NexPoint Real Estate Finance, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing compares full-year 2021 with full-year 2020; it does not provide a separate Q4 results summary.
Business context
NexPoint is an externally managed commercial mortgage REIT. It originates, structures and invests in real estate loans and securities, preferred equity, convertible notes, multifamily property and other real estate-related investments. The Manager makes investment decisions under Board oversight. The Company elected REIT status beginning with tax year 2020.
Financial performance and key metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Interest income | $55.8 million | $39.0 million |
| Interest expense | $29.8 million | $21.3 million |
| Net interest income | $26.1 million | $17.7 million |
| Other income | $71.3 million | $25.8 million |
| Operating expenses | $13.8 million | $9.2 million |
| Net income | $83.5 million | $34.2 million |
| Net income attributable to common stockholders | $39.6 million | $11.1 million |
| Basic / diluted EPS | $6.00 / $3.93 | $2.13 / $1.74 |
| Common dividends declared per share | $1.90 | $1.4198 |
| Cash provided by operating activities | $49.3 million | $32.9 million |
Other income included $57.6 million from consolidated CMBS variable-interest entities, including $29.8 million of unrealized gains, and a $13.8 million unrealized gain on the NexPoint Storage Partners investment. Results therefore included significant valuation-related, noncash items.
Common-stockholder EAD, a non-GAAP measure, was $17.8 million ($2.53 per diluted weighted-average share); CAD was $17.6 million ($2.50 per diluted share). These measures are not GAAP net income or operating cash flow and should not be treated as liquidity measures. Including redeemable noncontrolling interests, EAD was $38.5 million and CAD was $45.1 million.
At December 31, 2021, cash and cash equivalents were $26.5 million and restricted cash was $6.8 million. Total assets were $8.51 billion, total liabilities $8.01 billion, and stockholders’ equity $245.3 million. The balance sheet includes consolidated CMBS trust assets of $7.19 billion and related bonds payable of $6.73 billion; these amounts reflect accounting consolidation and are not wholly owned assets or direct Company obligations. Excluding CMBS trust debt, the Company reported approximately $1.1 billion of portfolio-related indebtedness. Debt included $726.3 million of Freddie Mac financing, $286.3 million of repurchase agreements and $168.3 million of unsecured notes, net.
Net interest income increased to $26.1 million from $17.7 million. The reported yield on average interest-earning assets was 6.72%, while the average interest-expense rate was 2.80%. The filing does not provide a single comparable overall operating margin.
Book value per common share was $21.88, versus $18.07 a year earlier; combined book value per common share and redeemable OP/SubOP unit was $21.51, versus $19.48. The Company reported $3.2 billion of combined portfolio unpaid principal balance excluding consolidation of CMBS trust assets and liabilities. Its portfolio had 74 discrete investments at year-end.
Material changes and capital activity
- Net income attributable to common stockholders rose 256.6%, driven mainly by higher net interest income and other income, including CMBS-related changes in net assets and fair-value marks. Operating expenses increased 49.7%, including higher stock compensation, legal and servicing costs.
- During 2021, the Company issued $135 million principal amount of 5.75% senior unsecured notes due 2026. It also issued 2,059,700 common shares in a secondary offering for net proceeds of approximately $40.5 million and sold 532,694 common shares through its ATM program for net proceeds of approximately $10.3 million; the ATM agreements were terminated in December.
- Investing activity included $710.5 million of purchases and investments listed in the filing, and acquisition of the 204-unit Hudson Montford multifamily property in Charlotte on December 31 for a reported $62,000 purchase price in the property table. The balance sheet recorded the property at $62.3 million, with $32.5 million of assumed mortgage debt. The filing’s property table appears to use amounts in thousands.
- Cash flow from investing activities was $517.9 million, largely reflecting repayments on mortgage loans held in VIEs; financing activities used $567.4 million, principally reflecting distributions to CMBS bondholders. Cash, cash equivalents and restricted cash declined by $0.2 million overall.
- The Board declared $0.475 per common share for Q4 2021, paid December 30. In February 2022 it declared a subsequent quarterly common dividend of $0.50 per share. Series A preferred stock carries an 8.50% cumulative dividend.
Outlook, risks and unusual items
No quantified earnings or investment guidance is provided. Management stated that cash, expected operating cash flows and potential financing were expected to cover operations, scheduled debt service, potential preferred-unit funding obligations and dividends for the 12 months after year-end. This is an expectation, not a guarantee. The Company said long-term requirements may be funded through operations, secured or unsecured borrowings and future debt or equity issuance.
- Key risks include real estate credit losses, interest-rate and credit-spread changes, refinancing and funding access, collateral calls, illiquid investments, and substantial leverage. The Mizuho repurchase transactions had one-to-two-month tenors and were expected to roll; approximately $2.1 billion par value of CMBS B-Pieces and interest-only strips was pledged as collateral.
- Portfolio concentration is material. At year-end, the portfolio mix excluding CMBS trust consolidation was approximately 48.0% SFR loans and 33.3% multifamily CMBS B-Pieces by unpaid principal balance. A major SFR loan was approximately $508.7 million, or 29.9% of portfolio unpaid principal balance as of February 28, 2022; the filing also identifies geographic concentration in Georgia and Florida.
- COVID-19 remained a source of uncertainty. Four CMBS B-Piece forbearances represented 0.8% of consolidated unpaid principal balance; nine SFR forbearances had ended by year-end. The filing says servicers continued payments during the approved forbearance periods.
- Approximately 5.9% of the portfolio by unpaid principal balance was LIBOR-linked at year-end. The Company had not received LIBOR transition notices and identified uncertainty around replacement benchmarks and possible asset-liability mismatches.
- Management disclosed conflicts associated with external management, affiliated investment activities and allocation of opportunities. The Manager receives an annual fee of 1.5% of defined Equity; 2021 fees were $2.3 million. The agreement also provides for a termination fee in most termination circumstances.
- A lawsuit connected to the Highland bankruptcy names the Sponsor and James Dondero, but not claims related to the Company’s business, assets or operations. Management said it did not expect a material effect. The Company reported no ordinary-course legal proceedings expected to materially affect its financial condition or results.
- After year-end, the Company issued another $35 million of 5.75% notes, and large OP/SubOP unit redemptions and share issuances occurred. These subsequent events may affect leverage, ownership and per-share metrics.
KPMG issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2021.
Important facts for investors to verify
- How much of reported earnings and the year-over-year increase came from recurring interest income versus unrealized CMBS and NSP valuation gains.
- The terms, rollover capacity, collateral requirements and covenant headroom of debt facilities, particularly the short-tenor repurchase agreements and the debt maturities shown for 2022–2026.
- Whether cash available for distribution and operating cash flow support common and preferred dividends after debt service, required REIT distributions and committed investment funding.
- The performance, valuation assumptions and concentration risk of the large SFR exposure, CMBS B-Pieces, and Georgia/Florida collateral.
- The full effects of 2022 OP/SubOP redemptions, subsequent share issuances, note issuance, investment commitments and loan prepayments on leverage, book value per share and dilution.
- The distinction between consolidated CMBS trust balances and the Company’s economic exposure, and the extent to which the filing’s stated portfolio and debt figures exclude those trusts.