NexPoint Real Estate Finance, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. NexPoint is an externally managed commercial mortgage REIT investing in real estate loans, preferred equity, multifamily property, securities and CMBS. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $16.4 | $14.4 | $66.0 | $39.9 |
| Interest expense | $10.7 | $7.8 | $28.6 | $21.9 |
| Net interest income | $5.7 | $6.6 | $37.4 | $18.0 |
| Net income (loss) | $(8.7) | $25.2 | $18.5 | $62.5 |
| Net income (loss) attributable to common stockholders | $(8.1) | $13.2 | $9.9 | $27.1 |
| Basic EPS | $(0.54) | $1.93 | $0.68 | $4.73 |
| Common dividend declared per share | $0.50 | $0.475 | $1.50 | $1.425 |
- At September 30, 2022, total assets were $8,275.9 and total liabilities were $7,780.9. These totals include consolidated CMBS variable-interest entities (VIEs): $6,980.1 of mortgage-loan assets and $6,488.5 of related bonds payable. The company reports its exposure to these trusts through subordinated interests; the trust assets and liabilities are not its general corporate assets and obligations.
- Outside those VIE bonds, reported debt included $688.5 of secured financing, $351.0 of repurchase agreements, $198.2 of unsecured notes and $32.2 of mortgages payable. Cash and cash equivalents were $22.1; restricted cash was $4.4. Common book value was $20.98 per share, down from $21.88 at December 31, 2021; combined book value was $20.68 per share/unit, down from $21.51.
- For the nine months, operating cash flow was $62.6, investing cash flow was $850.9 and financing cash flow was $(920.3); cash, cash equivalents and restricted cash declined $6.8 to $26.5. Investing and financing flows were substantially affected by mortgage-loan collections and distributions to CMBS bondholders.
- Management reported nine-month weighted-average portfolio yield of 11.55% and weighted-average financing cost of 4.65% in its net-interest-income analysis. These are management’s portfolio measures, not a reported net interest margin.
- Q3 non-GAAP EAD attributable to common stockholders was $6.9 ($0.44 per diluted weighted-average share); CAD was $7.2 ($0.46 per diluted weighted-average share). For the nine months, EAD was $36.2 ($2.40 per share) and CAD was $43.7 ($2.89 per share). These company-defined measures are not GAAP income or cash flow and may not be comparable with other REITs.
Changes versus comparable periods
- Q3 common-stockholder results swung to a loss from income a year earlier, mainly because other income of $22.0 in Q3 2021 became an other loss of $10.8 in Q3 2022. The company attributed the change primarily to lower CMBS VIE net-asset results and weaker fair-value marks. Q3 included $12.1 of unrealized loss in consolidated CMBS VIEs and $3.9 of unrealized loss on CMBS pass-through certificates.
- Q3 net interest income was $5.7 versus $6.6 a year earlier, although interest income increased; higher interest expense more than offset it. The MD&A narrative says net interest income increased, but the financial statements show a decrease.
- Nine-month net interest income increased to $37.4 from $18.0, with management citing $22.9 of prepayment penalties, partly offset by accelerated premium amortization and supported by a larger investment base. Other income moved from $54.8 of income to $7.9 of loss, resulting in lower GAAP net income.
- The company issued 531,728 common shares through its 2022 at-the-market program for $11.5 net proceeds and converted/redeemed OP units into approximately 5.17 million common shares during the nine months. Common shares outstanding rose to 15.0 million from 9.2 million at year-end 2021. Common book value per share declined despite higher reported common equity.
- The loan portfolio’s carrying value was $1,012.9 across 47 loans, down from $1,088.9 across 51 loans at year-end 2021. All loans were rated “3—Satisfactory” under the company’s internal ratings. Collateral was concentrated in single-family rental (70.2%) and multifamily (25.3%).
Outlook, risks and notable items
- No formal earnings or investment guidance was provided. Management said cash, expected operating cash flows and potential debt or equity financing should cover operations, scheduled debt service, dividends and potential funding obligations for the 12 months following quarter-end; longer-term funding may require additional financing.
- Management identified inflation and rising interest rates as risks to borrowing costs, operating expenses, property expenses, asset values and access to capital. Most of the portfolio’s principal balance was fixed-rate, while floating-rate debt and assets may reprice differently. The company had a $32.5 interest-rate cap with a 2.29% strike, expiring June 2024.
- The $351.0 Mizuho repurchase balance had no stated facility maturity; transactions generally had one- to two-month tenors and were expected to roll. Approximately $1.0 billion par value of securities collateralized the facility, and the collateral was described as illiquid. The company also had substantial scheduled debt maturities, including $351.0 of repurchase financing shown in 2022 and $206.8 total scheduled maturities in 2026.
- The company may have to fund an additional $18.6 of life-sciences preferred units by September 2023, subject to issuer extension rights. Subsequent to quarter-end, it funded $15.0 under that arrangement and purchased a $4.0 preferred-equity investment. The board later declared a $0.50 common dividend payable December 30, 2022.
- The Charlotte multifamily property was 96.1% occupied at quarter-end. A Highland-bankruptcy-related lawsuit names the Sponsor and others, but not the company; management did not expect a material effect. The company reported no material adverse legal proceedings, no loan modifications or troubled debt restructurings, and no off-balance-sheet arrangements.
- Management stated its disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. REIT status depends on meeting qualification requirements, including annual distribution requirements.
Important facts for investors to verify
- Reconcile the Q3 MD&A statement that net interest income increased with the financial statements showing a decline from $6.6 to $5.7.
- Assess how much nine-month earnings and distributions relied on prepayment penalties, noncash fair-value changes and the non-GAAP EAD/CAD adjustments.
- Review short-term repurchase-facility renewal, collateral and margin-call exposure, as well as debt maturities and refinancing needs.
- Monitor funding of the remaining preferred-unit commitment, cash available for dividends, and the effect of share issuance and OP-unit conversions on per-share book value and earnings.
- Evaluate concentration in SFR and multifamily collateral, geographic exposures, internal loan ratings and the assumptions used to value Level 3 investments.