NexPoint Real Estate Finance, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted. NexPoint is an externally managed commercial mortgage REIT investing in real estate loans, preferred and common equity, multifamily properties and mortgage-related securities.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $18.0 | $14.9 | $51.5 | $62.4 |
| Interest expense | $13.2 | $10.7 | $38.5 | $28.6 |
| Net interest income | $4.8 | $4.2 | $13.0 | $33.8 |
| Net income (loss) | $(17.1) | $(9.4) | $0.8 | $16.2 |
| Net income (loss) attributable to common stockholders | $(15.6) | $(9.3) | $(3.2) | $7.0 |
| Basic and diluted EPS | $(0.90) | $(0.62) | $(0.19) | $0.48 |
| Common dividends declared per share | $0.685 | $0.500 | $2.055 | $1.500 |
- Q3 drivers: Other loss was $15.5 million, including a $16.5 million unrealized loss on common stock investments and a $6.3 million credit-loss provision. Net interest income increased year over year, chiefly reflecting growth in preferred equity investments.
- Nine-month comparison: Net interest income fell 61.6%, primarily because of lower prepayment penalty income and higher borrowing costs. Common-stock investment unrealized losses were $17.6 million for the period. Management also cited lower expenses, mainly reflecting deconsolidation of Elysian at Hughes Center.
- Non-GAAP distribution measures: EAD attributable to common stockholders was $26.5 million ($1.48 per diluted share) for nine months, down from $33.2 million ($2.20). CAD was $28.3 million ($1.58 per diluted share), down from $40.8 million ($2.70). These company-defined measures are not GAAP earnings or cash flow and may not be comparable with other REITs.
Financial position, debt and liquidity
- At September 30, total assets were $6.89 billion, down from $8.15 billion at year-end 2022; total liabilities were $6.45 billion, down from $7.61 billion. The balance sheet includes consolidated CMBS entities, with $5.61 billion of mortgage loans and $5.23 billion of related bonds payable at fair value.
- Cash and cash equivalents were $11.0 million, plus $1.9 million of restricted cash. Common book value was $17.84 per share versus $20.29 at year-end; combined book value, including redeemable OP interests, was $17.81 per share/unit versus $20.03.
- Financing arrangements summarized by the Company totaled $1.21 billion at carrying value, excluding the separately presented consolidated CMBS trust bonds. This included $676.9 million of secured financing, $298.0 million of repurchase agreements, $205.6 million of unsecured notes and $32.2 million of mortgages payable. The weighted-average interest rate on the summarized financing arrangements was 4.23%, compared with 3.85% at year-end.
- The $298.0 million Mizuho repurchase balance is arranged in one-to-two-month transactions expected to roll; it has no stated facility maturity. Management identifies refinancing and access to capital as dependent on market conditions, leverage and lender restrictions.
- For the nine months, operating cash flow was $28.4 million, investing cash flow was $639.5 million and financing cash flow was $(675.3) million. Cash, cash equivalents and restricted cash declined $7.4 million to $12.9 million.
- Unfunded investment commitments were $58.8 million, comprising $52.2 million of preferred equity and $6.6 million of common equity. Management believes available cash, operating cash flows and potential financings will cover operations, expected debt service, specified potential funding obligations and dividends for the 12 months following September 30, 2023.
Portfolio, changes and material developments
- The loan portfolio had a carrying value of $1.03 billion across 52 loans, versus $982.7 million across 48 loans at year-end. Its weighted-average risk rating worsened slightly to 3.04 from 3.00; three loans were rated “Underperformance” and one “Risk of Impairment/Default.” That preferred-equity investment, in Atlanta, received a specific $5.8 million credit-loss allowance after property cash flow weakened; the Company replaced the property manager and took over operations in October.
- The portfolio is concentrated: 69.3% of loan face amount was secured by single-family rental properties and 23.3% by multifamily properties; Georgia represented 32.5% of loan face amount. Consolidated CMBS trust collateral was 97.4% multifamily.
- During the nine months, the Company deconsolidated Elysian at Hughes Center effective January 1, 2023, recognizing a $1.5 million gain; the investment is now presented as preferred equity. By September 30, $50.5 million of the preferred investment had been redeemed, leaving $14.8 million principal outstanding.
- On October 10, the Company took over management of Alexander at the District and expected to consolidate the property in Q4 2023. After quarter-end, it declared a $0.50 regular and $0.185 special common dividend, each payable December 29, 2023.
- On November 2, the Company launched a continuous offering of up to 16 million Series B preferred shares at $25 each, or up to $400 million gross, with a 9.00% stated dividend rate. Disclosed selling commissions and dealer-manager fees are 7% and 3% of gross proceeds, respectively. The Company also reported that an $5.0 million NSP promissory note was repaid October 27.
Outlook, risks and unusual matters
- No specific earnings or investment guidance is provided. Management says the rate environment, tighter commercial real estate credit availability and economic uncertainty have affected financing, acquisitions, asset-sale timing and proceeds. The Company also says changing benchmark rates could raise financing costs or create mismatches with investment rates; LIBOR-linked loans transitioned to SOFR with an immaterial rate effect as of quarter-end.
- Key risks include real estate credit deterioration, interest-rate and credit-spread changes, concentrated exposures, substantial leverage, refinancing of short-term repurchase transactions, illiquid collateral, the ability to maintain REIT qualification, and dependence on the external Manager.
- The Company adopted the CECL credit-loss standard on January 1, recording a $1.6 million reduction to retained earnings; its ending allowance for credit losses was $8.5 million. Estimates depend on loan-level and economic assumptions and actual losses may differ.
- Disclosure controls and procedures remained ineffective at September 30 because of a previously identified material weakness. Management had introduced acquisition-accounting checklists but said they had not operated long enough to conclude the weakness was remediated.
- A sponsor-related guaranty exposes the Company to maximum potential liability of approximately $83.8 million for obligations of NexPoint Storage Partners. The filing states that the Highland bankruptcy and UBS litigation do not involve claims against the Company and are not expected by management to materially affect it; an independent special committee reported no evidence of Company conduct exposing it to liability in those matters.
Key facts for investors to verify
- Whether the Atlanta preferred-equity investment stabilizes, the collateral supports recovery, and the $5.8 million allowance proves adequate.
- The sustainability of dividends relative to GAAP results, EAD/CAD, taxable income and cash available, particularly amid lower nine-month interest income and increased financing costs.
- Near-term refinancing and rollover terms for the Mizuho repurchase agreements, collateral requirements, and funding plans for $58.8 million of commitments and the NSP guaranty exposure.
- Progress on remediating the material weakness, Q4 consolidation of Alexander at the District, and net proceeds and dilution implications of the Series B preferred offering and its disclosed fees.