NexPoint Real Estate Finance, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. NexPoint is an externally managed commercial mortgage REIT investing in real estate loans, preferred and common equity, CMBS and related securities, and multifamily properties. Financial statements are audited by KPMG, which issued an unqualified opinion. The company adopted the current expected credit loss standard (CECL) on January 1, 2023.
Key financial results and position
| Metric | 2023 | 2022 |
|---|---|---|
| Interest income | $68.4 million | $78.0 million |
| Interest expense | $51.6 million | $40.3 million |
| Net interest income | $16.8 million | $37.7 million |
| Other income | $25.3 million | $2.7 million |
| Net income | $18.7 million | $14.2 million |
| Net income attributable to common stockholders | $10.4 million; $0.60 per share | $3.2 million; $0.22 per share |
| Operating cash flow | $31.6 million | $65.8 million |
| Cash and restricted cash at year-end | $16.6 million | $20.3 million |
| Common book value per share | $17.98 | $20.29 |
| Common dividends declared per share | $2.74 | $2.00 |
Net interest income fell 55.5%, as lower SFR and mezzanine loan balances reduced interest income while interest expense rose 28.1%. Higher other income—particularly a $38.2 million increase in net assets related to consolidated CMBS trusts—more than offset the decline in net interest income and lifted GAAP net income. Other income included material fair-value movements; it should not be treated as equivalent to recurring cash earnings.
Management’s non-GAAP measures were also lower: EAD attributable to common stockholders was $34.7 million ($1.93 per diluted weighted-average share), down 13.5%; CAD was $37.9 million ($2.11 per diluted share), down 21.3%. These measures are not GAAP cash flow or measures of liquidity and may not be comparable with peers. Common dividends declared of $2.74 per share exceeded reported EAD and CAD per diluted share. Common stockholders’ equity declined to $309.8 million from $346.5 million; combined book value including redeemable OP units was $17.93 per share/unit, versus $20.03.
At December 31, 2023, reported total assets were $7.02 billion and liabilities $6.57 billion, including consolidated CMBS trust assets of $5.68 billion and related bonds payable of $5.29 billion. These trust amounts substantially enlarge the balance sheet and are not equivalent to assets and debt owned or owed directly by the company. Excluding the CMBS trust bonds, company debt was approximately $1.27 billion in principal. Cash provided by investing activities was $741.3 million and financing activities used $776.6 million. The filing does not provide a conventional operating margin measure.
Portfolio, debt and liquidity
- Portfolio principal balance was approximately $1.56 billion excluding consolidated CMBS trusts; the company reported 87 discrete investments. By principal balance, SFR loans were the largest exposure. Management reported weighted-average occupancy of 91.4%, DSCR of 1.72, LTV of 68.8% and maturity of 5.2 years for underlying portfolio properties and investments, subject to stated exclusions.
- Principal debt was approximately $1.27 billion, with a reported weighted-average rate of 4.55% and weighted-average life of 2.9 years. Key balances included $590.3 million under a Freddie Mac facility, $303.5 million of Mizuho repurchase financing, $180.0 million of 5.75% senior unsecured notes, $36.5 million of 7.50% OP notes, and a $6.5 million 7.50% convertible note. The Mizuho transactions generally roll at one- to two-month tenors and had no stated facility maturity.
- Management stated that available cash, expected operating cash flow and potential financing were expected to cover operations, scheduled debt service, distributions and identified near-term obligations for the 12 months following year-end. This assessment depends on access to capital, asset performance and continued financing availability.
- Year-end unfunded commitments totaled $41.6 million: $35.0 million preferred equity and $6.6 million common equity. A separate preferred-unit arrangement could require up to $3.6 million of additional funding by September 2024.
Material changes, outlook and notable items
- Asset and portfolio changes: The company originated or acquired investments with approximately $117.9 million of principal/cost during 2023 and redeemed or sold investments with approximately $149.7 million of amortized cost basis. Some redemptions generated losses, including a $4.5 million loss on a multifamily preferred-equity investment.
- Property consolidation: In October 2023, the company took over management and consolidated Alexander at the District, a 280-unit Atlanta property with $63.5 million of mortgage debt. Occupancy was 68.6% at year-end. The company also owned Hudson Montford, a 204-unit Charlotte property, which was 95.1% occupied.
- Capital raising: The company issued an additional $15.0 million principal amount of 5.75% notes in November at 92% of par, receiving approximately $13.6 million after discount and underwriting fees. It launched a continuous offering of up to $400 million of 9.00% Series B preferred stock; by year-end it had issued 427,218 shares for $10.5 million gross proceeds. The offering carries selling commissions and dealer-manager fees totaling up to 10% of gross proceeds, subject to terms and exceptions.
- Credit losses and valuation: CECL adoption reduced opening retained earnings by $1.6 million. The year-end credit-loss allowance was $2.1 million after a $4.3 million 2023 provision. Two of 48 held-for-investment loans were rated “underperformance”; none were rated “risk of impairment/default.” The company recorded a $17.3 million unrealized loss on its NexPoint Storage Partners investment, contributing to reduced book value.
- Management outlook: No numerical earnings or distribution guidance is provided. Management describes high interest rates, inflation, constrained commercial real estate credit availability and economic uncertainty as challenging conditions. It intends to maintain REIT status and pursue risk-adjusted returns, but distributions remain subject to Board discretion, cash flows, debt covenants and REIT requirements.
- Subsequent events: In January 2024, a $508.7 million SFR loan was prepaid; the company received $52.8 million net cash after repaying $465.7 million of financing, recognized $8.9 million of prepayment income and wrote off a $25.4 million premium. In January 2024 it also entered a mezzanine loan commitment of up to $218 million with a related party; the company’s stated share was $208 million. Further advances were made in February and March 2024. These are post-year-end events, not 2023 results.
- Legal and control matters: The filing says the Highland Bankruptcy Trust and UBS lawsuits do not involve claims against the company or its assets. An independent special committee reported no evidence that the company engaged in conduct exposing it to liability in those cases; the Bankruptcy Trust lawsuit remained stayed as of January 2024. Management reported that a previously identified internal-control material weakness was remediated by year-end 2023 and that disclosure controls and internal control over financial reporting were effective. The auditor was not engaged to opine on internal-control effectiveness.
Investor verification priorities
- Review recurring cash earnings against the $2.74 common dividend, particularly the decline in EAD and CAD and the effect of non-cash fair-value gains in 2023 GAAP income.
- Examine refinancing and rollover exposure, including the short-tenor Mizuho repurchase transactions, debt maturities, collateral requirements and covenant headroom.
- Assess credit quality, CECL assumptions and the two underperforming loans, as well as property performance at Alexander at the District and the large SFR loan prepaid after year-end.
- Track unfunded commitments and the subsequent $208 million company share of the IQHQ-related mezzanine loan commitment, including funding sources and related-party terms.
- Verify the effect of Series B preferred issuance costs, redemption rights and future capital raising on liquidity, common-stock dilution and the priority of common distributions.
- Consider the concentration in SFR and selected geographies, subjective Level 3 valuations, REIT and Investment Company Act compliance, and dependence on the external manager and affiliates.