NexPoint Real Estate Finance, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparative results are for Q3 and the nine months ended September 30, 2020. The filing was signed November 8, 2021. NREF is an externally managed commercial mortgage REIT investing in real estate loans, preferred equity, common stock and multifamily CMBS.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $14.4m | $10.5m | $39.9m | $26.9m |
| Net interest income | $6.6m | $4.4m | $18.0m | $12.3m |
| Other income | $22.0m | $10.0m | $54.8m | $2.2m |
| Operating expenses | $3.4m | $2.9m | $10.3m | $6.5m |
| Net income | $25.2m | $11.5m | $62.5m | $7.9m |
| Net income attributable to common stockholders | $13.2m | $2.9m | $27.1m | $1.8m |
| Diluted EPS | $1.17 | $0.52 | $3.02 | $0.33 |
| Common dividend declared per share | $0.475 | $0.400 | $1.425 | $1.0198 |
Other income included changes in net assets of consolidated CMBS variable interest entities (VIEs) of $20.2m for Q3 and $48.9m year to date. These amounts include unrealized fair-value gains; they are not equivalent to recurring cash earnings. The company reported Q3 earnings available for distribution (EAD) of $0.71 and cash available for distribution (CAD) of $0.70 per diluted weighted-average share attributable to common stockholders; nine-month figures were $1.85 and $1.83, respectively. EAD and CAD are non-GAAP measures and are not cash-flow or liquidity measures.
- Balance sheet at September 30: Assets were $8.30bn, including $22.2m cash and $2.4m restricted cash. Total liabilities were $7.80bn; stockholders’ equity was $237.5m. Redeemable noncontrolling interests were a further $259.0m.
- Debt: Corporate financing included $805.4m secured financing, $222.5m master repurchase agreements and $108.0m unsecured notes, net. Disclosed outstanding face amount across these arrangements was $1.139bn. The balance sheet also included $6.653bn of bonds payable in consolidated CMBS VIEs; these are trust obligations, not presented as ordinary corporate borrowings. The VIEs’ corresponding mortgage assets were $7.085bn.
- Liquidity and cash flow, nine months: Operating cash flow was $37.2m, investing cash flow $196.5m and financing cash flow negative $242.7m. Cash, cash equivalents and restricted cash ended at $24.6m, down $8.9m from the beginning of the period.
- Portfolio: The company reported 69 discrete investments and a combined unpaid principal balance of $3.1bn on an unconsolidated CMBS-trust basis. Portfolio weighted-average cash coupon was 5.19% and all-in yield 5.41%. Loans held for investment totaled $1.024bn carrying value; all 47 were internally rated “3 — Satisfactory.”
- Book value: Common book value per share was $21.05, versus $18.07 at December 31, 2020. Combined book value per share/unit, including redeemable OP interests, was $21.04 versus $19.48.
Changes versus prior comparable periods
- Q3 common-stockholder income rose to $13.2m from $2.9m; nine-month income increased to $27.1m from $1.8m. Management attributed the improvement primarily to higher net interest income and other income, including CMBS VIE results and fair-value changes.
- Net interest income increased by $2.2m in Q3 and $5.8m year to date, principally reflecting a larger investment portfolio; management cited 69 investments at September 30, 2021, compared with 44 a year earlier.
- Nine-month other income rose sharply, from $2.2m to $54.8m, with the change in consolidated CMBS VIE net assets a significant contributor. Operating expenses also increased, from $6.5m to $10.3m year to date, including higher stock compensation, legal, servicing and management costs.
- Total assets increased to $8.30bn from $6.18bn at year-end 2020, largely reflecting the growth in consolidated CMBS VIE mortgage assets. Common shares outstanding rose to 9.16m from 5.02m, including a 2.06m-share public offering and conversion of 1.48m OP units into common shares during Q3.
Outlook, risks and unusual items
- Management provided no formal earnings or return guidance. It stated that available cash, expected operating cash flows and potential financing would be sufficient for operations, scheduled debt service, dividends and potential funding of up to $72m under a preferred-unit commitment for the 12 months following September 30, 2021.
- The September 2021 preferred-unit agreement involved a potential commitment of up to $75m, including an issuer option; $3m had been funded by quarter-end. The units accrue distributions at 10% annually, compounded monthly. The company subsequently reported purchasing $30m of these units on November 8.
- COVID-19 remains a source of uncertainty. Four approved CMBS B-piece forbearances represented 0.8% of consolidated unpaid principal balance; nine SFR loan forbearances had ended by September 30. The company said master servicers continued payments on the approved forbearance exposures. Management warned that the pandemic could affect borrowers, investment opportunities, covenants and access to capital.
- Risks include substantial leverage; short-tenor, floating-rate repurchase financing secured by illiquid CMBS investments; credit, interest-rate and spread movements; portfolio and geographic concentration; LIBOR transition; REIT qualification; dependence on and conflicts involving the external manager; and potential difficulty sustaining distributions. About 5% of portfolio principal was LIBOR-linked. The company reported no LIBOR transition notices received as of September 30.
- Subsequent events: the $32.8m bridge loan was repaid November 1; the Board approved a $0.475 common dividend and $0.53125 preferred dividend on November 3. A Highland-bankruptcy-related lawsuit filed October 15 named the Sponsor and others, but not NREF; management did not expect a material effect on NREF.
- Management reported effective disclosure controls as of September 30 and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- How much of reported earnings growth reflects recurring interest income versus CMBS and other unrealized fair-value gains?
- Whether CAD and operating cash flow sustainably cover common and preferred distributions, while recognizing that CAD is non-GAAP.
- Repurchase-agreement renewal, collateral and margin-call exposure, and total debt obligations after distinguishing corporate debt from consolidated CMBS VIE liabilities.
- Funding and returns for the preferred-unit commitment, including the remaining potential funding obligation and subsequent purchases.
- Effects of share issuance and OP-unit conversions on per-share earnings, ownership and book value, and progress in managing LIBOR transition and COVID-related credit risk.