NexPoint Real Estate Finance(NREF) - 2023 Q1 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements The report contains forward-looking statements concerning liquidity, capital resources, and operational results, which are based on current management beliefs and are subject to risks and uncertainties. The company cautions investors against relying on these statements as they are not guarantees of future performance[13][14][17] - Key risks that could cause actual results to differ materially from forward-looking statements include, but are not limited to: risks associated with debt-oriented real estate investments, interest rate fluctuations, substantial indebtedness, limited operating history, dependence on the external Manager, failure to qualify as a REIT, and a previously identified material weakness in internal controls[15][18] PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents NexPoint Real Estate Finance, Inc.'s unaudited consolidated financial statements for Q1 2023, detailing its financial position and performance Consolidated Financial Statements The company reported net income of $9.4 million for Q1 2023, with total assets decreasing to $8.04 billion and cash increasing to $38.8 million Consolidated Balance Sheet Highlights | Account | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $8,042,566 | $8,154,136 | | Cash and cash equivalents | $38,830 | $20,048 | | Mortgage loans held in VIEs, at fair value | $6,747,377 | $6,720,246 | | Total Liabilities | $7,569,590 | $7,609,122 | | Bonds payable held in VIEs, at fair value | $6,278,734 | $6,249,804 | | Total Stockholders' Equity | $377,264 | $448,513 | Consolidated Statement of Operations Highlights | Account | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total net interest income | $3,949 | $22,315 | | Total other income (loss) | $10,949 | $1,814 | | Total operating expenses | $5,520 | $6,060 | | Net income | $9,378 | $18,069 | | Net income attributable to common stockholders | $6,567 | $12,406 | | Earnings per share - basic | $0.38 | $0.90 | | Earnings per share - diluted | $0.37 | $0.78 | Notes to Consolidated Financial Statements The notes detail the company's organization, accounting policies, and investment portfolio, including the CECL standard adoption - The company is a commercial mortgage REIT focused on originating and investing in first-lien mortgage loans, mezzanine loans, preferred equity, and various mortgage-backed securities, primarily in the multifamily, SFR, and self-storage sectors[30][34] - Effective January 1, 2023, the company adopted the CECL standard (ASU 2016-13), resulting in a $1.6 million reduction in retained earnings due to an increased allowance for credit losses[65][66] Loans Held-for-Investment Summary | Loan Type | Carrying Value (Mar 31, 2023) (in thousands) | Carrying Value (Dec 31, 2022) (in thousands) | | :--- | :--- | :--- | | Mortgage loans | $723,343 | $726,531 | | Mezzanine loans | $135,336 | $165,182 | | Preferred equity | $149,212 | $90,965 | | Total | $1,007,891 | $982,678 | - As of March 31, 2023, all 50 loans held-for-investment in the portfolio were internally rated as "3 - Satisfactory," indicating collateral performance is meeting or on track to meet underwriting expectations[104] - Effective January 1, 2023, the company deconsolidated its investment in the Elysian at Hughes Center multifamily property following a restructuring, recognizing a gain on deconsolidation of $1.5 million[130][204] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2023 financial performance, highlighting decreased net interest income and key non-GAAP metrics Results of Operations Net income attributable to common stockholders decreased to $6.6 million in Q1 2023, primarily due to lower net interest income Comparison of Operating Results | Account | Q1 2023 (in thousands) | Q1 2022 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $3,949 | $22,315 | $(18,366) | (82.3)% | | Other income (loss) | $10,949 | $1,814 | $9,135 | 503.6% | | Operating expenses | $(5,520) | $(6,060) | $540 | (8.9)% | | Net income | $9,378 | $18,069 | $(8,691) | (48.1)% | | Net income attributable to common stockholders | $6,567 | $12,406 | $(5,839) | (47.1)% | Key Financial Measures and Indicators Key financial metrics for Q1 2023 include diluted EPS, dividends, EAD, CAD, and book value per share EAD and CAD Reconciliation | Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Net income attributable to common stockholders | $6,567 | $12,406 | | EAD attributable to common stockholders | $9,524 | $19,591 | | EAD per Diluted Weighted-Average Share | $0.54 | $1.36 | | CAD attributable to common stockholders | $9,956 | $25,555 | | CAD per Diluted Weighted-Average Share | $0.56 | $1.78 | Book Value Per Share / Unit | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Book value per share of common stock | $19.77 | $20.29 | | Combined book value per share / unit | $19.59 | $20.03 | Our Portfolio As of March 31, 2023, the company's portfolio consisted of 87 investments with a total principal balance of $1.66 billion and a carrying value of $1.71 billion Portfolio Overview as of March 31, 2023 | Metric | Total Portfolio | Floating Rate | Fixed Rate | | :--- | :--- | :--- | :--- | | Number of investments | 87 | 24 | 58 | | Principal balance (in thousands) | $1,655,145 | $368,748 | $1,286,397 | | Carrying value (in thousands) | $1,707,201 | $365,100 | $1,205,031 | | Weighted-average cash coupon | 5.67% | 9.13% | 4.68% | | Weighted-average all-in yield | 6.71% | 11.17% | 5.35% | Liquidity and Capital Resources The company's liquidity, including $40.3 million in cash and equivalents, is deemed sufficient for the next twelve months - Cash and cash equivalents (including restricted cash) ended the quarter at $40.3 million, up from $20.3 million at the beginning of the period[279] - The company utilizes a Freddie Mac credit facility with a $628.2 million outstanding balance and master repurchase agreements with a $350.4 million outstanding balance as of March 31, 2023[270][272] - The company is transitioning its LIBOR-indexed loans to SOFR, with the change expected to occur after June 30, 2023, and management anticipates an immaterial effect on interest rates[277] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, NexPoint Real Estate Finance, Inc. is not required to provide disclosures about market risk - Disclosure under this item is not required as the company qualifies as a smaller reporting company[309] Controls and Procedures Management concluded disclosure controls were ineffective as of March 31, 2023, due to a material weakness, with remediation ongoing - Management, including the President and CFO, concluded that disclosure controls and procedures were not effective as of March 31, 2023, due to a previously identified material weakness[310] - A remediation plan is underway, which includes implementing pre- and post-close acquisition checklists to ensure proper accounting analysis of investment contracts and structures, but the material weakness will not be considered remediated until these controls are fully implemented and tested over a sufficient period[313][315] PART II—OTHER INFORMATION Legal Proceedings The company reports no material legal proceedings that would adversely affect its financial condition or operations - The company reports no material legal proceedings[319] Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K are reported - No material changes to risk factors from the most recent Form 10-K are reported[320] Exhibits This section provides an index of exhibits filed with the Form 10-Q, including required certifications and Inline XBRL documents - The exhibit index lists required certifications and XBRL data files submitted with the report[327]