NexPoint Real Estate Finance, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance sheet compared with December 31, 2020. The company is an externally managed commercial mortgage REIT focused on real estate credit and related investments. It began operations in February 2020, so Q1 2020 was a partial operating quarter.
Financial performance and position
- Income: Net interest income was $6.2 million, up from $3.3 million. Net income was $25.1 million, versus a net loss of $22.9 million. Income attributable to common stockholders was $8.4 million, compared with a $6.4 million loss. Basic/diluted EPS was $1.67/$1.26, versus $(1.22)/$(1.22).
- Drivers and earnings quality: Other income was $22.3 million, versus a $24.9 million loss in Q1 2020, largely reflecting a $20.7 million gain in net assets of consolidated CMBS entities. That amount included $15.0 million of unrealized gains and $5.7 million of net interest earned. Core Earnings, a non-GAAP measure, were $2.9 million, or $0.53 per diluted share attributable to common stockholders; CAD, also non-GAAP, was $2.8 million, or $0.52 per share. These measures exclude certain items and are not substitutes for GAAP results.
- Interest and margins: Interest income was $12.6 million and interest expense was $6.5 million. The reported annualized yield on interest-earning assets was 4.65%, against a 2.66% average funding cost. No conventional operating margin is presented.
- Cash flow and liquidity: Operating cash flow was $9.1 million; investing cash flow was $71.4 million; financing cash flow was a use of $98.5 million. Cash and cash equivalents were $14.9 million, plus $0.6 million restricted cash, down from combined cash and restricted cash of $33.5 million at year-end. Management said available cash, expected operating cash flow and potential financings should cover operations, scheduled debt service and dividends for the 12 months after March 31, 2021.
- Assets, equity and debt: Total assets were $6.0 billion and total liabilities were $5.5 billion. Reported liabilities include $4.50 billion of bonds payable in consolidated CMBS entities; the filing says those entities are independent and their assets and liabilities are not owned by or legal obligations of the company. Other borrowings included $839.7 million of secured financing, $162.2 million under master repurchase agreements and $35.0 million of unsecured notes, net. Total stockholders’ equity was $134.4 million; redeemable noncontrolling interests were $285.6 million. Common book value per share was $19.28, versus $18.07 at year-end; combined book value per share including redeemable interests was $20.33, versus $19.48.
- Dividends: Common dividends declared were $0.475 per share, compared with $0.2198 in Q1 2020. The Series A preferred dividend declared was $0.53125 per share.
Portfolio and changes versus prior period
- At March 31, the portfolio comprised 62 investments, with $1.412 billion of principal balance and $1.439 billion of carrying value, excluding consolidated CMBS trust assets and liabilities. The portfolio included SFR loans, CMBS B-pieces and interest-only strips, mezzanine loans, preferred equity and a common-stock investment.
- Held-for-investment loans totaled $1.069 billion of carrying value across 50 loans; all were rated “3,” or satisfactory. SFR loans represented 85% of collateral by property type, and Georgia and Florida together represented about 59% by geography.
- Compared with Q1 2020, net interest income increased as the portfolio expanded and the company operated for a longer period. The marked improvement in GAAP income chiefly reflects the swing in fair-value changes on consolidated CMBS entities, from a $25.2 million loss to a $20.7 million gain. Operating expenses rose to $3.4 million from $1.2 million, including higher general and administrative, servicing and management fees.
- Common book value per share increased during Q1, including a stated $1.44 per-share contribution from the change in net assets related to consolidated CMBS entities.
Outlook, risks and notable items
- No earnings or portfolio guidance was provided. Management described a flexible investment strategy and said it intends to make regular quarterly common dividends, subject to Board authorization, operating needs and debt service.
- Key risks include COVID-19 effects on borrowers, collateral values, liquidity and capital access; real estate credit losses; interest-rate and credit-spread movements; geographic, asset-type and sponsor concentration; substantial leverage; and REIT qualification. Two CMBS B-piece forbearances, representing 0.9% of consolidated unpaid principal balance, were approved; nine SFR forbearances had ended by quarter-end. The company reported that servicers continued payments during the approved forbearance periods.
- The $162.2 million Mizuho repurchase financing had no stated maturity; outstanding transactions had one-to-two-month tenors and were expected to roll. Approximately $1.9 billion par value of CMBS B-pieces and interest-only strips secured repurchase borrowings; the company described this collateral as illiquid and irreplaceable.
- About 6% of portfolio unpaid principal balance was LIBOR-linked. Management noted the planned LIBOR transition could require contract changes and affect funding costs, asset values and rate matching.
- Subsequent to quarter-end, the company issued $75 million of 5.75% senior notes due 2026, sold about $5.3 million of common stock through its ATM program as of April 30, and made additional CMBS purchases. The Board declared a $0.475 common dividend payable June 30, 2021.
- The filing reported no material change to previously disclosed risk factors, no material legal proceedings or contingencies known to management, no off-balance-sheet arrangements, and effective disclosure controls as of March 31. It also disclosed correction of an immaterial Q1 2020 cash-flow presentation error, with no impact on balance sheets, operations or equity.
Important facts for investors to verify
- How much of GAAP earnings and book-value growth is attributable to unrealized CMBS fair-value changes, and how those marks compare with cash realization.
- The terms, rollover availability and collateral requirements of the short-tenor repurchase financing, including the effect of any margin calls or reduced advance rates.
- Whether Core Earnings and CAD support the common and preferred dividends over time; review the company’s non-GAAP definitions and reconciliations.
- Borrower performance and collateral concentration, including the status of prior forbearances and the company’s all-“satisfactory” loan risk ratings.
- The impact of the April debt issuance, ATM sales and subsequent CMBS acquisitions on leverage, liquidity and interest-rate exposure.