NexPoint Real Estate Finance, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. This externally managed commercial mortgage REIT reported the quarter and six months ended June 30, 2022. It invests in real estate loans, preferred equity, CMBS and related securities, common stock investments, and multifamily property. The company elected REIT tax treatment and said it believed it remained in compliance with applicable REIT requirements.
Key financial metrics
Amounts are in millions except per-share data; balance-sheet comparisons are June 30, 2022 versus December 31, 2021.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $17.6 | $12.9 | $49.6 | $25.5 |
| Net interest income | $8.5 | $5.3 | $31.7 | $11.4 |
| Other income (loss) | $3.7 | $10.6 | $2.9 | $32.9 |
| Net income | $8.5 | $12.3 | $27.2 | $37.3 |
| Net income attributable to common stockholders | $5.0 | $5.5 | $17.9 | $13.9 |
| Basic / diluted EPS | $0.34 / $0.34 | $1.04 / $0.58 | $1.25 / $1.14 | $2.69 / $1.83 |
| Common dividend declared per share | $0.50 | $0.475 | $1.00 | $0.95 |
| Operating expenses | $3.7 | $3.6 | $7.4 | $7.0 |
- Assets and equity: Total assets were $7.861 billion, down from $8.514 billion. Total liabilities were $7.347 billion; stockholders’ equity was $366.3 million. Common book value per share was $21.99 versus $21.88; combined book value per common share and redeemable OP unit was $21.59 versus $21.51.
- Cash and cash flow: Cash and cash equivalents were $52.7 million, with $1.3 million restricted cash. For the six months, operating cash flow was $51.4 million (versus $22.8 million); investing cash flow was $709.3 million (versus $45.1 million); financing cash flow was negative $740.0 million (versus negative $70.7 million). Cash, cash equivalents and restricted cash ended at $53.9 million.
- Debt and liquidity: Financing arrangements had $1.240 billion face amount outstanding, including $312.4 million under a Mizuho repurchase agreement, $633.9 million of Freddie Mac financing, and unsecured notes. The arrangements’ weighted-average interest rate was 3.11%; the Mizuho transactions had one-to-two-month tenors and were expected to roll. Separately, consolidated CMBS variable-interest entities had $6.096 billion of bonds payable, matched with $6.549 billion of mortgage loans; these trust obligations are not company obligations, and the company’s exposure is through subordinated interests. Management said available cash, expected operating cash flows and potential financings should cover operations, debt service, potential preferred-equity funding and dividends for the following 12 months.
- Portfolio: The company reported 76 investments and a combined portfolio principal amount of approximately $3.2 billion, excluding consolidation of CMBS trust assets and liabilities. Weighted-average cash coupon was 5.13% and all-in yield 5.88%. Held-for-investment loans and preferred equity totaled $994.6 million carrying value; all 46 loans were rated “3” (Satisfactory) under the company’s internal scale.
Material changes versus the prior comparable period
- Q2 net interest income increased 61% year over year, while net income attributable to common stockholders declined 9%. For the first half, net interest income rose 177% and common-stockholder net income rose 29%, even as total net income fell 27%.
- Management attributed higher net interest income mainly to prepayment penalties from early paydowns and a larger investment base, partly offset by accelerated premium amortization. Lower other income—primarily weaker changes in net assets of consolidated CMBS entities and lower fair-value marks—more than offset the interest-income growth in reported net income.
- Q2 and first-half EPS were lower than the prior year, with weighted-average basic shares rising substantially following OP-unit conversions and equity issuance. In the first half, the company issued about 5.17 million common shares in exchange for OP units and issued 501,600 shares through its ATM program.
- First-half EAD, a non-GAAP measure, was $29.3 million attributable to common stockholders ($1.97 per diluted weighted-average share); CAD was $36.5 million ($2.45 per diluted weighted-average share). These measures are not GAAP earnings or cash-flow measures and should not be treated as cash available for distribution without qualification.
Outlook, risks and unusual items
- No numerical earnings or investment guidance was provided. Management described a flexible, relative-value strategy and intends to continue quarterly common dividends. A $0.50 common dividend for Q3 2022 was declared after quarter-end, payable September 30, 2022; the Q2 preferred dividend was $0.53125 per share.
- Q2 acquisitions and originations included approximately $82.7 million of investments. Three investments redeemed for approximately $47.1 million of proceeds, including $2.4 million in prepayment penalties and a reported $2.0 million net gain on repayment.
- After quarter-end, the company made additional preferred-equity investments, sold a CMBS interest-only strip for $7.0 million, and purchased approximately $70.5 million principal amount of a Freddie Mac CMBS tranche. A $38.7 million bridge facility used for that acquisition was repaid the following day.
- The company had a potential obligation to fund up to $18.6 million of additional preferred units by September 2023, subject to the issuer’s extension option; management considered the obligation remote at June 30. It reported no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
- Key risks include leverage and refinancing or repo-rollover exposure, interest-rate and credit-spread changes, collateral and real-estate credit performance, portfolio concentration, illiquid collateral pledged under repurchase agreements, and the transition away from LIBOR. The company said 4.7% of portfolio principal was LIBOR-linked and had received no LIBOR-transition notices as of June 30.
- A lawsuit related to the Highland bankruptcy names the Sponsor and others but does not assert claims related to the company’s business, assets or operations; the Sponsor and its executive said they intended to defend it and the company did not expect a material effect. The filing also disclosed that controls and procedures were effective as of June 30, 2022.
Important facts for investors to verify
- How much of the increase in net interest income came from recurring investment income versus prepayment penalties, and whether those penalties are repeatable.
- How fair-value changes in CMBS and other investments, including the consolidated trust accounting, affected reported earnings and could affect future results.
- The maturity, collateral, covenants and rollover terms of financing—particularly the short-tenor Mizuho repo facility—and the company’s ability to meet funding needs in stressed markets.
- Whether distributions are supported by recurring cash generation; reconcile GAAP earnings, EAD, CAD and actual operating cash flow.
- Portfolio credit performance, geographic and property-type concentrations, valuation assumptions for Level 3 holdings, and progress on LIBOR transition.
- The status of potential preferred-unit funding, post-quarter investment activity, and the impact of common-share issuance and OP-unit redemptions on per-share results.