NexPoint Real Estate Finance, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 31, 2023. This is an annual report, not a standalone fourth-quarter results release. NexPoint is an externally managed commercial mortgage REIT investing in real estate loans, securities, preferred equity and multifamily properties.
Financial results and key metrics
| Metric | FY2022 / Dec. 31, 2022 | Prior comparable period |
|---|---|---|
| Interest income | $78.0 million | $55.8 million in FY2021 |
| Interest expense | $40.3 million | $29.8 million in FY2021 |
| Net interest income | $37.7 million | $26.1 million in FY2021 |
| Other income (loss) | $2.7 million | $71.3 million in FY2021 |
| Operating expenses | $26.2 million | $13.9 million in FY2021 |
| Net income | $14.2 million | $83.5 million in FY2021 |
| Net income attributable to common stockholders | $3.2 million | $39.6 million in FY2021 |
| Basic and diluted EPS | $0.22 | $6.00 basic and $3.93 diluted in FY2021 |
| Common dividends declared per share | $2.00 | $1.90 in FY2021 |
| Operating cash flow | $65.8 million | $49.3 million in FY2021 |
- Management-reported non-GAAP EAD attributable to common stockholders was $40.1 million, or $2.63 per diluted weighted-average share; CAD was $48.1 million, or $3.15 per diluted weighted-average share. These non-GAAP measures are not cash flow or direct measures of liquidity, and their calculations may not be comparable with other REITs.
- Common stockholders’ equity was $346.5 million, or $20.29 per share, versus $200.5 million, or $21.88 per share, at year-end 2021. Combined book value per common share and redeemable OP unit was $20.03, versus $21.51.
- Cash and cash equivalents were $20.0 million, plus $0.3 million of restricted cash. Investing activities provided $950.6 million and financing activities used $1.029 billion; the large flows include activity of consolidated securitization trusts.
- Debt financing arrangements totaled about $1.345 billion by carrying value: $628.6 million Freddie Mac SFR financing, $331.0 million repurchase agreements, about $205.0 million unsecured notes and $121.2 million property mortgages. Separately, the balance sheet included $6.250 billion of bonds payable of consolidated CMBS entities. Those trust liabilities relate to securitization assets and are not equivalent to the Company’s own financing debt.
- Portfolio unpaid principal balance was approximately $2.0 billion excluding consolidation of CMBS entities. Management reported 92.9% of underlying properties stabilized, weighted-average occupancy of 89.5%, DSCR of 1.78, LTV of 68.6% and weighted-average maturity of 5.9 years; these portfolio metrics exclude certain equity and property investments.
Material changes versus FY2021
- Net interest income rose 44.8%, reflecting investment activity and income from prepayments, while reported common-stockholder net income fell 91.8%.
- The primary earnings swing was other income: it fell by $68.6 million, mainly because of lower fair-value results from consolidated CMBS entities. Those entities contributed $10.2 million of change in net assets in 2022 versus $57.6 million in 2021; 2022 included $35.9 million net interest earned and $25.6 million of unrealized losses.
- Operating expenses increased 89.1%, including costs associated with the multifamily properties acquired or consolidated in 2022. General and administrative costs and management fees also increased.
- The Company acquired the 368-unit Elysian at Hughes Center property in Las Vegas for $184.1 million and acquired additional investments. It also sold approximately 64% of the interests in the property-owning trust during 2022, raising about $67.3 million net; management expected a 2023 restructuring to result in deconsolidation and presentation as a preferred equity investment.
- The Company issued 7.27 million common shares in 2022 to redeem OP units. Year-end common shares outstanding increased to 17.08 million from 9.16 million.
Outlook, risks and unusual items
- The filing gives no quantified earnings or distribution guidance. Management said available cash, expected operating cash flows and potential financing were expected to cover operations, scheduled debt service, distributions and potential obligations for the 12 months after year-end; access to capital and market conditions remain important uncertainties.
- Management cited inflation, rising interest rates, possible recession, credit spreads, refinancing and funding availability as risks. The portfolio has notable concentrations: one SFR loan had $508.7 million unpaid principal, about 25.2% of portfolio principal, and management disclosed substantial exposure to Florida and Georgia.
- The Mizuho repurchase agreement carried a 5.83% weighted-average rate at year-end, has no stated facility maturity, and transactions generally roll on one- to two-month terms. Approximately $974.4 million face value of securities collateralized $331.0 million of borrowings. This creates rollover, collateral and liquidity risks.
- A $97.6 million aggregate cap applies to guarantees supporting NSP obligations of approximately $64.2 million; the Company’s maximum stated liability is approximately $83.8 million. The Company reported the obligation as remote at year-end. It also reported a possible additional $3.7 million funding obligation for preferred units, considered remote at year-end.
- Management disclosed a material weakness in internal control over financial reporting related to missing controls for obtaining and reviewing final investment documents. The weakness was tied to the Elysian accounting; prior 2022 interim financial statements were revised, with the error deemed immaterial. Management concluded disclosure controls and internal control were not effective at year-end and described remediation steps that were not yet fully implemented. The auditor did not audit or opine on internal control effectiveness.
- Following the Elysian accounting correction, the Company expected to deconsolidate the property in 2023 after restructuring. Investors should assess the effects on reported assets, debt, earnings and comparability.
- The Company expected a $2–$4 million cumulative retained-earnings reduction on adopting CECL effective January 1, 2023, equivalent to an estimated $0.12–$0.23 per common share.
- The external management agreement’s initial term expired February 6, 2023, with successive one-year terms unless terminated. It provides for an annual fee of 1.5% of defined equity and, in most termination circumstances, a fee equal to three times the average annual management fee for the preceding two years.
- The filing also describes the Highland bankruptcy-related litigation and a February 2023 UBS lawsuit involving the Sponsor’s leadership and others. Neither lawsuit asserts claims related to NexPoint’s business or assets; management did not expect a material effect, while acknowledging potential reputational and management-distraction risks.
Most important facts for investors to verify
- Reconcile the sharp decline in GAAP common earnings with EAD and CAD, and review the assumptions and volatility behind CMBS fair-value marks.
- Confirm the Company’s actual debt maturities, repurchase-agreement renewal terms, collateral headroom, covenant compliance and available liquidity.
- Track remediation and independent validation of the material weakness, and assess any subsequent financial-statement revisions.
- Review the Elysian restructuring and deconsolidation, including its effect on leverage, earnings and the reported portfolio.
- Assess exposure to the NSP guarantee, remaining preferred-unit funding commitment and the credit quality and geographic concentration of underlying collateral.
- Compare declared common dividends with sustainable operating cash generation, while recognizing that EAD and CAD are non-GAAP measures and do not establish cash available for distributions.