just not available. Most repo facilities now are utilizing 50% to 65% haircuts.

Yes. And I'd say also, if you look at the CMBS portfolio overall and kind of where we estimate, the marks are -- right now, we think it's more kind of like a 31% advance rate. But yes, to reiterate what Matt said, repo financing can be -- it can cut both ways, so we want to be very cautious with it. But given the asset that we bought with it, it was priced post-COVID, we think it made sense. And we have tons of room and cushion, if marks move downward, to still be covered and not hit any margin calls.

And additionally, that's -- the 40% advance rate is only on the collateral that was pledged. So we still have a significant amount of collateral that we haven't pledged, which would drop that number into the mid-20s.

[Operator Instructions] And next, we have Stephen Laws with Raymond James.

I guess, first, guys, congratulations on your first quarter as a public company. It was an interesting 3 months that you guys decided to make that your debut. I guess, to start, interesting opportunities are out there. You guys have a very strong balance sheet relative to peers and have demonstrated that with the 2 recent investments. On more the mezzanine or structured financing side, it seems like this environment would create a lot of interesting opportunities. Historically, you have been great at sourcing those and generating attractive returns across your different vehicles. So can you talk about your appetite for investments like that, that wouldn't require use of leverage and your willingness to do something like that? Or is it still too early to consider those type of investments?

Yes. Steve, it's Matt McGraner. There are special situation opportunities that are beginning to appear as recently as the one announced with [ Coke and Ladder ]. There are several others that are ongoing in various property types. It's a little too early for our bread-and-butter multifamily, single-family rental and self-storage because as we have found the payment on all those, credits are holding up better in this environment. We absolutely have appetite for it. When and if it comes, we're under the tent on a number of opportunities to the extent that they become transactionable. One thing we'd like to just point out is that we know capital is out there. That's nondilutive, whether it's a JV or some sort of GP opportunity, to invest that we would look at with the current partners and other aspects or current investors and other fund verticals or new ones. We actually looked at potentially utilizing a partner for K-107 but felt that given where the yield transacted, it would be -- it would enhance book value in a stabilized environment and benefit the company to take down ourselves. So sort of a long-winded answer, but hopefully, that provides some color.

Yes. That's great color, Matt. Appreciate that. And I guess sticking on the 2 primary asset classes through this and other vehicles. You're big investors in both multifamily and single-family rental. Can you talk about the dynamics there? Are you seeing a shift? Is this social distancing and COVID world going to push a marginal person to single family for more space? Are you not really seeing that, and that's just more of a theory that's not playing out? Any color from the macro side on that would be great.

Yes. I mean, I think there's 2 important points. First is geographical, which I hit on in my prepared remarks. I just reject the notion outright that coastal, gateway cities that are denser will -- and normally colder climates will outperform going forward. I just don't see that, especially in high-tax states. So that means that you'll still have, I think, the net migration into the Floridas, [indiscernible] the Texases where, yes, there's more need for affordable housing. So I do think that the garden-style apartments -- or we think that the garden-style apartments will continue to exhibit resiliency in the global financial crisis. Class A and Class C took the pain first, if you will, I think 5% to 7% revenue declines in each of the -- of Class A and C. Bs were -- B garden was more 0% to 3% and held up better over the near and intermediate term, as you had a trade-down effect from Class A cohort renters. And then C took pain, obviously, with more hourly wage earners. So I think that you'll see some weakness there. If you have a new lease-up deal in multifamily, you're not happy. New leases are tough to come by when there's no one in the leasing office to fill new leases. So you'll see some pressure, and I think you have seen some pressure as recently as yesterday's earnings release from EQR. My hunch is that probably gets forced in the near term over new leases, and so it's good to have a stabilized garden multifamily property type as your underlying collateral. The single-family rental asset class has really impressed me personally over the last couple of years and then even more so through this downturn. I think that, that's going to be a winner and even more resilient potentially than multifamily as folks just want their own house, they want their own yards, and they want an affordable price point. So we're very happy that -- on a relative basis -- I don't think anyone's happy right now. But on a relative basis, we feel pretty good about the -- about our exposure being 95% to the property side.

Stephen, I'd add a little bit certainly on the single-family rental side in that I think this thing has unfolded so quickly. We're not even 2 months into it. It feels like a decade. But it's only been 2 months, and I think what we've seen is retention has gone way up across multi and single family. So some of these trends that I think may develop in the future, it's just too early. I think from our view, you're going to see things that have been developing since the great financial crisis kind of accelerate once we kind of get through the early stages of this. And I think that will definitely benefit just the workforce housing sector, whether it's multi or single family. But I think single family, in particular, could be a big winner here and creates a lot of opportunities. That property type is still very much not institutionally owned, and there's a lot of upside out there. For example, our single-family rental company is seeing retentions hit the high 80s, which is up from about mid-70s typically. So -- and then in May, they've seen their collections through yesterday in the 80s versus typically kind of 75% through this time period historically. And that's given the fact that they, like most people, can't process evictions or even charge late fees. So to be able to collect that kind of money in the first 5 days of May, which I think everybody thought would be the big bellwether of where things are going, I think speaks a lot about the SFR space.

That's great color and comments. I appreciate the detail. And Brian, to shift to the Q2 guidance, you -- NREF's unique in providing that most -- I can't think of any other peers that are doing that now. But what are the underlying assumptions in that, that we need to consider? Or is it built on any additional investments other than the 2 that are disclosed? Or is it largely built around the in-place portfolio and then some adjustments to factors for that?

I'll let Matt and Matt take the second part of the question. I'd say on the first part, because of the structure of our portfolio, we have a lot of visibility into it. Because of our operating platforms, I think we have more near-term visibility overall that gives us more confidence to be able to issue guidance. And typically, if you're a lender, you're going to get a report 30 days, 25 days after month end. And data kind of trickles in over time. For us, given that we have multifamily and single family and storage portfolios, we kind of see operationally what's happening on the ground, what's going on with rent collections, et cetera. So I think that just gives us a lot more confidence. And Matt said this several times, our geography also. We're just in better areas from a business-friendly perspective and I think just affordability as well. So Matt, I don't know if you guys want to talk about the other deals which are in the guidance?

Yes. Stephen, it's Matt McGraner. The guidance primarily just assumes K-107, which we just closed as additional investment in the [ next 3 ]. But there's not a ton of new investments in there that we think might actually transact in the second quarter. So there's some pretty healthy cushion, I think.

Our next question comes from Jade Rahmani with KBW.

I wanted to ask if you could comment on what the mark on B-Pieces is. So far this quarter, if there's been any value recovery? And perhaps could you give potentially a range around pro forma book value?

Yes. It's Matt McGraner. They're -- they have stabilized in terms of the new ones or at least the guidance that we think we have from Freddie Mac that they're sort of K -- or was 82 -- or KF72, was 82 and now is 87-ish. So picking up a few retracements there. So that's -- and again, in a stabilized market, we think that K-107, which we just bought, is probably unicorn paper in the sense that, number one, it's a fixed rate yield that has a short pay aspect to it. And number two is likely a 150, 200 basis points wide at the prior B-Piece, which was the [indiscernible].

Yes. And Jade, and as you know, from following some of the servicers like Walker & Dunlop, a lot of the fears that was out in the market of people not paying rent as of today hasn't really come through in the multifamily or single-family rental space. And so a lot of those 3/31 marks were driven by -- forced sellers of paper. They were using repo financing to get 80% margin on their positions. So obviously, we are affected by that. But like we said in our remarks, we haven't seen forbearance requests in our portfolios and across the universe and speaking with other company executives today having as well been at those across the Midland servicing, key servicing who offer Dunlop and CBRE gym. So I just want to add a little bit more color.

Is there a percentage of the $1.41 unrealized loss on a per share basis that has been recovered thus far, maybe 1/4 of that? Or what's a reasonable estimate?

I think that's a reasonable estimate.

It's in a quarter.

Excuse me?

It's in a quarter. Your estimate was -- sorry.

Okay. How should we think about the risk of additional -- or the risk of margin calls? Have there been any margin calls since the IPO? And how should we think about the risk of additional margin calls, and most importantly, the liquidity that's available to handle that?

Yes. So we've had no margin calls in the portfolio, no forced sales. And through April 23, we had debt that had no margin call feature. There was no mark-to-market feature. Now we're just under 6%. But with the advance rates that we have, it's just very low. We use that to price a new deal post of it. So it's already at the lower prices that we've kind of seen in the marketplace. We're not saying that there may not be a downward move if another shoe drops. But we have plenty of cushion, don't envision any mark-to-market movements that would force a margin call or any kind of sales on our end. _:p id="99323779" name="Jade Rahmani" type="A" /> And what on the balance sheet would be the tool to meet a margin call? Is it excess undrawn borrowing capacity?

That and the addition of adding further CMBS Freddie K collateral to the collateral package with the lender.

Yes. So we noted in our filing or in the stuff that we have a 40% advance rate that got us the $49 million of repo financing, and that is assuming we've only posted a portion of the collateral. So we have quite a bit of collateral that we have not posted yet. So we could repost that and draw down on it to meet a margin call.

And can you say how much that excess collateral is?

I believe it's $50 million, $60 million.

All right. And speakers, at this time, there are no more questions in the queue.

Great.

Thank you, everyone.

Thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect. Thank you for your participation, and please enjoy the rest of your day.