NexPoint Real Estate Finance(NREF) - 2025 Q2 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This section outlines the inherent risks and uncertainties associated with forward-looking statements, which may cause actual results to differ materially - Forward-looking statements in this report are based on management's current beliefs and assumptions and are subject to various risks and uncertainties that could cause actual results to differ materially[12][13] - Key risks include exposure to debt-oriented real estate investments, adverse effects from macroeconomic trends (inflation, high interest rates), delinquency and foreclosure risks in commercial real estate, fluctuations in interest rates and credit spreads, substantial indebtedness, dependence on the Manager, risks of failing to qualify as a REIT, and risks associated with pandemics and specific legal proceedings[14][16][203] PART I Item 1. Financial Statements This item presents the unaudited consolidated financial statements of NexPoint Real Estate Finance, Inc. and its subsidiaries for the quarter and six months ended June 30, 2025, and comparative periods, including balance sheets, statements of operations, statements of stockholders' equity, and statements of cash flows, along with accompanying notes Consolidated Balance Sheets Consolidated balance sheet highlights for June 30, 2025, and December 31, 2024, showing changes in assets, liabilities, and equity Consolidated Balance Sheet Highlights (in thousands): | Metric | June 30, 2025 | December 31, 2024 | Change ($) | | :------------------------------------------------ | :------------ | :---------------- | :--------- | | Cash and cash equivalents | $9,056 | $3,877 | +$5,179 | | Net Operating Real Estate Investments | $64,718 | $121,836 | -$57,118 | | Net Real Estate held for sale | $56,043 | — | +$56,043 | | Loans, held-for-investment, net | $474,203 | $497,544 | -$23,341 | | Preferred stock investments, at fair value | $113,423 | $18,949 | +$94,474 | | Mortgage loans held in variable interest entities, at fair value | $4,186,717 | $4,343,359 | -$156,642 | | TOTAL ASSETS | $5,402,380 | $5,416,073 | -$13,693 | | Secured financing agreements, net | $233,908 | $235,769 | -$1,861 | | Master repurchase agreements | $260,947 | $243,454 | +$17,493 | | Mortgages payable, net | $63,500 | $95,464 | -$31,964 | | Mortgages payable held for sale, net | $31,824 | — | +$31,824 | | Bonds payable held in variable interest entities, at fair value | $3,883,947 | $4,029,214 | -$145,267 | | Redeemable Series B Preferred stock | $245,607 | $149,045 | +$96,562 | | Total Stockholders' Equity | $348,235 | $336,484 | +$11,751 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $5,402,380 | $5,416,073 | -$13,693 | Consolidated Unaudited Statements of Operations Unaudited consolidated statements of operations for the three and six months ended June 30, 2025, and 2024, detailing net income and earnings per share Consolidated Statements of Operations (in thousands, except per share amounts): | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change ($) | Change (%) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net interest income (loss) | $12,069 | $6,740 | +$5,329 | +79.1% | | Total other income (loss) | $19,473 | $14,168 | +$5,305 | +37.4% | | Total operating expenses | $9,271 | $8,794 | +$477 | +5.4% | | Net income (loss) | $22,271 | $12,114 | +$10,157 | +83.8% | | Net income (loss) attributable to common stockholders | $12,285 | $7,488 | +$4,797 | +64.1% | | Earnings (loss) per share - basic | $0.69 | $0.43 | +$0.26 | +60.5% | | Earnings (loss) per share - diluted | $0.54 | $0.40 | +$0.14 | +35.0% | | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change ($) | Change (%) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net interest income (loss) | $23,578 | $(6,074) | +$29,652 | -488.2% | | Total other income (loss) | $42,209 | $23,367 | +$18,842 | +80.6% | | Total operating expenses | $17,554 | $19,820 | -$2,266 | -11.4% | | Net income (loss) | $48,233 | $(2,527) | +$50,760 | -2008.7% | | Net income (loss) attributable to common stockholders | $28,802 | $(6,799) | +$35,601 | -523.6% | | Earnings (loss) per share - basic | $1.64 | $(0.39) | +$2.03 | -520.5% | | Earnings (loss) per share - diluted | $1.24 | $(0.39) | +$1.63 | -417.9% | - Interest income for the six months ended June 30, 2024, included $25.0 million related to accelerated amortization of the premium associated with the prepayment on a senior loan[24] Consolidated Unaudited Statements of Stockholders' Equity This section details changes in stockholders' equity, including net income, stock-based compensation, and dividends for the periods presented - Total Stockholders' Equity increased from $336,484 thousand at December 31, 2024, to $348,235 thousand at June 30, 2025, driven by net income and vesting of stock-based compensation, partially offset by dividends[26] - Net income attributable to common stockholders for the six months ended June 30, 2025, was $28,802 thousand, a significant improvement from a net loss of $(6,799) thousand in the prior year[26][27] - Common stock dividends declared remained constant at $1.0000 per share for both the six months ended June 30, 2025, and 2024[26][27] Consolidated Unaudited Statements of Cash Flows This section presents the consolidated statements of cash flows, categorizing cash activities into operating, investing, and financing for the six months ended June 30, 2025, and 2024 Consolidated Statements of Cash Flows (in thousands): | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change ($) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Net cash provided by operating activities | $19,357 | $10,208 | +$9,149 | | Net cash provided by investing activities | $89,584 | $597,007 | -$507,423 | | Net cash used in financing activities | $(102,256) | $(616,548) | +$514,292 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $6,685 | $(9,333) | +$16,018 | | Cash, cash equivalents and restricted cash, end of period | $13,738 | $7,316 | +$6,422 | - The increase in operating cash flow was primarily due to the change in unrealized gains on investments held at fair value[272] - The substantial decrease in investing cash flow was mainly due to lower proceeds from payments received on mortgage loans held for investment[273] Notes to Consolidated Unaudited Financial Statements This section provides detailed notes explaining the Company's organization, significant accounting policies, and specific financial statement line items 1. Organization and Description of Business This note describes NexPoint Real Estate Finance, Inc.'s formation, REIT status, investment strategy, and external management structure - NexPoint Real Estate Finance, Inc. (NREF) is a commercial mortgage REIT, incorporated in Maryland on June 7, 2019, and elected REIT status commencing December 31, 2020[32] - NREF focuses on originating, structuring, and investing in first-lien mortgage loans, mezzanine loans, preferred equity, convertible notes, multifamily properties, common equity, CMBS securitizations, promissory notes, revolving credit facilities, and stock warrants[32][197] - The Company is externally managed by NexPoint Real Estate Advisors VII, L.P. (the "Manager"), an affiliate of its Sponsor, and primarily targets investments in multifamily, SFR, self-storage, and life science sectors within the top 50 MSAs[32][35][36][197] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and estimates used in preparing the financial statements, including consolidation, fair value measurements, and credit loss recognition - Financial statements are prepared in accordance with GAAP, requiring management to make estimates and assumptions that affect reported amounts[39][40][42] - The Company consolidates Variable Interest Entities (VIEs) when it has the power to direct activities and the obligation to absorb losses or right to receive significant benefits; CMBS trusts are consolidated under this model with assets and liabilities reported at fair value[43][44][46][47] - NREF adopted ASU 2016-13 (CECL model) on January 1, 2023, for estimating lifetime expected credit losses on its loan portfolio and unfunded loan commitments, using various forecasting methods and inputs[49][302] Expected Credit Loss Reserve (in thousands): | Metric | June 30, 2025 | December 31, 2024 | | :------------------------------------------ | :------------ | :---------------- | | Balances, December 31, | N/A | $(1,377) | | (Provision for) reversal of credit losses | $(8,909) | $422 | | Balance at June 30, | $(10,286) | $(1,678) | - The loan portfolio had a weighted-average risk rating of 3.0 as of both June 30, 2025, and December 31, 2024, on a 5-point scale (1=least risk, 5=greatest risk)[52][65] 3. Loans Held for Investment, Net This note provides a detailed breakdown of the Company's loan portfolio, including carrying values, loan counts, weighted-average coupons, and collateral property types Loans Held-for-Investment, Net (in thousands): | Loan Type | June 30, 2025 Carrying Value | Dec 31, 2024 Carrying Value | Loan Count (Jun 30, 2025) | Weighted Average Coupon (Jun 30, 2025) | | :-------------------------------- | :--------------------------- | :-------------------------- | :------------------------- | :------------------------------------- | | Mortgage loans | $279,587 | $263,395 | 10 | 10.26% | | Mezzanine loans | $130,088 | $134,870 | 21 | 9.39% | | Preferred equity | $205,807 | $223,653 | 17 | 10.86% | | Promissory notes | $1,562 | $3,992 | 1 | 15.00% | | Revolving credit facility | $136,746 | $135,029 | 1 | 13.50% | | Total | $753,790 | $760,939 | 50 | 10.92% | - For the six months ended June 30, 2025, originations totaled $33,586 thousand, while proceeds from principal repayments were $(39,671) thousand[63] - The loan portfolio's weighted-average risk rating remained at 3.0 as of June 30, 2025, with 97.21% of loans rated '3' (Satisfactory)[65] - Collateral property types are concentrated in Life Science (35.20%), Multifamily (33.52%), and Single Family Rental (27.11%) as of June 30, 2025[70] 4. CMBS Trusts This note details the Company's consolidated CMBS trusts, including their assets, liabilities, and changes in net assets, primarily backed by multifamily properties - The Company consolidates CMBS Entities where it is the primary beneficiary, carrying their assets and liabilities at fair value[71] Trust's Assets and Liabilities (in thousands): | Metric | June 30, 2025 | December 31, 2024 | | :------------------------------------------------ | :------------ | :---------------- | | Mortgage loans held in variable interest entities, at fair value | $4,186,717 | $4,343,359 | | Bonds payable held in variable interest entities, at fair value | $(3,883,947) | $(4,029,214) | Change in Net Assets Related to Consolidated CMBS VIEs (in thousands): | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net interest earned | $11,839 | $18,860 | | Realized gain (loss) | $(84) | $6,198 | | Unrealized gain (loss) | $(3,882) | $(3,726) | | Total Change in Net Assets | $7,873 | $21,332 | - The collateral property type for consolidated CMBS trusts is 100% Multifamily as of June 30, 2025[73] 5. Common and Preferred Stock Investments This note describes the Company's common and preferred stock investments, including fair value measurements and changes in unrealized gains or losses - The Company holds common stock investments in NexPoint Storage Partners (NSP) and a private ground lease REIT, both accounted for at fair value (Level 3 assets)[74][76] - Preferred stock investments include IQHQ Series D-1 ($18,532 thousand fair value) and IQHQ Series E ($94,891 thousand fair value, acquired Jan 2, 2025), also measured at fair value (Level 3 assets)[82][84][85][86] Change in Unrealized Gain (Loss) on Stock Investments (in thousands): | Investment Type | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Common stock investments | $(6,574) | $(2,642) | | Preferred stock and stock warrant investments | $38,195 | $102 | - Equity method investments include Resmark Forney Gateway Holdings, LLC, Resmark The Brook Holdings, LLC, Slater Apartments, and Capital Acquisitions Partners, LLC[79][80][81] 6. Unconsolidated Variable Interest Entities This note provides a summary of the Company's unconsolidated Variable Interest Entities (VIEs), detailing instrument types, asset types, accounting treatment, and ownership percentages Unconsolidated Variable Interest Entities (VIEs) as of June 30, 2025: | Entity | Instrument | Asset Type | Accounting Treatment | Percentage Ownership | | :-------------------------------- | :----------- | :----------- | :------------------- | :------------------- | | NexPoint Storage Partners, Inc. | Common Stock | Self-storage | Fair Value | 25.6% | | Resmark Forney Gateway Holdings, LLC | Common Equity | Multifamily | Equity Method | 98.0% | | Resmark The Brook Holdings, LLC | Common Equity | Multifamily | Equity Method | 98.0% | | Private REIT | Common Stock | Ground lease | Fair Value | 6.3% | | SK Apartments | Common Equity | Multifamily | Equity Method | 12.3% | | Capital Acquisitions Partners, LLC | Membership Interests | Multifamily | Equity Method | 79.1% | - The Company's maximum exposure to loss for the NSP investment is $24.7 million, for CAP is $1.5 million, and for the Private REIT is $26.1 million[89] 7. CMBS Structured Pass-Through Certificates This note details the Company's holdings in CMBS interest-only strips, their carrying value, underlying collateral, and related activity - The Company held fourteen CMBS interest-only strips (CMBS I/O Strips) at fair value as of June 30, 2025, with a total carrying value of $44,122 thousand[90][91] - These CMBS I/O Strips are interest-only tranches of Freddie Mac structured pass-through certificates, backed by fixed-rate mortgage loans secured primarily by stabilized multifamily properties[90] - The weighted-average current yield for CMBS I/O Strips was 19.72% as of June 30, 2025[91] Activity Related to CMBS I/O Strips, MSCR Notes, and Mortgage Backed Securities (in thousands): | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net interest earned | $(19) | $1,227 | | Change in unrealized gain (loss) on CMBS structured pass-through certificates | $1,832 | $421 | | Change in unrealized gain (loss) on MSCR Notes | — | $(13) | | Change in unrealized gain (loss) on mortgage backed securities | — | $615 | | Total | $1,813 | $2,250 | 8. Real Estate Investments, net This note provides information on the Company's real estate investments, including properties held for sale and net income from consolidated real estate owned - Hudson Montford, a 204-unit multifamily property, was classified as held for sale as of June 30, 2025, and subsequently sold on July 22, 2025, for $60.0 million[94][195] - Alexander at the District, a 280-unit multifamily property, had a net operating real estate investment carrying value of $64,718 thousand as of June 30, 2025[96] Net Income (Loss) from Consolidated Real Estate Owned (in thousands): | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Total revenues | $4,911 | $4,246 | | Total expenses | $7,610 | $9,805 | | Net income (loss) | $(2,699) | $(5,559) | - The decrease in expenses from consolidated real estate owned was primarily due to a decrease in depreciation and amortization of Hudson Montford after its classification as held for sale[226][233] 9. Debt This note provides a comprehensive summary of the Company's debt obligations, including outstanding balances, weighted-average interest rates, and maturity schedules Debt Summary (in thousands): | Debt Type | June 30, 2025 Outstanding Face Amount | Dec 31, 2024 Outstanding Face Amount | June 30, 2025 Weighted Average Interest Rate | | :-------------------------------- | :------------------------------------ | :----------------------------------- | :-------------------------------------------- | | Master Repurchase Agreements | $260,947 | $243,454 | 6.05% | | Freddie Mac (SFR loans) | $109,339 | $110,097 | 2.69% | | Freddie Mac (Mezzanine loans) | $57,945 | $59,252 | 0.30% | | Mortgages payable (Multifamily) | $95,980 | $95,980 | 8.33% | | NexBank, SSB (Common stock investment) | $10,000 | $10,000 | 8.29% | | Raymond James (Promissory note) | $58,351 | $57,520 | 11.82% | | Unsecured notes | $223,000 | $223,000 | 5.90% | | Total | $815,562 | $799,303 | 5.92% | - The Credit Facility with Freddie Mac for SFR loans had an outstanding balance of $109.3 million as of June 30, 2025, maturing on July 12, 2029[107][261] - The Company has $260.9 million borrowed under master repurchase agreements, collateralized by $745.8 million par value of CMBS B-Pieces and CMBS I/O Strips[108][264] Schedule of Debt Maturities (in thousands): | Year | Recourse | Non-recourse | Total | | :--- | :--------- | :------------- | :---- | | 2025 | $158,351 | $289,512 | $447,863 | | 2026 | $190,000 | $9,284 | $199,284 | | 2027 | $6,500 | — | $6,500 | | 2028 | $32,480 | $64,603 | $97,083 | | 2029 | — | $35,762 | $35,762 | | Thereafter | — | $29,070 | $29,070 | | Total | $387,331 | $428,231 | $815,562 | 10. Fair Value of Financial Instruments This note explains the Company's fair value hierarchy for financial instruments and provides details on Level 3 assets and their unobservable inputs - The Company uses a fair value hierarchy (Level 1, 2, and 3) for financial instruments, with cash and accrued interest primarily Level 1, mortgage loans in VIEs and CMBS pass-through certificates primarily Level 2, and common/preferred stock investments and warrants as Level 3[119] Level 3 Assets and Key Unobservable Inputs (as of June 30, 2025): | Investment | Carrying Value (in thousands) | Valuation Technique | Unobservable Inputs | Range | | :-------------------------- | :---------------------------- | :------------------ | :------------------ | :-------------------- | | NexPoint Storage Partners | $24,703 | Discounted cash flow | Terminal cap rate | 4.88% - 5.38% | | | | | Discount rate | 7.00% - 9.00% | | IQHQ Series D Preferred Stock | $18,949 | Discounted cash flow | Discount rate | 15.50% - 17.50% | | IQHQ Series E Preferred Stock | $94,513 | Discounted cash flow | Discount rate | 15.51% - 18.10% | | Private REIT | $26,113 | Market approach | NAV per share multiple | 0.95 - 1.10x | | IQHQ Warrants | $30,386 | Option pricing model | Volatility | 35.00% - 90.00% | - For the six months ended June 30, 2025, Level 3 assets saw additions of $94,930 thousand and a net change in unrealized gains/(losses) of $31,116 thousand[121] 11. Stockholders' Equity This note details the Company's common and preferred stock, share repurchase program, long-term incentive plan, and at-the-market program activities - As of June 30, 2025, the Company had 17,721,828 shares of common stock issued and outstanding[124] - The Series B Preferred Offering has issued 11,012,369 shares for gross proceeds of $269.4 million as of June 30, 2025, with a $25.00 per share liquidation preference[126][162][269] - The Share Repurchase Program, authorized for up to $20.0 million, was extended to February 24, 2027, but no purchases have been made as of June 30, 2025[128] - Under the Long Term Incentive Plan (LTIP), 482,772 restricted stock units were granted and 363,852 vested during the six months ended June 30, 2025, with $13.9 million in unrecognized compensation expense remaining[133][134] - The At-The-Market (ATM) Program has sold 531,728 common shares for total gross sales of $12.6 million since inception through June 30, 2025[138][266] 12. Earnings Per Share This note presents the calculation of basic and diluted earnings per share, including the components used in the dilution analysis Earnings Per Share (in thousands, except per share amounts): | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net income (loss) attributable to common stockholders | $28,802 | $(6,799) | | Weighted-average common shares outstanding - basic | 17,615 | 17,343 | | Weighted-average common shares outstanding - diluted | 37,349 | 26,399 | | Earnings (loss) per share - basic | $1.64 | $(0.39) | | Earnings (loss) per share - diluted | $1.24 | $(0.39) | - Diluted EPS calculation includes the assumed vesting of restricted stock units, potential redemption of OP Units, and conversion of Series B Preferred Stock[141][143] 13. Noncontrolling Interests This note details the changes in redeemable noncontrolling interests in the Operating Partnership (OP) and the net income attributable to them - Redeemable noncontrolling interests in the OP increased from $86,164 thousand at January 1, 2025, to $88,727 thousand at June 30, 2025[144] - Net income attributable to redeemable noncontrolling interests in the OP was $7,601 thousand for the six months ended June 30, 2025, compared to $382 thousand in the prior year[144] - As of June 30, 2025, noncontrolling interests held 5,038,382 OP Units[146] 14. Related Party Transactions This note describes transactions with related parties, including management fees, guarantees, and commitments with affiliates of the Manager - The Company paid the Manager $3.0 million in management fees for the six months ended June 30, 2025, calculated as 1.5% of 'Equity' as defined in the Management Agreement[147][157] - The Company, through REIT Sub, is jointly and severally liable for 85.90% of $13.3 million in accrued dividends on NSP Series D Preferred Stock, totaling $11.4 million as of June 30, 2025[158][159][280] - NexPoint Securities, Inc., an affiliate of the Manager, serves as dealer manager for the Series B Preferred Offering, receiving 7.0% selling commissions and a 3.0% dealer manager fee[162] - The Company has significant commitments related to IQHQ transactions, including a $195.5 million Alewife Loan (with $37.5 million unfunded) and a $160.1 million IQHQ Subscription Agreement for Series E preferred stock (with $65.5 million unfunded)[176][178][182][187][285][286][292][297] 15. Commitments and Contingencies This note outlines the Company's unfunded commitments for various investment types and specific contingent liabilities Unfunded Commitments by Investment Type (in thousands): | Investment Type | June 30, 2025 Unfunded Commitments | December 31, 2024 Unfunded Commitments | | :---------------- | :--------------------------------- | :----------------------------------- | | Loans | $39,035 | $64,217 | | Preferred Equity | $4,214 | $7,874 | | Common Equity | $1,536 | $2,536 | | Preferred Stock | $65,500 | $150,000 | | Total | $110,285 | $224,627 | - Specific unfunded commitments include $6.5 million for preferred equity in a Phoenix, AZ single-family property, $0.3 million for common equity in a Forney, TX multifamily property, and $0.3 million for common equity in a Richmond, VA multifamily property[173][174][282][283] - The Company has an unfunded commitment of $37.5 million for the Alewife Loan (total expected maximum commitment $195.5 million) and $65.5 million for the IQHQ Subscription Agreement (Series E preferred stock)[178][187][286][297] - The SFR OP Promissory Note II has an unfunded commitment of $1.5 million, with its maturity date extended to July 10, 2026[175][284] 16. Segment Reporting This note clarifies that the Company operates as a single reportable segment, NREF, managed on a consolidated basis - The Company operates as a single reportable segment, NREF, as its chief operating decision maker manages the business on a consolidated basis[188][189] 17. Subsequent Events This note reports significant events that occurred after the reporting period, including dividend declarations, stock issuances, and property sales - The Board declared a quarterly common stock dividend of $0.50 per share on July 28, 2025, payable September 30, 2025[191] - As of August 6, 2025, an additional 1,159,379 shares of Series B Preferred Stock were issued for net proceeds of $26.1 million[192] - The SFR OP Note II maturity date was extended to July 10, 2026, on July 10, 2025[194] - The sale of the Hudson Montford property was completed on July 22, 2025, for net proceeds of $27.3 million[195] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, including an overview of its business strategy, recent acquisitions and dispositions, detailed analysis of revenues and expenses, key financial measures, portfolio composition, liquidity, and critical accounting policies. It highlights significant improvements in net income and EPS for the current period Overview This overview describes NREF's business as a commercial mortgage REIT, its investment focus, external management, and the expected impact of ongoing legal proceedings - NREF is a commercial mortgage REIT focused on originating and investing in diverse real estate-related assets across multifamily, SFR, self-storage, and life science sectors in top MSAs[197] - The Company is externally managed by an affiliate of its Sponsor, leveraging extensive real estate and credit management expertise, with approximately $21.3 billion in gross real estate transactions since 2012 and $15.6 billion in loans and debt-related investments as of June 30, 2025[200] - Ongoing legal proceedings involving affiliates (Highland's bankruptcy, UBS Lawsuit) are not expected to materially affect NREF's business, results of operations, or financial condition[203] Purchases and Dispositions in the Quarter This section summarizes the Company's investment acquisitions, originations, redemptions, and sales during the quarter ended June 30, 2025 Acquisitions and Originations (3 Months Ended June 30, 2025, in thousands): | Investment Type | Principal Amount | Property Type | Coupon | Current Yield | | :---------------- | :--------------- | :------------ | :----- | :------------ | | Preferred Stock | $39,500 | Life Science | 16.50% | 16.50% | | Senior Loan | $6,498 | Life Science | 14.00% | 14.00% | | CMBS I/O Strip | $15,327 | Multifamily | 5.69% | 15.35% | | Total | $66,493 | | | | Redemptions and Sales (3 Months Ended June 30, 2025, in thousands): | Investment Type | Amortized Cost Basis | Redemption/Sales Proceeds | Net Gain (Loss) | | :---------------- | :------------------- | :------------------------ | :-------------- | | Preferred Equity | $10,399 | $10,399 | $0 | | Mezzanine | $2,500 | $2,500 | $0 | | Promissory Note | $1,936 | $1,936 | $0 | | Total | $18,637 | $18,637 | $0 | Components of Our Revenues and Expenses This section details the primary sources of the Company's revenues and the categories of its operating expenses, including management fees and G&A costs - Revenues are primarily derived from interest income on mortgage loans, mezzanine loans, and preferred equity investments, as well as changes in fair value of CMBS and stock investments, and revenues from consolidated real estate[207][208][209][210][213][214][215] - Expenses include general and administrative (G&A) costs, loan servicing fees, management fees, and expenses from consolidated real estate owned[216][217][218][219] - Total corporate G&A expenses, including management fees and Manager reimbursements, are capped at 2.5% of equity book value, with the Manager waiving fees if this limit is exceeded[216] Results of Operations for the Three and Six Months Ended June 30, 2025 and 2024 This section provides a comparative analysis of the Company's operating results, highlighting changes in net interest income, other income, operating expenses, and net income attributable to common stockholders Operating Results (in thousands): | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | $ Change | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :------- | :------- | | Net interest income (loss) | $12,069 | $6,740 | +$5,329 | 79.1% | | Other income | $19,473 | $14,168 | +$5,305 | 37.4% | | Operating expenses | $(9,271) | $(8,794) | $(477) | 5.4% | | Net income (loss) attributable to common stockholders | $12,285 | $7,488 | +$4,797 | 64.1% | | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | $ Change | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :------- | :------- | | Net interest income (loss) | $23,578 | $(6,074) | +$29,652 | (488.2)% | | Other income | $42,209 | $23,367 | +$18,842 | 80.6% | | Operating expenses | $(17,554) | $(19,820) | +$2,266 | (11.4)% | | Net income (loss) attributable to common stockholders | $28,802 | $(6,799) | +$35,601 | (523.6)% | - The increase in net interest income was primarily due to increased income from investments in preferred equity loans and the revolving credit facility[221][228] - Other income increased mainly due to unrealized gains related to preferred stock and warrants, and increased income from equity method investments[222][229] - G&A expenses decreased by $1.1 million for the six-month period, primarily due to a $0.9 million decrease in legal expense and a $0.1 million decrease in audit expense[230] Key Financial Measures and Indicators This section presents key financial performance metrics, including earnings per share, dividends, Earnings Available for Distribution (EAD), Cash Available for Distribution (CAD), and book value per share Earnings Per Share and Dividends Declared: | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Net income per share, basic | $1.64 | $(0.39) | 520.5% | | Net income per share, diluted | $1.24 | $(0.39) | 417.9% | | Dividends declared per share | $1.0000 | $1.0000 | —% | EAD and CAD (in thousands, except per share amounts): | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | EAD | $19,680 | $4,508 | 336.6% | | EAD per Diluted Common Share | $0.86 | $0.19 | 352.6% | | CAD | $21,116 | $29,915 | (29.4)% | | CAD per Diluted Common Share | $0.93 | $1.29 | (27.9)% | - EAD (Earnings Available for Distribution) is a non-GAAP measure used to evaluate performance and long-term distribution ability, excluding unrealized gains/losses and adding back stock-based compensation amortization[237][238][239] Book Value per Share / Unit (in thousands, except per share data): | Metric | June 30, 2025 | December 31, 2024 | | :------------------------------------------ | :------------ | :---------------- | | Common stockholders' equity | $307,333 | $295,624 | | Book value per share of common stock | $17.34 | $16.93 | | Combined book value per share / unit (including redeemable OP Units) | $17.40 | $16.97 | Our Portfolio This section provides an overview of the Company's investment portfolio, including the number of investments, principal balance, carrying value, and weighted-average yields - The Company's portfolio had a combined unpaid principal balance of $1.5 billion as of June 30, 2025, comprising various real estate-related investments[252] Overall Portfolio Statistics (in thousands) as of June 30, 2025: | Metric | Total Portfolio | | :------------------------ | :-------------- | | Number of investments | 86 | | Principal balance | $1,149,292 | | Carrying value | $1,525,479 | | Weighted-average cash coupon | 7.08% | | Weighted-average all-in yield | 8.65% | - The portfolio includes senior loans, CMBS B-Pieces, CMBS I/O Strips, mezzanine loans, preferred equity, common equity, preferred stock, real estate, promissory notes, revolving credit facilities, and stock warrants[252][253][254] Liquidity and Capital Resources This section discusses the Company's strategy for managing liquidity and capital, including sources of funding and current cash position - The Company's liquidity strategy relies on operating cash flows, debt/equity financings, and principal/interest payments from investments to meet both short-term and long-term capital requirements[257][258] - Key financing sources include Freddie Mac Credit Facilities ($109.3 million outstanding), repurchase agreements ($260.9 million borrowed), the ATM Program ($12.6 million gross sales), and the Series B Preferred Stock Offering ($269.4 million gross proceeds)[261][264][266][269] - As of June 30, 2025, cash and cash equivalents were $9.1 million, with additional liquidity expected from future debt or equity issuances and other borrowings[271] Recent Tax Law Update This section provides an update on recent tax law changes, specifically the "One Big Beautiful Bill Act" (OBBBA), and its expected impact on the Company - The "One Big Beautiful Bill Act" (OBBBA), signed July 4, 2025, permanently extended reduced U.S. federal income tax rates and the 20% deduction on "qualified REIT dividends"[259] - The OBBBA also increased the REIT asset test limit for TRSs from 20% to 25% for taxable years beginning after December 31, 2025[259] - The Company does not expect the OBBBA to have a material impact on its business[259] Cash Flows This section summarizes the Company's cash flow activities, detailing net cash provided by or used in operating, investing, and financing activities Cash Flow Summary (in thousands): | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $19,357 | $10,208 | | Net cash provided by investing activities | $89,584 | $597,007 | | Net cash (used in) financing activities | $(102,256) | $(616,548) | - The increase in operating cash flow was primarily due to changes in unrealized gains on investments held at fair value[272] - The decrease in investing cash flow was mainly due to lower proceeds from payments received on mortgage loans held for investment[273] Emerging Growth Company and Smaller Reporting Company Status This section clarifies the Company's status as an "emerging growth company" and "smaller reporting company" and the associated disclosure flexibilities - The Company has elected the extended transition period for complying with new or revised accounting standards as an "emerging growth company" under the JOBS Act[275][276] - As a "smaller reporting company," NREF may take advantage of certain scaled disclosures[277] Dividends This section outlines the Company's dividend policy, including its intention to make regular payments and the REIT distribution requirements - The Company intends to make regular quarterly dividend payments to common stockholders and accrued dividend payments on Series A and Series B Preferred Stock[277] - As a REIT, NREF is required to distribute annually at least 90% of its REIT taxable income[277] - Dividends are based on taxable earnings, which may differ from GAAP earnings, and may require asset sales, borrowings, or stock distributions if cash available for distribution is less than taxable income[277][278] Off-Balance Sheet Arrangements This section identifies the Company's significant off-balance sheet arrangements, specifically the NSP Sponsor Guaranty Agreement - The Company has one significant off-balance sheet arrangement: the NSP Sponsor Guaranty Agreement[279] - As of June 30, 2025, the Company is jointly and severally liable for 85.90% of $13.3 million in accrued dividends on NSP Series D Preferred Stock, amounting to $11.4 million[280] Commitments and Contingencies This section details the Company's unfunded commitments across various investment types and specific contingent liabilities Unfunded Commitments by Investment Type (in thousands): | Investment Type | June 30, 2025 Unfunded Commitments | December 31, 2024 Unfunded Commitments | | :---------------- | :--------------------------------- | :----------------------------------- | | Loans | $39,035 | $64,217 | | Preferred Equity | $4,214 | $7,874 | | Common Equity | $1,536 | $2,536 | | Preferred Stock | $65,500 | $150,000 | | Total | $110,285 | $224,627 | - Specific unfunded commitments include $6.5 million for preferred equity in a Phoenix, AZ single-family property, $0.3 million for common equity in a Forney, TX multifamily property, and $0.3 million for common equity in a Richmond, VA multifamily property[173][174][282][283] - The Company has an unfunded commitment of $37.5 million for the Alewife Loan (total expected maximum commitment $195.5 million) and $65.5 million for the IQHQ Subscription Agreement (Series E preferred stock)[178][187][286][297] Critical Accounting Policies and Estimates This section discusses the Company's critical accounting policies and estimates, emphasizing the significant judgment involved in areas like credit loss allowance and fair value measurements - The Company's critical accounting policies and estimates involve significant judgment, particularly for the allowance for credit losses (CECL model) and the valuation of common equity, preferred stock, and warrants[298][299][304] - The CECL model, adopted January 1, 2023, requires estimating lifetime expected credit losses on loans and unfunded commitments, relying on complex forecasting models and various inputs[301][302] - Valuation of Level 3 assets like NSP common stock, Private REIT common equity, IQHQ preferred stock, and IQHQ warrants involves subjective judgments and unobservable inputs (e.g., discount rates, terminal capitalization rates, volatility)[304][305][307][308] - The macroeconomic environment, characterized by high interest rates and economic uncertainty, increases the estimation uncertainty for financial instruments and real estate investments[309] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not required for smaller reporting companies - This item is not required for smaller reporting companies[311] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of June 30, 2025, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely. No material changes in internal control over financial reporting occurred during the quarter - The Company's disclosure controls and procedures were evaluated as effective as of June 30, 2025, providing reasonable assurance for timely and accurate information disclosure[312] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[314] PART II Item 1. Legal Proceedings The Company is not aware of any legal proceedings that are reasonably likely to have a material adverse effect on its results of operations or financial condition - Management is not aware of any legal proceedings likely to have a material adverse effect on the Company's results of operations or financial condition[316] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K filed on March 27, 2025 - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K filed March 27, 2025[317] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities This item reports no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities - There were no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities to report[318] Item 3. Defaults Upon Senior Securities This item reports no defaults upon senior securities - There were no defaults upon senior securities to report[319] Item 4. Mine Safety Disclosures This item is not applicable - This item is not applicable[320] Item 5. Other Information This item reports no other information - There is no other information to report[321] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from principal officers, XBRL documents, and the cover page interactive data file - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1)[322] - The filing includes Inline XBRL Instance Document and Taxonomy Extension Documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[322] - The Cover Page Interactive Data File (104) is formatted as Inline XBRL[322] Signatures The report is signed by Jim Dondero, President (Principal Executive Officer), and Paul Richards, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer), on August 7, 2025 - The report was signed by Jim Dondero, President (Principal Executive Officer), and Paul Richards, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)[327] - The signing date for the report was August 7, 2025[327]