NREF Stock: 12.8%-Yielder Up 18% in Last 3 Months
September 6, 2024
NexPoint Real Estate Reports Another Strong Quarter
Mortgage real estate trusts (mREITs) have represented one of the hardest hit sectors during the high-interest-rate period. Higher interest rates increase debt costs, shrink margins, and cut into profitability. Of course, the reverse will happen when the Federal Reserve starts to cut interest rates, as early as this month.
Lower debt costs, expanding margins, and improved profitability should help energize depressed stock prices and could translate into higher dividend payouts. Investor optimism about lower interest rates is already helping propel mREITs higher.
iShares Mortgage Real Estate Capped ETF (NYSE:REM) is up just 4.2% year to date, but it’s also up 12% over the last six months and 10% over the last three months.
Today’s income pick, NexPoint Real Estate Finance Inc (NYSE:NREF), is faring a little better, with NREF stock up 7.5% year to date, 25% over the last six months, and 17% over the last three months.
Continued strong financial results coupled with a raft of interest rate cuts and ongoing investor optimism could help juice NREF stock even further over the coming quarters. Trading at $15.72 per share, NREF stock still needs to climb an additional 20.5% to get to its May 2022 record high of $18.95 per share.
NexPoint Real Estate Finance is an mREIT that is primarily focused on investments in multifamily, single-family rental (SFR), self-storage, and hospitality sectors located predominantly in the top 50 metropolitan statistical areas. (Source: “2Q 2024 Financial Supplement,” NexPoint Real Estate Finance Inc, May 2, 2024.)
The company focuses on lending or investing in properties that are stabilized or require limited deferred funding to support leasing or the ramping up of operations, for which most capital expenditures are for value-added improvements.
The portfolio has minimal exposure to construction loans, no heavy transitional loans, and no for-sale loans.
NexPoint Real Estate Finance’s outstanding total portfolio is comprised of 85 investments worth $1.2 billion. The portfolio is geographically diverse with a bias towards the Southeast and Southwest.
Of that portfolio, multifamily, life sciences, single-family rental, and self-storage represent 56.9%, 22.2%, 18.8%, and 1.5% of the company’s debt portfolio, respectively.
Reports “Another Strong Quarter”
NexPoint reported second-quarter net income of $7.5 million, or $0.40 per share, down from $9.3 million, or $0.36 per share, in the second quarter of 2023. (Source: “NREF Announces Second Quarter 2024 Results, Provides Third Quarter 2024 Guidance,” NexPoint Real Estate Finance Inc, August 1, 2024.)
The company reported cash available for distribution of $15.0 million, or $0.64 per share, up 24% from $12.2 million, or $0.53 per share, in the same period last year.
Commenting on the second-quarter performance, Matthew McGraner, the company’s chief investment officer, said, “NREF is pleased to deliver another strong quarter with consistent, resilient earnings in our core property types. While banks and traditional lenders remain sidelined or distracted with credit issues, we remain active, focused and ready to deploy capital into this challenging credit market, capitalizing on market dislocations and creating long-term value for our shareholders.”
Looking ahead to the third quarter, NexPoint Real Estate Finance expects to report earnings available for distribution at the midpoint of $0.50 and cash available for distribution (CAD) at the midpoint of $0.45.
NREF Stock: Maintains Quarterly Dividend of $0.50
CAD is the amount of cash a REIT has available for dividends. So, it’s important that a REIT has enough CAD to cover its payout.
In the second quarter, NexPoint announced CAD of $0.64 per share. That’s more than enough to cover its most recent quarterly dividend of $0.50 per share, or $2.00 on an annual basis, for a forward dividend yield of 12.8%. (Source: “NexPoint Real Estate Finance, Inc. Announces Quarterly Dividend,” NexPoint Real Estate Finance Inc, July 31, 2024.)
That’s a big dividend yield, but not a total surprise. mREITs and REITs are legally obligated to distribute 90% or more of their taxable earnings back to shareholders as dividends.
When the company has a really good quarter, it can also distribute a special dividend. In October 2023, NexPoint Real Estate Finance stock declared a regular dividend of $0.50 per share and a special dividend of $0.185 per share. (Source: “NexPoint Real Estate Finance, Inc. Announces Quarterly and Special Dividends,” NexPoint Real Estate Finance Inc, October 31, 2023.)
Chart courtesy of StockCharts.com
The Lowdown on NREF Stock
NREF stock is a mortgage REIT with a geographically diverse portfolio that has a weighted average remaining term of 4.8 years. This helps provide income investors with a reliable and transparent earnings stream for roughly the next five years.
Despite challenging conditions in the commercial real estate market, NexPoint was able to generate second-quarter CAD of $0.64, which easily covers its quarterly distribution of $0.50 per share.
Thanks to NexPoint Real Estate Finance’s diversified portfolio and lower interest rates, which will allow the company to refinance its existing debt at better rates and bring in new mortgages, the outlook for NREF stock and its ultra-high yield dividend remains robust.
