NexPoint Real Estate Finance, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company began operations on February 11, 2020 after its IPO; accordingly, there is no comparable prior-year operating period, and reported year-to-date results cover a partial first year.
Business context
NexPoint is an externally managed commercial mortgage REIT focused on real estate loans, preferred equity and stock, and multifamily CMBS. Its portfolio includes single-family rental (SFR) loans, CMBS B-pieces and interest-only strips, mezzanine loans, preferred equity, and preferred stock.
Financial results and position
Amounts are in millions except per-share data. The balance sheet includes consolidated CMBS trusts; their assets and corresponding bonds are trust obligations, not company legal obligations.
| Metric | Q3 2020 | Nine months 2020 |
|---|---|---|
| Interest income | $10.5 | $26.9 |
| Interest expense | $6.1 | $14.6 |
| Net interest income | $4.4 | $12.3 |
| Other income (loss) | $10.0 | $2.2 |
| Operating expenses | $2.9 | $6.5 |
| Net income | $11.5 | $7.9 |
| Net income attributable to common stockholders | $2.9 | $1.8 |
| Basic / diluted EPS | $0.54 / $0.52 | $0.34 / $0.33 |
| Core Earnings, non-GAAP | $2.3; $0.42 diluted per share | $5.4; $1.00 diluted per share |
- Q3 other income was chiefly a $8.9 million gain in net assets of consolidated CMBS trusts and $1.3 million of dividend income. For the nine months, the CMBS trust item was a $1.2 million loss, partly offset by $3.6 million of dividend income.
- At September 30, total assets were $6.17 billion, cash and cash equivalents $18.0 million, total liabilities $5.78 billion, redeemable noncontrolling interests $265.2 million, and stockholders’ equity $123.9 million. Common stockholders’ equity was $86.4 million; common book value was $16.49 per share, or $18.48 including redeemable OP interests.
- Company financing included $786.9 million of Freddie Mac secured financing and $160.2 million of repurchase agreements. The repurchase financing had a one-month tenor and was expected to roll monthly; collateral included $1.96 billion par value of CMBS investments described as illiquid. Separately, consolidated CMBS trusts reported $5.09 billion of mortgage loans and $4.83 billion of bonds payable.
- Nine-month cash flows: $21.0 million provided by operations, $110.1 million used in investing, and $107.0 million provided by financing; cash rose by $18.0 million from a zero beginning balance.
- Common dividends declared were $0.40 per share for Q3 and $1.0198 per share year to date. The Series A preferred stock carries an 8.50% coupon and a $25 liquidation preference.
Changes, outlook, and key risks
- Q3 earnings reflect a substantial positive CMBS trust valuation/earnings contribution, whereas the nine-month CMBS trust result was negative. The filing provides no prior-year period for a direct comparison.
- The company reported that it expected available cash, operating cash flows, and potential financings to cover operations, scheduled debt service, and dividends for the 12 months following September 30, 2020. This is management’s assessment, not a quantified earnings forecast.
- Subsequent to quarter-end, the operating partnership issued $36.5 million of 7.5% unsecured notes. On October 20, the company acquired 18 mezzanine loans with about $97.9 million principal, partly funded by approximately $59.9 million of Freddie Mac seller financing at a stated 0.30% weighted-average fixed rate.
- COVID-19 could impair collateral values, borrower payments, funding access, and estimates of fair value and loan losses. At September 30, two CMBS B-piece forbearances represented 0.8% of consolidated unpaid principal balance; nine SFR forbearances had ended, and the servicers continued payments during the approved periods.
- Loans held for investment totaled $964.2 million carrying value; all 32 were internally rated “3” (satisfactory). SFR collateral was 95.95% of this portfolio, with Georgia and Florida representing 43.44% and 21.98% of face amount, respectively.
- A subsidiary had an approximately $227 million equity commitment for a proposed transaction involving Manager affiliates and could face a roughly $9.4 million termination fee in specified circumstances. At September 30, the amount, if any, was not estimable and funding was considered remote.
- Other material risks include leverage and refinancing, illiquid collateral, interest-rate and credit-spread movements, prepayments, geographic and asset concentration, external-manager conflicts, and maintaining REIT qualification. The company intended to elect REIT status for 2020; qualification was not assured.
- The filing notes immaterial Q1 cash-flow presentation errors corrected in year-to-date information, with no impact on balance sheets, operations, or equity. Management reported disclosure controls effective and no material change in internal control during Q3.
Important facts for investors to verify
- Whether CMBS trust fair-value movements and the resulting reported income are sustainable; review the underlying valuation inputs and the non-GAAP Core Earnings reconciliation.
- Liquidity and rollover terms for the monthly repurchase financing, available collateral, and the effect of post-quarter-end debt and loan acquisitions.
- Credit performance, forbearance developments, and geographic concentration in SFR and CMBS collateral, particularly amid COVID-19 effects.
- The status and potential funding or termination-fee exposure of the $227 million subsidiary commitment, and any related-party interests.
- Coverage of common and preferred dividends by taxable income and cash flows, and the company’s progress in satisfying REIT requirements.