NexPoint Real Estate Finance, Inc. (NREF) is a publicly traded real estate investment trust (REIT) focused on originating, structuring, and investing in a diverse array of commercial real estate assets. With a strong track record spanning over a decade, NREF has consistently delivered stable and attractive returns for its shareholders, navigating the complexities of the real estate market with prudent strategies and disciplined execution.
Company History and Formation
The company's history can be traced back to its incorporation in Maryland on June 7, 2019, as a commercial mortgage REIT. NREF commenced operations on February 11, 2020, upon closing its initial public offering of shares of common stock. Prior to the IPO, the company engaged in a series of transactions to acquire an initial portfolio consisting of senior pooled mortgage loans backed by single-family rental properties, the junior-most bonds of multifamily commercial mortgage-backed securities (CMBS), mezzanine loan and preferred equity investments in real estate companies and properties in the multifamily, single-family rental and self-storage asset classes. This initial portfolio was acquired from affiliates of NexPoint Advisors, L.P., the company's sponsor, pursuant to a contribution agreement.
In July 2019, before the Formation Transaction, two of NREF's subsidiaries entered into a loan and security agreement with Freddie Mac, borrowing approximately $788.8 million to acquire the senior pooled mortgage loans backed by single-family rental properties. This credit facility was assumed by the company as part of the Formation Transaction.
On March 15, 2022, NREF established an at-the-market (ATM) offering program through equity distribution agreements, allowing the company to issue and sell up to $100 million in shares of common stock and Series A preferred stock. As of September 30, 2024, the company had sold 531,730 shares of common stock for total gross proceeds of $12.6 million under this program.
It's worth noting that in October 2021, a lawsuit was filed by a litigation subtrust formed in connection with the Highland Capital Management bankruptcy against various persons and entities, including NREF's sponsor and James Dondero. Additionally, in February 2023, another lawsuit was filed by UBS Securities LLC and its affiliate against Mr. Dondero and several other persons and entities. NREF has been advised that the defendants named in each of the lawsuits intend to vigorously defend against the claims, and the company does not expect these lawsuits to have a material effect on its business, results of operations, or financial condition.
Investment Strategy and Portfolio Diversification
Today, NREF's investment strategy revolves around a well-diversified and carefully curated portfolio, encompassing a range of asset types, including first-lien mortgage loans, mezzanine loans, preferred equity, convertible notes, multifamily properties, and common equity investments. This diversification has been a key driver of the company's resilience, allowing it to capitalize on opportunities across different real estate sectors and mitigate the impact of market fluctuations.
NREF operates across several key product segments. As of September 30, 2024, the company had $693.83 million in mortgage loans, mezzanine loans, preferred equity, and promissory notes held for investment. This portfolio consists of 50 loans with a weighted average fixed-rate coupon of 11.42% and a weighted average life of 2.38 years. The mortgage loan portfolio is diversified across property types, with exposures to multifamily (35.29%), life science (33.17%), and single-family rental (27.51%) assets, primarily located in the top 50 metropolitan statistical areas.
The company has also consolidated nine CMBS trusts that it determined were variable interest entities (VIEs) and for which it is the primary beneficiary. These CMBS trusts held $4.64 billion in mortgage loans as of September 30, 2024, which were funded by $4.32 billion in bonds payable. The underlying collateral for these CMBS trusts is predominantly stabilized multifamily properties, with 99.60% of the portfolio in multifamily and the remaining 0.40% in manufactured housing.
In terms of equity investments, NREF owns approximately 25.70% of NexPoint Storage Partners, Inc. (NSP), a self-storage REIT, valued at $35.68 million as of September 30, 2024. The company also has a 6.40% stake in a private ground lease REIT valued at $27.49 million. Additionally, NREF owns $18.59 million in preferred stock of IQHQ, Inc., a privately held life sciences real estate investment trust.
The company's equity method investments include ownership interests ranging from 12.30% to 98.00% in several multifamily investment ventures, including Resmark Forney Gateway Holdings, LLC, Resmark The Brook Holdings, LLC, SK Apartments, and Capital Acquisitions Partners, LLC, with a total carrying value of $6.89 million as of September 30, 2024.
NREF also directly owns two multifamily properties, Hudson Montford in Charlotte, North Carolina, and Alexander at the District in Atlanta, Georgia, with a combined net book value of $122.78 million as of September 30, 2024.
Financials and Performance
NREF's financial performance has been consistently strong, with the company reporting net income of $13.97 million and cash available for distribution of $31.56 million for the fiscal year ended December 31, 2023. The company's balance sheet remains robust, with a debt-to-equity ratio of 1.52 times as of September 30, 2024, providing ample financial flexibility to navigate the current market environment.
For the most recent quarter ended September 30, 2024, NREF reported revenue of $42,218,000 and net income of $19,393,000. The company's operating cash flow (OCF) and free cash flow (FCF) for the quarter both stood at $14,717,000.
Liquidity and Capital Management
One of the hallmarks of NREF's success has been its prudent approach to capital allocation and risk management. The company's underwriting process is meticulous, with a focus on partnering with reputable sponsors and targeting stabilized or lightly transitional properties. This disciplined approach has enabled NREF to maintain a high-quality portfolio, with a weighted average loan-to-value ratio of 60.2% and a weighted average debt service coverage ratio of 1.36 times as of September 30, 2024.
As of September 30, 2024, NREF had a cash position of $34.71 million, providing a solid liquidity foundation for its operations and future investments.
Geographic Diversification
NREF's geographic diversification is another key strength, with its investments spread across the Sunbelt markets, including Texas, Massachusetts, California, Florida, and Georgia, among others. This diversification helps the company mitigate regional market risks and capitalize on the favorable demographic and economic trends in these high-growth areas.
Market Position and Future Outlook
Despite the challenges posed by the evolving macroeconomic landscape, NREF remains well-positioned for continued growth and success. The company's management team has demonstrated its ability to navigate complex market conditions, leveraging its deep industry expertise and strong relationships to identify and execute on attractive investment opportunities.
Looking ahead, NREF has provided guidance for the fourth quarter of 2024, expecting to report earnings available for distribution of $0.79 per diluted share at the midpoint, with a range of $0.75 to $0.83. The company's cash available for distribution is expected to be $0.50 per diluted share at the midpoint, with a range of $0.45 to $0.55.
It's worth noting that NREF-PA reported earnings available for distribution of $0.75 per diluted share for the third quarter of 2024, compared to $0.43 per diluted share in the same period last year, indicating that they beat their past guidance. Cash available for distribution was $0.67 per diluted share in the third quarter, compared to $0.47 for the same period last year.
In conclusion, NexPoint Real Estate Finance, Inc. is a diversified REIT that has proven its resilience and adaptability in the face of market challenges. With a robust investment strategy, prudent risk management, and a seasoned management team, NREF is well-positioned to continue delivering stable and attractive returns for its shareholders in the years to come.