NexPoint Real Estate Finance, Inc. - Quarter Report: 2021 March (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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(Mark One)

 

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

 

For the quarterly period ended March 31, 2021

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

 

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NexPoint Real Estate Finance, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

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Maryland	84-2178264
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

 

2515 McKinney Avenue, Suite 1100, Dallas, Texas	75201
(Address of Principal Executive Offices)	(Zip Code)

 

(833) 697-6246

 

(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

 

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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 April 30, 2021, the registrant had 5,282,263 shares of its common stock, par value $0.01 per share, outstanding. 

 

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NEXPOINT REAL ESTATE FINANCE, INC.

Form 10-Q

Quarter Ended March 31, 2021

 

INDEX

 

		Page
Cautionary Statement Regarding Forward-Looking Statements		ii
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2021(Unaudited) and December 31, 2020	1
	Consolidated Unaudited Statements of Operations for the Three Months Ended March 31, 2021 and 2020	2
	Consolidated Unaudited Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020	3
	Consolidated Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020	4
	Notes to Consolidated Unaudited Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signatures		41

 

 

 

 

		March 31, 2021				December 31, 2020
		(Unaudited)
ASSETS
Cash and cash equivalents		$	14,917			$	30,241
Restricted cash			570				3,230
Loans, held-for-investment, net			153,637				127,777
Common stock, at fair value			45,460				44,626
Mortgage loans, held-for-investment, net			915,348				918,114
Accrued interest and dividends			5,646				5,078
Mortgage loans held in variable interest entities, at fair value			4,782,318				5,007,515
CMBS structured pass through certificates, at fair value (Note 6)			38,923				38,984
Accounts receivable and other assets			3,384				745
TOTAL ASSETS		$	5,960,203			$	6,176,310
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Secured financing agreements, net		$	839,687			$	840,453
Master repurchase agreements			162,168				161,465
Unsecured notes, net			35,025				34,960
Accounts payable and other accrued liabilities			3,807				1,779
Accrued interest payable			2,791				2,311
Bonds payable held in variable interest entities, at fair value			4,496,771				4,731,429
Total Liabilities			5,540,249				5,772,397
Redeemable noncontrolling interests in the OP			285,587				275,670
Stockholders' Equity:
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; 5,309,565 and 5,350,000 shares issued and 5,022,578 and 5,022,578 shares outstanding, respectively			50				50
Additional paid-in capital			137,845				138,043
Retained earnings			9,218				3,485
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 327,422 shares, respectively			(4,195	)			(4,784	)
Total Stockholders' Equity			134,367				128,243
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	5,960,203			$	6,176,310

 

 

		For the Three Months Ended March 31,
		2021				2020
Net interest income
Interest income		$	12,649			$	6,586
Interest expense			(6,497	)			(3,331	)
Total net interest income		$	6,152			$	3,255
Other income (loss)
Change in net assets related to consolidated CMBS variable interest entities			20,711				(25,159	)
Change in unrealized gain on CMBS structured pass through certificates			631				—
Change in unrealized gain on common stock			834				—
Loan loss provision			(124	)			(212	)
Dividend income, net			—				447
Realized losses			(65	)			—
Other income			303				—
Total other income (loss)		$	22,290			$	(24,924	)
Operating expenses
General and administrative expenses			1,518				348
Loan servicing fees			1,336				655
Management fees			518				196
Total operating expenses		$	3,372			$	1,199
Net income			25,070				(22,868	)
Preferred stock dividends			(874	)			—
Net (income) loss attributable to redeemable noncontrolling interests			(15,829	)			16,515
Net income (loss) attributable to common stockholders			8,367			$	(6,353	)
Weighted-average common shares outstanding - basic			5,023				5,223
Weighted-average common shares outstanding - diluted			19,199				5,223
Earnings (loss) per share - basic		$	1.67			$	(1.22	)
Earnings (loss) per share - diluted		$	1.26			$	(1.22	)
Dividends declared per common share		$	0.4750			$	0.2198

 

		Preferred Stock								Common Stock								Additional				Retained Earnings				Common Stock				Preferred Stock
		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				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			—				—				—				—				391				—				—				—				391
Cancellation of common stock held in treasury			—				—				—				—				(589	)			—				589				—				—
Net income attributable to preferred stockholders			—				—				—				—				—				874				—				—				874
Net income attributable to common stockholders			—				—				—				—				—				8,367				—				—				8,367
Preferred stock dividends declared ($0.5313 per share)			—				—				—				—				—				(874	)			—				—				(874	)
Common stock dividends declared ($0.4750 per share)			—				—				—				—				—				(2,634	)			—				—				(2,634	)
Balances, March 31, 2021			1,645,000			$	16				5,022,578			$	50			$	137,845			$	9,218			$	(4,195	)		$	(8,567	)		$	134,367

		Common Stock								Additional				Retained Earnings (Loss)				Common Stock
		Number of Shares				Par Value				Paid-in Capital				Less Dividends				Held in Treasury at Cost				Total
Balances, December 31, 2019			—			$	—			$	—			$	—			$	—			$	—
Issuance of common stock through public offering, net			5,350,000				54				91,894				—				—				91,948
Repurchase of common stock			(87,466	)			(1	)			—				—				(1,338	)			(1,339	)
Net loss attributable to common stockholders			—				—				—				(6,353	)			—				(6,353	)
Common stock dividends declared ($0.4750 per share)			—				—				—				(1,157	)			—				(1,157	)
Balances, March 31, 2020			5,262,534			$	53			$	91,894			$	(7,510	)		$	(1,338	)		$	83,099

 

		For the Three Months Ended March 31,
		2021				2020
Cash flows from operating activities
Net income (loss)		$	25,070			$	(22,868	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of premiums			2,516				1,060
Accretion of discounts			(1,668	)			—
Loan loss provision, net			124				212
Net change in unrealized (gain) loss on investments held at fair value			(16,476	)			26,901
Net realized losses			65				—
Vesting of stock-based compensation			391				—
Changes in operating assets and liabilities:
Accrued interest and dividends receivable			(568	)			(1,632	)
Accounts receivable and other assets			(2,639	)			(1,096	)
Accrued interest payable			480				932
Accounts payable, accrued expenses and other liabilities			1,781				1,636
Net cash provided by operating activities			9,076				5,145
Cash flows from investing activities
Proceeds from payments received on mortgage loans held in variable interest entities			96,451				30,481
Proceeds from payments received on mortgage loans held for investment			834				455
Originations of loans, held-for-investment, net			(25,876	)			—
Net cash provided by investing activities			71,409				30,936
Cash flows from financing activities
Principal repayments on borrowings under secured financing agreements			(766	)			(419	)
Distributions to bondholders of variable interest entities			(89,234	)			(28,200	)
Borrowings under master repurchase agreements			5,737				—
Principal repayments on borrowings under master repurchase agreements			(5,034	)			—
Bridge Facility payments			—				(95,000	)
Proceeds from the issuance of common stock through public offering, net of offering costs			—				91,948
Repurchase of common stock			—				(1,339	)
Dividends paid to common stockholders			(2,386	)			(1,157	)
Dividends paid to preferred stockholders			(874	)			—
Distributions to redeemable noncontrolling interests in the OP			(5,912	)			(2,019	)
Contributions from noncontrolling interests			—				302
Net cash used in financing activities			(98,469	)			(35,884	)
Net increase (decrease) in cash, cash equivalents and restricted cash			(17,984	)			197
Cash, cash equivalents and restricted cash, beginning of period			33,471				—
Cash, cash equivalents and restricted cash, end of period		$	15,487			$	197

Supplemental Disclosure of Cash Flow Information
Interest paid		$	7,289			$	3,054
Supplemental Disclosure of Noncash Activities (Note 2)
Contributions from noncontrolling interests, including consolidation of the associated mortgage loans held in variable interest entities			—				2,787,735
Other assets acquired from contributions from noncontrolling interests			—				3,616
Assumed debt on contributions from noncontrolling interests, including consolidation of the associated bonds payable held in variable interest entities			—				(2,539,724	)
Increase in dividends payable upon vesting of restricted stock units			248				—
Increase in dividends payable to preferred stockholders			874				—

 

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 intends to elect to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2020. The Company is focused on originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity and common stock, 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 March 31, 2021, the Company holds approximately 50.28% of the common limited partnership units in the OP (“OP Units”), and the OP owns approximately 27.78% of the common limited partnership units ("SubOP Units") of two of its subsidiary partnerships and 100% of the SubOP Units of one of its subsidiary partnerships (collectively, the "Subsidiary OPs") (see Note 11). 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, for a three-year 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 NexPoint Real Estate Advisors, L.P., which 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 and common stock, 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, hospitality and office sectors predominantly in the top 50 metropolitan statistical areas ("MSAs"). 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 U.S. (“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 three months ended March 31, 2021.

 

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 March 31, 2021 and December 31, 2020 and results of operations for the three months ended March 31, 2021 and 2020 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, 2020, and notes thereto in its Annual Report on Form 10-K filed with the SEC on February 25, 2021.

 

 

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.

 

As a result of the COVID-19 pandemic, the Company has received and may continue to receive forbearance requests and may experience difficulty making new investments or redeploying proceeds from repayments of our existing investments, meeting financial covenants in the Company's debt obligations or accessing debt and equity capital on attractive terms, or at all. In addition, reduced economic activity may cause certain borrowers underlying the Company's real estate related assets and senior loans to become delinquent or default on their loans, or seek to defer payment on, or refinance, their loans. The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of our business. From inception through March 31, 2021, there have been two forbearance requests approved in the Company's CMBS B-Piece portfolio, representing 0.9% of the Company's consolidated unpaid principal balance outstanding. Additionally, there were nine forbearance requests approved in the Company's SFR Loan book. However, as of March 31, 2021, these loans were no longer in forbearance. Despite these forbearance requests, the master servicers continued to make payments to the Company for the portion of our CMBS B-Piece and SFR Loans that requested forbearance, and were approved by the Federal Home Loan Mortgage Corporation ("Freddie Mac"), during the entire forbearance period. These agreed upon forbearance requests include both principal and interest payments for three months, with an option to the borrower to extend an additional three months, and require the borrower to repay Freddie Mac within twelve months of the end of the forbearance period. For additional information regarding the risks to the Company related to the COVID-19 pandemic, or any other future pandemic, see "Item 1A. Risk Factors" of our Annual Report on Form 10-K filed with the SEC on February 25, 2021.

 

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. 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. In addition, all of the Company’s debt is an obligation of the Subsidiary OPs.

 

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 issued by the trusts, which include the controlling class, and has the ability to remove and replace the special servicer.

 

On the Consolidated Balance Sheets as of March 31, 2021, the Company consolidated the five 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 acts as the general partner of the Subsidiary OPs which own investments through limited liability companies that are SPEs and as the sole member of the Mezz LLC, which owns investments directly. The Company is the majority limited partner of the OP, holds approximately 50.28% of the OP Units in the OP and has the ability to remove the general partner of the OP with or without cause, and as such, 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 Subsidiary OPs have 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.

 

 

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.

 

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.

 

Formation Transaction

 

The Company commenced operations on February 11, 2020 upon the closing of its IPO. Prior to the closing of the IPO, the Company engaged in the Formation Transaction through which it acquired the Initial Portfolio consisting of SFR Loans, 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 was acquired from the Contribution Group pursuant to a contribution agreement through which the Contribution Group contributed their interest in the Initial Portfolio to SPEs owned by the Subsidiary OPs , in exchange for SubOP Units. The assets and liabilities constituting the Initial Portfolio were contributed at fair value using a cutoff date of January 31, 2020. The mezzanine loan, preferred stock and preferred equity investments were valued using a discounted cash flow model using discount rates negotiated with the Contribution Group. A third-party valuation firm was utilized to value the SFR Loans using the income approach in accordance with ASC Topic 820. The income approach utilizes a discounted cash flow method to present value the expected future cash flows. The future cash flows were projected based on the terms of the loans including interest rates, current balances and servicing fees. The future cash flows depend substantially on various other assumptions such as prepayment rates, prepayment charges, default rates, expected loss given default (severity), and other inputs. The Credit Facility (defined below) contributed along with the SFR Loans was also valued using the income approach as previously described. The equity and financial liabilities of the consolidated CMBS B-Pieces were valued using broker quotes (see “—Valuation Methodologies" below for more information on our valuation methodologies). The Bridge Facility (defined below) was originated shortly before the closing of the IPO and was contributed at its carrying value, which approximated fair value. The fair values of the contributed cash and accrued interest and dividends approximated their carrying values because of the short-term nature of these instruments. The fair values of the contributed assets described above were agreed upon by the Contribution Group and used to determine the number of SubOP Units issued. Any purchase premiums or discounts are amortized over the expected life of the investment.

 

The following table shows the par values, fair values and purchase premiums (discounts) of the Initial Portfolio as of February 11, 2020, the closing date of the IPO:

 

 

 

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

 

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.

 

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 and mortgage loans from the consolidated CMBS Entities 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.

 

Dividend Income - Dividend income is recorded when declared.

 

Realized Gain (Loss) on Sale of 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.

 

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, net” 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, 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

 

 

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 stop 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 three months ended March 31, 2021, 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 three months ended March 31, 2021, 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 include quoted prices for similar instruments in active markets, and inputs other than quoted prices 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 for the asset or liability, and include situations where there is little, if any, 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 - CMBS structured pass through certificates (“CMBS I/O Strips”) are categorized as Level 2 assets in the fair value hierarchy. CMBS I/O Strips 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.

 

 

SFR Loans, Preferred Equity Investments and Mezzanine Loans - SFR Loans, preferred equity and mezzanine loan investments are categorized as Level 3 assets in the fair value hierarchy. SFR Loans, preferred equity and mezzanine 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 sheet.

 

Common Stock Investment - The common stock investment 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 investment in NexPoint Storage Partners, Inc. ("NSP") using the fair value option in accordance with ASC 825-10. See Note 5 for additional disclosures regarding the fair value of this investment.

 

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 believes that it will operate in a manner that will allow it to qualify for taxation as a REIT under the Code, commencing with its taxable year ended December 31, 2020. As a result of the Company’s expected 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 March 31, 2021, 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 March 31, 2021.

 

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 Instruments – Credit 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.

 

 

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit 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 Instruments – Credit 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 Instruments – Credit 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 March 31, 2021 but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.

 

Other Matters

 

During the first quarter of 2021, an adjustment was made in accordance with ASC Topic 250, Accounting for Changes and Error Corrections, to correct an immaterial error to the Q1 2020 consolidated statement of cash flows. This resulted in an increase of approximately $28.2 million in investing cash inflows with a corresponding increase in financing cash outflows for the three months ended March 31, 2020. Additionally, for the three months ended March 31, 2020, the supplemental disclosures of non-cash investing and financing activities omitted non-cash increases in mortgage loans held in variable interest entities and non-cash increases in bonds payable from consolidated VIE's of approximately $48.0 million related to the consolidation of variable interest entities resulting from contributions of CMBS B-pieces in connection with the Formation Transaction. There was no impact to the Consolidated Balance Sheets, the Consolidated Statements of Operations or the Consolidated Statements of Stockholders' Equity.

 

 

3. Loans Held for Investment

 

The Company’s investments in SFR Loans, mezzanine loans, and preferred equity are accounted for as loans held for investment. The SFR Loans are presented as Mortgage loans, held-for-investment, net and the mezzanine loans and preferred equity is presented as Loans, held-for-investment, net on the Consolidated Balance Sheets. The following table summarizes our loans held for investment as of March 31, 2021 (dollars in thousands):

 

 

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

(2)	The weighted-average 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 three months ended March 31, 2021, the loan and preferred equity portfolio activity was as follows (in thousands):

 

 

(1)	Includes principal repayments on SFR Loans.
(2)	Includes net amortization of loan purchase premiums.

(3)	Based on management’s judgment and estimate of credit losses. See Note 2 for additional information.

 

 

As of March 31, 2021, there were $65.2 million of unamortized premiums on loans held-for-investment, net 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 table allocates the principal balance and net book value of the loan portfolio based on our internal risk ratings (dollars in thousands):

 

 

As of March 31, 2021, all 50 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. 

 

 

 

 

4. CMBS Trusts

 

As of March 31, 2021, the Company consolidated 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 operating cash-flows.

 

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

 

 

 

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

 

 

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:

 

 

 

 

5. Common Stock

 

On November 6, 2020, in connection with the closing of the acquisition of Jernigan Capital, Inc. ("JCAP"), by affiliates of the Manager, each share of JCAP’s series A preferred stock issued and outstanding immediately prior to the effective time of the acquisition was converted into the right to receive one share of common stock, par value $0.01 per share, of the surviving company. As a result, the entirety of the Company’s preferred stock investment in JCAP was converted into common stock of the surviving company, NSP. NSP provides debt and equity capital to self-storage entrepreneurs with a view toward eventual outright ownership of the facilities it finances. Following the conversion, the Company owns approximately 25.8% of the total outstanding shares of NSP and thus can exercise significant influence over NSP, implying this investment should be 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. This includes a one for one conversion, accrued interest and dividends and a make whole premium of 5% of the outstanding principal balance of JCAP series A preferred stock, as well as loan deposits paid on behalf of JCAP. 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. The most recent sales price for shares of JCAP common stock occurred on November 6, 2020 at $17.30 per share. This price was used to convert the JCAP common stock and JCAP series A preferred stock into shares of common stock of NSP with a price of $1,063.47 per share. As such, the Company initially measured the common stock investment in NSP using the purchase price. In addition, as this was the last observable market price and there were no significant events nor additional publicly available market prices for NSP common stock, the Company also measured the common stock investment in NSP as of December 31, 2020 using the purchase price. 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 projected cash flows generated by 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 following table presents the NSP common stock investment as of March 31, 2021 (in thousands, except share amounts):

 

 

 

6. CMBS Structured Pass Through Certificates

 

As of March 31, 2021, the Company held six CMBS I/O Strips at fair value. These 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. See Note 2 and Note 8 for additional disclosures regarding valuation methodologies for the CMBS I/O Strips.

 

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

 

 

The following table presents activity related to the Company’s CMBS I/O Strips (in thousands):

 

 

 

 

7. Debt

 

The following table summarizes the Company’s financing arrangements in place as of March 31, 2021:

 

 

(1)	Weighted-average interest rate using unpaid principal balances.

(2)	Weighted-average life is determined using the maximum maturity date of the corresponding loans, assuming all extension options are exercised by the borrower.

(3)	CMBS are shown at fair value. SFR Loans and mezzanine loans are shown at their carrying values.
(4)	In April 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.

(5)	The master repurchase agreement with Mizuho does not have a stated maturity date. The transactions in place have a one-month to two-month tenor and are expected to roll accordingly.

 

Prior to the Formation Transaction, two of our subsidiaries entered into a loan and security agreement dated, July 12, 2019, with Freddie Mac (the “Credit Facility”). Under the Credit Facility, these entities borrowed approximately $788.8 million in connection with their acquisition of senior pooled mortgage loans backed by SFR properties (the “Underlying Loans”). No additional borrowings can be made under the Credit Facility, and our obligations will be secured by the Underlying Loans. The Credit Facility is guaranteed by certain members of the Contribution Group. The guarantors are subject to minimum net worth and liquidity covenants. The Credit Facility continues to be guaranteed by members of the Contribution Group as of March 31, 2021. The Credit Facility was assumed by the Company as part of the Formation Transaction at carrying value which approximated fair value. As such, the remaining outstanding balance of $788.8 million was contributed to the Company on February 11, 2020. Our borrowings under the Credit Facility will mature on July 12, 2029. However, if an Underlying Loan matures prior to July 12, 2029, the Company will be required to repay the portion of the Credit Facility that is allocated to that loan. As of March 31, 2021, the outstanding balance on the Credit Facility was $779.8 million.

 

In connection with our recent CMBS acquisitions and new mezzanine debt investment, we, through the Subsidiary OPs, have borrowed approximately $162.2 million under our repurchase agreements and posted $1.9 billion par value of our CMBS B-Piece and CMBS I/O Strip investments as collateral as of March 31, 2021. The CMBS B-Pieces and CMBS I/O Strips held as collateral are illiquid and irreplaceable in nature. These assets are restricted solely to satisfy the interest and principal balances owed to the lender.

 

On October 15, 2020, the OP issued Senior Unsecured Notes (the “Notes”) for an aggregate principal amount of $36.5 million and a coupon rate of 7.50%. The Notes are due October 15, 2025 and were sold at approximately 99% of par value for proceeds of approximately $36.1 million before offering costs. Additionally, the Notes are fully guaranteed by the Company in the event that the OP cannot satisfy the obligations of the Notes. As of March 31, 2021, any action required under the guaranty is considered remote.

 

On October 20, 2020, the Company acquired a portfolio of 18 mezzanine loans with an aggregate principal amount outstanding of approximately $97.9 million and a weighted average fixed interest rate of 7.54% for a price of 102% of the outstanding principal amount plus accrued interest of $0.3 million. Freddie Mac provided seller financing of approximately $59.9 million with a weighted average fixed interest rate of 0.30%. Proceeds from the Notes offering and cash on hand were used to fund the remainder of the purchase price.

 

 

As of March 31, 2021, the outstanding principal balances related to the SFR Loans and levered mezzanine loans consisted of the following (dollars in thousands):

 

 

 

For the three months ended March 31, 2021, the activity related to the carrying value of the secured financing agreements and master repurchase agreements were as follows (in thousands):

 

 

 

Schedule of Debt Maturities

 

The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years subsequent to March 31, 2021 are as follows (in thousands):

 

 

(1)	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.

 

 

 

8. Fair Value of Financial Instruments

 

Fair-value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market-participant assumptions in fair-value measurements, ASC 820 establishes a fair-value hierarchy that distinguishes between market-participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market-participant assumptions (unobservable inputs classified within Level 3 of the hierarchy):

 

●

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’s assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Financial Instruments Carried at Fair Value

 

See Note 2 and Notes 4 through 6 for additional information.

 

Financial Instruments Not Carried at Fair Value

 

The fair values of cash and cash equivalents, accrued interest and dividends, accounts payable and other accrued liabilities and accrued interest payable approximated their carrying values because of the short-term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

 

Long-term indebtedness is carried at amounts that reasonably approximate their fair value. In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current credit worthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs.

 

Amounts borrowed under master repurchase agreements are based on their contractual amounts which reasonably approximate their fair value given the short to moderate term and floating rate nature.

 

 

The carrying values and fair values of the Company’s financial assets and liabilities recorded at fair value on a recurring basis, as well as other financial instruments not carried at fair value as of  March 31, 2021 (in thousands):

 

 

Other Financial Instruments Carried at Fair Value

 

Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP (see Note 11). The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the OP are classified as Level 2 if they are adjusted to their redemption value. At March 31, 2021, the redeemable noncontrolling interests in the OP are valued at their carrying value on the Consolidated Balance Sheets.

 

 

9. Stockholders’ Equity

 

Common Stock

 

On February 11, 2020, the Company completed its IPO of 5,000,000 shares of common stock, par value $0.01 per share, at a price of $19.00 per share. In connection with the IPO, the Company sold an additional 350,000 shares of common stock, par value $0.01 per share, at a price of $19.00 per share pursuant to the partial exercise of the underwriters’ option to purchase additional shares. Gross proceeds from the IPO and partial exercise was approximately $101.7 million. Underwriting discounts and commissions of approximately $6.9 million and offering expenses of approximately $3.3 million were deducted from additional paid in capital.

 

As of March 31, 2021, the Company had 5,309,565 shares of common stock, par value $0.01 per share, issued and 5,022,578 shares of common stock, par value $0.01 per share, outstanding.

 

Preferred Stock

 

On July 24, 2020, the Company issued 2,000,000 shares of its 8.50% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”) at a price to the public of $24.00 per share, for gross proceeds of $48.0 million before deducting underwriting discounts and commissions of approximately $1.2 million and other offering expenses of approximately $0.8 million. The Series A Preferred Stock has a $25.00 per share liquidation preference.

 

 

Share Repurchase Program

 

On March 9, 2020, the Board authorized a share repurchase program (the "Share Repurchase Program") through which the Company may repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $10.0 million in shares of its common stock, par value $0.01 per share, during a two-year period that is set to expire on March 9, 2022 (the “Share Repurchase Program”). On September 28, 2020, the Board authorized the expansion of the Share Repurchase Program to include the Company’s Series A Preferred Stock with the same period and repurchase limit. The Company may utilize various methods to affect the repurchases, and the timing and extent of the repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, including whether the Company’s common stock is trading at a significant discount to net asset value ("NAV") per share. Repurchases under this program may be discontinued at any time. From inception through March 31, 2021, the Company has repurchased 327,422 shares of its common stock, par value $0.01 per share, at a total cost of approximately $4.8 million, or $14.61 per share. These repurchased shares of common stock are classified as treasury stock and reduce the number of shares of the Company’s common stock outstanding and, accordingly, are considered in the weighted-average number of shares outstanding during the period. On March 3, 2021, the Company cancelled 40,435 shares of common stock, reducing the total classified as treasury stock to 286,987.

 

The audit committee has approved and ratified, subject to the prior authorization of our Board, repurchases from related party affiliates of the Company through the Share Repurchase Program, including accounts advised by affiliates of our Sponsor. As of  March 31, 2021, the Company has not repurchased shares of common stock or Series A Preferred Stock under the Share Repurchase Program from its officers, directors, Manager or Sponsor, or affiliates of any of the foregoing.

 

Long Term Incentive Plan

 

On January 31, 2020, the Company’s sole stockholder approved the NexPoint Real Estate Finance, Inc. 2020 Long Term Incentive Plan (the “2020 LTIP”) and the Company filed a registration statement on Form S-8 registering 1,319,734 shares of common stock, par value $0.01 per share, which the Company may issue pursuant to the 2020 LTIP. The 2020 LTIP authorizes the compensation committee of the Board to provide equity-based compensation in the form of stock options, appreciation rights, restricted shares, restricted stock units, performance shares, performance units and certain other awards denominated or payable in, or otherwise based on, the Company’s common stock or factors that may influence the value of the Company’s common stock, plus cash incentive awards, for the purpose of providing the Company’s directors, officers and other key employees (and those of the Manager and the Company’s subsidiaries), the Company’s non-employee directors, and potentially certain non-employees who perform employee-type functions, incentives and rewards for performance.

 

Restricted Stock Units. Under the 2020 LTIP, restricted stock units may be granted to the Company’s directors, officers and other key employees (and those of the Manager and the Company’s subsidiaries) and typically vest over a three to five-year period for officers, employees and certain key employees of the Manager and annually for directors. The most recent grant of restricted stock units to officers, employees and certain key employees of the Manager will vest over a four-year period. Beginning on the date of grant, restricted stock units earn dividends that are payable in cash on the vesting date. On May 8, 2020, pursuant to the 2020 LTIP, the Company granted 14,739 restricted stock units to its directors, on June 24, 2020, the Company granted 274,274 restricted stock units to its officers and other employees of the Manager, on November 2, 2020, the Company granted 1,838 restricted stock units to the sole member of the general partner of one of the Company's subsidiaries and on February 22, 2021 the Company granted 220,352 restricted stock units to its officers and other employees of the Manager and 11,832 restricted stock units to its directors. The following table includes the number of restricted stock units granted, vested, forfeited and outstanding as of March 31, 2021:

 

 

At-The-Market-Offering

 

On March 31, 2021, the Company, the OP and the Manager entered into separate equity distribution agreements (the "Equity Distribution Agreements") with each of Raymond James & Associates, Inc., Keefe, Bruyette & Woods, Inc., Robert W. Baird & Co. Incorporated and Virtu Americas LLC (collectively, the "Sales Agents"), pursuant to which the Company may issue and sell from time to time shares of the Company's common stock and Series A Preferred Stock having an aggregate sales price of up to $100.0 million (the "ATM Program"). The Equity Distribution Agreements provide for the issuance and sale of common stock or Series A Preferred Stock by the Company through a sales agent acting as a sales agent or directly to the sales agent acting as principal for its own account at a price agreed upon at the time of sale.

 

Sales of shares of common stock or Series A Preferred Stock under the ATM Program, if any, may be made in transactions that are deemed to be "at the market" offerings, as defined in Rule 415 under the Securities Act including, without limitation, sales made by means of ordinary brokers' transactions on the NYSE, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices.

 

Dividends

 

The Board declared the first quarterly dividend of 2021 to common shareholders of $0.475 per share on February 15, 2021 which was paid on March 31, 2021 to common stockholders of record on March 15, 2021.

 

The Board declared a dividend to preferred stockholders of $0.53125 per share on March 15, 2021, which was paid on April 25, 2021 to preferred stockholders of record on March 25, 2021.

 

 

10. Earnings (Loss) Per Share

 

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of the Company’s common stock outstanding and excludes any unvested restricted stock units issued pursuant to the 2020 LTIP.

 

Diluted earnings (loss) per share is computed by adjusting basic earnings (loss) per share for the dilutive effect of the assumed vesting of restricted stock units. Additionally, the Company includes the dilutive effect of the potential redemption of OP Units for common shares in accordance with the amended partnership agreement of the OP. During periods of net loss, the assumed vesting of restricted stock units is anti-dilutive and is not included in the calculation of earnings (loss) per share.

 

 

The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods presented (in thousands, except per share amounts):

 

 

 

11. Noncontrolling Interests

 

Redeemable Noncontrolling Interests in the Subsidiary OPs

 

In connection with the Formation Transaction, the Contribution Group contributed assets to SPEs owned by Subsidiary OPs of the Company in exchange for SubOP Units. Net income (loss) is allocated to holders of SubOP Units based upon net income (loss) attributable to common stockholders and the weighted-average number of SubOP Units outstanding to total common shares plus SubOP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to SubOP Units in accordance with the terms of the partnership agreement of the Subsidiary OPs. Each time the Subsidiary OPs distribute cash, limited partners of the Subsidiary OPs receive their pro-rata share of the distribution. Redeemable noncontrolling interests in the Subsidiary OPs have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the Subsidiary OPs.

 

In connection with the issuance of SubOP Units to the Contribution Group on February 11, 2020, the Subsidiary OPs and the OP amended the partnership agreements of the Subsidiary OPs (the “Subsidiary OP Amendments”). Pursuant to the Subsidiary OP Amendments, limited partners holding SubOP Units have the right to cause each of the Subsidiary OPs to redeem their units at a redemption price equal to and in the form of the Cash Amount (as defined in the partnership agreements of the Subsidiary OPs), provided that such SubOP Units have been outstanding for at least one year.

 

The OP is the general partner of the Subsidiary OPs and may, in its sole discretion, purchase the SubOP Units by paying to the SubOP Unit holder either the Cash Amount or the OP Unit Amount (one OP Unit for each SubOP Unit, subject to adjustment), as defined in the partnership agreements of the Subsidiary OPs. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption right to the extent the issuance of the OP Units to the redeeming limited partner would (1) be prohibited, as determined in the OP’s sole discretion, or (2) cause the acquisition of OP Units by such redeeming limited partner to be “integrated” with any other distribution of OP Units for purposes of complying with the Securities Act of 1933, as amended (the "Securities Act").

 

The OP, as the general partner and primary beneficiary of the Subsidiary OPs, consolidates the Subsidiary OPs.

 

 

Redeemable Noncontrolling Interests in the OP

 

Interests in the OP held by limited partners are represented by OP Units. As of March 31, 2021, the Company is the majority limited partner in the OP. Net income (loss) is allocated to holders of OP Units based upon net income (loss) attributable to common stockholders and the weighted-average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to OP Units in accordance with the terms of the partnership agreement of the OP. Each time the OP distributes cash to the Company, limited partners of the OP receive their pro-rata share of the distribution. Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP.

 

In connection with the IPO on February 11, 2020, the Company and the OP GP amended the partnership agreement of the OP (the “OP Amendment”). Pursuant to the OP Amendment, limited partners holding OP Units have the right to cause the OP to redeem their units at a redemption price equal to and in the form of the Cash Amount (as defined in the partnership agreement of the OP and discussed further below), provided that such OP Units have been outstanding for at least one year. The Company may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Shares Amount (generally one share of common stock of the Company for each OP Unit, subject to adjustment) as defined in the partnership agreement of the OP. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption right to the extent the issuance of the Company’s common stock to the redeeming limited partner would (1) be prohibited, as determined in the Company’s sole discretion, under the Company’s charter or (2) cause the acquisition of common stock by such redeeming limited partner to be “integrated” with any other distribution of the Company’s common stock for purposes of complying with the Securities Act. Accordingly, the Company records the OP Units held by noncontrolling limited partners outside of permanent equity and reports the OP Units at the greater of their carrying value or their redemption value using the Company’s stock price at each balance sheet date.

 

The Cash Amount is defined in the partnership agreement of the OP as the greater of the most recent NAV of the Company as determined by our Board and the volume-weighted average price of the Company's common stock, which because the Company's common stock is listed on the New York Stock Exchange (the "NYSE") will be calculated for the ten consecutive trading days (the "Ten Day VWAP") immediately preceding the date on which the general partner of the OP receives a notice of redemption from the limited partner, or the first business day thereafter (the "Valuation Date").  The Ten Day VWAP calculated based on a Valuation Date of March 31, 2021 was $18.40 and there were 13,787,123 OP Units outstanding. Assuming (1) that the Ten Day VWAP exceeded the NAV, (2) that all OP unitholders exercised their right to cause the OP to redeem all of their OP Units with a Valuation Date of March 31, 2021, and (3) that the Company then elected to purchase all of the OP Units by paying the Cash Amount, the Company would have paid $253.7 million in cash consideration to redeem the OP Units.

 

On July 30, 2020, NREF OP IV, L.P. (“OP IV”), one of the Subsidiary OPs, entered into subscription agreements with certain entities affiliated with the Manager (the “Manager Affiliates”), which were then-current majority owners of OP IV, for 359,000 SubOP Units in OP IV for total consideration of approximately $6.6 million. On August 4, 2020, OP IV entered into additional subscription agreements with the Manager Affiliates for 267,320 SubOP Units in OP IV for total consideration of approximately $4.9 million. The total number of SubOP Units issued was calculated by dividing the total consideration by the combined book value of the Company’s common stock and the SubOP Units, on a per share or unit basis, as of June 30, 2020, or $18.33 per SubOP Unit.

 

On September 30, 2020, the unitholders (other than the OP) of OP IV exercised their redemption right for 100% of their units outstanding. Following direction and approval of the Board and the general partner of OP IV, the OP purchased the tendered OP IV units in exchange for an equal number of OP Units. After the transaction, OP IV is wholly-owned by the OP and the Company owns 50.28% of the OP.

 

The following table sets forth the redeemable noncontrolling interests in the OP (reflecting the OP’s consolidation of the Subsidiary OPs) for the three months ended March 31, 2021 (in thousands):

 

 

On July 20, 2020, in connection with the anticipated issuance by the Company of the Series A Preferred Stock, the OP GP , following the direction and approval of the Board, amended the partnership agreement of the OP to provide for the issuance of 8.50% Series A Cumulative Redeemable Preferred Units (liquidation preference $25.00 per unit) in our OP (the “Series A Preferred Units”). The Company contributed the net proceeds from the sale of the Series A Preferred Stock to the OP in exchange for the same number of Series A Preferred Units. The Series A Preferred Units have economic terms that are substantially the same as the terms of the Series A Preferred Stock. The Series A Preferred Units rank, as to distributions and upon liquidation, senior to OP Units. On March 31, 2021, in connection with the Company's ATM Program (as defined below), the OP GP, following the direction and approval of the Board, further amended the partnership agreement of the OP to provide for the issuance of additional Series A Preferred Units. 

 

 

 

12. Related Party Transactions

 

Formation Transaction

 

The Company commenced operations on February 11, 2020 upon the closing of its IPO. Prior to the closing of the IPO, the Company engaged in the Formation Transaction through which it acquired the Initial Portfolio. The Initial Portfolio was acquired from the Contribution Group, which was comprised of affiliates 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 SPEs owned by the Subsidiary OPs, in exchange for SubOP Units. See Note 1 for additional disclosures regarding the Formation Transaction and Note 11 for more information regarding the noncontrolling interests in the Subsidiary OPs held by the Contribution Group.

 

The Formation Transaction was a related party transaction between the Contribution Group and the Company as the entities in the Contribution Group are affiliates of our Sponsor. See Note 1 for additional disclosures regarding the Formation Transaction.

 

Management Fee

 

In accordance with the Management Agreement, the Company pays the Manager an annual management fee equal to 1.5% of Equity (as defined below), paid monthly, in cash or shares of Company common stock at the election of our Manager (the “Annual Fee”). The duties performed by the Company’s Manager under the terms of the Management Agreement include, but are not limited to: providing daily management for the Company, selecting and working with third-party service providers, formulating an investment strategy for the Company and selecting suitable investments, managing the Company’s outstanding debt and its interest rate exposure and determining when to sell assets.

 

“Equity” means (a) the sum of (1) total stockholders’ equity immediately prior to the IPO, plus (2) the net proceeds received by the Company from all issuances of the Company’s equity securities in and after the IPO, plus (3) the Company’s cumulative Core Earnings (as defined below) from and after the IPO to the end of the most recently completed calendar quarter, (b) less (1) any distributions to the holders of the Company’s common stock from and after the IPO to the end of the most recently completed calendar quarter and (2) all amounts that the Company or any of its subsidiaries has paid to repurchase for cash the shares of the Company’s equity securities from and after the IPO to the end of the most recently completed calendar quarter. In the Company’s calculation of Equity, the Company will adjust its calculation of Core Earnings to remove the compensation expense relating to awards granted under one or more of its long-term incentive plans that is added back in the calculation of Core Earnings. Additionally, for the avoidance of doubt, Equity does not include the assets contributed to the Company in the Formation Transaction.

 

“Core Earnings” means the net income (loss) attributable to the common stockholders of the Company, computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), excluding any unrealized gains or losses or other similar non-cash items that are included in net income (loss) for the applicable reporting period, regardless of whether such items are included in other comprehensive (loss), or in net income (loss) and adding back amortization of stock-based compensation. Net income (loss) attributable to common stockholders may also be adjusted for one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between the Manager and the independent directors of the Board and approved by a majority of the independent directors of the Board.

 

Pursuant to the terms of the Management Agreement, the Company is required to pay directly or reimburse the Manager for all documented Operating Expenses and Offering Expenses it incurs on behalf of the Company. “Operating Expenses” include legal, accounting, financial and due diligence services performed by the Manager that outside professionals or outside consultants would otherwise perform, the Company’s pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Manager required for the Company’s operations, and compensation expenses under the 2020 LTIP. “Offering Expenses” include all expenses (other than underwriters’ discounts) in connection with an offering of securities, including, without limitation, legal, accounting, printing, mailing and filing fees and other documented offering expenses. For the three months ended March 31, 2021, there were no Offering Expenses that were paid on the Company's behalf for which the Company reimbursed the Manager.

 

Connections at Buffalo Pointe Contribution

 

On May 29, 2020, the OP entered into a contribution agreement (the “Buffalo Pointe Contribution Agreement”) with entities affiliated with executive officers of the Company and the Manager (the “BP Contributors”) whereby the BP Contributors contributed their respective preferred membership interests in NexPoint Buffalo Pointe Holdings, LLC (“Buffalo Pointe”), to the OP for total consideration of $10.0 million paid in OP Units. A total of 564,334.09 OP Units were issued to the BP Contributors, which was calculated by dividing the total consideration of $10.0 million by the combined book value of the Company’s common stock and the SubOP Units, on a per share or unit basis, as of the end of the first quarter, or $17.72 per OP Unit. Buffalo Pointe owns a stabilized multifamily property located in Houston, Texas with 95.2% occupancy as of March 31, 2021. The preferred equity investment pays current interest at a rate of 6.5%, deferred interest at a rate of 4.5%, has a loan-to-value ratio of 82.9% and a maturity date of May 1, 2030.

 

Pursuant to the OP’s limited partnership agreement and the Buffalo Pointe Contribution Agreement, the BP Contributors have the right to cause our OP to redeem their OP Units for cash or, at our election, shares of our common stock on a one-for-one basis, subject to adjustment, as provided and subject to the limitations in our OP’s limited partnership agreement, provided the OP Units have been outstanding for at least one year and our stockholders have approved the issuance of shares of common stock to the BP Contributors.

 

Jernigan Capital Acquisition

 

On November 6, 2020, a subsidiary of the Company and affiliates of our Manager completed a merger with JCAP, taking that entity private, and converting the Company’s preferred stock investment into common shares of NSP, the surviving entity. See Note 5 for additional disclosure regarding this transaction.

 

RSU Issuance

 

On  May 8, 2020, in accordance with the 2020 LTIP, the Company granted 14,739 restricted stock units to its directors, on June 24, 2020, the Company granted 274,274 restricted stock units to its officers and other employees of the Manager, on November 2, 2020, the Company granted 1,838 restricted stock units to the sole member of the general partner of one of the Company’s subsidiaries, and on February 22, 2021 the Company granted 232,184 restricted stock units to its directors, officers employees and certain key employees of the Manager and its affiliates. See Note 9 for additional disclosures.

 

 

Expense Cap

 

Pursuant to the terms of the Management Agreement, direct payment of operating expenses by the Company, which includes compensation expense relating to equity awards granted under the 2020 LTIP, together with reimbursement of operating expenses to the Manager, plus the Annual Fee, may not exceed 2.5% of equity book value (the “Expense Cap”) for any calendar year or portion thereof, provided, however, that this limitation will not apply to Offering Expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments. For the three months ended March 31, 2021, operating expenses did not exceed the Expense Cap.

 

For the three months ended March 31, 2021 and 2020, the Company incurred management fees of $0.5 million and $0.2 million, respectively.

 

 

13. Commitments and Contingencies

 

The Company is not aware of any contractual obligations, legal proceedings, or any other contingent obligations incurred in the normal course of business that would have a material adverse effect on our consolidated financial statements.

 

The Notes previously mentioned in Note 7 are fully guaranteed by the Company. As of March 31, 2021, there has been no indication that the OP will not be able to satisfy the terms of the Notes. The Company considers any action required under the guaranty to be remote.

 

14. Subsequent Events

 

At-The-Market-Offering

 

No issuances of securities under the ATM Program occurred in the quarter ended March 31, 2021. Subsequent to quarter end and as of April 30, 2021, the Company had issued 259,685 shares of common stock at an average price of $20.27 per share for gross proceeds of approximately $5.3 million. The Company paid approximately $0.1 million in fees to the Sales Agents with respect to such sales which were netted against the gross proceeds.

 

Unsecured Notes Offering

 

On April 20, 2021, the Company issued $75 million in aggregate principal amount of its 5.75% Senior Notes due 2026 at a price equal to 99.5% of par value for proceeds of approximately $73.1 million after original issue discount and underwriting fees. An account advised by NexAnnuity Asset Management, L.P., an affiliate of the Manager, purchased $2.5 million par value of the 5.75% Senior Notes. 

 

CMBS Acquisitions

 

On April 28, 2021, the Company, through a Subsidiary OP, purchased approximately $50.0 million aggregate notional amount of the X1 interest-only tranche of the Freddie Mac K-107 CMBS at a price equal to 12.06% of par value, or approximately $6.1 million. Approximately $4.6 million of the purchase price was financed through a repurchase agreement bearing an interest rate of 0.5% over one-month LIBOR. The investment has a coupon rate of 1.71%, a yield of approximately 14.04% and a maturity date of January 25, 2030. 

 

On April 29, 2021, the Company, through the Subsidiary OPs, purchased approximately $76.0 million in aggregate principal amount of the Class CS tranche of the Freddie Mac KF-108 CMBS at a price equal to 100% of par value, representing 100% of the Class CS tranche. The underlying portfolio consists of 37 floating-rate mortgage loans which are secured by multifamily properties. The Class CS tranche is the most subordinated tranche of this CMBS securitization, which includes the controlling class, and as a result the Company has the ability to remove and replace the special servicer. As such, it is expected that this CMBS securitization will be consolidated by the Company. 

 

Dividends Declared

 

On April 26, 2021, the Board declared a quarterly dividend of $0.4750 per share, payable on June 30, 2021 to common stockholders of record on June 15, 2021.