NexPoint Real Estate Finance(NREF) - 2021 Q2 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements The report contains forward-looking statements subject to risks and uncertainties, including those related to real estate investments, interest rates, and substantial indebtedness - The report contains forward-looking statements regarding liquidity, capital resources, performance, and results of operations, which are subject to risks and uncertainties[12] - Key risks include those associated with debt-oriented real estate investments, commercial real estate delinquencies/foreclosures, COVID-19 pandemic impacts, interest rate fluctuations, investment concentration, substantial indebtedness, limited operating history, and dependence on the Manager and its affiliates[14] PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents NexPoint Real Estate Finance, Inc.'s unaudited consolidated financial statements for Q2 and H1 2021, including balance sheets, statements of operations, stockholders' equity, and cash flows Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of June 30, 2021, and December 31, 2020 Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | Assets | | | | Total Assets | $8,536,132 | $6,176,310 | | Cash and cash equivalents | $29,988 | $30,241 | | Mortgage loans held in VIEs, at fair value | $7,348,132 | $5,007,515 | | Liabilities & Equity | | | | Total Liabilities | $8,098,596 | $5,772,397 | | Bonds payable held in VIEs, at fair value | $6,912,442 | $4,731,429 | | Total Stockholders' Equity | $152,026 | $128,243 | - Total assets increased by approximately $2.36 billion (38.1%) from December 31, 2020, to June 30, 2021, primarily driven by an increase in mortgage loans held in variable interest entities[18] Consolidated Unaudited Statements of Operations This section presents the company's financial performance, including interest income, expenses, and net income for the three and six months ended June 30, 2021 and 2020 Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Interest income | $12,879 | $9,821 | $25,528 | $16,407 | | Interest expense | $(7,589) | $(5,216) | $(14,086) | $(8,547) | | Total net interest income | $5,290 | $4,605 | $11,442 | $7,860 | | Total other income (loss) | $10,577 | $17,057 | $32,867 | $(7,867) | | Total operating expenses | $3,613 | $2,389 | $6,985 | $3,588 | | Net income (loss) | $12,254 | $19,273 | $37,324 | $(3,595) | | Net income (loss) attributable to common stockholders | $5,542 | $5,270 | $13,909 | $(1,083) | | Earnings (loss) per share - basic | $1.04 | $1.00 | $2.69 | $(0.21) | | Earnings (loss) per share - diluted | $0.58 | $1.00 | $1.83 | $(0.21) | | Dividends declared per common share | $0.4750 | $0.4000 | $0.9500 | $0.6198 | - Net income attributable to common stockholders increased by $0.272 million (5.2%) for the three months ended June 30, 2021, compared to the same period in 2020, and significantly increased by $14.992 million for the six months ended June 30, 2021, reversing a loss from the prior year[20] - Total net interest income increased by $0.685 million (14.9%) for the three months ended June 30, 2021, and by $3.582 million (45.6%) for the six months ended June 30, 2021, year-over-year[20] Consolidated Unaudited Statements of Stockholders' Equity This section details changes in stockholders' equity, reflecting net income, share issuances, and other equity transactions for the periods presented - Total Stockholders' Equity increased from $128.243 million at December 31, 2020, to $152.026 million at June 30, 2021, primarily due to net income attributable to common stockholders and proceeds from common share issuances[23][24] - The company issued 408,410 common shares through an at-the-market offering, generating $7.708 million in net proceeds during the six months ended June 30, 2021[23] Consolidated Unaudited Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2021 and 2020 Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------------------------------------ | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $22,841 | $11,909 | | Net cash provided by (used in) investing activities | $45,069 | $(21,377) | | Net cash provided by (used in) financing activities | $(70,703) | $10,434 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $(2,793) | $966 | | Cash, cash equivalents and restricted cash, end of period | $30,678 | $966 | - Net cash provided by operating activities increased by $10.932 million (91.8%) for the six months ended June 30, 2021, compared to the same period in 2020[27] - Investing activities shifted from a net cash outflow of $21.377 million in 2020 to a net cash inflow of $45.069 million in 2021, primarily due to increased proceeds from mortgage loan payments[27] - Financing activities resulted in a net cash outflow of $70.703 million in 2021, a significant change from the $10.434 million inflow in 2020, mainly due to distributions to bondholders of variable interest entities[27] Notes to Consolidated Unaudited Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, financial instruments, and other relevant information 1. Organization and Description of Business This note describes NexPoint Real Estate Finance, Inc.'s formation, business objectives as a commercial mortgage REIT, and investment strategy - NexPoint Real Estate Finance, Inc. is a commercial mortgage REIT incorporated in Maryland on June 7, 2019, intending to elect REIT status for the taxable year ended December 31, 2020[31] - The Company's primary investment objective is to generate attractive, risk-adjusted returns by originating, structuring, and investing in first-lien mortgage loans, mezzanine loans, preferred equity, common stock, and multifamily CMBS securitizations, focusing on multifamily, SFR, self-storage, hospitality, and office sectors[31][34] - Operations commenced on February 11, 2020, following an IPO and the acquisition of an initial portfolio (SFR Loans, CMBS B-Pieces, mezzanine/preferred equity) from affiliates of its Sponsor[32] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and estimation methods used in preparing the financial statements, including consolidation and fair value measurements - The financial statements are prepared in accordance with GAAP, requiring management estimates and assumptions, particularly affected by the COVID-19 pandemic's potential impact on investments and borrower delinquencies[35][38][39] - The Company consolidates variable interest entities (VIEs) where it is the primary beneficiary, such as seven Freddie Mac K-Series securitization entities, reporting their assets and liabilities at fair value[40][42][44] - The Company accounts for acquired assets (SFR Loans, CMBS B-Pieces) as asset acquisitions rather than business combinations, valuing them at fair value at the time of contribution[50][51] 3. Loans Held for Investment This note details the composition, carrying value, and performance of the company's loan portfolio held for investment, including SFR, mezzanine, and preferred equity loans Loans Held for Investment Summary (in thousands) | Loan Type | June 30, 2021 Carrying Value | December 31, 2020 Carrying Value | June 30, 2021 Loan Count | December 31, 2020 Loan Count | | :-------------------------------- | :--------------------------- | :--------------------------- | :----------------------- | :--------------------------- | | SFR Loans, held-for-investment | $896,746 | $918,114 | 25 | 26 | | Mezzanine loan, held-for-investment | $134,416 | $108,557 | 21 | 19 | | Preferred equity, held-for-investment | $15,267 | $19,220 | 2 | 3 | | Total | $1,046,429 | $1,045,891 | 48 | 48 | - The weighted-average coupon for all loans held for investment was 5.35% at June 30, 2021, slightly higher than 5.24% at December 31, 2020[92][95] - All 48 loans in the portfolio were rated '3' (Satisfactory) as of June 30, 2021, indicating collateral performance meets or is on track to meet underwriting expectations[100] Loan Portfolio Activity (Six Months Ended June 30, in thousands) | Activity | 2021 | 2020 | | :-------------------------------- | :------- | :------- | | Balance at December 31, | $1,045,891 | $0 | | Contributions from noncontrolling interests | $0 | $967,201 | | Originations | $25,926 | $7,500 | | Proceeds from principal repayments | $(20,825) | $(1,298) | | Amortization of loan premium, net | $(3,571) | $(2,999) | | Loan loss benefit (provision), net | $(107) | $(293) | | Realized losses | $(885) | $0 | | Balance at June 30, | $1,046,429 | $970,111 | 4. CMBS Trusts This note provides information on the company's consolidated CMBS entities, including their assets, liabilities, and underlying collateral characteristics - As of June 30, 2021, the Company consolidated seven CMBS Entities, recognizing their assets and liabilities at fair value[103][104] CMBS Trust Assets and Liabilities (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :------------------------------------------ | :------------ | :---------------- | | Mortgage loans held in VIEs, at fair value | $7,348,132 | $5,007,515 | | Bonds payable held in VIEs, at fair value | $(6,912,442) | $(4,731,429) | Change in Net Assets Related to Consolidated CMBS VIEs (in thousands) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net interest earned | $6,424 | $2,853 | $12,124 | $4,595 | | Unrealized gain (loss) | $1,550 | $12,179 | $16,561 | $(14,722) | | Total Change in net assets | $7,974 | $15,032 | $28,685 | $(10,127) | - The collateral underlying the CMBS trusts is predominantly multifamily properties (98.25%) as of June 30, 2021, with significant geographic concentration in Texas (15.83%) and Florida (13.90%)[106][107] 5. Common Stock This note describes the company's investment in NexPoint Storage Partners, Inc. common stock, including its valuation and ownership percentage - The Company's preferred stock investment in Jernigan Capital, Inc. (JCAP) was converted into common stock of NexPoint Storage Partners, Inc. (NSP) on November 6, 2020, following JCAP's acquisition by Manager affiliates[108] - As of June 30, 2021, the Company owns approximately 25.8% of NSP's outstanding shares, valued at $47.959 million, and accounts for this investment using the fair-value option[108][109][111] 6. CMBS Structured Pass Through Certificates This note details the company's holdings of CMBS I/O Strips, their carrying value, and related income and unrealized gains - As of June 30, 2021, the Company held eight CMBS I/O Strips, primarily interest-only tranches of Freddie Mac certificates backed by stabilized multifamily properties, with a total carrying value of $55.758 million[112][113] CMBS I/O Strips Activity (in thousands) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Interest income | $2,091 | $80 | $2,702 | $80 | | Change in unrealized gain | $(192) | $301 | $439 | $301 | | Realized gain | $484 | $0 | $484 | $0 | | Total | $2,383 | $381 | $3,625 | $381 | 7. Debt This note provides a breakdown of the company's financing arrangements, including repurchase agreements, credit facilities, and unsecured notes, along with their maturities Financing Arrangements as of June 30, 2021 (in thousands) | Facility Type | Outstanding Face Amount | Carrying Value | Weighted Average Interest Rate | | :-------------------------------- | :---------------------- | :------------- | :----------------------------- | | Master Repurchase Agreements | $177,625 | $177,625 | 1.86% | | Asset Specific Financing (SFR) | $765,372 | $765,372 | 2.43% | | Asset Specific Financing (Mezzanine) | $59,914 | $59,914 | 0.30% | | Unsecured Notes | $111,500 | $107,861 | 5.75% - 7.50% | | Total/Weighted Average | $1,114,411 | $1,110,772 | 2.62% | - The Company's debt portfolio includes a $765.4 million Credit Facility with Freddie Mac for SFR Loans, $177.6 million under master repurchase agreements collateralized by CMBS B-Pieces and I/O Strips, and $111.5 million in unsecured notes[117][118][119][121] Scheduled Debt Maturities (in thousands) | Year | Recourse | Non-recourse | Total | | :--- | :------- | :----------- | :---- | | 2021 | $0 | $(177,625) | $(177,625) | | 2022 | $0 | $0 | $0 | | 2023 | $0 | $(4,888) | $(4,888) | | 2024 | $0 | $(5,763) | $(5,763) | | 2025 | $(36,500) | $(46,094) | $(82,594) | | Thereafter | $(75,000) | $(768,541) | $(843,541) | | Total | $(111,500) | $(1,002,911) | $(1,114,411) | 8. Fair Value of Financial Instruments This note explains the methodology and categorization of financial instruments measured at fair value, based on input observability levels - The Company categorizes fair value measurements into a three-level hierarchy based on input observability: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[126][130] Fair Value of Financial Instruments (in thousands) as of June 30, 2021 | Asset/Liability | Carrying Value | Level 1 | Level 2 | Level 3 | Total Fair Value | | :------------------------------------------ | :------------- | :------ | :-------- | :-------- | :--------------- | | Assets | | | | | | | Cash and cash equivalents | $29,988 | $29,988 | $0 | $0 | $29,988 | | Loans, held-for-investment, net | $149,683 | $0 | $0 | $149,712 | $149,712 | | Common stock | $47,959 | $0 | $0 | $47,959 | $47,959 | | Mortgage loans held in VIEs, at fair value | $7,348,132 | $0 | $7,348,132 | $0 | $7,348,132 | | CMBS structured pass through certificates | $55,758 | $0 | $55,758 | $0 | $55,758 | | Liabilities | | | | | | | Secured financing agreements, net | $825,286 | $0 | $0 | $855,485 | $855,485 | | Master repurchase agreements | $177,625 | $0 | $0 | $177,625 | $177,625 | | Unsecured Notes | $107,861 | $0 | $0 | $107,861 | $107,861 | | Bonds payable held in VIEs, at fair value | $6,912,442 | $0 | $6,912,442 | $0 | $6,912,442 | 9. Stockholders' Equity This note details the components of stockholders' equity, including common and preferred stock outstanding, share repurchase programs, and equity awards - As of June 30, 2021, the Company had 5,498,980 shares of common stock outstanding and 1,645,000 shares of 8.50% Series A Cumulative Redeemable Preferred Stock outstanding[18][137][138] - The Board authorized a share repurchase program for up to $10.0 million of common and Series A Preferred Stock, under which 327,422 common shares were repurchased for approximately $4.8 million through June 30, 2021[139] - The Company granted 232,184 restricted stock units to directors, officers, and key employees in February 2021 under the 2020 LTIP, with 439,724 units outstanding as of June 30, 2021[142][172] - Through its ATM Program, the Company issued 408,410 common shares for net proceeds of $7.706 million for the six months ended June 30, 2021[145] 10. Earnings (Loss) Per Share This note presents the calculation of basic and diluted earnings per share, including the reconciliation of net income attributable to common stockholders Earnings (Loss) Per Share (in thousands, except per share amounts) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) attributable to common stockholders | $5,542 | $5,270 | $13,909 | $(1,083) | | Weighted-average common shares outstanding - basic | 5,306 | 5,263 | 5,165 | 5,248 | | Weighted-average common shares outstanding - diluted | 19,603 | 5,292 | 19,402 | 5,248 | | Earnings (loss) per share - basic | $1.04 | $1.00 | $2.69 | $(0.21) | | Earnings (loss) per share - diluted | $0.58 | $1.00 | $1.83 | $(0.21) | - Diluted EPS for the three months ended June 30, 2021, was $0.58, down from $1.00 in the prior year, despite an increase in net income attributable to common stockholders, due to a significant increase in diluted weighted-average shares outstanding (from 5,292 to 19,603)[151] 11. Noncontrolling Interests This note describes the nature and accounting for noncontrolling interests in consolidated subsidiaries, particularly redeemable noncontrolling interests in the OP - Noncontrolling interests represent ownership in consolidated subsidiaries held by entities other than the Company, with redeemable noncontrolling interests in the OP and Subsidiary OPs classified as temporary equity[47][152][156] - Limited partners holding OP Units have the right to redeem their units for cash or, at the Company's election, common stock, with the redemption value based on the greater of NAV or the Ten Day VWAP of the Company's common stock[157][158] Redeemable Noncontrolling Interests in the OP (in thousands) | Metric | June 30, 2021 | | :------------------------------------------ | :------------ | | Redeemable noncontrolling interests in the OP, December 31, 2020 | $275,670 | | Net income attributable to redeemable noncontrolling interests in the OP | $21,663 | | Distributions to redeemable noncontrolling interests in the OP | $(11,823) | | Redeemable noncontrolling interests in the OP, June 30, 2021 | $285,510 | 12. Related Party Transactions This note discloses transactions with related parties, including the Formation Transaction, management fees, and other arrangements with the Manager and its affiliates - The Formation Transaction, involving the acquisition of the Initial Portfolio from affiliates of the Sponsor, was a related party transaction[163][164] - The Company pays its Manager an annual management fee of 1.5% of Equity, which amounted to $1.0 million for the six months ended June 30, 2021, an increase from $0.5 million in the prior year[165][175] - The Company's operating expenses, including management fees and equity awards, are subject to an Expense Cap of 2.5% of equity book value, which was not exceeded for the six months ended June 30, 2021[174] 13. Commitments and Contingencies This note addresses any contractual obligations, legal proceedings, or contingent liabilities that could materially impact the company's financial statements - The Company is not aware of any contractual obligations, legal proceedings, or contingent obligations that would materially adversely affect its financial statements[176][177] - The OP Notes are fully guaranteed by the Company, but any action required under the guaranty is considered remote as of June 30, 2021[177] 14. Subsequent Events This note reports significant events that occurred after the balance sheet date, such as new financing agreements and dividend declarations - On July 6, 2021, the Company entered into a repurchase agreement, borrowing $43.7 million, collateralized by $80.9 million of B-Piece investments, to finance a CMBS securitization[178] - On July 28, 2021, the Board declared a quarterly dividend of $0.4750 per common share, payable on September 30, 2021[179] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, and strategic direction as a commercial mortgage REIT, including investment activities and performance metrics Overview This section provides a high-level description of the company's business as a commercial mortgage REIT, its investment objectives, and external management structure - The Company is a commercial mortgage REIT focused on originating, structuring, and investing in first-lien mortgage loans, mezzanine loans, preferred equity, common stock, and multifamily CMBS securitizations, primarily in top 50 MSAs[182] - The investment objective is to generate attractive, risk-adjusted returns through a flexible, relative-value focused strategy, with capital re-allocation among target investment classes[183] - The Company is externally managed by a subsidiary of its Sponsor, NexPoint Advisors, L.P., which provides extensive real estate and credit management expertise[184] Purchases and Dispositions in the Quarter This section details the company's investment activities, including CMBS purchases and dispositions of preferred equity, SFR loans, and CMBS I/O strips during the quarter CMBS Purchases (Three Months Ended June 30, 2021) | CMBS Securitization | Investment Date | Tranche | Par Amount | Cost (% of Par Value) | Underlying Loan Count | | :-------------------- | :-------------- | :------ | :--------- | :-------------------- | :-------------------- | | FREMF 2021-KF108 | 4/20/2021 | Class CS | $76,047,000 | 100.0% | 37 | | FHMS K107 | 4/28/2021 | X1 | $50,000,000 | 12.1% | N/A | | FHMS K107 | 5/4/2021 | X1 | $15,000,000 | 12.1% | N/A | | FHMS K109 | 5/27/2021 | X3 | $20,000,000 | 25.2% | N/A | | FHMS K085 | 6/2/2021 | X3 | $4,265,750 | 14.9% | N/A | | FRESB 2019-SB64 | 6/11/2021 | X1 | $80,000,000 | 7.0% | N/A | | FRESB 2020-SB76 | 6/21/2021 | X1 | $30,000,000 | 7.0% | N/A | | FREMF 2017-K62 | 6/30/2021 | Class D | $98,305,106 | 68.7% | 67 | | Total | | | $373,617,856 | | 104 | Dispositions (Three Months Ended June 30, 2021, in thousands) | Investment Type | Disposition Date | Cost Basis | Proceeds | Realized Gain/(Loss) | | :---------------- | :--------------- | :--------- | :------- | :------------------- | | Preferred Equity | 6/10/2021 | $3,941 | $3,821 | $(120) | | SFR Loan | 6/1/2021 | $15,930 | $15,300 | $(630) | | CMBS I/O Strip (3 items) | 6/23/2021, 5/3/2021 | $3,438 | $3,921 | $484 | | Total | | $23,309 | $23,042 | $(267) | Components of Our Revenues and Expenses This section outlines the primary sources of the company's revenue, including interest income, and its key expenses, such as interest expense, G&A, and management fees - Primary revenue sources include interest income from mortgage loans, mezzanine loans, preferred equity, and CMBS structured pass-through certificates, along with loan premium/discount amortization[189] - Key expenses include interest expense on financing obligations, general and administrative (G&A) expenses (e.g., audit, legal, stock compensation), loan servicing fees, and management fees paid to the Manager[190][200][201][202] - Other income/loss components include changes in net assets related to consolidated CMBS VIEs (fair value adjustments and net interest), unrealized gains/losses on CMBS I/O Strips and common stock, loan loss provision, dividend income, and realized losses[194][195][196][197][198][199] Results of Operations for the Three Months Ended June 30, 2021 and 2020 This section analyzes the company's financial performance for the three-month periods, comparing net interest income, other income, operating expenses, and net income year-over-year Operating Results (Three Months Ended June 30, in thousands) | Metric | 2021 | 2020 | | :----- | :----- | :----- | | Net interest income | $5,290 | $4,605 | | Other income | $10,577 | $17,057 | | Operating expenses | $(3,613) | $(2,389) | | Net income | $12,254 | $19,273 | | Net income attributable to common stockholders | $5,542 | $5,270 | - Net interest income increased by $0.7 million (15.2%) due to an increase in investments (64 discrete investments in 2021 vs. 40 in 2020)[205] - Other income decreased by $6.5 million (38.1%) primarily due to a lower change in net assets related to consolidated CMBS VIEs[206] - Operating expenses increased by $1.2 million (50.2%), driven by a $1.0 million increase in G&A expenses (including $0.5 million in stock compensation) and higher loan servicing and management fees[207][208][209] Results of Operations for the Six Months Ended June 30, 2021 and 2020 This section analyzes the company's financial performance for the six-month periods, comparing net interest income, other income, operating expenses, and net income year-over-year Operating Results (Six Months Ended June 30, in thousands) | Metric | 2021 | 2020 | | :----- | :------- | :------- | | Net interest income | $11,442 | $7,860 | | Other income (loss) | $32,867 | $(7,867) | | Operating expenses | $(6,985) | $(3,588) | | Net income (loss) | $37,324 | $(3,595) | | Net income (loss) attributable to common stockholders | $13,909 | $(1,083) | - Net income attributable to common stockholders significantly improved from a loss of $1.083 million in 2020 to a gain of $13.909 million in 2021[211] - Net interest income increased by $3.5 million (44.5%) due to increased investments and more days in operation[212] - Other income saw a substantial increase of $40.8 million, shifting from a loss of $7.9 million in 2020 to a gain of $32.9 million in 2021, primarily due to changes in net assets related to consolidated CMBS VIEs and fair value marks[213] - Operating expenses increased by $3.4 million (94.7%), mainly due to a $2.1 million increase in G&A (including $0.9 million in stock compensation and $0.5 million in legal fees) and higher loan servicing and management fees[214][215][216] Key Financial Measures and Indicators This section presents and discusses key financial metrics and performance indicators, including earnings per share, core earnings, cash available for distribution, and book value Earnings Per Share and Dividends Declared This section details the company's basic and diluted earnings per share and the dividends declared per common share for the reported periods EPS and Dividends Declared (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) attributable to common stockholders | $5,542 | $5,270 | $13,909 | $(1,083) | | Basic EPS | $1.04 | $1.00 | $2.69 | $(0.21) | | Diluted EPS | $0.58 | $1.00 | $1.83 | $(0.21) | | Dividends declared per common share | $0.4750 | $0.4000 | $0.9500 | $0.6198 | - Basic EPS increased to $1.04 for Q2 2021 (from $1.00 in Q2 2020) and to $2.69 for H1 2021 (from $(0.21) in H1 2020)[219] - Diluted EPS decreased to $0.58 for Q2 2021 (from $1.00 in Q2 2020) but increased to $1.83 for H1 2021 (from $(0.21) in H1 2020)[219] - Dividends declared per common share increased to $0.4750 for Q2 2021 (from $0.4000 in Q2 2020) and to $0.9500 for H1 2021 (from $0.6198 in H1 2020)[219] Core Earnings This section defines and reconciles Core Earnings, a non-GAAP measure, providing insights into the company's operational performance excluding certain adjustments - Core Earnings, a non-GAAP measure, excludes certain GAAP adjustments and non-cash items to provide a clearer view of operational performance[220] Core Earnings Reconciliation (in thousands, except per share amount) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) attributable to common stockholders | $5,542 | $5,270 | $13,909 | $(1,083) | | Amortization of stock-based compensation | $557 | $39 | $948 | $39 | | Unrealized (gains) or losses | $(2,659) | $(3,387) | $(8,586) | $4,029 | | Core Earnings | $3,440 | $1,945 | $6,271 | $3,066 | | Core Earnings per Diluted Weighted-Average Share | $0.59 | $0.37 | $1.12 | $0.58 | - Core Earnings per diluted weighted-average share increased to $0.59 for Q2 2021 (from $0.37 in Q2 2020) and to $1.12 for H1 2021 (from $0.58 in H1 2020)[223] Cash Available for Distribution This section defines and reconciles Cash Available for Distribution (CAD), a non-GAAP measure used to evaluate cash flow trends and dividend capacity - CAD is a non-GAAP measure used to evaluate cash flow trends and determine dividends, calculated by adjusting net income (loss) attributable to common stockholders for non-cash items[227][228] CAD Reconciliation (in thousands, except per share amounts) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) attributable to common stockholders | $5,542 | $5,270 | $13,909 | $(1,083) | | Amortization of stock-based compensation | $557 | $39 | $948 | $39 | | Amortization of premiums | $866 | $555 | $1,484 | $849 | | Change in unrealized loss on investments held at fair value | $(2,659) | $(3,387) | $(8,586) | $4,029 | | Accretion of discounts | $(895) | $(113) | $(1,571) | $(113) | | CAD | $3,411 | $2,216 | $6,184 | $3,631 | | CAD per share of common stock | $0.59 | $0.42 | $1.10 | $0.69 | - CAD per share of common stock increased to $0.59 for Q2 2021 (from $0.42 in Q2 2020) and to $1.10 for H1 2021 (from $0.69 in H1 2020)[229] Book Value per Share / Unit This section presents the book value per common share and the combined book value per share/unit, reflecting the company's equity value Book Value per Share (in thousands, except per share data) | Metric | June 30, 2021 | December 31, 2020 | | :------------------------------------------ | :------------ | :---------------- | | Common stockholders' equity | $107,549 | $90,733 | | Shares of common stock outstanding at period end | 5,499 | 5,023 | | Book value per share of common stock | $19.56 | $18.07 | - Book value per share of common stock increased to $19.56 at June 30, 2021, from $18.07 at December 31, 2020[232] Combined Book Value per Share / Unit (in thousands, except per share data) | Metric | June 30, 2021 | December 31, 2020 | | :------------------------------------------ | :------------ | :---------------- | | Total equity (Common stockholders' equity + Redeemable noncontrolling interests) | $393,059 | $366,403 | | Combined shares of common stock and redeemable OP Units and SubOP Units | 19,286 | 18,810 | | Combined book value per share / unit | $20.38 | $19.48 | Our Portfolio This section provides an overview of the company's investment portfolio, including its composition, principal balance, and weighted-average yields across various asset classes - As of June 30, 2021, the Company's portfolio consists of 64 investments, including SFR Loans, CMBS B-Pieces, CMBS I/O Strips, mezzanine loans, preferred equity investments, and a common stock investment, with a combined unpaid principal balance of $3.0 billion[233][236] Overall Portfolio Statistics (as of June 30, 2021, in thousands) | Metric | Total Portfolio | Floating Rate Investments | Fixed Rate Investments | Common Stock Investments | | :-------------------------- | :-------------- | :------------------------ | :--------------------- | :----------------------- | | Number of investments | 64 | 6 | 58 | 1 | | Principal balance (1) | $1,579,660 | $277,529 | $1,302,131 | N/A | | Carrying value | $1,579,393 | $275,860 | $1,303,534 | $47,959 | | Weighted-average cash coupon | 5.11% | 6.95% | 4.72% | N/A | | Weighted-average all-in yield | 5.24% | 7.41% | 4.78% | N/A | Liquidity and Capital Resources This section discusses the company's strategies for managing short-term and long-term liquidity needs, including financing sources and capital raising programs - Short-term liquidity needs are met by ongoing principal and interest payments, prepayments, and dividends from investments, while long-term needs are addressed through debt/equity issuances, operating cash flows, and secured/unsecured borrowings[237][238] - Key financing sources include Freddie Mac Credit Facilities ($765.4 million outstanding), master repurchase agreements ($177.6 million outstanding), and unsecured notes offerings ($111.5 million aggregate principal)[242][243][246][247][250] - The Company has an At-The-Market (ATM) Program to issue up to $100.0 million in common or Series A Preferred Stock and is monitoring the LIBOR transition, with some new investments already tied to SOFR[252][254] Cash Flows (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2021 | 2020 | | :------------------------------------------ | :----- | :------- | | Net cash provided by operating activities | $22,841 | $11,909 | | Net cash provided by (used in) investing activities | $45,069 | $(21,377) | | Net cash provided by (used in) financing activities | $(70,703) | $10,434 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $(2,793) | $966 | | Cash, cash equivalents and restricted cash, end of period | $30,678 | $966 | Emerging Growth Company and Smaller Reporting Company Status This section explains the company's status as an emerging growth company and smaller reporting company, and the associated regulatory flexibilities - The Company has elected to take advantage of the extended transition period for complying with new or revised accounting standards applicable to public companies, as permitted by the JOBS Act for emerging growth companies[261] - As a 'smaller reporting company,' the Company may also elect to utilize certain scaled disclosures[262] Income Taxes This section outlines the company's intention to qualify as a REIT for tax purposes, including distribution requirements and the treatment of taxable REIT subsidiary income - The Company intends to elect and operate as a REIT for U.S. federal income tax purposes, commencing with the taxable year ended December 31, 2020, which requires distributing at least 90% of its REIT taxable income annually[262][266] - Taxable income from non-REIT activities is managed through a Taxable REIT Subsidiary (TRS), which is subject to corporate income taxes; no significant TRS taxes were associated for the six months ended June 30, 2021[262][275] - The Company evaluates tax positions using a 'more-likely-than-not' threshold and had no material unrecognized tax benefit or expense, accrued interest, or penalties as of June 30, 2021[264][265] Dividends This section details the company's dividend policy and recent declarations for both common and Series A Preferred Stock, consistent with REIT requirements - The Company intends to make regular quarterly dividend payments to common stockholders and accrued dividend payments on Series A Preferred Stock, aiming to distribute substantially all of its taxable income to maintain REIT status[266] - The Board declared a quarterly common stock dividend of $0.4750 per share on April 26, 2021, and a preferred stock dividend of $0.53125 per share on June 25, 2021[267] Off-Balance Sheet Arrangements This section confirms the absence of any material off-balance sheet arrangements that could significantly impact the company's financial position - As of June 30, 2021, the Company had no off-balance sheet arrangements that would materially affect its financial condition or results of operations[268] Commitments and Contingencies This section addresses any contractual obligations, legal proceedings, or contingent liabilities that could materially impact the company's financial statements - The Company is not aware of any contractual obligations, legal proceedings, or other contingent obligations that would have a material adverse effect on its consolidated financial statements[269] Critical Accounting Policies and Estimates This section highlights the accounting policies requiring significant management judgment and estimates, such as loan loss allowances and REIT tax election - Critical accounting policies involve significant management judgments and estimates, particularly for the allowance for loan losses and the REIT tax election[270][271] - The allowance for loan losses is determined quarterly on a loan-by-loan basis for impaired loans and through a general allowance for non-impaired loans, considering quantitative and qualitative factors[272] - The Company intends to qualify as a REIT, which requires meeting specific organizational and operational requirements, including annual distribution of at least 90% of REIT taxable income[275] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that quantitative and qualitative disclosures about market risk are not required for smaller reporting companies, a status the Company currently holds - The Company is exempt from providing quantitative and qualitative disclosures about market risk as it qualifies as a smaller reporting company[276] Item 4. Controls and Procedures This section details the management's evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting - As of June 30, 2021, management, including the President and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective[277] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2021, that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting[279] PART II—OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and other required disclosures Item 1. Legal Proceedings This section addresses any legal proceedings the Company is involved in - 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[282] Item 1A. Risk Factors This section discusses the Company's risk factors, including updates related to the COVID-19 pandemic - There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K filed on February 25, 2021[283] - The COVID-19 pandemic continues to present material uncertainty and heightened risks, including potential operational risks from remote work and forbearance requests in the CMBS B-Piece portfolio (0.6% of UPB as of June 30, 2021)[284][285] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on any unregistered sales of equity securities and the use of proceeds - There were no unregistered sales of equity securities or use of proceeds to report[286] Item 3. Defaults Upon Senior Securities This section reports on any defaults upon senior securities - There were no defaults upon senior securities to report[287] Item 4. Mine Safety Disclosures This section provides disclosures related to mine safety - Mine safety disclosures are not applicable to the Company[288] Item 5. Other Information This section includes any other information required to be disclosed - There was no other information to report[289] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q - The report includes exhibits such as amended bylaws, supplemental indenture, loan and security agreements, certifications (CEO, CFO), and XBRL documents[292] Signatures This section contains the official signatures of the company's principal executive and financial officers, certifying the report's accuracy - The report is signed by Jim Dondero, Chairman of the Board and President (Principal Executive Officer), and Brian Mitts, Director, Chief Financial Officer, Executive VP Finance, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer), both dated August 2, 2021[296]