NexPoint Real Estate Finance, Inc. [NREF] Filings

10-Q 1 nref-20240630.htm 10-Q nref-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2024


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

For the transition period from __________ to __________

Commission File Number 001-39210

__________________________________

NexPoint Real Estate Finance, Inc.

(Exact Name of Registrant as Specified in Its Charter)

__________________________________


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


300 Crescent Court, Suite 700, Dallas, Texas (Address of Principal Executive Offices)			75201 (Zip Code)

(214) 276-6300

(Telephone Number, Including Area Code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

8.50% Series A Cumulative Redeemable Preferred Stock, par value 0.01 per share

NREF

NREF-PRA

New York Stock Exchange

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 x No o

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 x No o

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	o	Accelerated Filer	o
Non-Accelerated Filer	x	Smaller reporting company	x
Emerging growth company	x

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. o

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

As of August 7, 2024, the registrant had 17,461,129 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 June 30, 2024

INDEX


		Page
Cautionary Statement Regarding Forward-Looking Statements		ii

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of June 30, 2024 (Unaudited) and December 31, 2023	2
	Consolidated Unaudited Statements of Operations for the Three and Six Months Ended June 30, 2024 and 2023	4
	Consolidated Unaudited Statements of Stockholders' Equity for the Three an d Six Months Ended June 30, 2024 and 2023	6
	Consolidated Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023	8
	Notes to Consolidated Unaudited Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67
Signatures		68

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Cautionary Statement Regarding Forward-Looking Statements

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

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

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

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

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

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

•Risks associated with the ownership of real estate;

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

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

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

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

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

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

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

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

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•Risks associated with pandemics, including unpredictable variants and the future outbreak of other highly infectious or contagious diseases;

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

•Any other risks included under Part I, Item1A, "Risk Factors," of our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 22, 2024 (our "Annual Report").

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

iii

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PART I

Item 1. Financial Statements

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NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	June 30, 2024		December 31, 2023
	(Unaudited)
ASSETS
Cash and cash equivalents	$	4,266	$	13,824
Restricted cash	3,050		2,825
Real estate investments, net	123,619		126,551
Loans, held-for-investment, net ($23,935 and $22,989 with related parties, respectively)	430,514		328,460
Common stock investments, at fair value ($32,676 and $33,129 with related parties, respectively)	58,887		61,529
Mortgage loans, held-for-investment, net	232,333		676,420
Preferred stock investments, at fair value	18,384		14,776
Accrued interest and dividends	27,501		22,033
Mortgage loans held in variable interest entities, at fair value	5,600,925		5,677,763
CMBS structured pass-through certificates, at fair value	37,962		41,212
MSCR Notes, at fair value	—		10,378
Mortgage backed securities, at fair value ($15,975 and $0 with related parties, respectively)	15,975		38,270
Stock warrant investments	11,713		—
Accounts receivable and other assets	9,769		4,312
TOTAL ASSETS	$	6,574,898	$	7,018,353

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Secured financing agreements, net ($9,869 and $0 with related parties, respectively)	$	254,868	$	649,558
Master repurchase agreements	280,651		303,514
Unsecured notes, net ($12,400 and $6,500 with related parties, respectively)	226,123		219,483
Mortgages payable, net	95,564		95,657
Accounts payable and other accrued liabilities	7,944		6,428
Accrued interest payable	8,856		8,209
Bonds payable held in variable interest entities, at fair value	5,219,412		5,289,997
Total Liabilities	6,093,418		6,572,846

Redeemable Series B Preferred stock, $0.01 par value: 16,000,000 shares authorized; 3,163,477 and 427,218 shares issued and outstanding, respectively	69,191		8,599
Redeemable noncontrolling interests in the OP	84,815		89,471

Stockholders' Equity:
Noncontrolling interest in CMBS variable interest entities	3,177		—
Noncontrolling interest in subsidiary	95		95
Series A Preferred stock, $0.01 par value: 100,000,000 shares authorized; 1,645,000 and 2,000,000 shares issued and 1,645,000 and 1,645,000 shares outstanding, respectively	16		16

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Common stock, $0.01 par value: 500,000,000 shares authorized; 17,461,129 and 17,518,900 shares issued and 17,461,129 and 17,231,913 shares outstanding, respectively	174		172
Additional paid-in capital	385,071		395,737
Retained earnings (accumulated deficit)	(61,059)		(35,821)
Series A Preferred stock held in treasury at cost; 0 shares and 355,000, respectively	—		(8,567)
Common stock held in treasury at cost; 0 shares and 286,987 shares, respectively	—		(4,195)
Total Stockholders' Equity	327,474		347,437
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	6,574,898	$	7,018,353

See Notes to Consolidated Financial Statements

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NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2024		2023		2024		2023
Net interest income
Interest income (1)	$	18,233	$	17,299	$	16,659	$	33,460
Interest expense	(11,493)		(13,094)		(22,733)		(25,306)
Total net interest income (expense)	6,740		4,205		(6,074)		8,154
Other income (loss)
Change in net assets related to consolidated CMBS variable interest entities	12,916		6,886		21,332		17,889
Change in unrealized gain (loss) on CMBS structured pass-through certificates	461		968		421		216
Change in unrealized gain (loss) on common stock investments	(1,771)		175		(2,642)		(1,092)
Change in unrealized gain (loss) on preferred stock investments	38		—		102		—
Change in unrealized gain (loss) on MSCR Notes	2		326		(13)		28
Change in unrealized gain (loss) on mortgage backed securities	175		826		615		220
Reversal of (provision for) credit losses	2		6		422		40
Dividend income	501		—		1,001		—
Other income	414		36		488		353
Realized gain	471		—		471		—
Loss on extinguishment of debt	(184)		—		(184)		—
Gain on deconsolidation of variable interest entity	—		—		—		1,490
Equity in income (losses) of equity method investments	(892)		(889)		(2,892)		(889)
Revenues from consolidated real estate owned	2,035		1,036		4,246		2,064
Total other income	$	14,168	$	9,370	23,367		20,319
Operating expenses
General and administrative expenses	3,179		2,377		7,366		4,529
Loan servicing fees	350		1,063		917		2,106
Management fees	897		822		1,732		1,650
Expenses from consolidated real estate owned	4,368		836		9,805		2,333
Total operating expenses	$	8,794	$	5,098	19,820		10,618
Net income (loss)	12,114		8,477		(2,527)		17,855
Net (income) loss attributable to Series A preferred stockholders	(874)		(874)		(1,748)		(1,748)
Net (income) loss attributable to Series B preferred stockholders	(1,477)		—		(2,142)		—
Net (income) loss attributable to redeemable noncontrolling interests	(2,275)		(1,856)		(382)		(3,793)
Net income (loss) attributable to common stockholders	$	7,488	$	5,747	$	(6,799)	$	12,314

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Weighted-average common shares outstanding - basic	17,422		17,213		17,343		17,166
Weighted-average common shares outstanding - diluted	27,788		23,080		26,399		22,880

Earnings (loss) per share outstanding - basic	$	0.43	$	0.33	$	(0.39)	$	0.72
Earnings (loss) per share outstanding - diluted	$	0.40	$	0.33	$	(0.39)	$	0.70

Dividends declared per common share	$	0.5000	$	0.6850	$	1.0000	$	1.3700

(1) Includes $25.0 million related to accelerated amortization of the premium associated with the prepayment on a senior loan in the first quarter of 2024.

See Notes to Consolidated Financial Statements

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NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands)

(Unaudited)


Six Months Ended June 30, 2024	Series A Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings Less Dividends		Common Stock Held in Treasury at Cost		Preferred Stock Held in Treasury at Cost		Noncontrolling interest in CMBS VIEs		Noncontrolling interest in Subsidiary		Total
	Number of Shares	Par Value		Number of Shares	Par Value
Balances, December 31, 2023	1,645,000	$	16	17,231,913	$	172	$	395,737	$	(35,821)	$	(4,195)	$	(8,567)	$	—	$	95	$	347,437
Vesting of stock-based compensation	—	—		229,216	2		2,096		—		—		—		—		—		2,098
Noncontrolling interest in CMBS variable interest entities	—	—		—	—		—		—		—		—		3,177		—		3,177
Cancellation of common and preferred stock held in treasury	—	—		—	—		(12,762)		—		4,195		8,567		—		—		—
Net income attributable to Series A preferred stockholders	—	—		—	—		—		1,748		—		—		—		—		1,748
Net loss attributable to common stockholders	—	—		—	—		—		(6,799)		—		—		—		—		(6,799)
Series A preferred stock dividends declared ($1.0626 per share)	—	—		—	—		—		(1,748)		—		—		—		—		(1,748)
Common stock dividends declared ($1.0000 per share)	—	—		—	—		—		(18,439)		—		—		—		—		(18,439)
Balances, June 30, 2024	1,645,000	$	16	17,461,129	$	174	$	385,071	$	(61,059)	$	—	$	—	$	3,177	$	95	$	327,474


Three Months Ended June 30, 2024	Series A Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings Less Dividends		Common Stock Held in Treasury at Cost		Preferred Stock Held in Treasury at Cost		Noncontrolling interest in CMBS VIEs		Noncontrolling interest in Subsidiary		Total
	Number of Shares	Par Value		Number of Shares	Par Value
Balances, March 31, 2024	1,645,000	$	16	17,306,257	$	173	$	397,165	$	(59,318)	$	(4,195)	$	(8,567)	$	1,713	$	95	$	327,082
Vesting of stock-based compensation	—	—		154,872	1		668		—		—		—		—		—		669
Noncontrolling interest in CMBS variable interest entities	—	—		—	—		—		—		—		—		1,464		—		1,464
Cancellation of common and preferred stock held in treasury	—	—		—	—		(12,762)		—		4,195		8,567		—		—		—
Net income attributable to Series A preferred stockholders	—	—		—	—		—		874		—		—		—		—		874
Net income attributable to common stockholders	—	—		—	—		—		7,488		—		—		—		—		7,488
Series A preferred stock dividends declared ($0.5313 per share)	—	—		—	—		—		(874)		—		—		—		—		(874)
Common stock dividends declared ($0.5000 per share)	—	—		—	—		—		(9,229)		—		—		—		—		(9,229)
Balances, June 30, 2024	1,645,000	$	16	17,461,129	$	174	$	385,071	$	(61,059)	$	—	$	—	$	3,177	$	95	$	327,474

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Six Months Ended June 30, 2023	Series A Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings Less Dividends		Common Stock Held in Treasury at Cost		Preferred Stock Held in Treasury at Cost		Noncontrolling interest in CMBS VIEs		Noncontrolling interest in Subsidiary		Total
	Number of Shares	Par Value		Number of Shares	Par Value
Balances, December 31, 2022	1,645,000	$	16	17,079,943	$	171	$	392,124	$	4,435	$	(4,195)	$	(8,567)	$	—	$	64,529	$	448,513
Vesting of stock-based compensation	—	—		151,970	1		1,311		—		—		—		—		—		1,312
Adjustment to noncontrolling interest in subsidiary on deconsolidation of real estate	—	—		—	—		—		—		—		—		—		(64,434)		(64,434)
Cumulative effect of adoption of ASU 2016-13 (See Note 2)		—			—		—		(1,624)		—		—		—		—		(1,624)
Net income attributable to Series A preferred stockholders	—	—		—	—		—		1,748		—		—		—		—		1,748
Net income attributable to common stockholders	—	—		—	—		—		12,314		—		—		—		—		12,314
Series A preferred stock dividends declared ($1.0626 per share)	—	—		—	—		—		(1,748)		—		—		—		—		(1,748)
Common stock dividends declared ($1.3700 per share)	—	—		—	—		—		(24,438)		—		—		—		—		(24,438)
Balances, June 30, 2023	1,645,000	$	16	17,231,913	$	172	$	393,435	$	(9,313)	$	(4,195)	$	(8,567)	$	—	$	95	$	371,643


Three Months Ended June 30, 2023	Series A Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings (accumulated deficit) Less Dividends		Common Stock Held in Treasury at Cost		Preferred Stock Held in Treasury at Cost		Noncontrolling interest in CMBS VIEs		Noncontrolling interest in Subsidiary		Total
	Number of Shares	Par Value		Number of Shares	Par Value
Balances, March 31, 2023	1,645,000	$	16	17,184,231	$	172	$	392,440	$	(2,697)	$	(4,195)	$	(8,567)	$	—	$	95	$	377,264
Vesting of stock-based compensation	—	—		47,682	—		995		—		—		—		—		—		995
Net income attributable to Series A preferred stockholders	—	—		—	—		—		874		—		—		—		—		874
Net income attributable to common stockholders	—	—		—	—		—		5,747		—		—		—		—		5,747
Series A preferred stock dividends declared ($0.5313 per share)	—	—		—	—		—		(874)		—		—		—		—		(874)
Common stock dividends declared ($0.6850 per share)	—	—		—	—		—		(12,363)		—		—		—		—		(12,363)
Balances, June 30, 2023	1,645,000	$	16	17,231,913	$	172	$	393,435	$	(9,313)	$	(4,195)	$	(8,567)	$	—	$	95	$	371,643

See Notes to Consolidated Financial Statements

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NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Six Months Ended June 30,
	2024		2023
Cash flows from operating activities
Net income (loss)	$	(2,527)	$	17,855
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of premiums	29,556		7,337
Accretion of discounts	(7,573)		(7,072)
Depreciation and amortization of real estate investment	3,400		954
Amortization of deferred financing costs	24		22
Provision for (reversal of) credit losses	(422)		(40)
Net change in unrealized (gain) loss on investments held at fair value	5,203		4,272
Equity in (income) losses of unconsolidated equity method ventures	2,892		889
Net realized (gain) loss	(6,669)		—
Gain on deconsolidation of variable interest entity	—		(1,490)
Stock-based compensation expense	3,252		2,109
Payment in kind income	(7,296)		(1,794)
Loss on extinguishment of debt	184		—
Changes in operating assets and liabilities:
Accrued interest and dividends receivable	(5,468)		(1,609)
Accounts receivable and other assets	(5,457)		(407)
Accrued interest payable	647		(514)
Accounts payable, accrued expenses and other liabilities	462		1,963
Net cash provided by operating activities	10,208		22,475

Cash flows from investing activities
Proceeds from payments received on mortgage loans held in variable interest entities	248,922		444,463
Proceeds from payments received on mortgage loans held for investment	512,274		53,856
Proceeds from payments received on mortgage backed securities	—		546
Originations of mortgage loans, held-for-investment, net	(93,425)		—
Originations of loans, held-for-investment, net	(93,943)		(55,684)
Purchases of preferred stock	(3,507)		—
Purchases of equity method investments	(2,892)		(1,000)
Purchases of stock warrant investments	(11,713)		—
Purchases of CMBS securitizations held in variable interest entities, at fair value	(53,654)		—
Sales of CMBS securitizations held in variable interest entities, at fair value	61,961		—
Purchases of mortgage backed securities, at fair value	(44,396)		(5,733)
Sale of mortgage backed securities, at fair value	77,851		—
Decrease in cash in connection with VIE deconsolidation	—		(4,992)
Additions to real estate investments	(471)		(78)
Net cash provided by investing activities	597,007		431,378


Cash flows from financing activities
Borrowings under secured financing agreements	84,311		—
Principal repayments on borrowings under secured financing agreements	(479,085)		(10,214)
Distributions to bondholders of variable interest entities	(237,723)		(412,456)
Borrowings under master repurchase agreements	83,393		44,704
Principal repayments on borrowings under master repurchase agreements	(106,256)		(42,489)
Proceeds received from unsecured promissory note	6,500		—
Principal repayment on unsecured promissory note	(600)		—
Borrowings under bridge facility	19,900		—
Bridge facility repayments	(20,000)		—
Proceeds from the issuance of Series B preferred stock through public offering, net of offering costs	60,592		—
Principal repayments on mortgages payable	(116)		—
Payments for taxes related to net share settlement of stock-based compensation	(1,152)		(797)
Dividends paid to common stockholders	(17,384)		(23,575)
Dividends paid to Series A preferred stockholders	(1,748)		(1,748)
Dividends paid to Series B preferred stockholders	(2,142)		—
Distributions to redeemable noncontrolling interests in the OP	(5,038)		(6,046)
Net cash used in financing activities	(616,548)		(452,621)

Net increase (decrease) in cash, cash equivalents, and restricted cash	(9,333)		1,232
Cash, cash equivalents and restricted cash, beginning of period	16,649		20,347
Cash, cash equivalents and restricted cash, end of period	$	7,316	$	21,579

Supplemental Disclosure of Cash Flow Information
Interest paid	22,086		26,468
Supplemental Disclosure of Noncash Investing and Financing Activities
Adjustment to loans, held for investment, net on deconsolidation of real estate	—		36,022
Adjustment to real estate investments, net on deconsolidation of real estate	—		(185,732)
Adjustment to accrued interest and dividends on deconsolidation of real estate	—		2,049
Adjustment to accounts receivable and other assets on deconsolidation of real estate	—		(799)
Adjustment to mortgages payable, net on deconsolidation of real estate	—		89,012
Adjustment to accounts payable and accrued liabilities on deconsolidation of real estate	—		705
Adjustment to accrued interest payable on deconsolidation of real estate	—		1,087
Adjustment to noncontrolling interest in subsidiary on deconsolidation of real estate	—		64,434
Adjustment to retained earnings on deconsolidation of real estate	—		1,490
Adjustment to redeemable noncontrolling interest in the OP on deconsolidation of real estate	—		(297)
Increase in dividends payable upon vesting of restricted stock units	1,055		863
Consolidation of mortgage loans and bonds payable held in variable interest entities	1,276,923		—
Consolidation of noncontrolling interest in CMBS variable interest entities	3,177		—
Deconsolidation of mortgage loans and bonds payable held in variable interest entities	(1,331,412)		—

See Notes to Consolidated Financial Statements

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NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

NexPoint Real Estate Finance, Inc. (the “Company”, “we”, “our”) is a commercial mortgage real estate investment trust (a "REIT") incorporated in Maryland on June 7, 2019. The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2020 and the Company believes the current organization and method of operation will enable it to maintain its status as a REIT. The Company is focused on originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity, convertible notes, multifamily properties and common equity investments, as well as multifamily and single family rental ("SFR") commercial mortgage backed securities securitizations (“CMBS securitizations”), promissory notes and mortgage backed securities, all of which are considered our target assets. We primarily focus on investments in real estate sectors where our senior management team has operating expertise, including in the multifamily, SFR, self-storage, life science and hospitality sectors predominantly in the top 50 metropolitan statistical areas ("MSAs"). Substantially all of the Company’s business is conducted through NexPoint Real Estate Finance Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. As of June 30, 2024, the Company holds approximately 83.82% of the common limited partnership units in the OP (“OP Units”) which represents 100% of the Class A OP Units, and the OP owns all of the common limited partnership units (“SubOP Units”) of its subsidiary partnerships (collectively, the “Subsidiary OPs”) (see Note 13).

The OP also directly owns all of the membership interests of a limited liability company (the “Mezz LLC”) through which it owns a portfolio of mezzanine loans, as further discussed below. NexPoint Real Estate Finance OP 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 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 NexPoint Advisors, L.P. (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”). Subsequent to the Formation Transaction, the Company has continued to invest in asset types and real estate sectors within the Initial Portfolio and expanded to include additional asset types and real estate sectors.

The Company is externally managed by NexPoint Real Estate Advisors VII, L.P. (the “Manager”) through a management agreement dated February 6, 2020 and amended as of July 17, 2020 and November 3, 2021, that renewed on February 6, 2024 for a one-year term and is automatically renewed for successive one-year terms thereafter unless earlier terminated (as amended, the “Management Agreement”), by and between the Company and the Manager. The Manager conducts substantially all of the Company’s operations and provides asset management services for its real estate investments. The Company expects it will only have accounting employees while the Management Agreement is in effect. All of the Company’s investment decisions are made by the Manager, subject to general oversight by the Manager’s investment committee and the Company’s board of directors (the “Board”). The Manager is wholly owned by our Sponsor.

The Company’s primary investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term. The Company intends to achieve this objective primarily by originating, structuring and investing in our target assets. The Company concentrates on investments in real estate sectors where our senior management team has operating expertise, including in the multifamily, SFR, self-storage, life science and hospitality sectors predominantly in the top 50 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

Readers of this Quarterly Report on Form 10-Q (the "Quarterly Report") should refer to the audited financial statements and notes to consolidated financial statements of the Company for the year ended December 31, 2023, which are

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included in our Annual Report on Form 10-K ("Annual Report"), filed with the United States Securities and Exchange Commission (the "SEC") and also available on our website (nref.nexpoint.com), since we have omitted from this Quarterly Report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to Note 2, Summary of Significant Accounting Policies, in the notes to consolidated financial statements in our Annual Report for further discussion of our significant accounting policies and estimates. Information contained on, or accessible through, our website is not incorporated by reference into and does not constitute a part of this Quarterly Report or any other report or documents we file or furnish with the SEC.

General

In accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the SEC, these Condensed Consolidated Financial Statements do not include all of the information and disclosures required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. Readers of this Quarterly Report should refer to the Company's audited Consolidated Financial Statements, which are included in the Company’s Annual Report. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows, and equity for the interim periods have been included. The results for the three and six months ended June 30, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, and future fiscal years.

Basis of Accounting

The accompanying unaudited consolidated financial statements are presented in accordance with GAAP. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. There have been no significant changes to the Company’s significant accounting policies during the six months ended June 30, 2024.

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.

Use of Estimates and Assumptions

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

Principles of Consolidation

The Company accounts for subsidiary partnerships in which it holds an ownership interest in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest. As of June 30, 2024, the Company has determined it must consolidate the OP and the Subsidiary OPs under the VIE model as it was determined the Company both controls the direct activities of the OP and Subsidiary OPs and possesses the right to receive benefits that could potentially be significant to the OP and Subsidiary OPs. The 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.

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

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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 (see Note 6).

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 ten CMBS that the Company consolidates, the Company owns 100% of the most subordinate tranche of eight of the securities, 93.9% and 95.0%, respectively, of the most subordinate tranche of two of the securities issued by the trusts. The subordinate tranche includes the controlling class, and has the ability to remove and replace the special servicer. The portion of the controlling class not owned by the Company is classified as noncontrolling interest in CMBS variable interest entities.

On the Consolidated Balance Sheets as of June 30, 2024, the Company consolidated each of the Freddie Mac K-Series securitization entities (the “CMBS Entities”) that were determined to be VIEs and for which the Company is the primary beneficiary. The CMBS Entities are independent of the Company, and the assets and liabilities of the CMBS Entities are not owned by and are not legal obligations of ours. Our exposure to the CMBS Entities is through the subordinated tranches. For financial reporting purposes, the underlying mortgage loans held by the trusts are recorded as a separate line item on the balance sheet under “Mortgage loans held in variable interest entities, at fair value.” The liabilities of the trusts consist solely of obligations to the CMBS holders of the consolidated trusts, excluding the CMBS B-Piece investments held by the Company. The liabilities are presented as “Bonds payable held in variable interest entities, at fair value” on the Consolidated Balance Sheets. The CMBS B-Pieces held by the Company, and the interest earned thereon are eliminated in consolidation. Management has elected the measurement alternative in ASC 810 to report the fair value of the assets and liabilities of the consolidated CMBS Entities in order to provide users of the financial statements with better information regarding the effects of credit risk and other market factors on the CMBS B-Pieces owned by the Company. Management has elected to show interest income and interest expense related to the CMBS Entities in aggregate with the change in fair value as “Change in net assets related to consolidated CMBS variable interest entities.” The residual difference between the fair value of the CMBS Entities’ assets and liabilities represents the Company’s investments in the CMBS B-Pieces at fair value.

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 credit 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.

Allowance for Credit Losses

We adopted ASU 2016-13 as of January 1, 2023. The implementation process included the utilization of loan loss forecasting models, updates to our loan credit loss policy documentation, changes to internal reporting processes and related internal controls, and overall operational readiness for our adoption of the new standard. We have implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for our loan portfolio.

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These models are also utilized for estimating expected life-time credit losses for unfunded loan commitments for which the Company has a present contractual obligation to extend the credit and the obligation is not unconditionally cancellable. The CECL forecasting methods used by the Company include (i) a probability of default and loss given default method using underlying third-party CMBS/Commercial Real Estate loan database with historical loan losses from 1998 to 2022, and (ii) probability weighted expected cash flow method, depending on the type of loan and the availability of relevant historical market loan loss data. We might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data. Significant inputs to our forecasting methods include (i) key loan-specific inputs such as loan-to-value, vintage year, loan-term, underlying property type, occupancy, geographic location, performance against the underwritten business plan, and our internal loan risk rating, and (ii) a macro-economic environment forecast. The reasonable and supportable forecast period is determined based on the Company’s assessment of the most likely scenario of assumptions and plausible outcomes for the U.S. economy, current portfolio composition, level of historical loss forecast estimates, material changes in growth and credit strategy and other factors that may affect its loss experience. The Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed. The Company has determined that economic forecasts used in our CECL model can be reasonable and supportable over four quarters as it provides enough time to account for the expected changes of the economic conditions and the performance of the underlying assets. Beyond the Company’s reasonable and supportable forecast period, the Company immediately reverts to historical loss information. The Company considers an immediate reversion period appropriate in the CECL model because it provides a suitable balance between the stability of historical data and the flexibility to account for changing market conditions. The cumulative effect of adoption of ASU 2016-13 was a $1.6 million reduction in retained earnings. The beginning allowance for credit loss as of January 1, 2024 was $2.1 million. The reversal of credit losses of $0.4 million for the six months ended June 30, 2024 is included in reversal of (provision for) credit losses on the accompanying Consolidated Statements of Operations, resulting in an ending allowance for credit loss of $1.7 million as of June 30, 2024.

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

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

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

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

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

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

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,

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tenant profile, rental rates, operating expenses, the borrower’s exit plan and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.

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

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

The Company also recognizes a liability for expected credit losses for off-balance sheet exposures if the Company has a present contractual obligation to extend the credit and the obligation is not unconditionally cancellable by the Company.

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 consolidated 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 August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which simplifies an issuer’s accounting for convertible instruments and its application of the derivatives scope exception for contracts in its own equity. The amendment also requires entities to use the if-converted method for all convertible instruments in the diluted EPS calculation and include the effect of potential share settlement (if the effect is more dilutive) for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. In addition, the amendment requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. We adopted ASU 2020-06 as of January 1, 2024 using a modified retrospective method. ASU 2020-06 had no material impact upon adoption.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting – Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires a public entity to disclose significant segment expenses and other segment items in interim and annual periods and expands the ASC 280 disclosure requirements for interim periods. The ASU also explicitly requires public entities with a single reportable segment to provide all segment disclosures under ASC 280, including the new disclosures under ASU 2023-07. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Management is currently evaluating this ASU to determine its impact on the Company's disclosures.

3. Loans Held for Investment, Net

The Company’s investments in mortgage loans, mezzanine loans, preferred equity and promissory notes are accounted for as loans held for investment. The mortgage loans are presented as “Mortgage loans, held-for-investment, net” and the mezzanine loans, preferred equity and promissory notes are presented as “Loans, held-for-investment, net” on

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the Consolidated Balance Sheets. The following tables summarize our loans held-for-investment as of June 30, 2024 and December 31, 2023, respectively (dollars in thousands):


						Weighted Average
Loan Type	Outstanding Face Amount		Carrying Value (1)		Loan Count	Fixed Rate (2)		Coupon (3)		Life (years) (4)
June 30, 2024
Mortgage loans, held-for-investment	$	229,007	$	232,333	11	58.64	%	9.04	%	3.01
Mezzanine loans, held-for-investment	133,207		134,997		22	78.31	%	9.60	%	4.86
Preferred equity, held-for-investment	241,595		240,575		16	40.94	%	12.07	%	1.64
Promissory note, held-for-investment	68,000		54,942		2	100.00	%	16.47	%	0.89
	$	671,809	$	662,847	51	60.36	%	10.99	%	2.67


Loan Type	Outstanding Face Amount		Carrying Value (1)		Loan Count	Weighted Average
						Fixed Rate (2)		Coupon (3)		Life (years) (4)
December 31, 2023
Mortgage loans, held-for-investment	$	645,277	$	676,420	11	100.00	%	4.79	%	4.49
Mezzanine loans, held-for-investment	133,207		135,069		22	78.31	%	9.61	%	5.36
Preferred equity, held-for-investment	195,392		193,391		15	39.12	%	12.20	%	2.22
	$

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