NexPoint Real Estate Finance, Inc. (NREF) Earnings Call Transcript & Summary

Hello everyone. Thank you for joining us and welcome to the NexPoint Residential Trust (sic) [ NexPoint Real Estate Finance ] Quarter 2, 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Kristen Griffith, Investor Relations. Kristen, please go ahead.

Thank you. Good day everyone and welcome to NexPoint Real Estate Finance conference call to review the company results for the second quarter ended June 30, 2026. On the call today are Paul Richards, Executive Vice President and Chief Financial Officer, and Matthew 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 the 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 risk 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.

Thanks, Kristen, and good morning, everyone. I'll walk through our quarterly results, cover the balance sheet, and provide guidance for Q3 before turning it over to Matt for a deeper dive on the portfolio and macro lending environment. For the second quarter, we reported a net income of $0.29 per diluted share compared to $0.54 for Q2 2025. The earnings available for distribution was $0.46 per diluted share in Q2 compared to $0.43 per diluted share in the same period of 2025. Cash available for distribution was $0.58 per diluted share in Q2, compared to $0.46 per diluted share in the same period of 2025. We paid a regular dividend of $0.50 per share in the second quarter, which was 1.16x covered by cash available for distribution. On July 27, 2026, the Board declared a dividend of $0.50 per share payable for the third quarter of 2026. Book value per diluted share decreased by 1.9% from Q1 2026 to $18.60 per diluted share, primarily driven by a small unrealized loss on our stock warrant portfolio. Turning to new investments during the quarter. We have continued to originate new investments across our target asset classes, funded through a combination of retained operating cash flow, proceeds from our Series C preferred offering, and additional capacity under our secured financing facilities, reflecting our continued ability to identify and execute attractive opportunities that drives returns for our shareholders. We funded a $20.2 million preferred equity investment in a multifamily property that pays a monthly coupon of 14%, a $42.6 million mezzanine loan secured by a life science property at a 14% coupon, and funded an additional $31.9 million on other existing commitments in the quarter. I want to highlight what remains in our view the most important development year-to-date. We closed a $375 million drawable term loan facility with Mizuho Capital Markets, which we used to repay our $180 million, 5.75% senior unsecured notes at their May 1 maturity. As of today, there is $362.2 million outstanding on the facility. Concurrently, we entered into a TRS, or total return swap, with Mizuho, which reduces the effect of our net interest costs to SOFR plus 2.45%. The transaction removed the largest near-term liability overhang on our balance sheet and replaced fixed-rate unsecured debt with a floating-rate asset-based financing structure that better aligns with our preference to have additional balance sheet flexibility in terms of prepayment ability and provides a back-leveraged solution to enhance returns on new investments. Combined with the $22.6 million we raised in our Series C preferred, we head into the back half of 2026 with what we believe to be one of the cleanest, most flexible capital structures in the commercial mortgage REIT sector. Moving to the portfolio and balance sheet, our portfolio is comprised of 85 investments with a total outstanding balance of $1.1 billion. Our investments are allocated across sectors are as follows: 39.4% life sciences, 37.6% multifamily, 15.1% single-family rental, 4.2% storage, 2.1% industrial, and 1.6% marina. Our fixed income portfolio is allocated across investments as follows: 27.8% preferred equity investments, 24.9% mezz loans, 17.5% CMBS B-Pieces, 17.3% revolving credit facilities, 6.2% senior loans, 4% IO strips, and 2.2% promissory notes. The assets collateralizing our investments are allocated geographically as follows: 31.2% Massachusetts, 16% Texas, 6% Florida, 4.6% Georgia, 5.2% California, 4.7% Maryland, with the remainder across states with less than 4% exposure, reflecting our heavy preference to Sunbelt markets, with Massachusetts and California exposure heavily weighted towards life science. The collateral in our portfolio is 80.3% stabilized, with a 63.4% loan-to-value and a weighted average DSCR of 1.39x. We have $836.6 million of debt outstanding with a weighted average cost of 6.3% that has a weighted average maturity of 2.6 years. Our secured debt is collateralized by $1.4 billion of collateral with a weighted average maturity of 2.7 years and a debt-to-equity ratio of 0.88x. Moving to guidance for the third quarter. Earnings available for distribution, $0.43 per diluted share at the midpoint with a range of $0.38 on the low end and $0.48 on the high end. Cash available for distribution, $0.55 per diluted share at the midpoint with a range of $0.50 on the low end and $0.60 on the high end. And with that, I'd like to turn it over to Matt for a detailed discussion of the portfolio and the current market environment. Matt?

Thanks, Paul. Another great quarter of consistent, solid execution, so appreciate it. The underlying recurring earnings power of the portfolio is continuing to tick up while we operate at the top of the commercial mortgage peer group on credit. Now on to our verticals. As Paul noted, residential remains our largest exposure between SFR and multifamily. We believe residential fundamentals are turning and remain constructive. Blended lease trade-outs across our owned residential assets progressed from -1.7% in April to -1.2% in May, to -50 basis points in June and turned +30 basis points in July. That's the first positive blended print since early 2025. And new lease trade-outs remain the drag, but renewals have been holding up well. The 2021 and 2022 vintage loans are where the compression risk still sits. And as you know, we did very little originations during this period. Net deliveries peaked at approximately 695,000 units in the trailing 12 months ending Q4 2024 against roughly 282,000 units of average annual delivery since 2001. CoStar forecasts 2026 deliveries down approximately 49% from 2025 with another 20% decline in 2027, and starts are running approximately 70% below the 2022 peak. Supply is what broke pricing power in 2024 and 2025, and supply is what is going to return it. The structural backdrop has not changed. The cost to own in our markets remains roughly 3x the cost to rent, and there's no reasonable mortgage rate path that closes that gap quickly. Now on to life science. Alewife is now tracking to be 85% leased, up from 71% leased, anchored by Lila Sciences on a long-term lease for 245,000 square feet with expansion options. While Lila indeed does keep expanding their plan and programming at the asset, obviously a great sign and accretive to our collateral. The demand funnel for our life science collateral has widened materially because of AI and not in spite of it. AI companies need the same purpose-built infrastructure traditional lab tenants need, that is, power density, cooling capacity, structural floor loads, ventilation, vibration and vibration tolerances. They cannot retrofit older converted assets at any rent. Alewife has the bones. It's in the right submarket, adjacent to MIT and the broader Cambridge cluster. Our exposure here is not a generic bet on the sector. It's a concentrated bet on first-to-fill, infrastructure-grade assets in elite educational districts that are now also AI corridors. The credit profile is improving as the tenant universe widens. On to self-storage. Our NSP portfolio continues to outperform with occupancy in the low 90s, and with rent growth and NOI materially ahead of the sector. On the upcoming pipeline, in April, we walked through $190 million-plus of NREF investment across 11 active deals and $225 million-plus of structured product -- credit opportunities. And as Paul mentioned, we successfully closed in excess of $70 million of this pipeline during the quarter. The pipeline's blended return profile remains well in excess of our cost of capital on the TRS facility. And even with the move higher in the forward curve, pricing power remains with disciplined solution capital providers. To close and summarize, earnings are ahead of guidance we gave in April. Credit continues to hold well. The April pipeline converted into funded assets at double-digit coupons, a residential supply trough that is now visible in operating data rather than forecast, life science collateral that keeps de-risking, storage is bottoming, and a balance sheet purpose-built for exactly the rate environment we are in. As always, I want to thank the team for their hard work, and now we'd like to turn the call over to take your questions.

[Operator Instructions] Your first question comes from the line of Crispin Love with Piper Sandler.

First, on the portfolio makeup side, life sciences, I think it's now nearly 40%, exceeds multifamily, I think, for the first time for you guys. So, when you take a longer-term horizon lookout, how do you think about portfolio sizing with regards to multifamily and life sciences, where those could trend directionally, especially with the AI theme, but also kind of positive themes across multi as well as you look at the next several quarters and years.

Yes, that's a great question, Crispin, and one that we talk about often. I think in a normalized environment, we'd probably like to keep life sciences to be about a 1/3 -- or I'd say life science and advanced manufacturing, kind of biomanufacturing, those type of assets in around 1/3 of the pie chart. Obviously, in the recent kind of 12 to 18 months, Alewife is a one-off, pretty special opportunity that we were able to take advantage of. But going forward, I think we'd like to have it be 1/3 and have residential kind of be 50%. [indiscernible] about the exposure on life science, we are expecting probably to get some of that capital back. The sponsor on Alewife is out running a refi process to recap the Alewife whole campus, and we would get a substantial amount of capital back to then go redeploy. And our goal would be to probably redeploy most of those proceeds into residential assets.

Perfect. That makes sense. I know there's definitely a unique situation there. And then just on the dividend and the outlook, CAD has been ahead of the dividend for some time, but earnings available for distribution has been below for several quarters. So curious if you have a line of sight where you think -- when you think both EAD and CAD could be above the dividend on a sustainable basis. And are you just -- are you comfortable with the cost at the current level given the CAD coverage?

Yes, another great question, Crispin. We're definitely comfortable with the CAD coverage, which is our gold standard when it comes to distributions and when we discuss with the Board those opportunities for quarterly distributions. And over time we do think both EAD and CAD will converge, and what you've seen, too, is the increase in CAD over the past few quarters, as we discussed in prior calls, due to the redeployment accretively into investments via using proceeds from our Series B and now Series C preferred raising. So hope that answers your question.