NexPoint Real Estate Finance(NREF) - 2022 Q4 - Annual Report

PART I Item 1. Business NREF is a commercial mortgage REIT investing in debt and equity across multifamily, SFR, and self-storage, managing a $2.0 billion portfolio with a 3-to-1 leverage target - NREF is a commercial mortgage REIT focusing on first-lien mortgage loans, mezzanine loans, preferred equity, and CMBS, primarily in the multifamily, SFR, and self-storage sectors within the top 50 MSAs[24][28] - The company is externally managed by NexPoint Real Estate Advisors VII, L.P., an affiliate of NexPoint Advisors, L.P., with the manager handling all investment decisions and operations[27] Portfolio Composition by Net Equity (December 31, 2022) | Asset Class | Percentage of Net Equity (%) | | :--- | :--- | | Multifamily CMBS B-Pieces | 28.0% | | Mezzanine Loans | 15.9% | | SFR Loans | 14.8% | | Preferred Equity Investments | 13.7% | | Common Stock Investments | 11.8% | | Multifamily Property Real Estate | 9.5% | | CMBS I/O Strips | 3.1% | | Mortgage-Backed Securities | 2.5% | | MSCR Notes | 0.7% | Key Portfolio Metrics (as of December 31, 2022) | Metric | Value | | :--- | :--- | | Stabilized Properties | 92.9% | | Weighted Average Occupancy | 89.5% | | Portfolio-wide Weighted Average DSCR | 1.78x | | Weighted Average LTV | 68.6% | | Weighted Average Maturity | 5.9 years | - The company's financing strategy targets a leverage ratio not to exceed 3-to-1, with the manager having discretion over specific asset leverage[56] 2022 Highlights In 2022, the company made $380.4 million in new investments and $197.2 million in dispositions, issuing $35.0 million in notes and $12.6 million in stock 2022 Purchases and Investments Summary | Metric | Value ($) | | :--- | :--- | | Total Principal Amount | $380,401,247 | 2022 Property Acquisition | Property Name | Location | Purchase Price ($) | Mortgage Debt ($) | Units | Effective Ownership (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Elysian at Hughes | Las Vegas, NV | $184,100,000 | $89,634,000 | 368 | 36.0% | 2022 Dispositions and Loan Payoffs Summary | Metric | Value ($) | | :--- | :--- | | Total Amortized Cost Basis | $205,774,441 | | Total Disposition Proceeds | $197,234,265 | | Total Prepayment Penalties | $25,773,254 | | Total Net Gain on Prepayment | $17,233,078 | - The company issued $35.0 million of 5.75% Senior Unsecured Notes due 2026 and repurchased $5.0 million of these notes during the year, leaving $165.0 million outstanding[36] - Under its 2022 At-the-Market (ATM) Program, the company sold 531,728 shares of common stock for gross proceeds of $12.6 million[38] Item 1A. Risk Factors The company faces risks from real estate market downturns, credit and interest rate fluctuations, portfolio concentration, external manager dependence, and internal control weaknesses - The company's loans and investments are exposed to risks associated with debt-oriented real estate, including delinquency, foreclosure, and loss, which are heightened by macroeconomic trends like inflation and rising interest rates[84][88][95] - The portfolio has significant concentration risk: one fixed-rate loan represents approximately 25.2% of the total portfolio's unpaid principal balance, and about 53.4% of the portfolio is located in Florida and Georgia[100] - A single material weakness was identified in the company's internal control over financial reporting related to the Elysian at Hughes Center investment, leading to the conclusion that internal controls were not effective as of December 31, 2022[82][169] - The company is dependent on its external Manager and its affiliates, and faces significant conflicts of interest, including those arising from the Manager's compensation structure and competition for investment opportunities with other affiliated entities[198][209][217] - Failure to qualify as a REIT would result in significant adverse tax consequences, including being subject to corporate income tax and being unable to deduct dividends paid to stockholders[232][233] - The bankruptcy of Highland Capital Management, L.P. (a former affiliate) and related litigation involving key personnel could expose the company to negative publicity and divert management's attention, potentially impacting operations[212] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[304] Item 2. Properties As of December 31, 2022, the company directly owns one multifamily property and consolidates another Owned Properties | Property Name | Location | Units | Mortgage Debt (as of 12/31/22) ($) | | :--- | :--- | :--- | :--- | | Hudson Montford | Charlotte, NC | 204 | ~$32.5 million | | Elysian at Hughes Center | Las Vegas, NV | 368 | ~$89.6 million | Item 3. Legal Proceedings The company is not aware of any legal proceedings likely to have a material adverse effect on its financial condition or operations - Management is not aware of any legal proceedings likely to have a material adverse effect on the company's results or financial condition[307] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[308] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "NREF", with 17,471,218 shares outstanding as of March 31, 2023 - The company's common stock trades on the NYSE under the symbol "NREF"[312] - As of March 31, 2023, there were 17,471,218 shares of common stock outstanding[311] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income for 2022 decreased to $3.2 million due to unrealized losses, with portfolio growth to $2.0 billion and EAD at $2.50 and CAD at $2.97 per share Results of Operations Net income attributable to common stockholders decreased to $3.2 million in 2022, primarily due to unrealized losses on CMBS VIEs, despite increased net interest income Summary of Operating Results (in thousands) | | For the Year Ended Dec 31, 2022 | For the Year Ended Dec 31, 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $37,733 | $26,055 | $11,678 | 44.8% | | Other income (loss) | $2,661 | $71,263 | ($68,602) | (96.3)% | | Operating expenses | ($26,180) | ($13,846) | ($12,334) | 89.1% | | Net income attributable to common stockholders | $3,234 | $39,577 | ($36,343) | (91.8)% | - The increase in net interest income for 2022 was primarily due to an increase in investments (from 74 to 83 discrete investments) and prepayment penalties related to early paydowns[336] - The decrease in other income for 2022 was primarily due to an increase in unrealized losses related to consolidated CMBS VIEs and a decrease in fair value marks between periods[337] Key Financial Measures and Indicators For FY 2022, basic EPS was $0.22, dividends increased to $2.00, EAD was $2.50, and CAD was $2.97 per diluted share, with book value at $20.29 Per Share Data Comparison | Metric | 2022 ($) | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | :--- | | Net income per share, basic | $0.22 | $6.00 | $2.13 | | Dividends declared per share | $2.0000 | $1.9000 | $1.4198 | EAD and CAD Reconciliation Summary (per diluted share, including NCI) | Metric | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | EAD per Diluted Share | $2.50 | $1.89 | | CAD per Diluted Share | $2.97 | $2.21 | Book Value Per Share / Unit | Metric | Dec 31, 2022 ($) | Dec 31, 2021 ($) | | :--- | :--- | :--- | | Book value per share of common stock | $20.29 | $21.88 | | Combined book value per share / unit | $20.03 | $21.51 | Our Portfolio As of December 31, 2022, the portfolio comprised 83 investments with a $1.63 billion principal balance, primarily fixed-rate, yielding 6.41% Portfolio Summary (as of December 31, 2022) | Metric | Floating Rate | Fixed Rate | Common Stock | Real Estate | Total Portfolio | | :--- | :--- | :--- | :--- | :--- | :--- | | Number of investments | 22 | 57 | 2 | 2 | 83 | | Principal balance ($ thousands) | $368,021 | $1,260,751 | N/A | N/A | $1,628,772 | | Weighted-average all-in yield | 10.31% | 5.21% | N/A | N/A | 6.41% | Liquidity and Capital Resources The company's liquidity is sourced from operating cash flows, debt facilities, and equity issuances, including a $628.6 million Freddie Mac facility and $331.0 million in repurchase agreements - Primary sources of liquidity include cash from operations, debt facilities like the Freddie Mac Credit Facility and master repurchase agreements, and equity/debt issuances[365][366] Key Financing Balances (as of December 31, 2022) | Facility | Outstanding Balance ($ thousands) | | :--- | :--- | | Freddie Mac Credit Facility (SFR Loans) | $628,633 | | Master Repurchase Agreements | $331,020 | | Unsecured Notes, net | $204,960 | | Mortgages Payable, net | $121,236 | - The company is actively managing the transition from LIBOR to SOFR: as of year-end 2022, 3.7% of the portfolio was tied to LIBOR and 13.3% was tied to SOFR[381] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section is not required for smaller reporting companies, thus no disclosure is provided - Not required for smaller reporting companies[409] Item 8. Financial Statements and Supplementary Data This item refers to the consolidated financial statements and related notes, beginning on page F-1 - The required information is included in the consolidated financial statements and notes beginning on page F-1[410] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on accounting and financial disclosure - None[411] Item 9A. Controls and Procedures Management concluded disclosure controls were not effective as of December 31, 2022, due to a material weakness in internal control over financial reporting, with remediation underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022[412] - A material weakness was identified in internal controls relating to missing controls over obtaining and reviewing final executed documents for new investments due to inadequate risk assessment[418] - The remediation plan involves implementing pre-close and post-close acquisition checklists to ensure formal accounting analysis and review of final transaction documents[420] PART III Items 10-14 Information for Items 10-14, covering governance, compensation, and ownership, is incorporated by reference from the company's definitive proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of stockholders[427][428][429][430][431] PART IV Item 15. Exhibit and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including financial statements and an index of all exhibits - This item provides an index to the Consolidated Financial Statements, which begin on page F-1, and lists all exhibits filed with the report[434][435] Financial Statements and Supplementary Data Consolidated Financial Statements Consolidated financial statements for 2022 show total assets of $8.15 billion, liabilities of $7.61 billion, and net income of $14.2 million, reflecting CMBS trust consolidation Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $8,154,136 | $8,513,917 | | Total Liabilities | $7,609,122 | $8,007,211 | | Total Stockholders' Equity | $448,513 | $245,283 | Consolidated Statement of Operations Summary (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total net interest income | $37,733 | $26,055 | $11,678 | 44.8% | | Total other income (loss) | $2,661 | $71,313 | ($68,602) | (96.3)% | | Total operating expenses | $26,180 | $13,896 | ($12,334) | 89.1% | | Net income | $14,214 | $83,472 | ($69,258) | (83.0)% | Consolidated Statement of Cash Flows Summary (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $65,801 | $49,298 | | Net cash provided by investing activities | $950,578 | $517,878 | | Net cash used in financing activities | ($1,029,264) | ($567,415) | Notes to Consolidated Financial Statements Notes provide detailed financial information on VIE consolidation, loan portfolio, debt facilities, fair value, related-party transactions, and subsequent events, including an immaterial error correction - The company consolidates CMBS trusts where it is the primary beneficiary, reporting the assets and liabilities of these trusts at fair value, which significantly impacts the scale of the consolidated balance sheet[479][480] - As of December 31, 2022, all 48 loans held-for-investment were rated "3" (Satisfactory), indicating that collateral performance is meeting or on track to meet underwriting expectations[542] - Note 16 discloses an immaterial error correction for the Elysian at Hughes Center investment: it was previously accounted for as an unconsolidated preferred equity investment but was revised to be consolidated as a real estate investment owned by the company, effective Q1 2022[652] - Subsequent to year-end, in Q1 2023, the company made new preferred and common equity investments, authorized a new $20.0 million share repurchase program, declared common and preferred dividends, and acquired a new CMBS position[658][659][661][662][664]