NexPoint Real Estate Finance, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company began operations on February 11, 2020, following its IPO; therefore, there is no comparable prior-period operating result. Amounts below are in U.S. dollars unless noted.
Business context
NexPoint is an externally managed commercial mortgage REIT focused on mortgage loans, mezzanine loans, preferred equity and stock, and multifamily CMBS. It acquired its initial portfolio from sponsor affiliates in a formation transaction alongside its February IPO. It intends to elect REIT status for tax year 2020.
Financial results and position
- Revenue and earnings: Interest income was $6.6 million and interest expense $3.3 million, yielding net interest income of $3.3 million. A $25.2 million loss related to consolidated CMBS variable-interest entities (VIEs), a $0.2 million loan-loss provision, and $0.4 million of dividend income contributed to total other losses of $24.9 million. Net loss was $22.9 million; $16.5 million was attributed to redeemable noncontrolling interests, leaving a $6.4 million loss attributable to common stockholders, or $1.22 per diluted share.
- Non-GAAP measure: Core Earnings were $1.2 million, or $0.23 per diluted share, after the company excluded specified items, including unrealized losses. Core Earnings are not a substitute for GAAP results and are also used in calculating the manager’s fee.
- Cash flow: Operating cash flow was $5.1 million, investing cash flow $2.7 million, and financing cash flow was a use of $7.7 million. Cash ended at $0.2 million. The cash-flow statement reflects the IPO proceeds and repayment of the $95 million bridge facility.
- Assets and capital: Total assets were $2.715 billion and total liabilities $2.399 billion. Stockholders’ equity was $83.1 million; redeemable noncontrolling interests were $233.4 million. Book value was $15.79 per common share, or $17.72 on a combined basis including redeemable Sub OP units.
- Debt and liquidity: The company had $788.3 million outstanding under its Freddie Mac credit facility, at a weighted-average rate of 2.44%, secured by SFR loans. The facility matures in 2029, subject to earlier repayment as underlying loans mature. Separately, consolidated CMBS VIEs reported $1.608 billion of bonds payable; these are obligations of the trusts, not legal obligations of the company. Management said cash, expected operating cash flows, and potential financing would be sufficient for the next 12 months, despite only $0.2 million of cash at quarter-end.
- Portfolio: The company reported a $1.1 billion portfolio on an unconsolidated presentation basis, with 36 investments and a 7.54% weighted-average cash coupon. Held-for-investment loans had $955.5 million carrying value; all 31 were internally rated “3,” or satisfactory. SFR loans represented 97.5% of the collateral property types for that loan portfolio, and Georgia and Florida together represented 66.5% of its geographic exposure.
- Dividends and shares: The company declared and paid a quarterly dividend of $0.2198 per share. It repurchased 87,466 shares for $1.3 million, averaging $15.30 per share, under a $10 million authorization. The IPO raised $91.9 million net of underwriting discounts and offering expenses.
Changes, outlook, risks and unusual items
- The portfolio, financing, and reported results reflect the company’s launch and formation transaction; the filing cautions that results cannot be compared with a prior operating period.
- The $25.2 million CMBS VIE loss was principally an unrealized fair-value loss. Management’s Core Earnings reconciliation excludes $7.5 million of unrealized losses attributable to common stockholders; do not treat Core Earnings as GAAP profit or cash flow.
- COVID-19 was identified as a material uncertainty that could weaken borrowers, reduce property collateral values, increase loan losses, disrupt capital access, and affect covenant compliance, cash flows, and investment activity. The company said the impact was highly uncertain.
- Management cited concentration, credit, interest-rate, prepayment, financing, and real-estate risks. Valuations for certain investments rely on Level 3 inputs and estimates. The company also disclosed exposure to LIBOR-indexed contracts and the anticipated transition away from LIBOR.
- No formal earnings or portfolio guidance was provided. A May 4, 2020 dividend declaration of $0.40 per share, payable June 30, was disclosed as a subsequent event. Subsequent April transactions included additional CMBS purchases and a $48.8 million repurchase-agreement borrowing.
- The company said it believed it was in compliance with REIT requirements and intended to elect REIT status for 2020; qualification is not assured. It reported no material legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- How CMBS fair-value marks, broker quotations, and the $25.2 million VIE loss affect actual portfolio value and common-stock book value.
- Borrower payment performance, COVID-related delinquencies, collateral values, and any subsequent changes to the $0.2 million loan-loss provision.
- Liquidity assumptions supporting management’s 12-month sufficiency statement, including access to repurchase and other financing and related collateral or covenant requirements.
- The distinction between $788.3 million of company credit-facility debt and $1.608 billion of consolidated VIE bonds, and the company’s economic exposure to those trusts.
- Whether dividends are supported by taxable income and cash generation over time; the first-quarter GAAP loss and Core Earnings are different measures.
- Concentration in SFR collateral and in Georgia and Florida, related-party formation valuations, manager fees, and the redemption terms of noncontrolling partnership interests.