Nexpoint Real Estate Finance, Inc. annual report, FY2020

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NexPoint Real Estate Finance, Inc. — 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. The company began operations on February 11, 2020 after its IPO, so 2020 results cover a partial first year and are not directly comparable with 2019, when the company reported no operating activity.

Business context

NexPoint is an externally managed commercial mortgage REIT investing in single-family rental (SFR) loans, multifamily CMBS, mezzanine loans, preferred equity and real estate-related common stock. It intends to qualify as a REIT beginning with tax year 2020. The portfolio’s reported $2.9 billion unpaid principal balance excludes the consolidation of CMBS trust assets and liabilities; the GAAP balance sheet includes those trusts.

Financial performance and position

  • Income: Net interest income was $17.7 million on interest income of $39.0 million and interest expense of $21.3 million. Average asset yield was 4.23% and average financing cost was 2.51%.
  • Profit: Net income was $34.2 million; net income attributable to common stockholders was $11.1 million. Basic and diluted EPS were $2.13 and $1.74. Other income of $25.8 million included a $19.9 million gain in net assets related to consolidated CMBS entities and $6.3 million of dividend income.
  • Non-GAAP measures: Core Earnings attributable to common stockholders were $8.4 million, or $1.57 per diluted weighted-average share. Fourth-quarter Core Earnings were $3.0 million, or $0.55 per diluted share. Fourth-quarter cash available for distribution (CAD) was $2.8 million, or $0.52 per common share. These measures have company-specific definitions and should not be treated as GAAP income or cash flow.
  • Cash flow and liquidity: Operating cash flow was $32.9 million; investing cash flow was negative $68.3 million; financing cash flow was positive $68.8 million. Year-end cash and cash equivalents were $30.2 million, plus $3.2 million restricted cash. Management said available cash, expected operating cash flow and potential financing were sufficient for operations, scheduled debt service and dividend requirements for the 12 months after year-end.
  • Debt: The debt schedule reports $1.038 billion of total debt at face amount: $1.002 billion non-recourse and $36.5 million of recourse unsecured notes. Major borrowings included $780.5 million of Freddie Mac financing, $161.5 million under repurchase agreements, $59.9 million of seller financing and $36.5 million of 7.50% notes due 2025. Repurchase transactions have one-to-two-month tenors and are expected to roll; approximately $2.0 billion par value of CMBS investments was pledged as collateral. Separately, GAAP consolidated CMBS trust bonds payable were $4.731 billion; the trusts’ assets and liabilities are not generally legal obligations of the company.
  • Equity and dividends: Common stockholders’ equity was $128.2 million, with book value of $18.07 per common share; combined book value including redeemable OP interests was $19.48 per share/unit. Common dividends declared were $1.4198 per share for 2020, including a fourth-quarter dividend of $0.40. The 8.50% Series A preferred stock has a $25 liquidation preference.
  • Portfolio indicators: Management reported 98.0% of underlying properties stabilized, 95.1% weighted-average occupancy, 2.07x weighted-average DSCR, 67.9% weighted-average LTV and 8.0-year weighted-average maturity. Approximately 61.3% of portfolio unpaid principal balance excluding CMBS trust consolidation was in SFR loans. A single fixed-rate SFR loan had approximately $508.7 million unpaid principal balance, about 36.5% of portfolio balance.

Material changes and notable items

  • The IPO raised approximately $101.7 million gross and $91.5 million net; proceeds repaid the $95 million KeyBank bridge facility.
  • The company issued $48.0 million gross of Series A preferred stock and the OP issued $36.5 million of 7.50% senior unsecured notes. The notes, together with cash on hand and $59.9 million of Freddie Mac seller financing, funded the acquisition of 18 mezzanine loans with approximately $97.9 million outstanding principal.
  • The company expanded its multifamily CMBS holdings during 2020, including acquisitions financed in part with repurchase borrowings. The $86 million Raymond James bridge facility used for securitization acquisitions was repaid in August.
  • The company’s Jernigan Capital preferred-stock investment converted to common stock of NexPoint Storage Partners (NSP) after the acquisition of Jernigan Capital by Manager affiliates. NexPoint owned approximately 25.8% of NSP at year-end and carried the investment at a Level 3 fair value of $44.6 million.
  • The company repurchased 327,422 common shares for approximately $4.8 million, averaging $14.61 per share. Subsidiaries also purchased 355,000 Series A preferred shares for approximately $8.6 million.
  • Year-end common book value included $19.9 million of unrealized gains from consolidated CMBS entities, or $1.31 per common share, and IPO offering costs of $0.58 per share.

Outlook, risks and contingencies

  • No formal earnings or operating guidance is provided. Management’s liquidity statement is an expectation, not a guarantee, and depends partly on access to financing.
  • COVID-19 remained a material uncertainty. Two CMBS B-piece forbearance requests, representing 0.8% of consolidated unpaid principal balance, were approved; one loan repaid advanced principal and interest, while the other was current under its agreement. Nine SFR forbearances had ended by year-end.
  • Key risks include high leverage; concentrated SFR, geographic and asset exposure; borrower defaults and real-estate valuation uncertainty; illiquidity and potential repurchase-agreement collateral calls; interest-rate and LIBOR transition exposure; and reliance on the external Manager, including conflicts of interest and related-party transactions. Approximately 13.3% of the portfolio had variable rates tied to LIBOR.
  • The Manager’s agreement provides for a 1.5% annual fee based on defined Equity and a potential termination fee, subject to stated terms. The company reported $1.6 million of management fees for 2020 and said operating expenses remained within the 2.5% expense cap.
  • The Highland bankruptcy and the termination of a shared-services agreement between Highland and the Sponsor on February 19, 2021 could disrupt the Sponsor or Manager’s administrative support; management expected to provide or outsource those services.
  • The company intends to elect REIT status for 2020 and stated it believed it was in compliance at year-end; failure to qualify could materially affect taxes and distributions. Management reported no material legal proceedings or off-balance-sheet arrangements. KPMG gave an unqualified audit opinion. Disclosure controls were deemed effective; the filing did not include management’s internal-control assessment or auditor attestation due to the new-public-company transition period.
  • After year-end, the company issued two mezzanine loans totaling approximately $26.4 million, with stated minimum all-in rates of 12.5% initially, and declared a $0.475 common dividend payable March 31, 2021.

Important facts for investors to verify

  • Reconcile the debt schedule’s $1.038 billion total, the $1.002 billion non-recourse amount, and the separately consolidated CMBS trust bonds; assess the short tenor, collateral and renewal terms of repo financing.
  • Review the composition and valuation sensitivity of the $19.9 million CMBS-related unrealized gain, Level 3 investments and the NSP holding.
  • Test dividend sustainability against CAD, operating cash flow, debt service and REIT distribution requirements; compare the reported common dividend with both GAAP earnings and the company’s non-GAAP measures.
  • Assess credit and concentration risk in the large SFR loan, the geographic exposure to Georgia and Florida, and the subordinated CMBS and mezzanine positions; monitor forbearance and delinquency developments.
  • Confirm ongoing REIT qualification, compliance with debt covenants, replacement of Highland-related support services, and disclosures about related-party transactions and Manager conflicts.