NexPoint Real Estate Finance, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; filed August 10, 2020. The company began operations on February 11, 2020, after its IPO, so there is no prior-year comparable operating period. The December 31, 2019 balance sheet reflects the pre-operating company and is not a meaningful operating comparison.
Business context
NexPoint is an externally managed commercial mortgage REIT focused on mortgage loans, mezzanine loans, preferred equity and stock, and multifamily CMBS. Its portfolio at June 30 included single-family rental (SFR) loans, CMBS B-pieces and interest-only strips, mezzanine loans, preferred equity, and preferred stock. The company intended to elect REIT status beginning with tax year 2020.
Financial results and position
| Metric | Q2 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Interest income | $9.821 million | $16.407 million |
| Interest expense | $5.216 million | $8.547 million |
| Net interest income | $4.605 million | $7.860 million |
| Other income (loss) | $17.057 million | $(7.867) million |
| Net income (loss) | $19.273 million | $(3.595) million |
| Net income (loss) attributable to common stockholders | $5.270 million | $(1.083) million |
| Basic and diluted EPS | $1.00 | $(0.21) |
| Core Earnings, a non-GAAP measure | $1.944 million; $0.37 per diluted share | $3.066 million; $0.58 per diluted share |
| Common dividends declared per share | $0.40 | $0.6198 |
Q2 other income was driven mainly by a $15.032 million gain in net assets related to consolidated CMBS variable-interest entities (VIEs), plus $1.805 million of dividend income. For the six-month period, CMBS VIE changes were a $10.127 million loss, partly offset by $2.252 million of dividend income. These fair-value effects are a major reason Q2 GAAP earnings and six-month GAAP results differ.
At June 30, total assets were $3.859 billion, total liabilities $3.522 billion, redeemable noncontrolling interests $251.384 million, and stockholders’ equity $86.297 million. Cash and cash equivalents were $966,000. Reported debt included $787.569 million of secured financing and $60.123 million under master repurchase agreements. The balance sheet also included $2.836 billion of mortgage loans and $2.672 billion of bonds payable in consolidated CMBS VIEs. Those trusts are independent of the company; the filing says their assets and liabilities are not company-owned or legal obligations, and NexPoint’s exposure is through subordinate tranches.
Six-month cash flows were $11.909 million provided by operations, $21.377 million used in investing, and $10.434 million provided by financing; cash increased by $966,000. Book value per common share was $16.40; combined book value including redeemable OP interests was $18.33 per share/unit. The reported weighted-average portfolio cash coupon was 5.10% and all-in yield 4.54%.
Changes, outlook, and material matters
- The portfolio and operating history are newly established: assets and liabilities were contributed in the formation transaction and the IPO closed in February 2020. The filing therefore provides no year-over-year operating comparison.
- All 33 held-for-investment loans were rated “3,” or satisfactory, at quarter-end. The held-for-investment loan portfolio had a $901.9 million face amount and $970.1 million carrying value; 95.61% of its collateral was SFR property.
- COVID-19 had prompted approved forbearance for two CMBS B-piece requests, representing 1.7% of the relevant consolidated unpaid principal balance, and nine SFR-loan requests, representing 2.84%. The company expected master servicers to continue payments during the agreed forbearance periods, but cautioned that pandemic impacts remain uncertain.
- Management stated available cash, expected operating cash flows, and potential debt or equity financing should cover operations, scheduled debt service, and dividend requirements for the 12 months after June 30. Cash on hand was only $966,000, making execution of that financing and cash-flow expectation important.
- After quarter-end, the company issued 2.0 million 8.5% Series A preferred shares at $24 per share, raising $48 million gross, and declared a $0.40 common dividend payable September 30. It also acquired additional CMBS positions and entered short-term financing arrangements; the filing describes these subsequent transactions in detail.
- A subsidiary committed approximately $227 million toward a proposed transaction involving Manager affiliates, subject to conditions and reductions for other financing. The company itself was not party to the commitment and did not guarantee it.
- A May 2020 related-party transaction exchanged OP units valued at $10 million for preferred membership interests in Buffalo Pointe, a Houston multifamily property reported 93% occupied at June 30. The investment has 6.5% current and 4.5% deferred interest and 84% LTV.
- The company disclosed immaterial errors in the Q1 cash-flow presentation relating to consolidated CMBS trusts; corrected year-to-date information had no impact on balance sheets, statements of operations, or equity. Management said disclosure controls were effective and reported no material control changes.
Key risks include pandemic-related borrower stress and collateral declines, real-estate and geographic concentration, credit-spread and interest-rate changes, reliance on financing and short-term repo rollovers, valuation uncertainty in less-liquid instruments, and dependence on the external Manager. The filing reported no legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements as of June 30.
Important facts for investors to verify
- How the $15.0 million Q2 CMBS VIE gain and $10.1 million six-month VIE loss were determined, and the sensitivity of fair values to broker quotes and market liquidity.
- Current borrower performance, collections, and subsequent developments in the COVID-related forbearance requests, especially given the SFR and geographic concentrations.
- Liquidity after the quarter-end preferred offering, CMBS purchases, and borrowings; terms and renewal risk of repurchase agreements and other short-dated facilities.
- Whether cash flows and available capital support debt service and dividends, and how the common dividend compares with taxable income and Core Earnings.
- Terms, related-party conflicts, and funding obligations associated with Buffalo Pointe, Manager-affiliated OP-unit issuances, and the proposed transaction equity commitment.
- Reconciliation of GAAP results, non-GAAP Core Earnings, and combined book value, including the impact of consolidated VIEs and redeemable noncontrolling interests.