NexPoint Real Estate Finance, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. NexPoint is an externally managed commercial mortgage REIT investing in real-estate loans, preferred equity, common stock and multifamily CMBS. Comparisons are with 2020 periods, when the company had a shorter operating history.
Key financial metrics
| Metric | Q2 2021 / June 30, 2021 | Comparison |
|---|---|---|
| Net interest income | $5.3 million; interest income $12.9 million and interest expense $7.6 million | $4.6 million in Q2 2020 |
| Net income attributable to common stockholders | $5.5 million; basic EPS $1.04 and diluted EPS $0.58 | $5.3 million; basic and diluted EPS $1.00 in Q2 2020 |
| Six-month net income attributable to common stockholders | $13.9 million; basic EPS $2.69 and diluted EPS $1.83 | Loss of $1.1 million; EPS loss of $0.21 in first-half 2020 |
| Core earnings / cash available for distribution (CAD) | Q2: $3.4 million / $3.4 million, or $0.59 per diluted share for each measure. First half: $6.3 million / $6.2 million, or $1.12 / $1.10 per diluted share. | Both are non-GAAP measures; CAD is not a substitute for operating cash flow or GAAP earnings. |
| Common dividends declared | $0.475 per share in Q2; $0.95 per share for the first half | $0.40 and $0.6198, respectively, in 2020 |
| Cash and restricted cash | $30.0 million cash and cash equivalents; $30.7 million including restricted cash | $33.5 million combined at December 31, 2020 |
| Debt and equity | $1.111 billion carrying value of secured financing, repo borrowings and unsecured notes; $152.0 million stockholders’ equity. Common book value was $19.56 per share; combined book value including redeemable OP interests was $20.38 per share/unit. | $1.037 billion carrying value of those borrowings and $128.2 million stockholders’ equity at December 31, 2020 |
| Cash flows, first half | $22.8 million operating; $45.1 million investing; $(70.7) million financing; cash, cash equivalents and restricted cash decreased $2.8 million. | $11.9 million operating; $(21.4) million investing; $10.4 million financing in first-half 2020 |
Material changes and portfolio
- Q2 net interest income rose about $0.7 million year over year, primarily with growth in investments. Other income fell about $6.5 million, mainly because the change in net assets of consolidated CMBS entities was lower. Operating expenses increased $1.2 million, including higher stock-based compensation.
- For the first half, net interest income increased $3.6 million and other income improved to $32.9 million from a $7.9 million loss, primarily reflecting CMBS fair-value changes. First-half operating expenses increased to $7.0 million from $3.6 million.
- Total assets were $8.536 billion, up from $6.176 billion at year-end. The balance sheet includes $7.348 billion of mortgage loans and $6.912 billion of bonds from consolidated CMBS variable interest entities (VIEs). These largely matched trust assets and liabilities; they are not equivalent to corporate recourse debt. The company’s disclosed portfolio statistics, excluding the consolidated VIE assets and liabilities, showed $1.580 billion principal balance across 64 investments.
- Held-for-investment loans totaled $1.046 billion across 48 loans; all were internally rated “3” (satisfactory). SFR loans represented 85.1% of their collateral property mix, and Georgia was the largest disclosed state exposure at 39.4% of loan face amount.
- During Q2, the company reported purchases of CMBS interests with aggregate par amounts of about $373.6 million. A $67.5 million CMBS B-Piece purchase dated June 30 settled July 6; it caused consolidation of a trust at the trade date and a $67.5 million unsettled broker payable at quarter-end.
Outlook, risks and unusual items
- No earnings or investment-volume guidance was provided. Management stated that available cash, expected operating cash flows and potential debt or equity financing were expected to cover operations, scheduled debt service and dividends for the 12 months after June 30, 2021. This depends in part on continued access to capital markets.
- Management highlighted COVID-19 uncertainty, borrower credit and collateral risks, interest-rate and credit-spread volatility, leverage, portfolio concentration, and dependence on the external Manager. Two approved CMBS B-Piece forbearances represented 0.6% of consolidated unpaid principal balance; nine SFR forbearances were no longer in forbearance at quarter-end. The filing says servicers continued payments during the approved periods.
- The $177.6 million Mizuho repurchase balance had no stated facility maturity and consisted of transactions with one- to two-month tenors expected to roll. Approximately $1.8 billion par value of CMBS B-Pieces and IO strips was pledged as collateral; the filing describes these assets as illiquid and restricted to the facility.
- The company issued $75 million principal amount of 5.75% senior unsecured notes due 2026 in April. It also disclosed $36.5 million of 7.50% notes due 2025. The debt-maturity schedule lists $177.6 million in 2021, primarily the short-tenor repo balance.
- LIBOR transition could require contract changes and affect financing costs or asset-liability matching. About 5.8% of portfolio unpaid principal balance was LIBOR-linked; the company had received no transition notices by June 30. A new CMBS investment was SOFR-linked.
- The company reported no material changes to previously disclosed risk factors, no material adverse legal proceedings or contingencies, and effective disclosure controls. It believed it was complying with REIT requirements; loss of REIT status could materially affect taxes and distributions.
- Fair-value marks were significant to reported results: first-half net income included a $20.3 million net unrealized gain adjustment on investments held at fair value in the cash-flow reconciliation. Several valuations used Level 3 inputs.
Most important facts for investors to verify
- How much of earnings and CAD is repeatable interest income versus unrealized fair-value changes, and how do the company’s non-GAAP definitions compare with peers?
- Whether the short-tenor repo financing rolls on acceptable terms, and the consequences of collateral calls or reduced advance rates on pledged, illiquid CMBS assets.
- Underlying loan and CMBS collateral performance, especially geographic and asset-type concentrations, forbearance developments and any changes in internal loan ratings.
- The potential impact of LIBOR replacement on financing costs, investment yields and contractual interest-rate mismatches.
- Whether operating cash flows and available financing support dividends and debt service, including the distinction between the company’s own borrowings and consolidated CMBS trust liabilities.
- Effects of redeemable OP interests, equity issuance and stock-based compensation on per-share earnings, ownership and book value.