NexPoint Real Estate Finance, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise stated. NexPoint is an externally managed commercial mortgage REIT investing in real estate loans, preferred equity, securities and select properties.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $17.3 | $16.4 | $33.5 | $47.5 |
| Interest expense | $13.1 | $9.1 | $25.3 | $17.9 |
| Net interest income | $4.2 | $7.3 | $8.2 | $29.6 |
| Other income | $9.4 | $7.5 | $20.3 | $9.3 |
| Operating expenses | $5.1 | $7.3 | $10.6 | $13.3 |
| Net income | $8.5 | $7.5 | $17.9 | $25.5 |
| Net income attributable to common stockholders | $5.7 | $3.9 | $12.3 | $16.3 |
| Diluted EPS | $0.33 | $0.26 | $0.70 | $1.04 |
| Common dividends declared per share | $0.685 | $0.500 | $1.370 | $1.000 |
Financial position, cash flow and portfolio
- Total assets were $7.60 billion and total liabilities were $7.14 billion at June 30, 2023. Cash and cash equivalents were $19.7 million, with an additional $1.9 million of restricted cash.
- Common book value was $19.38 per share, down from $20.29 at December 31, 2022. Combined book value including redeemable OP interests was $19.24 per share/unit, versus $20.03.
- Six-month operating cash flow was $22.5 million, down from $50.7 million. Investing activities provided $431.4 million, largely reflecting loan collections; financing activities used $452.6 million. Cash, cash equivalents and restricted cash increased $1.2 million to $21.6 million.
- Debt financing arrangements totaled $1.25 billion carrying value, excluding the separately presented CMBS variable-interest-entity bonds. This included $333.2 million under a Mizuho repurchase agreement, carrying a 7.01% weighted-average rate and rolling one- to two-month terms; $618.4 million of Freddie Mac financing; and $205.4 million of unsecured notes. Consolidated VIE bonds were an additional $5.87 billion, matched principally by $6.32 billion of VIE mortgage loans; the company says these are obligations of the trusts, not legal obligations of the company.
- The portfolio comprised 88 discrete investments. Held-for-investment loan carrying value was $1.02 billion across 51 loans; all were internally rated “3,” or satisfactory. The broader portfolio was weighted toward fixed-rate investments, with a 6.96% weighted-average all-in yield, according to management.
Changes versus prior periods and unusual items
- Q2 net interest income fell 42% year over year as interest expense rose to $13.1 million from $9.1 million. For the first half, net interest income declined 73%; management attributed the decrease primarily to lower prepayment penalty income. The six-month interest-income table also shows substantially lower SFR-loan interest income.
- Common-stockholder income rose 49% in Q2 but fell 24% for the six-month period. Higher other income—primarily the change in net assets of consolidated CMBS VIEs—partly offset lower net interest income. These VIE results include fair-value movements and net interest.
- Effective January 1, 2023, NexPoint deconsolidated the Elysian at Hughes Center property following a restructuring and accounted for its retained position as preferred equity. It recorded a $1.5 million deconsolidation gain; $47.0 million of the preferred investment had been redeemed by June 30, leaving $18.4 million outstanding. The change also reduced reported real estate assets and mortgage debt.
- The company adopted CECL on January 1, 2023. The allowance increased from $0.7 million to $2.3 million, reducing opening retained earnings by $1.6 million. The allowance remained $2.3 million at June 30.
- Management’s non-GAAP earnings available for distribution (EAD) per diluted share was $0.47 for Q2 and $1.01 for the first half; cash available for distribution (CAD) was $0.50 and $1.06, respectively. These amounts were below declared common dividends of $0.685 and $1.37 per share. EAD and CAD are company-defined measures, not substitutes for GAAP earnings or operating cash flow.
Outlook, risks and contingencies
- No specific earnings or investment guidance was provided. Management said available cash, expected operating cash flows and potential financing would be sufficient for operations, scheduled debt service, identified investment commitments and dividends for the 12 months following June 30, 2023. Access to funding remains exposed to credit and equity market conditions, leverage and lender restrictions.
- Near-term liquidity needs include debt service, distributions and investment funding. Disclosed unfunded commitments include $22.8 million for Phoenix preferred equity, $16.3 million of Forney preferred equity and $3.8 million of related common equity, $19.1 million of Richmond preferred equity and $3.8 million of related common equity, and $0.2 million for a Houston life-sciences investment. The company also disclosed up to $9.8 million of additional funding under an existing preferred-unit agreement. Subsequent to quarter-end, it funded $0.7 million and $2.4 million under that agreement.
- The company’s maximum stated liability under a guaranty of NexPoint Storage Partners obligations was approximately $83.8 million. Management considered a payment under the guaranty remote and recorded no contingency. This exposure is associated with an investment in NSP whose carrying value was $51.0 million.
- Key risks include real estate credit losses and collateral values, interest-rate and credit-spread changes, concentrated exposures, substantial indebtedness, short-term repurchase-agreement rollover risk, liquidity and refinancing, REIT qualification, and reliance on the external manager. About 3.7% of portfolio principal was LIBOR-linked and 12.1% SOFR-linked; the company expected LIBOR transitions to SOFR to have an immaterial effect on affected loan rates, but noted benchmark changes could affect funding costs and asset-liability matching.
- Disclosure controls and procedures were reported ineffective at June 30, 2023 because of an existing material weakness in internal control over financial reporting. Management had introduced pre- and post-close investment checklists, but stated the remediation had not operated long enough to be considered effective.
- The filing reports no material change to previously disclosed risk factors. The company stated that lawsuits involving its sponsor and related parties did not concern its business or assets; an independent special committee reported no evidence that the company engaged in conduct exposing it to liability from those cases.
Most important facts for investors to verify
- Whether recurring net interest income and cash generation can support the common dividend, given first-half CAD of $1.06 per diluted share versus $1.37 declared.
- The scale, timing and funding source for outstanding investment commitments, and whether management’s liquidity assessment includes all disclosed commitments.
- Repurchase-agreement rollover terms, collateral requirements and the consequences of higher funding costs or reduced collateral values.
- Performance and valuation of CMBS VIEs, NSP and other Level 3 investments, including the NSP guaranty exposure.
- Progress toward remediating the material weakness and restoring effective disclosure controls.
- Loan credit quality, collateral performance and the assumptions underlying the $2.3 million CECL allowance; the filing’s satisfactory internal ratings are management assessments.