NexPoint Real Estate Finance, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. NexPoint is an externally managed commercial mortgage REIT focused on real estate loans, preferred equity, CMBS, and related investments. Unless otherwise noted, amounts below are in millions.
Financial performance and condition
- Net interest income: $23.2, up from $6.2 in Q1 2021. Interest income was $32.0 versus $12.6, while interest expense increased to $8.8 from $6.5. Management attributed the increase mainly to prepayment penalties, investment growth, and related premium amortization.
- Net income: $18.7, compared with $25.1. Other income (loss) shifted to a loss of $0.8 from income of $22.3, primarily reflecting lower CMBS VIE returns and fair-value marks.
- Common-stockholder results: Net income attributable to common stockholders rose to $12.9 from $8.4. Basic and diluted EPS fell to $0.93 and $0.81, respectively, from $1.67 and $1.26, as the weighted-average basic share count increased to 13.9 million from 5.0 million. The filing’s reported diluted EPS also reflects potential OP-unit conversions and restricted stock units.
- Distributions: Common dividend declared was $0.50 per share, versus $0.475 a year earlier. Series A preferred dividend was $0.53125 per share.
- Non-GAAP distribution measures: Earnings Available for Distribution (EAD) attributable to common stockholders was $20.1, or $1.40 per diluted weighted-average share, versus $2.9, or $0.53. Cash Available for Distribution (CAD) was $26.1, or $1.81 per diluted weighted-average share, versus $2.8, or $0.52. These are company-defined non-GAAP measures and are not equivalent to GAAP earnings or operating cash flow.
- Cash flow: Operating activities provided $38.5, versus $9.1. Investing activities provided $211.1, mainly from mortgage-loan repayments; financing activities used $247.4, primarily including distributions to VIE bondholders. Cash, cash equivalents, and restricted cash ended at $35.4, including $35.2 of unrestricted cash.
- Assets and equity: Total assets were $8,021.5, down from $8,513.9. The balance sheet included $6,716.2 of mortgage loans and $6,266.9 of bonds payable in consolidated CMBS VIEs. Common book value per share was $22.21, up from $21.88; combined book value per share/unit, including redeemable OP interests, was $21.78, up from $21.51.
- Debt and liquidity: Financing arrangements had $1,235.8 of outstanding face amount ($1,231.7 carrying value), excluding $6,266.9 of consolidated VIE bonds. Debt included $639.9 under the Freddie Mac SFR facility, $297.0 of short-tenor Mizuho repurchase financing, and $202.7 of unsecured notes. Management said available cash, expected operating cash flows, and potential financing were expected to cover operations, scheduled debt service, dividends, and potential preferred-equity funding needs for the 12 months after quarter-end.
- Portfolio: The company reported 71 discrete investments and a $3.2 billion combined unpaid principal balance, excluding consolidation of CMBS VIE assets and liabilities. Held-for-investment loans totaled $1,056.2 across 47 loans; all were internally rated “3,” or “Satisfactory.” The portfolio included a 204-unit Charlotte multifamily property, 92.2% occupied at quarter-end.
Material changes and notable activity
- The company originated or acquired approximately $182.9 of investments in the quarter, including convertible notes, preferred equity, CMBS interests, and a $13.5 floating-rate bridge loan secured by a Las Vegas development property.
- Investment redemptions and maturities generated $124.0 of proceeds and $22.7 of prepayment penalties during the quarter. Net gain on the listed repayments was $15.9.
- In January and February, the company redeemed approximately 5.2 million OP units and issued approximately 5.2 million common shares. The transaction reduced redeemable OP interests and increased common shares outstanding; dilution is relevant when assessing per-share results.
- Unsecured 5.75% notes due 2026 increased following a January 2022 issuance of $35.0 principal amount. The company also started a new $100.0 ATM program in March; quarter-end sales were 91,428 common shares for $2.1 gross proceeds.
- The 2021 ATM program had been terminated in December 2021. The new program had issued no preferred shares through March 31.
Outlook, risks, and unusual items
- No earnings or investment-volume guidance was provided. Management described a flexible investment strategy and stated that it expected liquidity sources to be sufficient for near-term requirements, while noting that future capital access depends on market conditions, leverage, lender restrictions, and operating performance.
- Interest-rate, credit-spread, collateral-value, refinancing, and funding risks are material. The Mizuho repo facility has no stated final maturity; its transactions typically have one- to two-month tenors and are expected to roll. Approximately $2.1 billion par value of CMBS investments was pledged as collateral and described as illiquid and difficult to replace.
- LIBOR-based exposures may require transition to another benchmark. The company reported that 5.5% of its portfolio, by unpaid principal balance, paid a variable rate tied to LIBOR; it had received no LIBOR-transition notices by quarter-end. It had a $32.5 interest-rate cap with a 2.29% strike, expiring June 2024.
- The company could be required to fund up to an additional $18.6 for preferred units supporting life-science real estate transactions, potentially by September 2023; management considered the funding obligation remote at quarter-end. The preferred units accrue distributions at 10% annually, compounded monthly.
- COVID-19 effects remain a stated uncertainty. Four CMBS B-Piece forbearance requests had been approved since inception, representing 0.8% of consolidated unpaid principal balance; nine SFR loan forbearances had ended by quarter-end. The company reported no loan modifications or troubled debt restructurings in Q1.
- A lawsuit connected to the Highland bankruptcy names the Sponsor and others, but not NexPoint’s business, assets, or operations. Management did not expect a material effect on the company. The filing reported no material change to previously disclosed risk factors, no material legal proceedings for the company, and no defaults on senior securities.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It elected REIT status and stated it believed it remained in compliance; failure to qualify could materially affect taxes and distributions.
Important facts for investors to verify
- Whether elevated prepayment penalties and associated net interest income are repeatable, and how premium amortization affects future earnings.
- The effects of OP-unit conversions, share issuance, and other dilution on per-share earnings, book value, and distributions.
- Repo renewal terms, collateral requirements, debt maturities, and capacity to refinance or raise capital in stressed markets.
- Credit performance and valuation assumptions for CMBS, the Level 3 NSP investment, and the concentrated SFR and multifamily exposures.
- Actual funding needs for the preferred-equity commitment, LIBOR transition outcomes, and the sustainability of dividends relative to taxable income and cash available for distribution.