0001786248 NexPoint Real Estate Finance, Inc. false --12-31 Q2 2022 0.01 0.01 100,000,000 100,000,000 2,000,000 2,000,000 1,645,000 1,645,000 0.01 0.01 500,000,000 500,000,000 15,236,618 9,450,921 14,949,631 9,163,934 355,000 355,000 286,987 286,987 0.5313 0.5000 1.0625 1.0000 0.5313 0.4750 1.0625 0.9500 3 50.0 30 15 3 6 16 — — 58,923 2 3 5 4 April 25, 2022 June 30, 2022 June 15, 2022 June 22, 2022 July 25, 2022 July 14, 2022 50.0 0 July 27, 2022 September 30, 2022 September 15, 2022 The Company, through the Subsidiary OPs, purchased approximately $80.0 million, $35.0 million, $40.0 million and $50.0 million aggregate notional amount of the X1 interest-only tranche of the FRESB 2019-SB64 CMBS I/O Strip on June 11, 2021, September 29, 2021, February 3, 2022 and March 18, 2022, respectively. Certain key employees of the Manager elected to net the taxes owed upon vesting against the shares issued resulting in 114,494 shares being issued as shown on the consolidated statements of stockholders' equity. Shares vested prior to June 30, 2022 Includes net amortization of loan purchase premiums. The Company, through the Subsidiary OPs, purchased approximately $50.0 million and $15.0 million aggregate notional amount of the X1 interest-only tranche of the FHMS K-107 CMBS I/O Strip on April 28, 2021 and May 4, 2021, respectively. The transactions in place in the master repurchase agreement with Mizuho have a one-month to two-month tenor and are expected to roll accordingly. CMBS are shown at fair value on an unconsolidated basis. SFR Loans and mezzanine loans are shown at amortized cost. The weighted-average coupon is weighted on current principal balance. The weighted-average life is weighted on current principal balance and assumes no prepayments. The maturity date for preferred equity investments represents the maturity date of the senior mortgage, as the preferred equity investments require repayment upon the sale or refinancing of the asset. Weighted-average interest rate using unpaid principal balances. On April 15, 2020, three of our subsidiaries entered into a master repurchase agreement with Mizuho Securities (“Mizuho”). Borrowings under these repurchase agreements are collateralized by portions of the CMBS B-Pieces and CMBS I/O Strips. The Company, through the Subsidiary OPs, purchased approximately $50.0 million and $15.0 million aggregate notional amount of the X1 interest-only tranche of the FHMS K-107 CMBS I/O Strip on April 28, 2021 and May 4, 2021, respectively. Current yield is the annualized income earned divided by the cost basis of the investment. On April 15, 2020, three of our subsidiaries entered into a master repurchase agreement with Mizuho Securities (“Mizuho”). Borrowings under these repurchase agreements are collateralized by portions of the CMBS B-Pieces, CMBS I/O Strips and SFR pass-through certificates. Weighted-average life is determined using the maximum maturity date of the corresponding loans, assuming all extension options are exercised by the borrower. Carrying value includes the outstanding face amount plus unamortized purchase premiums/discounts and any allowance for loan losses. The weighted-average life is weighted on outstanding face amount and assumes no prepayments. The maturity date for preferred equity investments represents the maturity date of the senior mortgage, as the preferred equity investments require repayment upon the sale or refinancing of the asset. The Company, through the Subsidiary OPs, purchased approximately $80.0 million and $35.0 million aggregate notional amount of the X1 interest-only tranche of the FRESB 2019-SB64 CMBS I/O Strip on June 11, 2021 and September 29, 2021, respectively. The weighted-average of loans paying a fixed rate is weighted on current principal balance. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number 001-39210

 


 

NexPoint Real Estate Finance, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Maryland

84-2178264

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

300 Crescent Court, Suite 700, Dallas, Texas

75201

(Address of Principal Executive Offices)

(Zip Code)

 

(214) 276-6300

 

(Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

8.50% Series A Cumulative Redeemable Preferred

Stock, par value 0.01 per share

 

NREF

NREF-PRA

 

New York Stock Exchange

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

Accelerated Filer

Non-Accelerated Filer

 

Smaller reporting company

Emerging growth company

     

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

As of August 3, 2022, the registrant had 14,949,631 shares of its common stock, par value $0.01 per share, outstanding. 

 



 

 

 

NEXPOINT REAL ESTATE FINANCE, INC.

Form 10-Q

Quarter Ended June 30, 2022

 

INDEX

 

 

Page

Cautionary Statement Regarding Forward-Looking Statements

iii

     

PART IFINANCIAL INFORMATION

     

Item 1.

Financial Statements

 
 

Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021

1

 

Consolidated Unaudited Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021

2

 

Consolidated Unaudited Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021

3

 

Consolidated Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021

5

 

Notes to Consolidated Unaudited Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

42

     

PART IIOTHER INFORMATION

     

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3.

Defaults Upon Senior Securities

44

Item 4.

Mine Safety Disclosures

44

Item 5.

Other Information

44

Item 6.

Exhibits

45

Signatures

46

 

 

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. In particular, statements relating to our liquidity and capital resources, our performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions and demographics) are forward-looking statements. We caution investors that any forward-looking statements presented in this quarterly report are based on management’s then-current beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result,” the negative version of these words and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

 

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We cautionyou therefore against relying on any of these forward-looking statements.

 

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

 

Our loans and investments expose us to risks similar to and associated with debt-oriented real estate investments generally;

 

 

Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us;

 

 

Risks associated with the current COVID-19 pandemic, including unpredictable variants and the future outbreak of other highly infectious or contagious diseases;

 

 

Fluctuations in interest rate and credit spreads could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments;

 

 

Risks associated with the ownership of real estate;

 

 

Our loans and investments may be concentrated in terms of type of interest, geography, asset types and sponsors and may continue to be so in the future;

 

 

We have a substantial amount of indebtedness which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs;

 

 

We have limited operating history as a standalone company and may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our stockholders;

 

 

We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of NexPoint Advisors, L.P. (our “Sponsor”), members of the management team of NexPoint Real Estate Advisors VII, L.P. (our “Manager”) or their affiliates.

 

 

We are dependent upon our Manager and its affiliates to conduct our day-to-day operations; thus, adverse changes in their financial health or our relationship with them could cause our operations to suffer;

 

 

Our Manager and its affiliates face conflicts of interest, including significant conflicts created by our Manager’s compensation arrangements with us, including compensation that may be required to be paid to our Manager if our management agreement is terminated, which could result in decisions that are not in the best interests of our stockholders;

 

 

We pay substantial fees and expenses to our Manager and its affiliates, which may increase the risk that you will not earn a profit on your investment;

 

 

If we fail to qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes, cash available for distributions ("CAD") to be paid to our stockholders could decrease materially, which would limit our ability to make distributions to our stockholders;

 

 

Risks associated with the Highland Capital Management, L.P. (“Highland”) bankruptcy, including related litigation and potential conflicts of interest; and

 

 

Any other risks included under Part I, Item1A, “Risk Factors,” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022.

 

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this quarterly report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

 

 

 
 

NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

   

June 30, 2022

   

December 31, 2021

 
    (Unaudited)          

ASSETS

               

Cash and cash equivalents

  $ 52,682     $ 26,459  

Restricted cash

    1,261       6,773  

Bridge loan, net

    13,468        

Real estate investment, net (Note 8)

    60,428       62,269  

Loans held-for-investment, net

    258,577       241,517  

Common stock investments, at fair value

    86,808       58,460  

Mortgage loans, held-for-investment, net

    736,007       847,364  

Accrued interest

    10,795       8,319  

Mortgage loans held in variable interest entities, at fair value

    6,548,544       7,192,547  

CMBS structured pass-through certificates, at fair value (Note 6)

    63,003       69,816  

MSCR notes, at fair value

    8,809        

SFR pass-through certificates, at fair value

    19,466        

Accounts receivable and other assets

    1,361       393  

TOTAL ASSETS

  $ 7,861,209     $ 8,513,917  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Liabilities:

               

Secured financing agreements, net

  $ 693,782     $ 786,226  

Master repurchase agreements

    312,355       286,324  

Unsecured notes, net

    198,044       168,325  

Mortgages payable, net

    32,200       32,176  

Accounts payable and other accrued liabilities

    8,274       3,903  

Accrued interest payable

    4,493       3,985  

Due to brokers for unsecured notes purchased, not yet settled

    1,950        

Bonds payable held in variable interest entities, at fair value

    6,095,570       6,726,272  

Total Liabilities

    7,346,668       8,007,211  
                 

Redeemable noncontrolling interests in the OP

    148,240       261,423  
                 

Stockholders' Equity:

               

Noncontrolling interest in CMBS variable interest entities

          7,175  

Noncontrolling interest in subsidiary

    95       95  

Preferred stock, $0.01 par value: 100,000,000 shares authorized; 2,000,000 and 2,000,000 shares issued and 1,645,000 and 1,645,000 shares outstanding, respectively

    16       16  

Common stock, $0.01 par value: 500,000,000 shares authorized; 15,236,618 and 9,450,921 shares issued and 14,949,631 and 9,163,934 shares outstanding, respectively

    150       92  

Additional paid-in capital

    347,776       222,300  

Retained earnings

    31,026       28,367  

Preferred stock held in treasury at cost; 355,000 shares and 355,000, respectively

    (8,567 )     (8,567 )

Common stock held in treasury at cost; 286,987 shares and 286,987 shares, respectively

    (4,195 )     (4,195 )

Total Stockholders' Equity

    366,301       245,283  

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 7,861,209     $ 8,513,917  

 

 

See Notes to Consolidated Financial Statements

 

 

 

 

NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Net interest income

                               

Interest income

  $ 17,621     $ 12,879     $ 49,594     $ 25,528  

Interest expense

    (9,107 )     (7,589 )     (17,925 )     (14,086 )

Total net interest income

  $ 8,514     $ 5,290     $ 31,669     $ 11,442  

Other income (loss)

                               

Change in net assets related to consolidated CMBS variable interest entities

    4,551       7,974       7,967       28,685  

Change in unrealized gain (loss) on CMBS structured pass-through certificates

    (3,311 )     (192 )     (7,651 )     439  

Change in unrealized gain on common stock investments

    3,019       2,499       3,348       3,333  

Change in unrealized (loss) on MSCR notes

    (191 )           (191 )      

Change in unrealized (loss) on SFR pass-through certificates

    (39 )           (39 )      

Loan loss benefit (provision)

    87       17       (64 )     (107 )

Realized losses

          (192 )           (257 )

Other income

    65       471       238       774  

Gain on extinguishment of debt

    17             17        

Net loss from consolidated real estate owned (Note 8)

    (531 )           (744 )      

Total other income (loss)

  $ 3,667     $ 10,577     $ 2,881     $ 32,867  

Operating expenses

                               

General and administrative expenses

    1,868       1,816       3,631       3,334  

Loan servicing fees

    1,080       1,279       2,221       2,615  

Management fees

    780       518       1,508       1,036  

Total operating expenses

  $ 3,728     $ 3,613     $ 7,360     $ 6,985  

Net income

    8,453       12,254       27,190       37,324  

Net (income) attributable to preferred shareholders

    (882 )     (878 )     (1,756 )     (1,752 )

Net (income) attributable to redeemable noncontrolling interests

    (2,548 )     (5,834 )     (7,491 )     (21,663 )

Net income attributable to common stockholders

  $ 5,023     $ 5,542     $ 17,943     $ 13,909  
                                 

Weighted-average common shares outstanding - basic

    14,748       5,306       14,304       5,165  

Weighted-average common shares outstanding - diluted

    22,494       19,603       22,263       19,402  
                                 

Earnings per share - basic

  $ 0.34     $ 1.04     $ 1.25     $ 2.69  

Earnings per share - diluted

  $ 0.34     $ 0.58     $ 1.14     $ 1.83  
                                 

Dividends declared per common share

  $ 0.5000     $ 0.4750     $ 1.0000     $ 0.9500  

 

 

See Notes to Consolidated Financial Statements

 

 

 

NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERSEQUITY

(dollars in thousands)

(Unaudited)

 

   

Series A Preferred Stock

   

Common Stock

   

Additional

   

Retained Earnings

   

Common Stock

   

Preferred Stock

   

Noncontrolling interest

   

Noncontrolling interest

         

Three Months Ended June 30, 2022

 

Number of Shares

   

Par Value

   

Number of Shares

   

Par Value

   

Paid-in Capital

   

Less Dividends

   

Held in Treasury at Cost

   

Held in Treasury at Cost

   

in CMBS VIEs

   

in Subsidiary

   

Total

 

Balances, March 31, 2022

    1,645,000     $ 16       14,485,274     $ 145     $ 338,127     $ 33,766     $ (4,195 )   $ (8,567 )   $     $ 95     $ 359,387  

Vesting of stock-based compensation

                54,185       1       520                                     521  

Issuance of common stock through at-the-market offering, net

                410,172       4       9,129                                     9,133  

Net income attributable to preferred stockholders

                                  882                               882  

Net income attributable to common stockholders

                                  5,023                               5,023  

Preferred stock dividends declared ($0.5313 per share)

                                  (882 )                             (882 )

Common stock dividends declared ($0.5000 per share)

                                  (7,763 )                             (7,763 )

Balances, June 30, 2022

    1,645,000     $ 16       14,949,631     $ 150     $ 347,776     $ 31,026     $ (4,195 )   $ (8,567 )   $     $ 95     $ 366,301  

 

 

   

Series A Preferred Stock

   

Common Stock

   

Additional

   

Retained Earnings

   

Common Stock

   

Preferred Stock

   

Noncontrolling interest

   

Noncontrolling interest

         

Six Months Ended June 30, 2022

 

Number of Shares

   

Par Value

   

Number of Shares

   

Par Value

   

Paid-in Capital

   

Less Dividends

   

Held in Treasury at Cost

   

Held in Treasury at Cost

   

in CMBS VIEs

   

in Subsidiary

   

Total

 

Balances, December 31, 2021

    1,645,000     $ 16       9,163,934     $ 92     $ 222,300     $ 28,367     $ (4,195 )   $ (8,567 )   $ 7,175     $ 95     $ 245,283  

Vesting of stock-based compensation

                114,494       1       1,053                                     1,054  

Issuance of common stock through at-the-market offering, net

                501,600       5       10,940                                     10,945  

Conversion of redeemable noncontrolling interests in the OP

                5,169,603       52       113,483                                     113,535  

Noncontrolling interest in CMBS VIEs

                                                    (7,175 )           (7,175 )

Net income attributable to preferred stockholders

                                  1,756                               1,756  

Net income attributable to common stockholders

                                  17,943                               17,943  

Preferred stock dividends declared ($1.0625 per share)

                                  (1,756 )                             (1,756 )

Common stock dividends declared ($1.0000 per share)

                                  (15,284 )                             (15,284 )

Balances, June 30, 2022

    1,645,000     $ 16       14,949,631     $ 150     $ 347,776     $ 31,026     $ (4,195 )   $ (8,567 )   $     $ 95     $ 366,301  

 

3

 

NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERSEQUITY

(dollars in thousands)

(Unaudited)

 

   

Preferred Stock

   

Common Stock

   

Additional

   

Retained Earnings

   

Common Stock

   

Preferred Stock

   

Noncontrolling interest

   

Noncontrolling interest

         

Three Months Ended June 30, 2021

 

Number of Shares

   

Par Value

   

Number of Shares

   

Par Value

   

Paid-in Capital

   

Less Dividends

   

Held in Treasury at Cost

   

Held in Treasury at Cost

   

in CMBS VIEs

   

in Subsidiary

   

Total

 

Balances, March 31, 2021

    1,645,000     $ 16       5,022,578     $ 50     $ 137,845     $ 9,218     $ (4,195 )   $ (8,567 )   $     $     $ 134,367  

Vesting of stock-based compensation

                67,992       1       237                                     238  

Issuance of common shares through at-the-market offering, net

                408,410       4       7,704                                     7,708  

Issuance of subsidiary preferred membership units through private offering, net

                                                          98       98  

Noncontrolling interest in CMBS VIEs

                                                    6,869             6,869  

Net income attributable to preferred stockholders

                                  878                               878  

Net income attributable to common stockholders

                                  5,542                               5,542  

Preferred stock dividends declared ($0.5313 per share)

                                  (878 )                             (878 )

Common stock dividends declared ($0.4750 per share)

                                  (2,796 )                             (2,796 )

Balances, June 30, 2021

    1,645,000     $ 16       5,498,980     $ 55     $ 145,786     $ 11,964     $ (4,195 )   $ (8,567 )   $ 6,869     $ 98     $ 152,026  

 

 

   

Preferred Stock

   

Common Stock

   

Additional

   

Retained Earnings

   

Common Stock

   

Preferred Stock

   

Noncontrolling interest

   

Noncontrolling interest

         

Six Months Ended June 30, 2021

 

Number of Shares

   

Par Value

   

Number of Shares

   

Par Value

   

Paid-in Capital

   

Less Dividends

   

Held in Treasury at Cost

   

Held in Treasury at Cost

   

in CMBS VIEs

   

in Subsidiary

   

Total

 

Balances, December 31, 2020

    1,645,000     $ 16       5,022,578     $ 50     $ 138,043     $ 3,485     $ (4,784 )   $ (8,567 )   $     $     $ 128,243  

Vesting of stock-based compensation

                67,992       1       628                                     629  

Cancellation of common stock held in treasury

                            (589 )           589                          

Issuance of common shares through at-the-market offering, net

                408,410       4       7,704                                     7,708  

Issuance of subsidiary preferred membership units through private offering, net

                                                          98       98  

Noncontrolling interest in CMBS VIEs

                                                    6,869             6,869  

Net income attributable to preferred stockholders

                                  1,752                               1,752  

Net income attributable to common stockholders

                                  13,909                               13,909  

Preferred stock dividends declared ($1.0625 per share)

                                  (1,752 )                             (1,752 )

Common stock dividends declared ($0.9500 per share)

                                  (5,430 )                             (5,430 )

Balances, June 30, 2021

    1,645,000     $ 16       5,498,980     $ 55     $ 145,786     $ 11,964     $ (4,195 )   $ (8,567 )   $ 6,869     $ 98     $ 152,026  

 

 

 

NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

   

For the Six Months Ended June 30,

 
   

2022

   

2021

 

Cash flows from operating activities

               

Net income

  $ 27,190     $ 37,324  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Amortization of premiums

    13,754       5,288  

Accretion of discounts

    (6,274 )     (3,332 )

Depreciation and amortization of real estate investment

    1,890        

Amortization of deferred financing costs

    24        

Loan loss provision

    64       107  

Net change in unrealized (gain) loss on investments held at fair value

    12,729       (20,335 )

Net realized losses

          397  

Vesting of stock-based compensation

    1,544       947  

Payment in kind income

    (346 )      

Gain on extinguishment of debt

    (17 )      

Changes in operating assets and liabilities:

               

Accrued interest

    (2,476 )     (644 )

Accounts receivable and other assets

    (968 )     (709 )

Accrued interest payable

    508       1,001  

Accounts payable, accrued expenses and other liabilities

    3,757       2,797  

Net cash provided by operating activities

    51,379       22,841  
                 

Cash flows from investing activities

               

Proceeds from payments received on mortgage loans held in variable interest entities

    740,723       143,567  

Proceeds from payments received on mortgage loans held for investment

    172,121       20,825  

Originations of bridge loan

    (13,434 )      

Originations of loans, held-for-investment, net

    (112,199 )     (25,926 )

Purchases of CMBS structured pass-through certificates, at fair value

    (4,543 )     (21,271 )

Sales of CMBS structured pass-through certificates, at fair value

          3,921  

Purchases of CMBS securitizations held in variable interest entities, at fair value

    (44,823 )     (76,047 )

Purchases of MSCR notes, at fair value

    (9,000 )      

Purchases of SFR pass-through certificates, at fair value

    (19,491 )      

Additions to real estate investments

    (49 )      

Net cash provided by investing activities

    709,305       45,069  
                 

Cash flows from financing activities

               

Principal repayments on borrowings under secured financing agreements

    (92,444 )     (15,167 )

Distributions to bondholders of variable interest entities

    (691,744 )     (132,834 )

Borrowings under master repurchase agreements

    69,470       26,936  

Principal repayments on borrowings under master repurchase agreements

    (43,439 )     (10,776 )

Proceeds received from unsecured notes offering, net

    34,174       72,684  

Repurchase of unsecured notes

    (2,879 )      

Proceeds from the issuance of common stock through at-the-market offering, net of offering costs

    10,945       7,708  

Proceeds from the issuance of common stock

    113,535        

Redemption of redeemable noncontrolling interests in the OP

    (113,535 )      

Proceeds from the issuance of subsidiary preferred membership units through private offering, net of offering costs

          98  

Payments for taxes related to net share settlement of stock-based compensation

    (490 )     (318 )

Dividends paid to common stockholders

    (14,671 )     (5,459 )

Dividends paid to preferred stockholders

    (1,756 )     (1,752 )

Distributions to redeemable noncontrolling interests in the OP

    (7,139 )     (11,823 )

Net cash used in financing activities

    (739,973 )     (70,703 )
                 

Net increase (decrease) in cash, cash equivalents and restricted cash

    20,711       (2,793 )

Cash, cash equivalents and restricted cash, beginning of period

    33,232       33,471  

Cash, cash equivalents and restricted cash, end of period

  $ 53,943     $ 30,678  

 

 

See Notes to Consolidated Financial Statements

 

 

NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

Supplemental Disclosure of Cash Flow Information

               

Interest paid

  $ 17,008     $ 12,868  

Supplemental Disclosure of Noncash Investing and Financing Activities

               

Consolidation of mortgage loans and bonds payable held in variable interest entities

    375,468       2,394,732  

Due to brokers for securities purchased, not yet settled

          67,523  

Consolidation of noncontrolling interest in CMBS variable interest entities

          6,869  

Conversion of convertible notes to common stock

    25,000        

Increase in dividends payable upon vesting of restricted stock units

    613       (29 )

Increase in dividends payable to preferred stockholders

          874  

Due to brokers for repurchase of unsecured notes, not yet settled

    1,950        

 

 

See Notes to Consolidated Financial Statements

 

 

NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Organization and Description of Business

 

NexPoint Real Estate Finance, Inc. (the “Company”, “we”, “our”) is a commercial mortgage REIT incorporated in Maryland on June 7, 2019. The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2020. The Company is focused on originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity, multifamily properties and common stock investments, as well as multifamily commercial mortgage-backed securities securitizations (“CMBS securitizations”). Substantially all of the Company’s business is conducted through NexPoint Real Estate Finance Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. As of June 30, 2022, the Company holds approximately 76.42% of the common limited partnership units in the OP (“OP Units”), which represents 100% of the Class A OP Units, and the OP owns all of the common limited partnership units (“SubOP Units”) of three of its subsidiary partnerships (collectively, the “Subsidiary OPs”) (see Note 13). The OP also directly owns all of the membership interests of a limited liability company (the “Mezz LLC”) through which it owns a portfolio of mezzanine loans, as further discussed below. NexPoint Real Estate Finance Operating Partnership GP, LLC (the “OP GP”) is the sole general partner of the OP.

 

The Company commenced operations on February 11, 2020 upon the closing of its initial public offering of shares of its common stock (the “IPO”). Prior to the closing of the IPO, the Company engaged in a series of transactions through which it acquired an initial portfolio consisting of senior pooled mortgage loans backed by single family rental (“SFR”) properties (the “SFR Loans”), the junior most bonds of multifamily CMBS securitizations (the “CMBS B-Pieces”), mezzanine loan and preferred equity investments in real estate companies and properties in other structured real estate investments within the multifamily, SFR and self-storage asset classes (the “Initial Portfolio”). The Initial Portfolio was acquired from affiliates (the “Contribution Group”) of our Sponsor, pursuant to a contribution agreement with the Contribution Group through which the Contribution Group contributed their interest in the Initial Portfolio to special purpose entities (“SPEs”) owned by the Subsidiary OPs, in exchange for SubOP Units (the “Formation Transaction”).

 

The Company is externally managed by the Manager through a management agreement dated February 6, 2020 and amended as of July 17, 2020 and November 3, 2021, for a three-year initial term set to expire on February 6, 2023 (as amended, the “Management Agreement”), by and between the Company and the Manager. The Manager conducts substantially all of the Company’s operations and provides asset management services for its real estate investments. The Company expects it will only have accounting employees while the Management Agreement is in effect. All of the Company’s investment decisions are made by the Manager, subject to general oversight by the Manager’s investment committee and the Company’s board of directors (the “Board”). The Manager is wholly owned by our Sponsor.

 

The Company’s primary investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term. The Company intends to achieve this objective primarily by originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity, multifamily properties and common stock investments, as well as multifamily CMBS securitizations. The Company concentrates on investments in real estate sectors where our senior management team has operating expertise, including in the multifamily, SFR, self-storage, life science, hospitality and office sectors predominantly in the top 50 metropolitan statistical areas. In addition, the Company targets lending or investing in properties that are stabilized or have a “light transitional” business plan, meaning a property that requires limited deferred funding to support leasing or ramp-up of operations and for which most capital expenditures are for value-add improvements. Through active portfolio management, the Company seeks to take advantage of market opportunities to achieve a superior portfolio risk-mix that delivers attractive total returns.

 

2. Summary of Significant Accounting Policies

 

Basis of Accounting

 

The accompanying unaudited consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. There have been no significant changes to the Company’s significant accounting policies during the six months ended June 30, 2022.

 

The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

 

In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of June 30, 2022 and  December 31, 2021 and results of operations for the three and six months ended June 30, 2022 and 2021 have been included. Such adjustments are normal and recurring in nature. The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021, and notes thereto in its Annual Report on Form 10-K filed with the SEC on February 28, 2022.

 

7

 

Use of Estimates and Assumptions

 

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. It is at least reasonably possible that these estimates could change in the near term. Estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.

 

Principles of Consolidation

 

The Company accounts for subsidiary partnerships in which it holds an ownership interest in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest. As of June 30, 2022, the Company has determined it must consolidate the OP and the Subsidiary OPs under the VIE model as it was determined the Company both controls the direct activities of the OP and Subsidiary OPs and possesses the right to receive benefits that could potentially be significant to the OP and Subsidiary OPs. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, including the OP and its subsidiaries. The Company’s sole significant asset is its investment in the OP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the OP. 

 

8

 

Variable Interest Entities

 

The Company evaluates all of its interests in VIEs for consolidation. When the Company’s interests are determined to be variable interests, the Company assesses whether it is deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. FASB ASC Topic 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. The Company considers its variable interests, as well as any variable interests of its related parties in making this determination. Where both of these factors are present, the Company is deemed to be the primary beneficiary, and it consolidates the VIE. Where either one of these factors is not present, the Company is not the primary beneficiary, and it does not consolidate the VIE.

 

CMBS Trusts

 

The Company consolidates the trusts that issue beneficial ownership interests in mortgage loans secured by commercial real estate (commonly known as CMBS) when the Company holds a variable interest in, and management considers the Company to be the primary beneficiary of, those trusts. Management believes the performance of the assets that underlie CMBS issuances most significantly impact the economic performance of the trust, and the primary beneficiary is generally the entity that conducts activities that most significantly impact the performance of the underlying assets. In particular, the most subordinate tranches of CMBS expose the holder to greater variability of economic performance when compared to more senior tranches since the subordinate tranches absorb a disproportionately higher amount of the credit risk related to the underlying assets. Generally, a trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint, remove and replace the special servicer for the trust. For the CMBS that the Company consolidates, the Company owns 100% of the most subordinate tranche of the securities. The subordinate tranche includes the controlling class and has the ability to remove and replace the special servicer. 

 

On the Consolidated Balance Sheets as of June 30, 2022, the Company consolidated each of the Freddie Mac K-Series securitization entities (the “CMBS Entities”) that were determined to be VIEs and for which the Company is the primary beneficiary. The CMBS Entities are independent of the Company, and the assets and liabilities of the CMBS Entities are not owned by and are not legal obligations of ours. Our exposure to the CMBS Entities is through the subordinated tranches. For financial reporting purposes, the underlying mortgage loans held by the trusts are recorded as a separate line item on the balance sheet under “Mortgage loans held in variable interest entities, at fair value.” The liabilities of the trusts consist solely of obligations to the CMBS holders of the consolidated trusts, excluding the CMBS B-Piece investments held by the Company. The liabilities are presented as “Bonds payable held in variable interest entities, at fair value” on the Consolidated Balance Sheets. The CMBS B-Pieces held by the Company, and the interest earned thereon are eliminated in consolidation. Management has elected the measurement alternative in ASC 810 to report the fair value of the assets and liabilities of the consolidated CMBS Entities in order to provide users of the financial statements with better information regarding the effects of credit risk and other market factors on the CMBS B-Pieces owned by the Company. Management has elected to show interest income and interest expense related to the CMBS Entities in aggregate with the change in fair value as “Change in net assets related to consolidated CMBS variable interest entities.” The residual difference between the fair value of the CMBS Entities’ assets and liabilities represents the Company’s investments in the CMBS B-Pieces at fair value. 

 

Investment in subsidiaries

 

The Company conducts its operations through the OP, which directly or through a subsidiary, acts as the general partner of the Subsidiary OPs. The Subsidiary OPs own investments through limited liability companies that are SPEs which own investments directly. The OP is the sole member of the Mezz LLC, which owns investments directly. The OP has three classes of OP Units: Class A, Class B and Class C. Class A OP Units and Class B OP Units each have 50.0% of the voting power of the OP Units and Class C OP Units have no voting power. Each Class A OP Unit, Class B OP Unit and Class C OP Unit otherwise represents substantially the same economic interest in the OP. The Company is the majority limited partner of the OP in terms of economic interests, holding approximately 76.42% of the OP Units in the OP as of  June 30, 2022, which represent 100% of the Class A OP Units, and the general partner of the OP must generally receive approval of the Board to take any actions. As such, the Company consolidates the OP. The Company consolidates the SPEs in which it has a controlling financial interest, as well as any VIEs where it is the primary beneficiary. All of the investments the SPEs own are consolidated in the unaudited consolidated financial statements. Generally, the assets of each entity can only be used to settle obligations of that particular entity, and the creditors of each entity have no recourse to the assets of other entities or the Company notwithstanding equity pledges various lenders may have in certain entities or guarantees provided by certain entities.

 

Redeemable Noncontrolling Interests

 

Noncontrolling interests represent the ownership interests in consolidated subsidiaries held by entities other than the Company. Those noncontrolling interests that the holder is allowed to redeem before liquidation or termination of the entity that issued those interests are considered redeemable noncontrolling interests.

 

The OP and the Subsidiary OPs have issued redeemable noncontrolling interests classified on the Consolidated Balance Sheets as temporary equity in accordance with ASC 480. This is presented as “Redeemable noncontrolling interests in the OP” on the Consolidated Balance Sheets and their share of “Net Income (Loss)” as “Net Income (Loss) attributable to redeemable noncontrolling interests” in the accompanying Consolidated Statements of Operations.

 

9

 

The redeemable noncontrolling interests were initially measured at the fair value of the contributed assets in accordance with ASC 805-50. The redeemable noncontrolling interests will be adjusted to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests. Capital contributions, distributions and profits and losses are allocated to the redeemable noncontrolling interests in accordance with the terms of the partnership agreements of the Subsidiary OPs and the OP.

 

Acquisition Accounting

 

The Company accounts for the assets acquired in the Formation Transaction as asset acquisitions pursuant to ASC 805-50, rather than as business combinations. Substantially all of the fair value of the assets acquired are concentrated in a group of similar identifiable assets, i.e. the SFR Loans represent one acquisition of similar identifiable assets, and the acquisition of the CMBS B-Pieces represents an additional acquisition of similar identifiable assets. Additionally, there were no corresponding in-place workforce, servicing platforms or any other item that could be considered an input or process associated with these assets. As such, the SFR Loans and the CMBS B-Pieces do not constitute businesses as defined by ASC 805-10-55. As the investments in the Initial Portfolio were contributed to the Subsidiary OPs in a non-cash transaction, cost is based on the fair value of the assets at the time of contribution.

 

Cash, Cash Equivalents and Restricted Cash

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. Substantially all amounts on deposit with major financial institutions exceed insured limits.

 

From time to time, the Company may have to post cash collateral to satisfy margin calls due to changes in fair value of the underlying collateral subject to master repurchase agreements. This cash is listed as restricted cash on the Consolidated Balance Sheets. Restricted cash is also stated at cost, which approximates fair value.

 

Mortgage and Other Loans Held-For-Investment, net

 

Loans that are held-for-investment are carried at their aggregate outstanding face amount, net of applicable (i) unamortized origination or acquisition premium and discounts, (ii) unamortized deferred fees and other direct loan origination costs, (iii) valuation allowance for loan losses and (iv) write-downs of impaired loans. The effective interest method is used to amortize origination or acquisition premiums and discounts and deferred fees or other direct loan origination costs. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest income earned on the assets.

 

Purchase Price Allocation

 

The Company considers the acquisition of real estate investments as asset acquisitions. Upon acquisition of a property, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment and intangible lease assets in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805.

 

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (“ASC 820”) (see Note 10), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets represents the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

 

Real estate assets, including land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Expenditures for improvements, renovations and replacements are capitalized at cost. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table:

 

 

Land

 

Not depreciated

Buildings

 

30 years

Improvements

 

15 years

Furniture, fixtures and equipment

 

3 years

Intangible lease assets

 

6 months

 

Post-acquisition, construction in progress includes the cost of renovation projects being performed at the various properties. Once a project is complete, the historical cost of the renovation is placed into service in one of the categories above depending on the type of renovation project and is depreciated over the estimated useful lives as described in the table above.

 

Secured Financing and Master Repurchase Agreements

 

The Company's borrowings under secured financing agreements and master repurchase agreements are treated as collateralized financing arrangements carried at their contractual amounts, net of unamortized debt issuance costs, if any.

 

Income Recognition

 

Interest Income - Loans held-for-investment, CMBS structured pass-through certificates, mortgage loans from the consolidated CMBS Entities, bridge loans, MSCR notes and SFR pass-through certificates where the Company expects to collect the contractual interest and principal payments are considered to be performing loans. The Company recognizes income on performing loans in accordance with the terms of the loan on an accrual basis. Interest income also includes amortization of loan premiums or discounts and loan origination costs and prepayment penalties.

 

Realized Gain (Loss) on Investments - The Company recognizes the excess, or deficiency, of net proceeds received, less the carrying value of such investments, as realized gains or losses, respectively. The Company reverses cumulative, unrealized gains or losses previously reported in its Consolidated Statements of Operations with respect to the investment sold at the time of the sale.

 

Revenue Recognition

 

The Company owns a multifamily property whereby its primary operations consist of rental income earned from its residents under lease agreements typically with terms of one year or less. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. The Company records an allowance to reflect revenue that may not be collectable. This is recorded through a provision for bad debts, which is included in rental income in the accompanying Consolidated Statements of Operations. Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, pets and administrative, application and other fees and are recognized when earned. The Company implemented the provisions of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) as of December 31, 2021. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as a substantial portion of its revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09.

 

In July 2018, the FASB issued ASU 2018-11, LeasesTargeted Improvements (“ASU 2018-11”), which provides entities with relief from the costs of implementing certain aspects of ASU 2016-02. ASU 2018-11 provides a practical expedient that allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where the Company is the lessor. The Company implemented the provisions of ASU 2018-11 and 2016-02, collectively Topic 842 Leases (“ASC 842”), effective December 31, 2021. The Company presents the disclosure of leases in the Consolidated Statements of Operations and began presenting all rentals and reimbursements from tenants as a single line item within rental income (Note 8).

Expense Recognition

Interest expense, in accordance with the Company’s financing agreements, is recorded on the accrual basis. General and administrative expenses are expensed as incurred.

 

Allowance for Loan Losses

 

The Company, with the assistance of an independent valuations firm, performs a quarterly evaluation of loans classified as held for investment for impairment on a loan-by-loan basis in accordance with ASC 310-10-35, Receivables, Subsequent Measurement (“ASC 310-10-35”). If the Company determines that it is probable that it will be unable to collect all amounts owed according to the contractual terms of a loan, impairment of that loan is indicated. If a loan is considered to be impaired, the Company will establish an allowance for loan losses, through a valuation provision in earnings that reduces carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. For non-impaired loans with no specific allowance the Company determines an allowance for loan losses in accordance with ASC 450-20, Loss Contingencies (“ASC 450-20”), which represents management’s best estimate of incurred losses inherent in the portfolio at the balance sheet date, excluding impaired loans and loans carried at fair value. Management considers quantitative factors likely to cause estimated credit losses, including default rate and loss severity rates. The Company also evaluates qualitative factors such as macroeconomic conditions, evaluations of underlying collateral, trends in delinquencies and non-performing assets. Increases to (or reversals of) the allowance for loan loss are included in “Loan loss (provision)” on the accompanying Consolidated Statements of Operations.

 

Significant judgment is required in determining impairment and in estimating the resulting loss allowance, and actual losses, if any, could materially differ from those estimates.

 

The Company performs a quarterly review of the portfolio. In conjunction with this review, the Company assesses the risk factors of each loan, including, without limitation, loan-to-value ratio, debt yield, property type, geographic and local market dynamics, physical condition, collateral, cash-flow volatility, leasing and tenant profile, loan structure, exit plan and project sponsorship. Based on a 5-point scale, our loans are rated “1” through “5,” from least risk to greatest risk, respectively, which ratings are defined as follows:

 

1 – Outperform – Materially exceeds performance metrics (for example, technical milestones, occupancy, rents and net operating income) included in original or current credit underwriting and business plan;

 

2 – Exceeds Expectations – Collateral performance exceeds substantially all performance metrics included in original or current credit underwriting and business plan;

 

3 – Satisfactory – Collateral performance meets, or is on track to meet, underwriting; business plan is met or can reasonably be achieved;

 

4 – Underperformance – Collateral performance falls short of underwriting, material differences exist from business plan, or both; technical milestones have been missed; defaults may exist or may soon occur absent material improvement; and

 

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5 – Risk of Impairment/Default – Collateral performance is significantly worse than underwriting; major variance from business plan; loan covenants or technical milestones have been breached; timely exit from loan via sale or refinancing is questionable.

 

The Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, as well as the financial and operating capability of the borrower. Specifically, the collateral’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the collateral’s liquidation value. The Company also evaluates the financial condition of any loan guarantors, as well as any changes in the borrower’s competency in managing and operating the collateral. In addition, the Company considers the overall economic environment, real estate or industry sector and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.

 

The Company considers loans to be past-due when a monthly payment is due and unpaid for 60 days or more. Loans will be placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when they become 120 days or more past-due unless the loan is both well secured and in the process of collection. Accrual of interest on individual loans is discontinued when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Our policy is to cease accruing interest when a loan’s delinquency exceeds 120 days. All interest accrued but not collected for loans that are placed on nonaccrual status or subsequently charged-off are reversed against interest income. Income is subsequently recognized on the cash basis until, in management’s judgment, the borrower’s ability to make periodic principal and interest payments returns and future payments are reasonably assured, in which case the loan is returned to accrual status.

 

For individual loans, a troubled debt restructuring is a formal restructuring of a loan where, for economic or legal reasons related to the borrower’s financial difficulties, a concession that would not otherwise be considered is granted to the borrower. The concession may be granted in various forms, including providing a below-market interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date or a combination of these. An individual loan that has had a troubled debt restructuring is considered to be impaired and is subject to the relevant accounting for impaired loans. As of, and for the six months ended June 30, 2022, the Company had no loan modifications, and, thus no troubled debt restructurings.

 

A loan is written off when it is no longer realizable and/or it is legally discharged.

 

The Company will evaluate acquired loans and debt securities for which it is probable at acquisition that all contractually required payments will not be collected in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. During the six months ended June 30, 2022, there were no loans acquired with deteriorated credit quality.

 

Fair Value

 

GAAP requires the categorization of the fair value of financial instruments into three broad levels that form a hierarchy based on the transparency of inputs to the valuation.

 

Level 1 – Inputs are adjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 – Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar instruments in active markets, and inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 – Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, related market activity for the asset or liability.

 

The Company follows this hierarchy for our financial instruments. Classifications will be based on the lowest level of input that is significant to the fair value measurement. The Company reviews the valuation of Level 3 financial instruments as part of our quarterly process.

 

Valuation of Consolidated VIEs

 

The Company reports the financial assets and liabilities of each consolidated CMBS trust at fair value using the measurement alternative included in Accounting Standards Update (“ASU”) No. 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”). Pursuant to ASU 2014-13, both the financial assets and financial liabilities of the consolidated CMBS trusts are measured using the fair value of the financial liabilities (which are considered more observable than the fair value of the financial assets) and the equity of the CMBS trusts beneficially owned by the Company. As a result, the CMBS issued by the consolidated trusts, but not beneficially owned by us, are presented as financial liabilities in our consolidated financial statements, measured at their estimated fair value; the Company measured the financial assets as the total estimated fair value of the CMBS issued by the consolidated trust, regardless of whether such CMBS represent interests beneficially owned by the Company. Under the measurement alternative prescribed by ASU 2014-13, “Net income (loss)” reflects the economic interests in the consolidated CMBS beneficially owned by the Company, presented as “Change in net assets related to consolidated CMBS variable interest entities” in the Consolidated Statements of Operations, which includes applicable (1) changes in the fair value of CMBS beneficially owned by the Company, (2) interest income, interest expense and servicing fees earned from the CMBS trusts and (3) other residual returns or losses of the CMBS trusts, if any.

 

Valuation Methodologies

 

CMBS Trusts - The financial liabilities and equity of the consolidated CMBS trusts were valued using broker quotes. Broker quotes represent the price that an investment could be sold for in a market transaction and represent fair market value. Loans and bonds with quotes that are based on actual trades with a sufficient level of activity on or near the valuation date are classified as Level 2 assets. Loans and bonds that are priced using quotes derived from implied values, bid/ask prices for trades that were never consummated, or a limited amount of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

 

CMBS Structured Pass-Through Certificates, MSCR Notes and SFR Pass-Through Certificates - CMBS structured pass-through certificates (“CMBS I/O Strips”), MSCR Notes and SFR pass-through certificates are categorized as Level 2 assets in the fair value hierarchy. CMBS I/O Strips, MSCR Notes and SFR pass-through certificates are valued using broker quotes. Broker quotes represent the price that an investment could be sold for in a market transaction and represent fair market value. Loans and bonds with quotes that are based on actual trades with a sufficient level of activity on or near the valuation date are classified as Level 2 assets.

 

11

 

SFR Loans, Preferred Equity Investments, Mezzanine Loans and Bridge Loans - SFR Loans, preferred equity, mezzanine loans and bridge loan investments are categorized as Level 3 assets in the fair value hierarchy. SFR Loans, preferred equity, mezzanine loans and bridge loan investments are valued using a discounted cash flow model using discount rates derived from observable market data applied to the internal rate of return implied by the expected contractual cash flows. The valuation is done for disclosure purposes only as these investments are not carried at fair value on the Consolidated Balance Sheets.

 

Common Stock Investments - The common stock investment in NexPoint Storage Partners, Inc. (“NSP”) is categorized as a Level 3 asset in the fair value hierarchy. Despite our ability to exercise significant influence, the Company chose to value the NSP investment using the fair value option in accordance with ASC 825-10. The common stock investment in a private ground lease REIT (“Private REIT”) is categorized as a Level 2 asset in the fair value hierarchy. See Note 5 for additional disclosures regarding the fair value of these investments.

 

Repurchase Agreements - The repurchase agreements are categorized as Level 3 liabilities in the fair value hierarchy as such liabilities represent borrowings on collateral with terms specific to each borrower. Given the short to moderate term of the floating-rate facilities, the Company expects the fair value of repurchase agreements to approximate their outstanding principal balances.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis - Certain assets not measured at fair value on an ongoing basis but that are subject to fair-value adjustments only in certain circumstances, such as when there is evidence of impairment, will be measured at fair value on a nonrecurring basis. For first mortgage loans, mezzanine loans and preferred equity investments, the Company applies the amortized cost method of accounting.

 

Overall, our determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are our best estimates after consideration of a variety of internal and external factors. When an independent valuation firm expresses an opinion on the fair value of a financial instrument in the form of a range, the Company selects a value within the range provided by the independent valuation firm, generally the midpoint, to assess the reasonableness of our estimated fair value for that financial instrument.

 

Income Taxes

 

The Company has elected to be taxed as a REIT and expects to continue to qualify as a REIT. As a result of the Company’s REIT qualification, the Company does not expect to pay U.S. federal corporate level taxes. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its stockholders. If the Company fails to meet these requirements, it could be subject to federal income tax on all of the Company’s taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to stockholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless the Company is entitled to relief under specific statutory provisions. Taxable income from certain non-REIT activities is managed through a taxable REIT subsidiary (“TRS”), which is subject to U.S. federal and applicable state and local corporate income taxes. As of June 30, 2022, the Company believes it is in compliance with all applicable REIT requirements and had no significant taxes associated with its TRS.

 

The Company evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Our management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. There are no examinations in progress, and none are expected at this time.

 

The Company recognizes its tax positions and evaluates them using a two-step process. First, the Company determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement. The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of June 30, 2022.

 

Recent Accounting Pronouncements

 

Section 107 of the Jumpstart Our Business Startups Act (“JOBS Act”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. The Company  may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.

 

In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses on Financial Instruments (“ASU 2016-13”), which establishes credit losses on certain types of financial instruments. The new approach changes the impairment model for most financial assets and will require the use of an “expected credit loss” model for financial instruments measured at amortized cost and certain other instruments. This model applies to trade and other receivables, loans, debt securities, net investments in leases and off-balance sheet credit exposures (such as loan commitments, standby letters of credit and financial guarantees not accounted for as insurance) and requires entities to estimate the lifetime expected credit loss on such instruments and record an allowance that represents the portion of the amortized cost basis that the entity does not expect to collect.

 

This allowance is deducted from the financial asset’s amortized cost basis to present the net amount expected to be collected. The new expected credit loss model will also apply to purchased financial assets with credit deterioration, superseding current accounting guidance for such assets. The amended guidance also amends the impairment model for available-for-sale debt securities, requiring entities to determine whether all or a portion of the unrealized loss on such securities is a credit loss, and also eliminating the option for management to consider the length of time a security has been in an unrealized loss position as a factor in concluding whether or not a credit loss exists. The amended model states that an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra account to the amortized cost basis, instead of a direct reduction of the amortized cost basis of the investment, as under current guidance. As a result, entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings as opposed to in interest income over time. There are also additional disclosure requirements included in this guidance. The amended guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. However, certain provisions of the guidance are only required to be applied on a prospective basis. That methodology replaces the probable, incurred loss model for those assets. The new standard is effective for the Company for annual and interim periods beginning after December 15, 2022. While the Company is currently evaluating the impact ASU 2016-13 will have on the Company’s consolidated financial statements, the ultimate impact will depend on the portfolio and facts and circumstances near the date of adoption.

 

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In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial InstrumentsCredit Losses, which updated the effective dates of implementation to align the implementation date for annual and interim financial statements as well as clarify the scope of the guidance in ASU 2016-13. This standard’s effective date is the same as ASU 2016-13.

 

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326. Financial InstrumentsCredit Losses, which is intended to clarify the guidance introduced by ASU 2016-13. This standard’s effective date is the same as ASU 2016-13.

 

In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief for Topic 326. Financial InstrumentsCredit Losses, which provides for an option to irrevocably elect the fair-value option for certain financial assets previously measured at amortized cost basis. Other than the Company’s investment in CMBS, the Company does not currently expect to elect the fair-value option for assets expected to be held at amortized cost. This standard’s effective date is the same as ASU 2016-13.

 

In March 2020, the FASB issued AU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the U.S. Dollar London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance is effective upon issuance and generally may be elected over time through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions through  June 30, 2022 but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.

 

3. Loans Held for Investment, Net

 

The Company’s investments in mortgage loans, mezzanine loans, preferred equity and convertible notes are accounted for as loans held for investment. The mortgage loans are presented as Mortgage loans, held-for-investment, net and the mezzanine loans, preferred equity and convertible notes are presented as Loans, held-for-investment, net on the Consolidated Balance Sheets. The following tables summarize our loans held-for-investment as of June 30, 2022 and December 31, 2021, respectively (dollars in thousands):

 

                           

Weighted Average

 

Loan Type

 

Outstanding Face Amount

   

Carrying Value (1)

   

Loan Count

   

Fixed Rate (2)

   

Coupon (3)

   

Life (years) (4)

 

June 30, 2022

                                               

Mortgage loans, held-for-investment

  $ 693,834     $ 736,007       16       100.00 %     4.81 %     5.86  

Mezzanine loans, held-for-investment

    155,103       157,411       23       67.95 %     9.53 %     5.96  

Preferred equity, held-for-investment

    101,330       101,166       7       92.10 %     10.46 %     6.45  
    $ 950,267     $ 994,584       46       93.93 %     6.18 %     5.94  

 

(1)

Carrying value includes the outstanding face amount plus unamortized purchase premiums/discounts and any allowance for loan losses.

(2)

The weighted-average of loans paying a fixed rate is weighted on current principal balance.

(3)

The weighted-average coupon is weighted on outstanding face amount.

(4)

The weighted-average life is weighted on outstanding face amount and assumes no prepayments. The maturity date for preferred equity investments represents the maturity date of the senior mortgage, as the preferred equity investments require repayment upon the sale or refinancing of the asset.

 

                           

Weighted Average

 

Loan Type

 

Outstanding Face Amount

   

Carrying Value (1)

   

Loan Count

   

Fixed Rate (2)

   

Coupon (3)

   

Life (years) (4)

 

December 31, 2021

                                               

Mortgage loans, held-for-investment

  $ 795,223     $ 847,364       21       100.00 %     4.85 %     6.45  

Mezzanine loans, held-for-investment

    152,144       154,516       23       69.28 %     8.03 %     6.50  

Preferred equity, held-for-investment

    66,697       66,624       6       100.00 %     10.52 %     3.84  

Convertible note, held-for-investment

    20,478       20,377       1       100.00 %     9.00 %     1.99  
    $ 1,034,542     $ 1,088,881       51       95.48 %     5.77 %     6.20  

 

(1)

Carrying value includes the outstanding face amount plus unamortized purchase premiums/discounts and any allowance for loan losses.

(2)

The weighted-average of loans paying a fixed rate is weighted on current principal balance.

(3)

The weighted-average coupon is weighted on current principal balance.

(4)

The weighted-average life is weighted on current principal balance and assumes no prepayments. The maturity date for preferred equity investments represents the maturity date of the senior mortgage, as the preferred equity investments require repayment upon the sale or refinancing of the asset.

 

For the six months ended June 30, 2022 and 2021, the loan and preferred equity portfolio activity was as follows (in thousands):

 

   

For the Six Months Ended June 30,

 
   

2022

   

2021

 

Balance at December 31,

  $ 1,088,881     $ 1,045,891  

Originations

    112,199       25,926  

Proceeds from principal repayments

    (172,121 )     (20,825 )

Conversion of convertible bonds to common stock

    (25,000 )      

PIK distribution reinvested in Preferred Units

    346        

Amortization of loan premium, net (1)

    (9,657 )     (3,571 )

Loan loss provision

    (64 )     (107 )

Realized losses

          (885 )

Balance at June 30,

  $ 994,584     $ 1,046,429  

 

(1)

Includes net amortization of loan purchase premiums.

 

13

 

As of June 30, 2022, and December 31, 2021, there were $44.9 million and $55.0 million of unamortized premiums on loans, held-for-investment, net, respectively, on the Consolidated Balance Sheets.

 

As discussed in Note 2, the Company evaluates loans classified as held-for-investment on a loan-by-loan basis every quarter. In conjunction with the review of the portfolio, the Company assesses the risk factors of each loan and assign a risk rating based on a variety of factors. Loans are rated “1” through “5,” from least risk to greatest risk, respectively. See Note 2 for a more detailed discussion of the risk factors and ratings. The following tables allocate the principal balance and net book value of the loan portfolio based on our internal risk ratings (dollars in thousands):

     

June 30, 2022

 
     

Number of

   

Carrying

   

% of Loan

 

Risk Rating

   

Loans

   

Value

   

Portfolio

 
1           $        
2                    
3       46       994,584       100.00 %
4                    
5                    
        46     $ 994,584       100.00 %

 

     

December 31, 2021

 
     

Number of

   

Carrying

   

% of Loan

 

Risk Rating

   

Loans

   

Value

   

Portfolio

 
1           $        
2                    
3       51       1,088,881       100.00 %
4                    
5                    
        51     $ 1,088,881       100.00 %

 

As of June 30, 2022, all 46 loans held-for-investment in our portfolio were rated “3,” or “Satisfactory” based on the factors assessed by the Company and discussed in Note 2.

 

The following tables present the geographies and property types of collateral underlying the Company’s loans held-for-investment as a percentage of the loans’ face amounts. 

 

Geography

 

June 30, 2022

   

December 31, 2021

 

Georgia

    32.41 %     38.93 %

Florida

    17.75 %     16.90 %

Texas

    9.11 %     7.74 %

Nevada

    6.49 %     *  

Maryland

    6.08 %     5.66 %

Minnesota

    5.21 %     4.86 %

California

    4.55 %     2.53 %

Alabama

    3.59 %     3.35 %

North Carolina

    2.43 %     2.23 %

Arkansas

    1.39 %     *  

Missouri

    1.27 %     1.19 %

New Jersey

    *       2.83 %

Connecticut

    0.00 %     2.87 %

Other (17 and 19 states each at <1%)

    9.72 %     10.91 %
      100.00 %     100.00 %

*Included in “Other.”

 

Collateral Property Type

 

June 30, 2022

   

December 31, 2021

 

Single Family Rental

    71.27 %     76.15 %

Multifamily

    25.16 %     20.32 %

Life Science

    2.75 %     3.53 %

Self-Storage

    0.82 %     0.00 %
      100.00 %     100.00 %

 

 

4. CMBS Trusts

 

As of June 30, 2022, the Company consolidated all of the CMBS Entities that it determined are VIEs and for which the Company is the primary beneficiary. The Company elected the fair-value measurement alternative in accordance with ASU 2014-13 for each of the trusts and carries the fair values of the trust’s assets and liabilities at fair value in its Consolidated Balance Sheets, recognizes changes in the trust’s net assets, including changes in fair-value adjustments and net interest earned, in its Consolidated Statements of Operations and records cash interest received from the trusts and cash interest paid to bondholders of the CMBS not beneficially owned by the Company as financing cash flows.

 

The following table presents the Company’s recognized Trust’s Assets and Liabilities (in thousands):

 

Trust's Assets

 

June 30, 2022

   

December 31, 2021

 

Mortgage loans held in variable interest entities, at fair value

  $ 6,548,544     $ 7,192,547  

Accrued interest receivable

    2,109       2,212  
                 

Trust's Liabilities

               

Bonds payable held in variable interest entities, at fair value

    (6,095,570 )     (6,726,272 )

Accrued interest payable

    (1,482 )     (1,500 )

 

14

 

The following table presents “Change in net assets related to consolidated CMBS variable interest entities” (in thousands):

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Net interest earned

  $ 8,215     $ 6,424     $ 16,168     $ 12,124  

Unrealized gain (loss)

    (3,664 )     1,550       (8,201 )     16,561  

Change in net assets related to consolidated CMBS variable interest entities

  $ 4,551     $ 7,974     $ 7,967     $ 28,685  

 

The following tables present the geographies and property types of collateral underlying the CMBS trusts consolidated by the Company as a percentage of the collateral unpaid principal balance:

 

Geography

 

June 30, 2022

   

December 31, 2021

 

Texas

    14.71 %     16.88 %

Florida

    14.57 %     14.77 %

California

    9.79 %     8.50 %

Arizona

    8.11 %     10.37 %

Washington

    6.18 %     6.19 %

New Jersey

    5.01 %     4.65 %

Georgia

    4.79 %     4.97 %

Colorado

    4.54 %     4.08 %

Nevada

    3.62 %     3.51 %

Connecticut

    3.21 %     3.02 %

North Carolina

    2.94 %     3.12 %

New York

    2.79 %     2.45 %

Ohio

    2.05 %     1.72 %

Indiana

    1.78 %     1.68 %

Virginia

    1.76 %     1.70 %

Maryland

    1.65 %     1.55 %

Illinois

    1.44 %     *  

Missouri

    1.35 %     1.26 %

South Carolina

    1.02 %     1.56 %

Other (22 and 20 states each at <1%)

    8.69 %     8.02 %
      100.00 %     100.00 %

*Included in “Other.”

 

Collateral Property Type

 

June 30, 2022

   

December 31, 2021

 

Multifamily

    98.38 %     98.42 %

Manufactured Housing

    1.62 %     1.58 %
      100.00 %     100.00 %

 

15

 
 

5. Common Stock Investments

 

The Company owns approximately 25.8% of the total outstanding shares of NSP and thus can exercise significant influence over NSP and is accounted for under the equity method. The Company elected the fair-value option in accordance with ASC 825-10-10 for NSP.

 

The investment in NSP is a Level 3 asset in the fair value hierarchy and was initially measured using the entry price of the asset. The Company's valuation policy for common stock is to use readily available market prices on the relevant valuation date to the extent they are available. On a quarterly basis beginning March 31, 2021, the Company determines the value using widely accepted valuation techniques, including the discounted cash flow methodology whereby observable market terminal capitalization rates and discount rates are applied to the consolidated NSP cash flows, a top-down approach. In addition, as a secondary check for reasonableness, a bottoms-up approach was also used by valuing the wholly-owned self-storage assets in aggregate and development loans individually. In this bottoms-up approach, the discounted cash flow methodology is also applied to the self-storage assets owned by NSP. Additionally, the income approach is used to determine the fair value of the development loans owned by NSP whereby contractual cash flows are discounted at observable market discount rates. The valuation relies primarily on the top-down approach, but uses the bottoms-up approach to ensure reasonable accuracy.

 

The investment in Private REIT is a Level 2 asset in the fair value hierarchy and was initially measured using the convertible notes conversion share price of $17.50. On April 14, 2022, the two convertible notes converted into 1,394,213 shares or $25.0 million of common stock in Private REIT, the parent company of the borrower under the convertible notes. The Company values this investment based on the Private REIT's current private offering price of $20.00 per share.      

 

The following table presents the common stock investments as of June 30, 2022 and December 31, 2021, respectively (in thousands, except share amounts):

 

   

Investment

     

Shares

   

Fair Value

 

Investment

 

Date

 

Property Type

 

June 30, 2022

   

December 31, 2021

   

June 30, 2022

   

December 31, 2021

 

Common Stock

                                       

NexPoint Storage Partners

 

11/6/2020

 

Self-storage

    41,963       41,963     $ 58,923     $ 58,460  

Private REIT

 

4/14/2022

 

Ground lease

    1,394,213             27,885        

 

 

The following table presents “Change in unrealized gain on common stock investment” (in thousands):

 

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Change in unrealized gain on NexPoint Storage Partners

  $ 134     $ 2,499     $ 463     $ 3,333  

Change in unrealized gain on Private REIT

    2,885             2,885        

Change in unrealized gain on common stock investments

  $ 3,019     $ 2,499     $ 3,348     $ 3,333  

 

 

6. CMBS Structured Pass-Through Certificates, MSCR Notes and SFR Pass-Through Certificates

 

As of June 30, 2022, the Company held thirteen CMBS I/O Strips, two MSCR Notes and two SFR Pass-Through Certificates at fair value. The CMBS I/O Strips consist of interest only tranches of Freddie Mac structured pass-through certificates with underlying portfolios of fixed-rate mortgage loans secured primarily by stabilized multifamily properties. The MSCR Notes transfer the credit risk on a pool of loans referencing Freddie Mac Multifamily Participation Certificates or credit enhancement on affordable multifamily-backed bonds issued by state and local housing finance agencies. SFR Pass-Through Certificates receive principal and interest on floating-rate mortgage loans secured by single family rental properties. See Note 2 and Note 10 for additional disclosures regarding valuation methodologies for the CMBS I/O Strips, MSCR Notes and SFR Pass-Through Certificates.

 

The following table presents the CMBS I/O Strips, MSCR Notes and SFR Pass-Through Certificates as of  June 30, 2022 (in thousands):

 

   

Investment

                           

Investment

 

Date

 

Carrying Value

 

Property Type

 

Interest Rate

   

Current Yield (1)

 

Maturity Date

CMBS I/O Strips

                               

CMBS I/O Strip

 

5/18/2020

  $ 2,016  

Multifamily

    2.09 %     15.01 %

9/25/2046

CMBS I/O Strip

 

8/6/2020

    7,407  

Multifamily

    0.10 %     15.39 %

6/25/2030

CMBS I/O Strip

 

8/6/2020

    20,741  

Multifamily

    3.09 %     15.71 %

6/25/2030

CMBS I/O Strip

 

4/28/2021

(2)   6,318  

Multifamily

    1.71 %     15.73 %

1/25/2030

CMBS I/O Strip

 

5/27/2021

    4,113  

Multifamily

    3.50 %     15.38 %

5/25/2030

CMBS I/O Strip

 

6/7/2021

    489  

Multifamily

    2.39 %     18.23 %

11/25/2028

CMBS I/O Strip

 

6/11/2021

(3)   7,453  

Multifamily

    1.36 %     14.97 %

5/25/2029

CMBS I/O Strip

 

6/21/2021

    1,553  

Multifamily

    1.30 %     18.47 %

5/25/2030

CMBS I/O Strip

 

8/10/2021

    2,766  

Multifamily

    1.96 %     15.55 %

4/25/2030

CMBS I/O Strip

 

8/11/2021

    1,475  

Multifamily

    3.20 %     13.55 %

7/25/2031

CMBS I/O Strip

 

8/24/2021

    277  

Multifamily

    2.70 %     14.22 %

1/25/2031

CMBS I/O Strip

 

9/1/2021

    4,148  

Multifamily

    2.04 %     15.12 %

6/25/2030

CMBS I/O Strip

 

9/11/2021

    4,247  

Multifamily

    3.05 %     13.54 %

9/25/2031

Total

      $ 63,003         2.22 %     15.38 %  
                                 

MSCR Notes

                               

MSCR Notes

 

5/25/2022

    3,985  

Multifamily

    10.03 %     10.03 %

5/25/2052

MSCR Notes

 

5/25/2022

    4,824  

Multifamily

    7.03 %     7.03 %

5/25/2052

Total

      $ 8,809         8.39 %     8.39 %  
                                 

SFR Pass-Through Certificates

                               

SFR Pass-Through Certificate

 

6/1/2022

    9,986  

Single-Family

    4.08 %     4.28 %

4/17/2026

SFR Pass-Through Certificate

 

6/1/2022

    9,480  

Single-Family

    4.87 %     5.12 %

11/19/2025

Total

      $ 19,466         4.46 %     4.69 %  

 

(1)

Current yield is the annualized income earned divided by the cost basis of the investment. 

(2) The Company, through the Subsidiary OPs, purchased approximately $50.0 million and $15.0 million aggregate notional amount of the X1 interest-only tranche of the FHMS K-107 CMBS I/O Strip on April 28, 2021 and May 4, 2021, respectively. 

(3)

The Company, through the Subsidiary OPs, purchased approximately $80.0 million, $35.0 million, $40.0 million and $50.0 million aggregate notional amount of the X1 interest-only tranche of the FRESB 2019-SB64 CMBS I/O Strip on June 11, 2021, September 29, 2021, February 3, 2022 and March 18, 2022, respectively.

 

The following table presents the CMBS I/O Strips as of December 31, 2021 (in thousands):

 

   

Investment

                           

Investment

 

Date

 

Carrying Value

 

Property Type

 

Interest Rate

   

Current Yield (1)

 

Maturity Date

CMBS I/O Strips

                               

CMBS I/O Strip

 

5/18/2020

  $ 2,356  

Multifamily

    2.02 %     14.47 %

9/25/2046

CMBS I/O Strip

 

8/6/2020

    8,383  

Multifamily

    0.10 %     14.67 %

6/25/2030

CMBS I/O Strip

 

8/6/2020

    23,188  

Multifamily

    2.98 %     14.48 %

6/25/2030

CMBS I/O Strip

 

4/28/2021

(2)   7,274  

Multifamily

    1.59 %     13.88 %

1/25/2030

CMBS I/O Strip

 

5/27/2021

    4,781  

Multifamily

    3.38 %     14.16 %

5/25/2030

CMBS I/O Strip

 

6/7/2021

    589  

Multifamily

    2.31 %     16.56 %

11/25/2028

CMBS I/O Strip

 

6/11/2021

(3)   6,424  

Multifamily

    1.26 %     13.57 %

5/25/2029

CMBS I/O Strip

 

6/21/2021

    1,850  

Multifamily

    1.20 %     17.02 %

5/25/2030

CMBS I/O Strip

 

8/10/2021

    3,246  

Multifamily

    1.89 %     14.30 %

4/25/2030

CMBS I/O Strip

 

8/11/2021

    1,697  

Multifamily

    3.10 %     12.55 %

7/25/2031

CMBS I/O Strip

 

8/24/2021

    317  

Multifamily

    2.61 %     13.14 %

1/25/2031

CMBS I/O Strip

 

9/1/2021

    4,827  

Multifamily

    1.92 %     13.53 %

6/25/2030

CMBS I/O Strip

 

9/11/2021

    4,884  

Multifamily

    2.95 %     12.55 %

9/25/2031

Total

      $ 69,816         2.15 %     14.16 %  

 

(1)

Current yield is the annualized income earned divided by the cost basis of the investment. 

(2) The Company, through the Subsidiary OPs, purchased approximately $50.0 million and $15.0 million aggregate notional amount of the X1 interest-only tranche of the FHMS K-107 CMBS I/O Strip on April 28, 2021, and May 4, 2021, respectively. 

(3)

The Company, through the Subsidiary OPs, purchased approximately $80.0 million and $35.0 million aggregate notional amount of the X1 interest-only tranche of the FRESB 2019-SB64 CMBS I/O Strip on June 11, 2021, and September 29, 2021, respectively.

 

The following table presents activity related to the Company’s CMBS I/O Strips, MSCR Notes and SFR Pass-Through Certificates (in thousands):

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Net interest earned

  $ 1,409     $ 2,575     $ 2,574     $ 3,186  

Change in unrealized gain on CMBS structured pass-through certificates

    (3,311 )     (192 )     (7,651 )     439  

Change in unrealized (loss) on MSCR notes

    (191 )           (191 )      

Change in unrealized (loss) on SFR pass-through certificates

    (39 )           (39 )      

Total

  $ (2,132 )   $ 2,383     $ (5,307 )   $ 3,625  

 

16

 

 

7. Bridge Loan

 

On March 31, 2022, the Company, through one of the Subsidiary OPs, originated a bridge loan for $13.5 million. The bridge loan is secured by a development property in Las Vegas, Nevada, and was used by the borrower to finance the acquisition of the property prior to obtaining construction financing. The loan bears interest at a rate of 1.50% plus the Wall Street Journal Prime Rate (“WSJ Prime”) and matures on October 1, 2022.

 

8. Real Estate Investment, net

 

On December 31, 2021, the Company acquired a 204-unit multifamily property in Charlotte, North Carolina. As of  June 30, 2022, the property was 95.1% occupied, with effective rent per occupied unit of $1,585 per month (unaudited).

 

As of  June 30, 2022, the major components of the Company's investments in multifamily properties were as follows (in thousands): 

 

Real Estate Investment, Net

 

Land

   

Buildings and Improvements

   

Intangible Lease Assets

   

Furniture, Fixtures and Equipment

   

Totals

 

Hudson Montford

  $ 10,996     $ 49,815     $ 954     $ 552     $ 62,317  

Accumulated depreciation and amortization

          (848 )     (954 )     (87 )     (1,889 )

Total Real Estate Investment, Net

  $ 10,996     $ 48,967     $     $ 465     $ 60,428  

 

As of  December 31, 2021, the major components of the Company's investments in multifamily properties were as follows (in thousands): 

 

Real Estate Investment, Net

 

Land

   

Buildings and Improvements