NexPoint Real Estate Finance, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. NexPoint is an externally managed commercial mortgage REIT investing in real estate loans, preferred equity, securities and properties, with a focus on multifamily, single-family rental, self-storage and life-science assets. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Net interest income (expense) | $(12.8) million | $3.9 million in Q1 2023 |
| Net income (loss) | $(14.6) million | $9.4 million in Q1 2023 |
| Net income (loss) attributable to common stockholders | $(14.3) million; basic and diluted EPS $(0.83) | $6.6 million; basic EPS $0.38 and diluted EPS $0.37 in Q1 2023 |
| Other income | $9.2 million | $10.9 million in Q1 2023 |
| Operating expenses | $11.0 million | $5.5 million in Q1 2023 |
| Operating cash flow | $17.7 million | $15.0 million in Q1 2023 |
| Cash, cash equivalents and restricted cash | $19.3 million | $16.6 million at December 31, 2023 |
| Total assets / total liabilities | $7.085 billion / $6.637 billion | $7.018 billion / $6.573 billion at December 31, 2023 |
| Book value per common share | $16.63 | $17.98 at December 31, 2023 |
| Common dividend declared per share | $0.50 | $0.685 in Q1 2023 |
- The reported net interest loss included approximately $25.0 million of accelerated premium amortization after repayment of a senior loan. Interest expense was $11.2 million.
- Management reported non-GAAP cash available for distribution (CAD) of $12.0 million, or $0.67 per diluted weighted-average share, compared with $10.0 million, or $0.56, in Q1 2023. Earnings available for distribution (EAD) was a non-GAAP loss of $10.0 million, or $(0.55) per diluted share. These measures are company-defined and are not substitutes for GAAP earnings or cash flow.
- Investing activities provided $545.4 million, principally from principal repayments on mortgage loans; financing activities used $560.5 million, largely from repayments of secured financing. Cash flows therefore reflect substantial loan repayments and debt reduction, not just recurring operating performance.
- Balance-sheet debt lines totaled approximately $839.8 million, excluding $5.774 billion of bonds payable recorded with consolidated variable-interest-entity (VIE) trusts. The VIE mortgage assets were $6.182 billion; the filing says these trust assets and liabilities are not the Company’s legal obligations. The $341.7 million Mizuho repurchase balance is collateralized by securities and rolls through transactions with one-to-two-month tenors.
- The company-reported portfolio, excluding consolidated CMBS trust assets and liabilities, had a combined unpaid principal balance of approximately $1.5 billion. Its loan-held-for-investment portfolio had a $532.2 million carrying value, and its internal weighted-average loan risk rating was 3.0. One loan, representing 2.34% of that portfolio, was rated 4; none were rated 5.
Material changes versus the prior comparable period
- Common-stockholder results shifted from $6.6 million of income in Q1 2023 to a $14.3 million loss, primarily due to the accelerated premium amortization on the prepaid senior loan.
- Operating expenses nearly doubled, mainly reflecting higher stock compensation and legal fees, and the consolidation of the Alexander at the District multifamily property. Expenses from consolidated real estate were $5.4 million versus $1.5 million.
- The loan portfolio’s carrying value fell from $1.005 billion at year-end to $532.2 million, mainly due to $511.2 million of principal repayments; the company originated $60.2 million of loans during the quarter.
- Secured financing agreements declined from $649.6 million to $182.6 million, while master repurchase agreements increased from $303.5 million to $341.7 million. Total debt on the financing-arrangements schedule declined from $1.268 billion to $839.8 million.
- The common dividend declared declined to $0.50 per share from $0.685 a year earlier. Book value per common share also declined, to $16.63 from $17.98 at year-end.
Outlook, risks and unusual items
- Liquidity outlook: Management says available cash, expected operating cash flows and potential debt or equity financings should cover operations, scheduled debt service, potential unfunded commitments and dividend requirements for the 12 months following March 31, 2024. Longer-term funding may depend on financing markets, asset cash flows and additional debt or equity issuance; this is not a guarantee.
- No earnings guidance: The filing provides no specific earnings or return forecast. Management notes that high interest rates and constrained, more expensive commercial real estate credit can affect asset financing, sales and access to debt capital.
- Unfunded commitments: Commitments totaled $190.8 million at quarter-end, including $164.7 million for the Alewife mezzanine loan, $21.5 million for preferred equity and $4.6 million for common equity. After quarter-end, the company reported an expected maximum Alewife commitment of $179 million following allocation of funding rights to co-lenders; the company remains responsible for amounts they do not fund.
- Guarantee exposure: A sponsor guaranty related to NexPoint Storage Partners (NSP) covers obligations for accrued Series D preferred dividends. NSP’s related promissory notes were repaid, but accrued preferred dividends were $7.3 million at March 31, 2024. The filing says the Company and another entity are jointly and severally liable for 85.90% of the guaranteed amount; the Company’s precise standalone exposure is not clearly quantified in the provided text.
- Related parties and valuation: The Manager and several counterparties are affiliates. Series B preferred shares carry a 9.00% stated dividend and the offering pays selling commissions and dealer-manager fees. Certain equity investments use Level 3 valuations based on unobservable assumptions, so reported fair values may be sensitive to inputs.
- Other risks: The Company identifies leverage, refinancing and short-tenor repo rollover needs, interest-rate and credit-spread changes, real estate collateral performance, geographic and asset concentration, REIT qualification, and reliance on its external Manager as risks. Consolidated CMBS trusts are heavily concentrated in multifamily collateral. The filing reports no material change to previously disclosed risk factors and no known legal proceeding expected to materially affect the Company; separate lawsuits involving the Sponsor and its affiliates are described as not relating to Company operations or assets.
- Subsequent events: After quarter-end, the Company reported additional Alewife funding, a new $10 million NexBank loan, a CMBS purchase and sales of certain securities. The Board declared a $0.50 common dividend payable June 28, 2024.
Important facts for investors to verify
- How much of the Q1 loss and the change in GAAP interest income reflects the one-time $25.0 million accelerated premium amortization, and how does the company’s non-GAAP CAD reconcile to recurring cash available for distributions?
- What funding will be required for the $190.8 million quarter-end commitments, particularly Alewife, and how much will co-lenders actually fund?
- What are the refinancing and collateral-call risks associated with the $341.7 million short-tenor repo facility and the securities pledged to it?
- What is the Company’s specific share of the NSP guaranty exposure, and how could the remaining accrued preferred dividends change?
- How do occupancy, property operations and valuation assumptions support the underlying loan, equity and Level 3 investments, including the multifamily properties and NSP?
- Can distributions be supported by recurring cash generation given the Q1 GAAP loss, lower common dividend versus the prior year, and management’s reliance on external financing for liquidity?