NexPoint Real Estate Finance(NREF) - 2021 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements for Q3 2021 show total assets increased to $8.3 billion, with net income attributable to common stockholders rising to $13.2 million Consolidated Balance Sheets Total assets increased to $8.30 billion as of September 30, 2021, from $6.18 billion at year-end 2020, primarily driven by growth in mortgage loans held in VIEs | Financial Metric (in thousands) | September 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $8,296,407 | $6,176,310 | | Mortgage loans held in variable interest entities, at fair value | $7,085,361 | $5,007,515 | | Mortgage loans, held-for-investment, net | $871,711 | $918,114 | | Total Liabilities | $7,799,912 | $5,772,397 | | Bonds payable held in variable interest entities, at fair value | $6,652,704 | $4,731,429 | | Secured financing agreements, net | $805,427 | $840,453 | | Total Stockholders' Equity | $237,503 | $128,243 | Consolidated Statements of Operations Net income attributable to common stockholders for Q3 2021 significantly increased to $13.2 million from $2.9 million in Q3 2020, driven by higher net interest and other income | Metric (in thousands, except per share) | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net interest income | $6,582 | $4,390 | $18,024 | $12,250 | | Total other income (loss) | $21,963 | $10,039 | $54,830 | $2,172 | | Total operating expenses | $3,354 | $2,888 | $10,339 | $6,476 | | Net income | $25,191 | $11,541 | $62,515 | $7,946 | | Net income attributable to common stockholders | $13,233 | $2,862 | $27,142 | $1,779 | | Earnings per share - basic | $1.93 | $0.54 | $4.73 | $0.34 | | Earnings per share - diluted | $1.17 | $0.52 | $3.02 | $0.33 | | Dividends declared per common share | $0.4750 | $0.4000 | $1.4250 | $1.0198 | Consolidated Statements of Stockholders' Equity Total stockholders' equity grew to $237.5 million by September 30, 2021, from $128.2 million at year-end 2020, fueled by net income and equity offerings - For the nine months ended September 30, 2021, key equity changes included the issuance of common shares through a public offering (net proceeds of $41.0 million) and an at-the-market offering (net proceeds of $10.4 million)[23] - Net income attributable to common stockholders for the nine-month period was $27.1 million, while common stock dividends declared amounted to $10.0 million[23] - Redeemable noncontrolling interests in the OP were converted, resulting in the issuance of 1,479,132 common shares and an increase in additional paid-in capital of $32.4 million[22][23] Consolidated Statements of Cash Flows Net cash provided by operating activities was $37.2 million for the nine months ended September 30, 2021, with a net decrease in cash, cash equivalents, and restricted cash of $8.9 million | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $37,226 | $21,034 | | Net cash provided by (used in) investing activities | $196,542 | $(110,112) | | Net cash provided by (used in) financing activities | $(242,660) | $107,042 | | Net increase (decrease) in cash | $(8,892) | $17,964 | Notes to Consolidated Financial Statements Detailed notes cover the company's organization, accounting policies, loan portfolio composition, consolidation of CMBS trusts as VIEs, debt facilities, and equity activities - The company is a commercial mortgage REIT focused on originating and investing in first-lien mortgage loans, mezzanine loans, preferred equity, and CMBS securitizations, primarily in the multifamily, SFR, and self-storage sectors[32][35] - The company consolidates several CMBS trusts as Variable Interest Entities (VIEs), reporting their assets and liabilities at fair value on its balance sheet[45][46] - As of September 30, 2021, all 47 loans held-for-investment, with a total carrying value of $1.02 billion, were internally rated as '3' or 'Satisfactory'[104] - The company has elected to be treated as a REIT for tax purposes, commencing with the taxable year ended December 31, 2020[32][84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant increase in net income for Q3 and the first nine months of 2021, driven by portfolio growth and favorable CMBS fair value adjustments Results of Operations Net income attributable to common stockholders for Q3 2021 rose to $13.2 million, primarily due to a $2.2 million increase in net interest income and $12.0 million in other income | Metric (in thousands) | Q3 2021 | Q3 2020 | Change | | :--- | :--- | :--- | :--- | | Net interest income | $6,582 | $4,390 | +$2,192 | | Other income | $21,963 | $10,039 | +$11,924 | | Operating expenses | $3,354 | $2,888 | +$466 | | Net income attributable to common stockholders | $13,233 | $2,862 | +$10,371 | | Metric (in thousands) | Nine Months 2021 | Nine Months 2020 | Change | | :--- | :--- | :--- | :--- | | Net interest income | $18,024 | $12,250 | +$5,774 | | Other income | $54,830 | $2,172 | +$52,658 | | Operating expenses | $10,339 | $6,476 | +$3,863 | | Net income attributable to common stockholders | $27,142 | $1,779 | +$25,363 | Key Financial Measures and Indicators Non-GAAP measures EAD and CAD are used, with Q3 2021 EAD per diluted share at $0.51 and CAD per diluted share at $0.62 | Metric (in thousands, except per share) | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | EAD | $10,519 | $7,201 | $26,704 | $18,773 | | EAD per Diluted Share | $0.51 | $0.38 | $1.35 | $1.02 | | CAD | $12,933 | $7,969 | $31,070 | $21,590 | | CAD per Diluted Share | $0.62 | $0.42 | $1.57 | $1.17 | | Metric | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Book value per share of common stock | $21.05 | $18.07 | | Combined book value per share / unit | $21.04 | $19.48 | Our Portfolio The portfolio comprises 69 investments with a total carrying value of $1.65 billion as of September 30, 2021, yielding a weighted-average all-in yield of 5.41% | Portfolio Statistics | Total Portfolio | Floating Rate | Fixed Rate | Common Stock | | :--- | :--- | :--- | :--- | :--- | | Number of investments | 69 | 7 | 62 | 1 | | Principal balance (in thousands) | $1,592,224 | $291,839 | $1,300,385 | N/A | | Carrying value (in thousands) | $1,604,929 | $291,166 | $1,313,763 | $49,321 | | Weighted-average all-in yield | 5.41% | 7.70% | 4.90% | N/A | Liquidity and Capital Resources Liquidity is derived from operating cash flows, debt facilities, and equity issuances, with $745.5 million outstanding on the Freddie Mac credit facility - Primary sources of liquidity include cash from operations, debt facilities, and equity offerings[263][264] - Key debt facilities include a Freddie Mac Credit Facility ($745.5 million outstanding), master repurchase agreements ($222.5 million outstanding), and unsecured notes[268][275][278] - In 2021, the company raised capital via an at-the-market (ATM) program, a $75 million senior unsecured notes offering, and a secondary public offering of common stock[277][278][279] - The company has a commitment to potentially purchase up to an additional $72.0 million of Preferred Units by September 2023[283][285] Item 3. Quantitative and Qualitative Disclosures About Market Risk Disclosure regarding quantitative and qualitative market risk is not required for smaller reporting companies - Disclosure is not required for smaller reporting companies[304] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of September 30, 2021[305] - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2021[307] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is not involved in any legal proceedings likely to have a material adverse effect on its financial condition or operations - Management is not aware of any legal proceedings that are reasonably likely to have a material adverse effect on the company's financial condition or results of operations[310] Item 1A. Risk Factors No material changes to risk factors were reported, but the company continues to monitor COVID-19 impacts, including four active forbearance requests in its CMBS B-Piece portfolio - No material changes have been made to the risk factors previously disclosed in the Annual Report on Form 10-K filed on February 25, 2021[311] - The COVID-19 pandemic continues to present material uncertainty and risk. As of September 30, 2021, four forbearance requests were approved in the CMBS B-Piece portfolio, representing 0.8% of the outstanding unpaid principal balance[313][314] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported during the period - None[315] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None[316] Item 5. Other Information The Management Agreement was amended on November 3, 2021, to update terminology and clarify renewal terms - The Management Agreement was amended on November 3, 2021, to update terminology from 'Core Earnings' to 'Earnings Available for Distribution' and clarify renewal terms[318] Item 6. Exhibits This section lists exhibits filed with the quarterly report, including amended agreements and officer certifications