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. 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 commercial mortgage-backed securities securitizations (“CMBS securitizations”), multifamily structured credit risk notes (“MSCR Notes”) and mortgage-backed securities, or our target assets. 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, 2023, the Company holds approximately 83.41% of the common limited partnership units in the OP (“OP Units”) which represents 100.00% of the Class A OP Units, and the OP owned all of the common limited partnership units (“SubOP Units”) of its subsidiary partnerships (collectively, the “Subsidiary OPs”) (see Note 14).
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 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 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 expires on February 6, 2024 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, 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 U.S. generally accepted accounting principles (“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, 2023.
The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (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, 2023 and December 31, 2022 and results of operations for the three months ended March 31, 2023 and 2022 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, 2022, and notes thereto in its Annual Report on Form 10-K filed with the SEC on March 31, 2023.
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 March 31, 2023, 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 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 CMBS that the Company consolidates, the Company owns 100% of the most subordinate tranche of the securities. The subordinate tranche includes the controlling class and has the ability to remove and replace the special servicer.
On the Consolidated Balance Sheets as of March 31, 2023, the Company consolidated each of the Freddie Mac K-Series securitization entities (the “CMBS Entities”) that were determined to be VIEs and for which the Company is the primary beneficiary. The CMBS Entities are independent of the Company, and the assets and liabilities of the CMBS Entities are not owned by and are not legal obligations of ours. Our exposure to the CMBS Entities is through the subordinated tranches. For financial reporting purposes, the underlying mortgage loans held by the trusts are recorded as a separate line item on the balance sheet under “Mortgage loans held in variable interest entities, at fair value.” The liabilities of the trusts consist solely of obligations to the CMBS holders of the consolidated trusts, excluding the CMBS B-Piece investments held by the Company. The liabilities are presented as “Bonds payable held in variable interest entities, at fair value” on the Consolidated Balance Sheets. The CMBS B-Pieces held by the Company, and the interest earned thereon are eliminated in consolidation. Management has elected the measurement alternative in ASC 810 to report the fair value of the assets and liabilities of the consolidated CMBS Entities in order to provide users of the financial statements with better information regarding the effects of credit risk and other market factors on the CMBS B-Pieces owned by the Company. Management has elected to show interest income and interest expense related to the CMBS Entities in aggregate with the change in fair value as “Change in net assets related to consolidated CMBS variable interest entities.” The residual difference between the fair value of the CMBS Entities’ assets and liabilities represents the Company’s investments in the CMBS B-Pieces at fair value.
Investment in subsidiaries
The Company conducts its operations through the OP, which directly or through a subsidiary, acts as the general partner of the Subsidiary OPs. The Subsidiary OPs own investments through limited liability companies that are SPEs which own investments directly. The OP is the sole member of the Mezz LLC, which owns investments directly. The OP has three classes of OP Units: Class A, Class B and Class C. Class A OP Units and Class B OP Units each have 50.0% of the voting power of the OP Units and Class C OP Units have no voting power. Each Class A OP Unit, Class B OP Unit and Class C OP Unit otherwise represents substantially the same economic interest in the OP. The Company is the majority limited partner of the OP in terms of economic interests, holding approximately 83.41% of the OP Units in the OP as of March 31, 2023 which represent 100% of the Class A OP Units, and the OP GP must generally receive approval of the Board to take any actions. As such, the Company consolidates the OP. The Company consolidates the SPEs where it is the primary beneficiary, as well as any VIEs where it is the primary beneficiary. All of the investments the SPEs own are consolidated in the 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. As of March 31, 2023, there are no outstanding redeemable noncontrolling interests issued by the Subsidiary OPs.
Redeemable Noncontrolling Interests
Noncontrolling interests represent the ownership interests in consolidated subsidiaries held by entities other than the Company. Those noncontrolling interests that the holder is allowed to redeem before liquidation or termination of the entity that issued those interests are considered redeemable noncontrolling interests.
The OP and the Subsidiary OPs have issued redeemable noncontrolling interests classified on the Consolidated Balance Sheets as temporary equity in accordance with ASC 480. This is presented as “Redeemable noncontrolling interests in the OP” on the Consolidated Balance Sheets and their share of “Net Income (Loss)” as “Net Income (Loss) attributable to redeemable noncontrolling interests” in the accompanying Consolidated Statements of Operations.
The redeemable noncontrolling interests were initially measured at the fair value of the contributed assets in accordance with ASC 805-50. The redeemable noncontrolling interests will be adjusted to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests. Capital contributions, distributions and profits and losses are allocated to the redeemable noncontrolling interests in accordance with the terms of the partnership agreements of the Subsidiary OPs and the OP.
Acquisition Accounting
The Company accounts for the assets acquired in the Formation Transaction as asset acquisitions pursuant to ASC 805-50, rather than as business combinations. Substantially all of the fair value of the assets acquired are concentrated in a group of similar identifiable assets, i.e. the SFR Loans represent one acquisition of similar identifiable assets, and the acquisition of the CMBS B-Pieces represents an additional acquisition of similar identifiable assets. Additionally, there were no corresponding in-place workforce, servicing platforms or any other item that could be considered an input or process associated with these assets. As such, the SFR Loans and the CMBS B-Pieces do not constitute businesses as defined by ASC 805-10-55.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. Substantially all amounts on deposit with major financial institutions exceed insured limits.
From time to time, the Company may have to post cash collateral to satisfy margin calls due to changes in fair value of the underlying collateral subject to master repurchase agreements. This cash is listed as restricted cash on the Consolidated Balance Sheets. Restricted cash is also stated at cost, which approximates fair value.
Mortgage and Other Loans Held-For-Investment, net
Loans that are held-for-investment are carried at their aggregate outstanding face amount, net of applicable (i) unamortized origination or acquisition premium and discounts, (ii) unamortized deferred fees and other direct loan origination costs, (iii) valuation allowance for 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.
Purchase Price Allocation
The Company considers the acquisition of real estate investments as asset acquisitions. Upon acquisition of a property, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment and intangible lease assets, in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805.
The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (“ASC 820”) (see Note 11), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets represents the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.
Real estate assets, including land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Expenditures for improvements, renovations and replacements are capitalized at cost. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table:
| | | | | |
| Land | Not depreciated |
Buildings | 30 years |
Improvements | 15 years |
Furniture, fixtures, and equipment | 3 years |
Intangible lease assets | 6 months |
Post-acquisition, construction in progress includes the cost of renovation projects being performed at the various properties. Once a project is complete, the historical cost of the renovation is placed into service in one of the categories above depending on the type of renovation project and is depreciated over the estimated useful lives as described in the table above.
Secured Financing and Master Repurchase Agreements
The Company's borrowings under secured financing agreements and master repurchase agreements are treated as collateralized financing arrangements carried at their contractual amounts, net of unamortized debt issuance costs, if any.
Income Recognition
Interest Income - Loans and mortgage loans held-for-investment, CMBS structured pass-through certificates, mortgage loans held in variable interest entities, bridge loans, MSCR Notes and mortgage backed securities where the Company expects to collect the contractual interest and principal payments are considered to be performing loans. The Company recognizes income on performing loans in accordance with the terms of the loan on an accrual basis. Interest income also includes amortization of loan premiums or discounts and loan origination costs and prepayment penalties.
Realized Gain (Loss) on Investments - The Company recognizes the excess, or deficiency, of net proceeds received, less the carrying value of such investments, as realized gains or losses, respectively. The Company reverses cumulative, unrealized gains or losses previously reported in its Consolidated Statements of Operations with respect to the investment sold at the time of the sale.
Rental Revenue
The Company owns one multifamily property whereby its primary operations consist of rental income earned from its residents under lease agreements typically with terms of one year or less. See Note 9 for additional information regarding this multifamily property. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. The Company records an allowance to reflect revenue that may not be collectable. This is recorded through a provision for bad debts, which is included in revenues from consolidated real estate owned in the accompanying Consolidated Statements of Operations. Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, pets and administrative, application and other fees and are recognized when earned. The Company implemented the provisions of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) as of December 31, 2021. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as a substantial portion of its revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09.
In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements (“ASU 2018-11”), which provides entities with relief from the costs of implementing certain aspects of ASU 2016-02. ASU 2018-11 provides a practical expedient that allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where the Company is the lessor. The Company implemented the provisions of ASU 2018-11 and 2016-02, collectively Topic 842 Leases (“ASC 842”), effective January 1, 2022. The Company presents the disclosure of leases in the consolidated statements of operations and began presenting all rentals and reimbursements from
tenants within revenues and expenses from consolidated real estate owned on the Consolidated Statements of Operations (Note 9).
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 Credit Losses
In prior periods, the Company, with the assistance of an independent valuations firm, performed 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 determined that it was probable that it would be unable to collect all amounts owed according to the contractual terms of a loan, impairment of that loan was indicated. If a loan was considered to be impaired, the Company would establish an allowance for loan losses, through a valuation provision in earnings that reduced 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 was expected solely from the collateral. For non-impaired loans with no specific allowance the Company determined an allowance for loan losses in accordance with ASC 450-20, Loss Contingencies (“ASC 450-20”), which represented 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 considered quantitative factors likely to cause estimated credit losses, including default rate and loss severity rates. The Company also evaluated 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 for the fiscal year ended December 31, 2022 are included in “Loan loss (provision)” on the accompanying Consolidated Statements of Operations.
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 requires the use of a current expected credit loss ("CECL") 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.
We adopted the guidance 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. 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 allowance for loan and lease losses reserve as of December 31, 2022, was $0.7 million and the CECL reserve as of January 1, 2023, is $2.3 million. As such, the cumulative effect of adoption of ASU 2016-13 is a $1.6 million reduction in retained earnings. The reversal of (provision for) credit losses of $0.034 million is included in other income on the accompanying Consolidated Statements of Operations, resulting in a March 31, 2023 ending allowance for credit loss of $2.3 million.
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, tenant profile, rental rates, operating expenses, the borrower’s exit plan and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.
The Company considers loans to be past-due when a monthly payment is due and unpaid for 60 days or more. Loans will be placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when they become 120 days or more past-due unless the loan is both well secured and in the process of collection. Accrual of interest on individual loans is discontinued when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Our policy is to cease accruing interest when a loan’s delinquency exceeds 120 days. All interest accrued but not collected for loans that are placed on nonaccrual status or subsequently charged-off are reversed against interest income. Income is subsequently recognized on the cash basis until, in management’s judgment, the borrower’s ability to make periodic principal and interest payments returns and future payments are reasonably assured, in which case the loan is returned to accrual status.
For individual loans, a troubled debt restructuring is a formal restructuring of a loan where, for economic or legal reasons related to the borrower’s financial difficulties, a concession that would not otherwise be considered is granted to the borrower. The concession may be granted in various forms, including providing a below-market interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date or a combination of these. An individual loan that has had a troubled debt restructuring is considered to be impaired and is subject to the relevant accounting for impaired loans. As of and for the three months ended March 31, 2023, 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, 2023, there were no loans acquired with deteriorated credit quality.
Fair Value
GAAP requires the categorization of the fair value of financial instruments into three broad levels that form a hierarchy based on the transparency of inputs to the valuation.
Level 1 – Inputs are adjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 – Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar instruments in active markets, and inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 – Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, related market activity for the asset or liability.
The Company follows this hierarchy for our financial instruments. Classifications will be based on the lowest level of input that is significant to the fair value measurement. The Company reviews the valuation of Level 3 financial instruments as part of our quarterly process.
Valuation of Consolidated VIEs
The Company reports the financial assets and liabilities of each consolidated CMBS trust at fair value using the measurement alternative included in ASU No. 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”). Pursuant to ASU 2014-13, both the financial assets and financial liabilities of the consolidated CMBS trusts are measured using the fair value of the financial liabilities (which are considered more observable than the fair value of the financial assets) and the equity of the CMBS trusts beneficially owned by the Company. As a result, the CMBS issued by the consolidated trusts, but not beneficially owned by us, are presented as financial liabilities in our consolidated financial statements, measured at their estimated fair value; the Company measured the financial assets as the total estimated fair value of the CMBS issued by the consolidated trust, regardless of whether such CMBS represent interests beneficially owned by the Company. Under the measurement alternative prescribed by ASU 2014-13, “Net income (loss)” reflects the economic interests in the consolidated CMBS beneficially owned by the Company, presented as “Change in net assets related to consolidated CMBS variable interest entities” in the Consolidated Statements of Operations, which includes applicable (1) changes in the fair value of CMBS beneficially owned by the Company, (2) interest income, interest expense and servicing fees earned from the CMBS trusts and (3) other residual returns or losses of the CMBS trusts, if any.
Valuation Methodologies
CMBS Trusts - The financial liabilities and equity of the consolidated CMBS trusts were valued using broker quotes. Broker quotes represent the price that an investment could be sold for in a market transaction and represent fair market value. Loans and bonds with quotes that are based on actual trades with a sufficient level of activity on or near the valuation date are classified as Level 2 assets. Loans and bonds that are priced using quotes derived from implied values, bid/ask prices for trades that were never consummated, or a limited amount of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.
CMBS Structured Pass-Through Certificates, MSCR Notes and Mortgage Backed Securities - Interest only tranches of CMBS structured pass-through certificates (“CMBS I/O Strips”), MSCR Notes and mortgage backed securities are categorized as Level 2 assets in the fair value hierarchy. CMBS I/O Strips, MSCR Notes and mortgage backed securities 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 Sheets.
Common Stock Investments - The common stock investment in NexPoint Storage Partners, Inc. (“NSP”) is categorized as a Level 3 asset in the fair value hierarchy. Despite our ability to exercise significant influence, the Company chose to value the NSP investment using the fair value option in accordance with ASC 825-10. The common stock investment in a private ground lease REIT (the “Private REIT”) is presented at fair value using the fair value option in accordance with ASC 825-10. The investment is categorized as a Level 3 asset in the fair value hierarchy.
Equity Method Investments - Under the equity method of accounting, the Company initially recognizes its investment at cost and subsequently adjusts the carrying amount of the investments for its share of earnings and losses reported by the investee, distributions received, and other-than-temporary impairments.
Repurchase Agreements - The repurchase agreements are categorized as Level 3 liabilities in the fair value hierarchy as such liabilities represent borrowings on collateral with terms specific to each borrower. Given the short to moderate term of the floating-rate facilities, the Company expects the fair value of repurchase agreements to approximate their outstanding principal balances.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis - Certain assets not measured at fair value on an ongoing basis but that are subject to fair-value adjustments only in certain circumstances, such as when there is evidence of impairment, will be measured at fair value on a nonrecurring basis. For first mortgage loans, mezzanine loans and preferred equity investments, the Company applies the amortized cost method of accounting.
Overall, our determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are our best estimates after consideration of a variety of internal and external factors. When an independent valuation firm expresses an opinion on the fair value of a financial instrument in the form of a range, the Company selects a value within the range provided by the independent valuation firm, generally the midpoint, to assess the reasonableness of our estimated fair value for that financial instrument.
Income Taxes
The Company has elected to be taxed as a REIT. As a result of the Company’s REIT qualification, the Company does not expect to pay U.S. federal corporate level taxes. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its stockholders. If the Company fails to meet these requirements, it could be subject to federal income tax on all of the Company’s taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to stockholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless the Company is entitled to relief under specific statutory provisions. Taxable income from certain non-REIT activities is managed through a taxable REIT subsidiary (“TRS”), which is subject to U.S. federal and applicable state and local corporate income taxes. As of March 31, 2023, 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 for open tax years 2020 through 2023.
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 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, 2024. The Company has not adopted any of the optional expedients or exceptions through March 31, 2023 but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.
In December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Topic 848 ("ASU 2022-06") which was issued to defer the sunset date of Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform to December 31, 2024. ASU 2022-06 is effective immediately for all companies. ASU 2022-06 had no impact on the Company’s consolidated financial statements for the three months ended March 31, 2023.
3. Loans Held for Investment, Net
The Company’s investments in mortgage loans, mezzanine loans, preferred equity and convertible notes are accounted for as loans held for investment. The mortgage loans are presented as “Mortgage loans, held-for-investment, net” and the mezzanine loans, preferred equity and convertible notes are presented as “Loans, held-for-investment, net” on the Consolidated Balance Sheets. The following tables summarize our loans held-for-investment as of March 31, 2023 and December 31, 2022, respectively (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loan Type | | Outstanding Face Amount | | Carrying Value (1) | | Loan Count | | Weighted Average |
| | | | Fixed Rate (2) | | Coupon (3) | | Life (years) (4) |
| March 31, 2023 | | | | | | | | | | | | |
| Mortgage loans, held-for-investment | | $ | 687,602 | | | $ | 723,343 | | | 15 | | 100.00 | % | | 4.81 | % | | 5.11 |
| Mezzanine loans, held-for-investment | | 133,207 | | | 135,336 | | | 22 | | 78.31 | % | | 9.48 | % | | 6.05 |
| Preferred equity, held-for-investment | | 150,209 | | | 149,212 | | | 13 | | 60.26 | % | | 11.23 | % | | 3.49 |
| | $ | 971,018 | | | $ | 1,007,891 | | | 50 | | 90.88 | % | | 6.44 | % | | 4.99 |
(1)Carrying value includes the outstanding face amount plus unamortized purchase premiums/discounts and any allowance for loan losses.
(2)The weighted-average of loans paying a fixed rate is weighted on current principal balance.
(3)The weighted-average coupon is weighted on outstanding face amount.
(4)The weighted-average life is weighted on outstanding face amount and assumes no prepayments. The maturity date for preferred equity investments represents the maturity date of the senior mortgage, as the preferred equity investments require repayment upon the sale or refinancing of the asset.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loan Type | | Outstanding Face Amount | | Carrying Value (1) | | Loan Count | | Weighted Average |
| | | | | Fixed Rate (2) | | Coupon (3) | | Life (years) (4) |
| December 31, 2022 | | | | | | | | | | | | |
| Mortgage loans, held-for-investment | | $ | 688,046 | | | $ | 726,531 | | | 15 | | 100.00 | % | | 4.81 | % | | 5.36 |
| Mezzanine loans, held-for-investment | | 163,021 | | | 165,182 | | | 23 | | 63.99 | % | | 10.42 | % | | 5.39 |
| Preferred equity, held-for-investment | | 91,382 | | | 90,965 | | | 10 | | 67.69 | % | | 11.51 | % | | 2.76 |
| | $ | 942,449 | | | $ | 982,678 | | | 48 | | 90.64 | % | | 6.43 | % | | 5.11 |
(1)Carrying value includes the outstanding face amount plus unamortized purchase premiums/discounts and any allowance for loan losses.
(2)The weighted-average of loans paying a fixed rate is weighted on current principal balance.
(3)The weighted-average coupon is weighted on outstanding face amount.
(4)The weighted-average life is weighted on outstanding face amount and assumes no prepayments. The maturity date for preferred equity investments represents the maturity date of the senior mortgage, as the preferred equity investments require repayment upon the sale or refinancing of the asset.
For the three months ended March 31, 2023 and 2022, the loan and preferred equity portfolio activity was as follows (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
| Balance at December 31, | $ | 982,678 | | | $ | 1,088,881 | |
| Recognition of retained preferred equity investment upon deconsolidation of real estate (Note 15) | 36,022 | | | — | |
| Cumulative effect of adoption of ASU 2016-13 (See Note 2) | (1,624) | | | — | |
| Originations | 28,816 | | | 99,708 | |
| Proceeds from principal repayments | (36,743) | | | (124,633) | |
| PIK distribution reinvested in Preferred Units | 209 | | | 168 | |
| Amortization of loan premium, net (1) | (1,501) | | | (7,818) | |
| Reversal of (provision for) credit losses, net | 34 | | | (151) | |
| Balance at March 31, | $ | 1,007,891 | | | $ | 1,056,155 | |
(1)Includes net amortization of loan purchase premiums.
As of March 31, 2023, and December 31, 2022, there were $55.0 million and $40.9 million of unamortized premiums on loans, held-for-investment, net, respectively, on the Consolidated Balance Sheets.
As discussed in Note 2, the Company evaluates loans classified as held-for-investment on a loan-by-loan basis every quarter. In conjunction with the review of the portfolio, the Company assesses the risk factors of each loan and assign a risk rating based on a variety of factors. Loans are rated “1” through “5,” from least risk to greatest risk, respectively. See Note 2 for a more detailed discussion of the risk factors and ratings. The following tables allocate the principal balance and net book value of the loan portfolio based on our internal risk ratings (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Risk Rating | | March 31, 2023 |
| Number of
Loans | | Carrying
Value | | % of Loan
Portfolio |
| 1 | | — | | $ | — | | | — | |
| 2 | | — | | — | | | — | |
| 3 | | 50 | | 1,007,891 | | | 100.00 | % |
| 4 | | — | | — | | | — | |
| 5 | | — | | — | | | — | |
| | 50 | | $ | 1,007,891 | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | |
| Risk Rating | | December 31, 2022 |
| Number of
Loans | | Carrying
Value | | % of Loan
Portfolio |
| 1 | | — | | $ | — | | | — | |
| 2 | | — | | — | | | — | |
| 3 | | 48 | | 982,678 | | | 100.00 | % |
| 4 | | — | | — | | | — | |
| 5 | | — | | — | | | — | |
| | 48 | | $ | 982,678 | | | 100.00 | % |
As of March 31, 2023, 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.
| | | | | | | | | | | | | | |
| Geography | | March 31, 2023 | | December 31, 2022 |
| Georgia | | 33.04 | % | | 34.04 | % |
| Florida | | 18.78 | % | | 19.34 | % |
| Texas | | 12.43 | % | | 11.21 | % |
| Nevada | | 2.80 | % | | 0.30 | % |
| Maryland | | 5.43 | % | | 5.59 | % |
| Minnesota | | 6.76 | % | | 6.97 | % |
| California | | 2.16 | % | | 4.66 | % |
| Alabama | | 3.70 | % | | 3.81 | % |
| North Carolina | | 2.69 | % | | 2.65 | % |
| Arkansas | | 1.37 | % | | 1.42 | % |
| Other (20 and 22 states each at <1%) | | 10.84 | % | | 10.01 | % |
| | 100.00 | % | | 100.00 | % |
*Included in “Other.”
| | | | | | | | | | | | | | |
| Collateral Property Type | | March 31, 2023 | | December 31, 2022 |
| Single Family Rental | | 71.54 | % | | 72.26 | % |
| Multifamily | | 23.67 | % | | 23.11 | % |
| Life Science | | 3.06 | % | | 2.85 | % |
| Self-Storage | | 1.73 | % | | 1.79 | % |
| | 100.00 | % | | 100.00 | % |
4. CMBS Trusts
As of March 31, 2023, the Company consolidated all of the CMBS Entities that it determined are VIEs and for which the Company is the primary beneficiary. The Company elected the fair-value measurement alternative in accordance with ASU 2014-13 for each of the trusts and carries the fair values of the trust’s assets and liabilities at fair value in its Consolidated Balance Sheets, recognizes changes in the trust’s net assets, including changes in fair-value adjustments and net interest earned, in its Consolidated Statements of Operations and records cash interest received from the trusts and cash interest paid to bondholders of the CMBS not beneficially owned by the Company as financing cash flows.
The following table presents the Company’s recognized Trust’s Assets and Liabilities (in thousands):
| | | | | | | | | | | | | | |
| Trust's Assets | | March 31, 2023 | | December 31, 2022 |
| Mortgage loans held in variable interest entities, at fair value | | $ | 6,747,377 | | | $ | 6,720,246 | |
| Accrued interest receivable | | 4,370 | | | 4,029 | |
| | | | |
| Trust's Liabilities | | | | |
| Bonds payable held in variable interest entities, at fair value | | (6,278,734) | | | (6,249,804) | |
| Accrued interest payable | | (3,514) | | | (3,207) | |
The following table presents “Change in net assets related to consolidated CMBS variable interest entities” (in thousands):
| | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2023 | | 2022 |
| Net interest earned | | $ | 10,643 | | | $ | 7,953 | |
| Unrealized gain (loss) | | 360 | | | (4,537) | |
| Change in net assets related to consolidated CMBS variable interest entities | | $ | 11,003 | | | $ | 3,416 | |
The following tables present the geographies and property types of collateral underlying the CMBS trusts consolidated by the Company as a percentage of the collateral unpaid principal balance:
| | | | | | | | | | | | | | |
| Geography | | March 31, 2023 | | December 31, 2022 |
| Texas | | 18.16 | % | | 17.95 | % |
| Florida | | 13.25 | % | | 13.82 | % |
| Arizona | | 3.97 | % | | 6.98 | % |
| California | | 8.24 | % | | 9.28 | % |
| Georgia | | 4.66 | % | | 4.68 | % |
| Washington | | 7.66 | % | | 6.88 | % |
| New Jersey | | 3.76 | % | | 3.97 | % |
| Nevada | | 2.33 | % | | 1.99 | % |
| Pennsylvania | | 1.19 | % | | 1.01 | % |
| Colorado | | 7.25 | % | | 6.21 | % |
| Connecticut | | 2.96 | % | | 3.64 | % |
| North Carolina | | 3.90 | % | | 3.53 | % |
| New York | | 3.23 | % | | 2.76 | % |
| Ohio | | 2.34 | % | | 2.00 | % |
| Virginia | | 1.89 | % | | 1.62 | % |
| Indiana | | 1.98 | % | | 1.69 | % |
| Illinois | | 1.59 | % | | 1.37 | % |
| Michigan | | 1.30 | % | | 1.11 | % |
| South Carolina | | * | | * |
| Maryland | | 1.10 | % | | * |
| Missouri | | 1.46 | % | | 1.25 | % |
| Other (21 and 22 states each at <1%) | | 7.78 | % | | 8.26 | % |
| | 100.00 | % | | 100.00 | % |
*Included in “Other.”
| | | | | | | | | | | | | | |
| Collateral Property Type | | March 31, 2023 | | December 31, 2022 |
| Multifamily | | 97.50 | % | | 98.45 | % |
| Manufactured Housing | | 2.50 | % | | 1.55 | % |
| | 100.00 | % | | 100.00 | % |
5. Common Stock and Equity Method Investments
The Company owns approximately 25.7% of the total outstanding shares of common stock of NSP and thus can exercise significant influence over NSP. NSP is a VIE and the Company has determined that it is not the primary beneficiary of NSP. The investment qualifies to be accounted for using the equity method. However, the Company elected the fair-value option in accordance with ASC 825-10-10 for NSP.
The investment in NSP is a Level 3 asset in the fair value hierarchy and was initially measured using the entry price of the asset. The Company's valuation policy for common stock is to use readily available market prices on the relevant valuation date to the extent they are available. On a quarterly basis, the Company determines the value using widely accepted valuation techniques. A bottoms up approach was used by valuing the wholly-owned self-storage assets in aggregate and development loans individually. In this bottoms-up approach, the discounted cash flow methodology is applied to the self-storage assets owned by NSP. Additionally, the income approach is used to determine the fair value of the development loans owned by NSP whereby contractual cash flows are discounted at observable market discount rates.
In addition, as a secondary check for reasonableness, a top down approach was applied whereby observable market terminal capitalization rates and discount rates are applied to the consolidated NSP cash flows. The valuation relies primarily on the bottoms-up approach, but uses the top down approach to corroborate the bottoms-up conclusion with a reasonable precision.
The Company owns approximately 6.36% of the total outstanding shares of common stock of the Private REIT as of March 31, 2023. The Company elected the fair-value option in accordance with ASC 825-10-10 for the Private REIT.
The investment in the Private REIT is a Level 3 asset in the fair value hierarchy and was initially measured using the convertible notes conversion share price of $17.50. On April 14, 2022, the two convertible notes converted into 1,394,213 shares or $25.0 million of common stock in the Private REIT, the parent company of the borrower under the convertible notes. As of March 31, 2023, the Company valued this investment based on the Private REIT's market approach price of $19.26 per share.
The Company owns approximately 98.0% of the total outstanding common equity of each of RFGH and RTB. The investments in RFGH and RTB are equity method investments. These investments are held in entities that are considered VIEs as the power to direct activities is not proportional to ownership interests. The Company is not the primary beneficiary, but is deemed to have significant influence, and as such accounts for them using the equity method.
The following table presents the common stock investments as of March 31, 2023 and December 31, 2022, respectively (in thousands, except share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment | | Investment
Date | | Property Type | | Shares | | Fair Value |
| | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
| Common Stock | | | | | | | | | | | | |
| NexPoint Storage Partners | | 11/6/2020 | | Self-storage | | 41,963 | | 41,963 | | $ | 50,145 | | | $ | 50,380 | |
| Private REIT | | 4/14/2022 | | Ground lease | | 1,394,213 | | 1,394,213 | | 26,853 | | | 27,884 | |
The following table presents “Change in unrealized gain on common stock investments” (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
| Change in unrealized gain on NexPoint Storage Partners | $ | (235) | | | $ | 329 | |
| Change in unrealized gain on Private REIT | (1,032) | | | — | |
| Change in unrealized gain on common stock investments | $ | (1,267) | | | $ | 329 | |
The following table presents the equity method investments as of March 31, 2023 and December 31, 2022, respectively (in thousands, except share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment | | Investment
Date | | Property Type | | Shares | | Carrying Value |
| | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
| Common Equity | | | | | | | | | | | | |
| RFGH | | 2/10/2023 | | Multifamily | | 50,000 | | — | | 500 | | | — | |
| RTB | | 2/24/2023 | | Multifamily | | 50,000 | | — | | 500 | | | — | |
6. Variable Interest Entities
Consolidated VIEs
At the end of each reporting period, the Company reassesses whether it remains the primary beneficiary for VIEs consolidated under the VIE model.
As of March 31, 2023, the Company has accounted for the following investments as unconsolidated VIEs:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Entities | | Instrument | | Asset Type | | Percentage Ownership as of March 31, 2023 | | Relationship as of March 31, 2023 |
| | | |
| Unconsolidated Entities: | | | | | | | | |
| NexPoint Storage Partners, Inc. | | Common Stock | | Self-storage | | 25.7 | % | | VIE |
| Resmark Forney Gateway Holdings, LLC | | Common equity | | Multifamily | | 98.0 | % | | VIE |
| Resmark The Brook, LLC | | Common equity | | Multifamily | | 98.0 | % | | VIE |
The Company's maximum exposure to loss of value for the NSP investment, inclusive of a related guaranty, is the carrying value of the Company's $50.1 million NSP common stock investment and the guaranteed obligations with respect to NSP under the Sponsor Guaranty Agreement as described in Note 15 of $83.8 million. The Company’s maximum exposure to loss of value for the RFGH and RTB common equity investments is the $0.5 million carrying value for each investment and may include an additional $3.8 million in unfunded commitments for each investment to the extent those commitments are funded.
7. CMBS Structured Pass-Through Certificates, MSCR Notes and Mortgage Backed Securities
As of March 31, 2023, the Company held twelve CMBS I/O Strips, three MSCR Notes and seven mortgage backed securities at fair value. The CMBS I/O Strips consist of interest only tranches of Freddie Mac structured pass-through certificates with underlying portfolios of fixed-rate mortgage loans secured primarily by stabilized multifamily properties. The MSCR Notes are unguaranteed securities designed to transfer to investors a portion of the credit risk associated with eligible multifamily mortgages linked to a reference pool. Mortgage backed securities receive principal and interest on floating-rate loans secured by SFR, multifamily and self-storage properties. See Note 2 and Note 11 for additional disclosures regarding valuation methodologies for the CMBS I/O Strips, MSCR Notes and mortgage backed securities.
The following table presents the CMBS I/O Strips, MSCR Notes and mortgage backed securities as of March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment | | Investment
Date | | Carrying Value | | Property Type | | Interest Rate | | Current Yield (1) | | Maturity Date |
| CMBS I/O Strips | | | | | | | | | | | | |
| CMBS I/O Strip | | 5/18/2020 | | $ | 1,781 | | | Multifamily | | 2.02 | % | | 14.58 | % | | 9/25/2046 |
| CMBS I/O Strip | | 8/6/2020 | | 16,976 | | | Multifamily | | 2.98 | % | | 16.44 | % | | 6/25/2030 |
| CMBS I/O Strip | | 4/28/2021 | (2) | 5,582 | | | Multifamily | | 1.59 | % | | 16.02 | % | | 1/25/2030 |
| CMBS I/O Strip | | 5/27/2021 | | 3,636 | | | Multifamily | | 3.39 | % | | 16.20 | % | | 5/25/2030 |
| CMBS I/O Strip | | 6/7/2021 | | 442 | | | Multifamily | | 2.31 | % | | 19.65 | % | | 11/25/2028 |
| CMBS I/O Strip | | 6/11/2021 | (3) | 3,409 | | | Multifamily | | 1.19 | % | | 13.75 | % | | 5/25/2029 |
| CMBS I/O Strip | | 6/21/2021 | | 1,043 | | | Multifamily | | 1.18 | % | | 17.17 | % | | 5/25/2030 |
| CMBS I/O Strip | | 8/10/2021 | | 2,405 | | | Multifamily | | 1.89 | % | | 16.35 | % | | 4/25/2030 |
| CMBS I/O Strip | | 8/11/2021 | | 1,322 | | | Multifamily | | 3.10 | % | | 14.08 | % | | 7/25/2031 |
| CMBS I/O Strip | | 8/24/2021 | | 247 | | | Multifamily | | 2.61 | % | | 14.83 | % | | 1/25/2031 |
| CMBS I/O Strip | | 9/1/2021 | | 3,673 | | | Multifamily | | 1.92 | % | | 15.48 | % | | 6/25/2030 |
| CMBS I/O Strip | | 9/11/2021 | | 3,792 | | | Multifamily | | 2.95 | % | | 14.04 | % | | 9/25/2031 |
| Total | | | | $ | 44,308 | | | | | 2.47 | % | | 15.77 | % | | |
| | | | | | | | | | | | |
| MSCR Notes | | | | | | | | | | | | |
| MSCR Notes | | 5/25/2022 | | $ | 3,899 | | | Multifamily | | 13.98 | % | | 13.98 | % | | 5/25/2052 |
| MSCR Notes | | 5/25/2022 | | 4,825 | | | Multifamily | | 10.98 | % | | 10.98 | % | | 5/25/2052 |
| MSCR Notes | | 9/23/2022 | | 1,291 | | | Multifamily | | 11.33 | % | | 12.45 | % | | 11/25/2051 |
| Total | | | | $ | 10,015 | | | | | 12.19 | % | | 12.34 | % | | |
| | | | | | | | | | | | |
| Mortgage Backed Securities | | | | | | | | | | | | |
| Mortgage Backed Securities | | 6/1/2022 | | $ | 9,793 | | | Single-Family | | 7.79 | % | | 8.11 | % | | 4/17/2026 |
| Mortgage Backed Securities | | 6/1/2022 | | 8,286 | | | Single-Family | | 4.87 | % | | 5.07 | % | | 11/19/2025 |
| Mortgage Backed Securities | | 7/28/2022 | | 535 | | | Single-Family | | 6.23 | % | | 6.33 | % | | 10/17/2027 |
| Mortgage Backed Securities | | 7/28/2022 | | 869 | | | Single-Family | | 3.60 | % | | 4.20 | % | | 6/20/2028 |
| Mortgage Backed Securities | | 9/12/2022 | | 3,965 | | | Multifamily | | 10.56 | % | | 10.54 | % | | 1/25/2031 |
| Mortgage Backed Securities | | 9/29/2022 | | 7,826 | | | Self Storage | | 10.34 | % | | 10.36 | % | | 9/15/2027 |
| Mortgage Backed Securities | | 3/10/2023 | | 5,733 | | | Multifamily | | 13.07 | % | | 13.10 | % | | 2/25/2025 |
| Total | | | | $ | 37,007 | | | | | 8.67 | % | | 8.82 | % | | |
(1)Current yield is the annualized income earned divided by the cost basis of the investment.
(2)The Company, through the Subsidiary OPs, purchased approximately $50.0 million and $15.0 million aggregate notional amount of the X1 interest-only tranche of the FHMS K-107 CMBS I/O Strip on April 28, 2021 and May 4, 2021, respectively.
(3)The Company, through the Subsidiary OPs, purchased approximately $80.0 million, $35.0 million, $40.0 million and $50.0 million aggregate notional amount of the X1 interest-only tranche of the FRESB 2019-SB64 CMBS I/O Strip on June 11, 2021, September 29, 2021, February 3, 2022 and March 18, 2022, respectively.
The following table presents the CMBS I/O Strips as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment | | Investment
Date | | Carrying Value | | Property Type | | Interest Rate | | Current Yield (1) | | Maturity Date |
| CMBS I/O Strips | | | | | | | | | | | | |
| CMBS I/O Strip | | 5/18/2020 | | $ | 1,807 | | | Multifamily | | 2.02 | % | | 14.56 | % | | 9/25/2046 |
| CMBS I/O Strip | | 8/6/2020 | | 18,364 | | | Multifamily | | 2.98 | % | | 15.98 | % | | 6/25/2030 |
| CMBS I/O Strip | | 4/28/2021 | (2) | 5,676 | | | Multifamily | | 1.59 | % | | 15.52 | % | | 1/25/2030 |
| CMBS I/O Strip | | 5/27/2021 | | 3,693 | | | Multifamily | | 3.39 | % | | 15.73 | % | | 5/25/2030 |
| CMBS I/O Strip | | 6/7/2021 | | 455 | | | Multifamily | | 2.31 | % | | 18.91 | % | | 11/25/2028 |
| CMBS I/O Strip | | 6/11/2021 | (3) | 4,188 | | | Multifamily | | 1.19 | % | | 13.34 | % | | 5/25/2029 |
| CMBS I/O Strip | | 6/21/2021 | | 1,117 | | | Multifamily | | 1.18 | % | | 16.77 | % | | 5/25/2030 |
| CMBS I/O Strip | | 8/10/2021 | | 2,445 | | | Multifamily | | 1.89 | % | | 15.87 | % | | 4/25/2030 |
| CMBS I/O Strip | | 8/11/2021 | | 1,333 | | | Multifamily | | 3.10 | % | | 13.74 | % | | 7/25/2031 |
| CMBS I/O Strip | | 8/24/2021 | | 250 | | | Multifamily | | 2.61 | % | | 14.44 | % | | 1/25/2031 |
| CMBS I/O Strip | | 9/1/2021 | | 3,726 | | | Multifamily | | 1.92 | % | | 15.03 | % | | 6/25/2030 |
| CMBS I/O Strip | | 9/11/2021 | | 3,822 | | | Multifamily | | 2.95 | % | | 13.70 | % | | 9/25/2031 |
| Total | | | | $ | 46,876 | | | | | 2.46 | % | | 15.32 | % | | |
| | | | | | | | | | | | |
| MSCR Notes | | | | | | | | | | | | |
| MSCR Notes | | 5/25/2022 | | $ | 4,019 | | | Multifamily | | 13.02 | % | | 13.02 | % | | 5/25/2052 |
| MSCR Notes | | 5/25/2022 | | 4,988 | | | Multifamily | | 10.02 | % | | 10.02 | % | | 5/25/2052 |
| MSCR Notes | | 9/23/2022 | | 1,306 | | | Multifamily | | 10.37 | % | | 11.40 | % | | 11/25/2051 |
| Total | | | | $ | 10,313 | | | | | 11.23 | % | | 11.36 | % | | |
| | | | | | | | | | | | |
| Mortgage Backed Securities | | | | | | | | | | | | |
| Mortgage Backed Securities | | 6/1/2022 | | $ | 9,638 | | | Single-Family | | 7.08 | % | | 7.39 | % | | 4/17/2026 |
| Mortgage Backed Securities | | 6/1/2022 | | 8,966 | | | Single-Family | | 4.87 | % | | 5.08 | % | | 11/19/2025 |
| Mortgage Backed Securities | | 7/28/2022 | | 526 | | | Single-Family | | 6.23 | % | | 6.33 | % | | 10/17/2027 |
| Mortgage Backed Securities | | 7/28/2022 | | 819 | | | Single-Family | | 3.60 | % | | 4.23 | % | | 6/20/2028 |
| Mortgage Backed Securities | | 9/12/2022 | | 4,473 | | | Multifamily | | 9.29 | % | | 9.27 | % | | 1/25/2031 |
| Mortgage Backed Securities | | 9/29/2022 | | 7,906 | | | Self Storage | | 9.57 | % | | 9.59 | % | | 9/15/2027 |
| Total | | | | $ | 32,328 | | | | | 7.28 | % | | 7.45 | % | | |
(1)Current yield is the annualized income earned divided by the cost basis of the investment.
(2)The Company, through the Subsidiary OPs, purchased approximately $50.0 million and $15.0 million aggregate notional amount of the X1 interest-only tranche of the FHMS K-107 CMBS I/O Strip on April 28, 2021 and May 4, 2021, respectively.
(3)The Company, through the Subsidiary OPs, purchased approximately $80.0 million, $35.0 million, $40.0 million and $50.0 million aggregate notional amount of the X1 interest-only tranche of the FRESB 2019-SB64 CMBS I/O Strip on June 11, 2021, September 29, 2021, February 3, 2022 and March 18, 2022, respectively.
The following table presents activity related to the Company’s CMBS I/O Strips, MSCR Notes and mortgage backed securities (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
| Net interest earned | $ | 717 | | | $ | 1,165 | |
| Change in unrealized gain (loss) on CMBS structured pass-through certificates | (752) | | | (4,340) | |
| Change in unrealized gain (loss) on MSCR notes | (298) | | | — | |
| Change in unrealized (loss) on mortgage backed securities | (606) | | | — | |
| Total | $ | (939) | | | $ | (3,175) | |
8. Bridge Loan
On March 31, 2022, the Company, through one of the Subsidiary OPs, originated a bridge loan for $13.5 million. The bridge loan was secured by a development property in Las Vegas, Nevada, and was used by the borrower to finance the acquisition of the property prior to obtaining construction financing. The loan bore interest at a rate of 1.50% plus the Wall Street Journal Prime Rate (“WSJ Prime”) and was set to mature on October 1, 2022. On August 9, 2022, the bridge loan was paid off.
9. Real Estate Investment, net
On December 31, 2021, the Company acquired a 204-unit multifamily property in Charlotte, North Carolina (Hudson Montford). The property was 93.6% and 96.1% occupied, with effective rent per occupied unit of $1,653 per month and $1,663, per month as of March 31, 2023 (unaudited) and December 31, 2022, respectively. On February 1, 2022, the Company acquired a 368-unit multifamily property in Las Vegas, Nevada (Elysian at Hughes Center). As of December 31, 2022, the property was 94.0% occupied with effective rent per occupied unit of $1,927 per month as of December 31, 2022. The Company no longer maintains a common equity interest in this property and through a restructuring effective January 1, 2023, the investment is deconsolidated and presented solely as a preferred equity investment in 2023.
As of March 31, 2023, the major components of the Company's investments in multifamily properties were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Investment, Net | Land | | Buildings and
Improvements | | Intangible Lease
Assets | | Construction in Progress | | Furniture,
Fixtures and
Equipment | | Totals |
| Hudson Montford | $ | 10,996 | | | $ | 49,837 | | | $ | — | | | $ | 26 | | | $ | 629 | | | $ | 61,488 | |
| Accumulated depreciation and amortization | — | | | (2,176) | | | — | | | — | | | (240) | | | (2,416) | |
| Total Real Estate Investments, Net | $ | 10,996 | | | $ | 47,661 | | | $ | — | | | $ | 26 | | | $ | 389 | | | $ | 59,072 | |
As of December 31, 2022, the major components of the Company's investments in multifamily properties were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Investments, Net | Land | | Buildings and
Improvements | | Intangible Lease
Assets | | Construction in Progress | | Furniture,
Fixtures and
Equipment | | Totals |
| Hudson Montford | $ | 10,996 | | | $ | 49,831 | | | $ | — | | | $ | 2 | | | $ | 602 | | | $ | 61,431 | |
| Elysian at Hughes | 25,590 | | | 160,141 | | | — | | | — | | | — | | | 185,731 | |
| Accumulated depreciation and amortization | — | | | (1,752) | | | — | | | — | | | (188) | | | (1,940) | |
| Total Real Estate Investments, Net | $ | 36,586 | | | $ | 208,220 | | | $ | — | | | $ | 2 | | | $ | 414 | | | $ | 245,222 | |
The following table reflects the revenue and expenses for the three months ended March 31, 2023 and 2022, for our multifamily property (in thousands).
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
| Revenues | | | |
| Rental income | $ | 1,018 | | | $ | 2,180 | |
| Other income | 10 | | | 207 | |
| Total revenues | $ | 1,028 | | | $ | 2,387 | |
| Expenses | | | |
| Interest expense | 581 | | | 669 | |
| Real estate taxes and insurance | 172 | | | 404 | |
| Property operating expenses | 185 | | | 367 | |
| Property general and administrative expenses | 35 | | | 45 | |
| Property management fees | 29 | | | 63 | |
| Depreciation and amortization | 476 | | | 944 | |
| Rate cap (income) expense | 194 | | | (351) | |
| Debt service bridge | — | | | 287 | |
| Casualty loss | (175) | | | — | |
| Total expenses | 1,497 | | | 2,428 | |
| Net income (loss) from consolidated real estate owned | $ | (469) | | | $ | (41) | |
10. Debt
The following table summarizes the Company’s financing arrangements in place as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Facility | | Collateral |
| | Date issued | | Outstanding
face amount | | Carrying value | | Final stated
maturity | | Weighted
average interest
rate (1) | | Weighted
average life
(years) (2) | | Outstanding
face amount | | Amortized cost
basis | | Carrying value
(3) | | Weighted
average life
(years) (2) |
| Master Repurchase Agreements | | | | | | | | | | | | | | | | | | | |
| CMBS | | | | | | | | | | | | | | | | | | | |
| Mizuho(4) | 4/15/2020 | | $ | 350,399 | | | $ | 350,399 | | | N/A | (5) | 6.72 | % | | 0.10 | | $ | 967,094 | | | $ | 541,495 | | | $ | 536,115 | | | 6.8 |
| Asset Specific Financing | | | | | | | | | | | | | | | | | | | |
| Single Family Rental loans | | | | | | | | | | | | | | | | | | | |
| Freddie Mac | 7/12/2019 | | 628,228 | | | 628,228 | | | 7/12/2029 | | 2.35 | % | | 5.1 | | 687,602 | | | 723,343 | | | 723,343 | | | 5.1 |
| Mezzanine loans | | | | | | | | | | | | | | | | | | | |
| Freddie Mac | 10/20/2020 | | 59,252 | | | 59,252 | | | 8/1/2031 | | 0.30 | % | | 7.0 | | 96,817 | | | 99,188 | | | 99,188 | | | 7.0 |
| Multifamily properties | | | | | | | | | | | | | | | | | | | |
| CBRE | 12/31/2021 | | 32,480 | | | 32,235 | | | 6/1/2028 | (6) | 7.34 | % | | 5.2 | | N/A | | 59,072 | | | 59,072 | | | 5.2 |
| Unsecured Financing | | | | | | | | | | | | | | | | | | | |
| Various | 10/15/2020 | | 36,500 | | | 35,606 | | | 10/25/2025 | | 7.50 | % | | 2.6 | | N/A | | N/A | | N/A | | 2.6 |
| Various | 4/20/2021 | | 165,000 | | | 163,070 | | | 4/15/2026 | | 5.75 | % | | 3.0 | | N/A | | N/A | | N/A | | N/A |
| Various | 10/18/2022 | | 6,500 | | | 6,500 | | | 10/18/2027 | | 7.50 | % | | 4.6 | | N/A | | N/A | | N/A | | N/A |
| Total/weighted average | | | $ | 1,278,359 | | | $ | 1,275,290 | | | | | 4.19 | % | | 3.5 | | $ | 1,751,513 | | | $ | 1,423,098 | | | $ | 1,417,718 | | | 6.1 |
(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 on an unconsolidated basis. SFR Loans and mezzanine loans are shown at amortized cost.
(4)On April 15, 2020, three of our subsidiaries entered into a master repurchase agreement with Mizuho Securities ("Mizuho"). Borrowings under these repurchase agreements are collateralized by portions of the CMBS B-Pieces, CMBS I/O Strips, MSCR Notes and mortgage backed securities.
(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.
(6)Debt was assumed upon acquisition of this property and recorded at the outstanding principal amount, net of debt issuance costs. The loan can be prepaid at a 1.0% prepayment premium on any unpaid principal. The loan is open to pre-payment in the last three months of the term.
The following table summarizes the Company’s financing arrangements in place as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Facility | | Collateral |
| | Date issued | | Outstanding
face amount | | Carrying value | | Final stated
maturity | | Weighted
average interest
rate (1) | | Weighted
average life
(years) (2) | | Outstanding
face amount | | Amortized cost
basis | | Carrying value
(3) | | Weighted
average life
(years) (2) |
| Master Repurchase Agreements | | | | | | | | | | | | | | | | | | | |
| CMBS | | | | | | | | | | | | | | | | | | | |
| Mizuho(4) | 4/15/2020 | | $ | 331,020 | | | $ | 331,020 | | | N/A | (5) | 5.83 | % | | 0.2 | | $ | 974,440 | | | $ | 543,919 | | | $ | 539,736 | | | 7.0 |
| Asset Specific Financing | | | | | | | | | | | | | | | | | | | |
| Single Family Rental loans | | | | | | | | | | | | | | | | | | | |
| Freddie Mac | 7/12/2019 | | 628,633 | | | 628,633 | | | 7/12/2029 | | 2.35 | % | | 5.4 | | 688,046 | | | 726,531 | | | 726,531 | | | 5.4 |
| Mezzanine loans | | | | | | | | | | | | | | | | | | | |
| Freddie Mac | 10/20/2020 | | 59,252 | | | 59,252 | | | 8/1/2031 | | 0.30 | % | | 7.3 | | 105,817 | | | 108,390 | | | 108,390 | | | 7.3 |
| Multifamily properties | | | | | | | | | | | | | | | | | | | |
| CBRE | 12/31/2021 | | 32,480 | | | 32,176 | | | 6/1/2028 | (6) | 5.80 | % | | 5.4 | | N/A | | 59,491 | | | 59,491 | | | 5.4 |
| CBRE | 2/1/2022 | | 89,634 | | | 89,060 | | | 2/1/2032 | | 3.52 | % | | 9.1 | | N/A | | 185,731 | | | 185,731 | | | 9.1 |
| Unsecured Financing | | | | | | | | | | | | | | | | | | | |
| Various | 10/15/2020 | | 36,500 | | | 35,530 | | | 10/25/2025 | | 7.50 | % | | 2.8 | | N/A | | N/A | | N/A | | 2.8 |
| Various | 4/20/2021 | | 165,000 | | | 162,930 | | | 4/15/2026 | | 5.75 | % | | 3.3 | | N/A | | N/A | | N/A | | N/A |
| Various | 10/18/2022 | | $ | 6,500 | | | $ | 6,500 | | | 10/18/2027 | | 7.50 | % | | 4.8 | | N/A | | N/A | | N/A | | N/A |
| Total/weighted average | | | $ | 1,349,019 | | | $ | 1,345,101 | | | | | 3.85 | % | | 4.1 | | $ | 1,768,303 | | | $ | 1,624,062 | | | $ | 1,619,879 | | | 6.4 |
(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 on an unconsolidated basis. SFR Loans and mezzanine loans are shown at amortized cost.
(4)On April 15, 2020, three of our subsidiaries entered into a master repurchase agreement with Mizuho. Borrowings under these repurchase agreements are collateralized by portions of the CMBS B-Pieces, CMBS I/O Strips, MSCR Notes and mortgage backed securities.
(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.
(6)Debt was assumed upon acquisition of this property and recorded at the outstanding principal amount, net of debt issuance costs. The loan can be prepaid at a 1.0% prepayment premium on any unpaid principal. The loan is open to pre-payment in the last three months of the term.
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 and the OP. The guarantors are subject to minimum net worth and liquidity covenants. The Credit Facility continues to be guaranteed by members of the Contribution Group and the OP as of March 31, 2023. 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 or is paid off 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, 2023, the outstanding balance on the Credit Facility was $628.2 million.
We, through the Subsidiary OPs, have borrowed approximately $350.4 million under our repurchase agreements and posted $967.1 million par value of our CMBS B-Piece, CMBS I/O Strip, MSCR Notes and mortgage backed security investments as collateral for the three months ended March 31, 2023. The CMBS B-Pieces, CMBS I/O Strips, MSCR Notes and mortgage backed securities 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 7.50% Senior Unsecured Notes (the “OP Notes”) for an aggregate principal amount of $36.5 million and a coupon rate of 7.50%. The OP 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 OP
Notes are fully guaranteed by the Company in the event that the OP cannot satisfy the obligations of the OP Notes. As of March 31, 2023, any action required under the guaranty is considered remote.
On January 25, 2022, the Company issued an additional $35.0 million aggregate principal amount of its 5.75% Senior Unsecured Notes due 2026 (the "5.75% Notes") at a price equal to 100.9% par value, including accrued interest, for proceeds of approximately $35.1 million after original issue discount and underwriting fees.
On May 20, 2022, the Company purchased $3.0 million aggregate principal amount of its 5.75% Notes at a price equal to 96.3% par value, including accrued interest, for approximately $2.9 million. The purchased 5.75% Notes were cancelled upon settlement.
On June 30, 2022, the Company purchased $2.0 million aggregate principal amount of its 5.75% Notes at a price equal to 96.5% par value, including accrued interest, for approximately $2.0 million. The purchased 5.75% Notes were cancelled upon settlement.
As of March 31, 2023, the outstanding principal balances related to the SFR Loans and levered mezzanine loans consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment | | Investment Date | | Outstanding Principal Balance (1) | | Location | | Property Type | | Interest Type | | Interest Rate | | Maturity Date |
| SFR Loans | | | | | | | | | | | | | | |
| Senior loan | | 2/11/2020 | | $ | 465,690 | | | Various | | Single-family | | Fixed | | 2.24 | % | | 9/1/2028 |
| Senior loan | | 2/11/2020 | | 46,094 | | | Various | | Single-family | | Fixed | | 2.14 | % | | 10/1/2025 |
| Senior loan | | 2/11/2020 | | 34,385 | | | Various | | Single-family | | Fixed | | 2.70 | % | | 11/1/2028 |
| Senior loan | | 2/11/2020 | | 9,251 | | | Various | | Single-family | | Fixed | | 2.79 | % | | 9/1/2028 |
| Senior loan | | 2/11/2020 | | 9,284 | | | Various | | Single-family | | Fixed | | 2.45 | % | | 3/1/2026 |
| Senior loan | | 2/11/2020 | | 8,787 | | | Various | | Single-family | | Fixed | | 3.51 | % | | 2/1/2028 |
| Senior loan | | 2/11/2020 | | 8,805 | | | Various | | Single-family | | Fixed | | 3.30 | % | | 10/1/2028 |
| Senior loan | | 2/11/2020 | | 7,974 | | | Various | | Single-family | | Fixed | | 3.14 | % | | 1/1/2029 |
| Senior loan | | 2/11/2020 | | 6,748 | | | Various | | Single-family | | Fixed | | 2.98 | % | | 2/1/2029 |
| Senior loan | | 2/11/2020 | | 5,922 | | | Various | | Single-family | | Fixed | | 2.99 | % | | 3/1/2029 |
| Senior loan | | 2/11/2020 | | 5,486 | | | Various | | Single-family | | Fixed | | 2.40 | % | | 2/1/2024 |
| Senior loan | | 2/11/2020 | | 5,346 | | | Various | | Single-family | | Fixed | | 3.14 | % | | 12/1/2028 |
| Senior loan | | 2/11/2020 | | 4,992 | | | Various | | Single-family | | Fixed | | 2.64 | % | | 10/1/2028 |
| Senior loan | | 2/11/2020 | | 4,749 | | | Various | | Single-family | | Fixed | | 2.48 | % | | 8/1/2023 |
| Senior loan | | 2/11/2020 | | 4,715 | | | Various | | Single-family | | Fixed | | 2.97 | % | | 1/1/2029 |
| Total | | | | $ | 628,228 | | | | | | | | | 2.35 | % | | |
| Mezzanine Loans | | | | | | | | | | | | | | |
| Senior loan | | 10/20/2020 | | $ | 8,723 | | | Wilmington, DE | | Multifamily | | Fixed | | 0.30 | % | | 6/1/2029 |
| Senior loan | | 10/20/2020 | | 7,344 | | | White Marsh, MD | | Multifamily | | Fixed | | 0.30 | % | | 4/1/2031 |
| Senior loan | | 10/20/2020 | | 6,353 | | | Philadelphia, PA | | Multifamily | | Fixed | | 0.30 | % | | 7/1/2031 |
| Senior loan | | 10/20/2020 | | 5,881 | | | Daytona Beach, FL | | Multifamily | | Fixed | | 0.30 | % | | 7/1/2031 |
| Senior loan | | 10/20/2020 | | 4,523 | | | Laurel, MD | | Multifamily | | Fixed | | 0.30 | % | | 7/1/2031 |
| Senior loan | | 10/20/2020 | | 4,179 | | | Temple Hills, MD | | Multifamily | | Fixed | | 0.30 | % | | 1/1/2029 |
| Senior loan | | 10/20/2020 | | 3,390 | | | Temple Hills, MD | | Multifamily | | Fixed | | 0.30 | % | | 5/1/2029 |
| Senior loan | | 10/20/2020 | | 3,348 | | | Lakewood, NJ | | Multifamily | | Fixed | | 0.30 | % | | 5/1/2029 |
| Senior loan | | 10/20/2020 | | 2,454 | | | North Aurora, IL | | Multifamily | | Fixed | | 0.30 | % | | 11/1/2028 |
| Senior loan | | 10/20/2020 | | 2,264 | | | Rosedale, MD | | Multifamily | | Fixed | | 0.30 | % | | 10/1/2028 |
| Senior loan | | 10/20/2020 | | 2,215 | | | Cockeysville, MD | | Multifamily | | Fixed | | 0.30 | % | | 7/1/2031 |
| Senior loan | | 10/20/2020 | | 2,026 | | | Laurel, MD | | Multifamily | | Fixed | | 0.30 | % | | 7/1/2029 |
| Senior loan | | 10/20/2020 | | 1,836 | | | Vancouver, WA | | Multifamily | | Fixed | | 0.30 | % | | 8/1/2031 |
| Senior loan | | 10/20/2020 | | 1,763 | | | Tyler, TX | | Multifamily | | Fixed | | 0.30 | % | | 11/1/2028 |
| Senior loan | | 10/20/2020 | | 1,307 | | | Las Vegas, NV | | Multifamily | | Fixed | | 0.30 | % | | 10/1/2028 |
| Senior loan | | 10/20/2020 | | 918 | | | Atlanta, GA | | Multifamily | | Fixed | | 0.30 | % | | 8/1/2031 |
| Senior loan | | 10/20/2020 | | 728 | | | Des Moines, IA | | Multifamily | | Fixed | | 0.30 | % | | 3/1/2029 |
| Total | | | | $ | 59,252 | | | | | | | | | 0.30 | % | | |
(1)Outstanding principal balance represents the total repurchase agreement balance outstanding as of March 31, 2023.
For the three months ended March 31, 2023 and 2022, the activity related to the carrying value of the master repurchase agreements, secured financing agreements and unsecured financing were as follows (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
| Balances as of December 31, | $ | 1,345,101 | | | $ | 1,273,051 | |
| Adjustment to mortgages payable, net on deconsolidation of real estate | (89,012) | | | — | |
| Principal borrowings | 26,801 | | | 148,948 | |
| Principal repayments | (7,827) | | | (100,884) | |
| Accretion of discounts | 216 | | | 197 | |
| Amortization of deferred financing costs | 11 | | | 12 | |
| Balances as of March 31, | $ | 1,275,290 | | | $ | 1,321,324 | |
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, 2023 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Year | | Recourse | | Non-recourse | | Total |
| 2023(1) | | $ | — | | | $ | (355,148) | | | $ | (355,148) | |
| 2024 | | — | | | (5,486) | | | (5,486) | |
| 2025 | | (36,500) | | | (46,094) | | | (82,594) | |
| 2026 | | (197,480) | | | (9,284) | | | (206,764) | |
| 2027 | | (6,500) | | | — | | | (6,500) | |
| Thereafter | | — | | | (621,867) | | | (621,867) | |
| | $ | (240,480) | | | $ | (1,037,879) | | | $ | (1,278,359) | |
(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.
11. 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.
Derivative Financial Instruments and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings. In order to minimize counterparty credit risk, the Company enters into and expects to enter into hedging arrangements only with major financial institutions that have high credit ratings.
The Company utilizes an independent third party to perform the market valuations on its derivative financial instruments. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of March 31, 2023 and December 31, 2022 were classified as Level 2 of the fair value hierarchy.
The Company’s main objective in using interest rate derivatives is to add stability to interest expense related to floating rate debt. To accomplish this objective, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. On December 30, 2021, the Company, through a subsidiary, entered into a $32.5 million interest rate cap agreement at a strike rate of 2.29% to hedge the variable cash flows associated with the Company's floating rate debt. The interest rate cap terminates on June 1, 2024. As of March 31, 2023, this interest rate cap had a fair value of approximately $1.1 million.
Financial Instruments Carried at Fair Value
See Note 2 and Notes 4 through 7 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.
In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current creditworthiness 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 that 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, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | |
| Cash and cash equivalents | $ | 38,830 | | | $ | 38,830 | | | $ | — | | | $ | — | | | $ | 38,830 | |
| Restricted cash | 1,495 | | | 1,495 | | | — | | | — | | | 1,495 | |
| Real estate investment, net | 59,072 | | | — | | | — | | | 59,072 | | | 59,072 | |
| Loans, held-for-investment, net | 284,548 | | | — | | | — | | | 290,503 | | | 290,503 | |
| Common stock investments, at fair value | 76,998 | | | — | | | — | | | 76,998 | | | 76,998 | |
| Equity method investments | 1,000 | | | — | | | — | | | 1,000 | | | 1,000 | |
| Mortgage loans, held-for-investment, net | 723,343 | | | — | | | — | | | 717,651 | | | 717,651 | |
| Accrued interest | 17,467 | | | 17,467 | | | — | | | — | | | 17,467 | |
| Mortgage loans held in variable interest entities, at fair value | 6,747,377 | | | — | | | 6,747,377 | | | — | | | 6,747,377 | |
| CMBS structured pass-through certificates, at fair value | 44,308 | | | — | | | 44,308 | | | — | | | 44,308 | |
| MSCR notes, at fair value | 10,015 | | | — | | | 10,015 | | | — | | | 10,015 | |
| Mortgage backed securities, at fair value | 37,007 | | | — | | | 37,007 | | | — | | | 37,007 | |
| Accounts receivable and other assets | 1,106 | | | 1,106 | | | — | | | — | | | 1,106 | |
| $ | 8,042,566 | | | $ | 58,898 | | | $ | 6,838,707 | | | $ | 1,145,224 | | | $ | 8,042,829 | |
| | | | | | | | | |
| Liabilities | | | | | | | | | |
| Secured financing agreements, net | $ | 687,480 | | | $ | — | | | $ | — | | | $ | 713,253 | | | $ | 713,253 | |
| Master repurchase agreements | 350,399 | | | — | | | — | | | 350,399 | | | 350,399 | |
| Unsecured notes, net | 205,176 | | | — | | | 178,073 | | | — | | | 178,073 | |
| Mortgages payable, net | 32,235 | | | — | | | — | | | 32,235 | | | 32,235 | |
| Accounts payable and other accrued liabilities | 5,377 | | | 5,377 | | | — | | | — | | | 5,377 | |
| Accrued interest payable | 10,189 | | | 10,189 | | | — | | | — | | | 10,189 | |
| Bonds payable held in variable interest entities, at fair value | 6,278,734 | | | — | | | 6,278,734 | | | — | | | 6,278,734 | |
| $ | 7,569,590 | | | $ | 15,566 | | | $ | 6,456,807 | | | $ | 1,095,887 | | | $ | 7,568,260 | |
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 December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
| | Carrying
Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | |
| Cash and cash equivalents | | $ | 20,048 | | | $ | 20,048 | | | $ | — | | | $ | — | | | $ | 20,048 | |
| Restricted cash | | 299 | | | 299 | | | — | | | — | | | 299 | |
| Real estate investments, net | | 245,222 | | | — | | | — | | | 245,222 | | | 245,222 | |
| Loans, held-for-investment, net | | 256,147 | | | — | | | — | | | 255,254 | | | 255,254 | |
| Common stock investments, at fair value | | 78,264 | | | — | | | — | | | 78,264 | | | 78,264 | |
| Mortgage loans, held-for-investment, net | | 726,531 | | | — | | | — | | | 727,533 | | | 727,533 | |
| Accrued interest | | 15,665 | | | 15,665 | | | — | | | — | | | 15,665 | |
| Mortgage loans held in variable interest entities, at fair value | | 6,720,246 | | | — | | | 6,720,246 | | | — | | | 6,720,246 | |
| CMBS structured pass-through certificates, at fair value | | 46,876 | | | — | | | 46,876 | | | — | | | 46,876 | |
| MSCR notes, at fair value | | 10,313 | | | — | | | 10,313 | | | — | | | 10,313 | |
| Mortgage backed securities, at fair value | | 32,328 | | | — | | | 32,328 | | | — | | | 32,328 | |
| Accounts receivable and other assets | | 2,197 | | | 2,197 | | | — | | | — | | | 2,197 | |
| | $ | 8,154,136 | | | $ | 38,209 | | | $ | 6,809,763 | | | $ | 1,306,273 | | | $ | 8,154,245 | |
| | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Secured financing agreements, net | | $ | 687,885 | | | $ | — | | | $ | — | | | $ | 713,253 | | | $ | 713,253 | |
| Master repurchase agreements | | 331,020 | | | — | | | — | | | 331,020 | | | 331,020 | |
| Unsecured notes, net | | 204,960 | | | — | | | 175,560 | | | — | | | 175,560 | |
| Mortgages payable, net | | 121,236 | | | — | | | — | | | 121,236 | | | 121,236 | |
| Accounts payable and other accrued liabilities | | 6,231 | | | 6,236 | | | — | | | — | | | 6,236 | |
| Accrued interest payable | | 7,986 | | | 7,986 | | | — | | | — | | | 7,986 | |
| Bonds payable held in variable interest entities, at fair value | | 6,249,804 | | | — | | | 6,249,804 | | | — | | | 6,249,804 | |
| | $ | 7,609,122 | | | $ | 14,222 | | | $ | 6,425,364 | | | $ | 1,165,509 | | | $ | 7,605,095 | |
The significant unobservable inputs used in the fair value measurement of the Company’s investment in NSP are the discount rate and terminal capitalization rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The Company's investment in the Private REIT was transferred out of level 2 to level 3 due to a lack of observable market data for the three months ended December 31, 2022. The following is a summary of significant unobservable inputs used in the fair valuation of the Company's Level 3 assets carried at fair value on the Consolidated Balance Sheets for the three months ended March 31, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying
Value | | Valuation Technique | | Unobservable Inputs | | Range | | Weighted Average |
| Common stock investment, at fair value | $ | 50,145 | | | Discounted cash flow | | Terminal cap rate | | 5.13% - 5.63% | | 5.38 | % |
| | | | | Discount rate | | 7.75% - 9.75% | | 8.75 | % |
| Common stock investment, at fair value | 26,853 | | | Market approach | | Yield | | 3.35% - 5.00% | | 3.81 | % |
The table below reflects a summary of changes for the Company's Level 3 common stock assets carried at fair value on the Consolidated Balance Sheets for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | |
| Balance as of 12/31/22 | | Change in Unrealized Gains /(Losses) | | Balance as of 03/31/23 |
| Common stock investment, at fair value | $ | 50,380 | | | $ | (235) | | | $ | 50,145 | |
| Common stock investment, at fair value | 27,884 | | | (1,031) | | | 26,853 | |
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 14). 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, 2023, the redeemable noncontrolling interests in the OP are valued at their carrying value on the Consolidated Balance Sheets (see Note 14).
12. Stockholders’ Equity
Common Stock
During the three months ended March 31, 2023, the Company issued 104,288 shares of common stock pursuant to its long-term incentive plan (see “Long Term Incentive Plan” below).
As of March 31, 2023, the Company had 17,471,218 shares of common stock, par value $0.01 per share, issued and 17,184,231 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 “Prior Share Repurchase Program”) through which the Company could 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 expired on March 9, 2022. On September 28, 2020, the Board authorized the expansion of the Prior Share Repurchase Program to include the Company’s Series A Preferred Stock with the same period and repurchase limit. The Company was able to 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. From inception through expiration, the Company 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.
On February 22, 2023, 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 and Series A Preferred Stock at an aggregate market value of up to $20.0 million in shares of its common stock during a two-year period set to expire on February 22, 2025. 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 NAV per
share. Repurchases under this program may be discontinued at any time. The Company has not made any purchases under the Share Repurchase Program as of the date of this report.
Long Term Incentive Plan
On January 31, 2020, the NexPoint Real Estate Finance, Inc. 2020 Long Term Incentive Plan (the “2020 LTIP”) was approved, and on May 7, 2020, 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, 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, on November 8, 2021, the Company granted 1,201 restricted stock units to the sole member of the general partner of one of the Company's subsidiaries, and on February 21, 2022, the Company granted 264,476 restricted stock units to its officers and other employees of the Manager and 12,464 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, 2023:
| | | | | | | | | | | |
| 2023 |
| Number of Units | | Weighted Average
Grant Date Fair Value |
| Outstanding January 1, 2023 | 577,360 | | $ | 17.88 | |
| Granted | — | | | 19.85 | |
| Vested | (133,109) | (1) | 19.39 | |
| Forfeited | — | | | 20.81 | |
| Outstanding March 31, 2023 | 444,251 | | $ | 17.35 | |
(1)Certain key employees of the Manager elected to net the taxes owed upon vesting against the shares issued resulting in 104,288 shares being issued as shown on the consolidated statements of stockholders' equity.
The vesting schedule for the restricted stock units as of March 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | |
| Shares Vesting |
| February | | May | | Total |
| 2023 | — | | 68,569 | | 68,569 |
| 2024 | 120,640 | | 68,564 | | 189,204 |
| 2025 | 120,646 | | — | | 120,646 |
| 2026 | 65,832 | | — | | 65,832 |
| Total | 307,118 | | 137,133 | | 444,251 |
At-The-Market-Offering
On March 15, 2022, the Company, the OP and the Manager entered into separate equity distribution agreements (the “2022 Equity Distribution Agreements”) with each of Raymond James, Keefe, Bruyette & Woods, Inc., Robert W. Baird & Co. Incorporated and Virtu Americas LLC (collectively, the “2022 Sales Agents”), pursuant to which the Company could 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 “2022 ATM Program”). The 2022 Equity Distribution Agreements provided 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 2022 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 of 1933 (the "Securities Act") including, without limitation, sales made by means of ordinary brokers' transactions on the New York Stock Exchange (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.
The following table contains summary information of the 2022 ATM Program since its inception through March 31, 2023:
| | | | | |
| Gross Proceeds | $ | 12,575,493 | |
| Shares of Common Stock Issued | 531,728 |
| Gross Average Sale Price per Share of Common Stock | $ | 23.65 | |
| |
| Sales Commissions | $ | 188,655 | |
| Offering Costs | 888,249 | |
| Net Proceeds | 11,498,589 | |
| Average Price Per Share, net | $ | 21.62 | |
Noncontrolling Interest in Subsidiary
On April 1, 2021, a subsidiary of one of the Subsidiary OPs (such subsidiary, the “REIT Sub”) closed its issuance of 125 preferred membership units of the REIT Sub (the “Preferred Membership Units”) at a price of $1,000 per unit, for gross proceeds of approximately $0.1 million, net of offering costs and initial administrative expenses. Holders of Preferred Membership Units are entitled to receive distributions semiannually from the REIT Sub at a per annum rate equal to 12.0% of the total of the purchase price of $1,000 per unit plus accumulated and unpaid distributions. The Preferred Membership Units are generally redeemable by the REIT Sub at any time for $1,000 per unit plus accumulated and unpaid distributions and an additional redemption premium if the Preferred Membership Units are redeemed on or before December 31, 2023. The issuance of the 125 Preferred Membership Units is presented as “Noncontrolling interest in subsidiary” on the Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity.
OP Unit Redemptions
At the 2021 annual meeting of the Company, the Company's stockholders approved the potential issuance of 13,758,905.9 shares of the Company's common stock to related parties in connection with the redemption of their OP Units or SubOP Units that may be redeemed for OP Units. On September 8, 2021, the Company redeemed approximately
1,479,132 OP Units and issued 1,479,132 shares of common stock to the redeeming unitholders. On January 7, 2022, the Company redeemed approximately 4,774,570 OP Units and issued 4,774,570 shares of common stock to the redeeming unitholders. On February 14, 2022, the Company redeemed approximately 395,033 OP Units and issued 395,033 shares of common stock to the redeeming unitholders. On December 23, 2022, the Company redeemed 2,100,000 OP Units and issued 2,100,000 shares of common stock to the redeeming unitholders. As of March 31, 2023, the Company had issued 8,748,735 shares of the Company's common stock to redeeming unitholders.
Dividends
The Board declared a dividend to preferred stockholders of $0.53125 per share on December 15, 2022, which was paid on January 25, 2023, to preferred stockholders of record as of January 13, 2023.
The Board declared a dividend to preferred stockholders of $0.53125 per share on February 22, 2023, which was paid on April 25, 2023, to preferred stockholders of record as of April 13, 2023.
The Board declared the first regular quarterly dividend of 2023 to common stockholders of $0.50 per share on February 22, 2023, which was paid on March 31, 2023, to common stockholders of record on March 15, 2023.
The Board declared a special dividend to common stockholders of $0.185 per share on February 22, 2023, which was paid on March 31, 2023, to common stockholders of record on March 15, 2023.
13. Earnings Per Share
Basic earnings per share is computed by dividing net income 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 per share is computed by adjusting basic earnings 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 (the "OP LPA"). 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 per share for the periods presented (in thousands, except per share amounts):
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
| Net income attributable to common stockholders | $ | 6,567 | | | $ | 12,406 | |
| | | |
| Earnings for basic computations | | | |
| Net income attributable to redeemable noncontrolling interests | 1,937 | | | 4,783 | |
| Net income for diluted computations | $ | 8,504 | | | $ | 17,189 | |
| | | |
| Weighted-average common shares outstanding | | | |
| Average number of common shares outstanding - basic | 17,118 | | | 13,855 | |
| Average number of unvested restricted stock units | 522 | | | 525 | |
| Average number of OP Units and SubOP Units | 5,038 | | | 7,650 | |
| Average number of common shares outstanding - diluted | 22,678 | | | 22,030 | |
| Earnings per weighted average common share: | | | |
| Basic | $ | 0.38 | | | $ | 0.90 | |
| Diluted | $ | 0.37 | | | $ | 0.78 | |
14. Noncontrolling Interests
Redeemable Noncontrolling Interests in the OP
Interests in the OP held by limited partners are represented by OP Units. As of March 31, 2023, the Company holds the majority economic interests in the OP. Net income is allocated to holders of OP Units based upon net income 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 OP LPA. 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.
Pursuant to the OP LPA, 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 OP LPA), 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 OP LPA. 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 OP LPA 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 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, 2023 was $15.27, and there were 5,038,382 OP Units outstanding other than those held by the Company. Assuming that (1) the Ten Day VWAP exceeded the NAV, (2) all OP unitholders exercised their right to cause the OP to redeem all of their OP Units with a Valuation Date of March 31, 2023 and (3) the Company then elected to purchase all of the OP Units by paying the Cash Amount, the Company would have paid $76.9 million in cash consideration to redeem the OP Units.
On September 8, 2021, the general partner of the OP executed the OP LPA for the purposes of creating a board of directors of the OP (the “Partnership Board”) and subdividing and reclassifying the outstanding OP Units into Class A, Class B and Class C OP Units. The OP LPA generally provides that the newly created Class A OP Units and Class B OP Units each have 50.0% of the voting power of the OP Units, including with respect to the election of directors to and removal of directors from the Partnership Board, and that the Class C OP Units have no voting power. The reclassification of the OP Units did not have a material effect on the economic interests of the holders of OP Units. In connection with the adoption of the OP LPA, the OP Units held by the Company were reclassified into Class A OP Units, the OP Units held by a subsidiary of NexPoint Diversified Real Estate Trust were reclassified into Class B OP Units and the remaining OP Units were reclassified into Class C OP Units.
The Partnership Board of the OP has exclusive authority to select, remove and replace the general partner of the OP and no other authority. The Partnership Board may replace the general partner of the OP at any time. Pursuant to the terms of the OP LPA, the Company appointed Brian Mitts as the sole initial director of the Partnership Board. The number of directors on the Partnership Board is initially one but may be increased by following the affirmative vote or consent of the majority of the voting power of the OP Units (the “Requisite Approval”). The election of directors to and removal of directors from the Partnership Board also requires the Requisite Approval.
As of March 31, 2023, the Company owns 83.41% of the OP Units representing 100% of the Class A OP Units. See Note 12 for additional disclosures regarding redemption of OP Units.
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, 2023 (in thousands):
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2023 | | 2022 |
| Redeemable noncontrolling interests in the OP, December 31, | $ | 96,501 | | | $ | 261,423 | |
| Adjustment to redeemable noncontrolling interest in the OP on deconsolidation of real estate | 297 | | | — | |
| Net income attributable to redeemable noncontrolling interests in the OP | 1,937 | | | 4,943 | |
| Redemption of redeemable noncontrolling interests in the OP | — | | | (113,535) | |
| Distributions to redeemable noncontrolling interests in the OP | (3,023) | | | (3,569) | |
| Redeemable noncontrolling interests in the OP, March 31, | $ | 95,712 | | | $ | 149,262 | |
The table below presents the common shares and OP Units outstanding held by the noncontrolling interests (“NCI”), as the OP Units and SubOP Units held by the Company are eliminated in consolidation:
| | | | | | | | | | | | | | | | | | | | |
| Period End | | Common Shares Outstanding | | OP Units Held by NCI | | Combined Outstanding |
| March 31, 2023 | | 17,184,231 | | 5,038,382 | | 22,222,613 |
15. Related Party Transactions
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 closing of 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 Earnings Available for Distribution (“EAD”) (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 EAD 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 EAD. Additionally, for the avoidance of doubt, Equity does not include the assets contributed to the Company in the Formation Transaction.
“EAD” 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 income (loss), or in net income (loss) and adding back amortization of stock-based compensation. For the purpose of calculating EAD for the Annual Fee, net income (loss) attributable to common stockholders may also be adjusted for the effects of certain GAAP adjustments and transactions that may not be indicative of the Company’s current operations, 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. EAD has replaced our prior presentation of Core Earnings.
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, 2023, 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 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. The Company additionally contributed an aggregate of approximately $1.2 million on January 9, 2023, March 6, 2023 and March 28, 2023. Buffalo Pointe owns a stabilized multifamily property located in Houston, Texas with 91.5% occupancy as of March 31, 2023. 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 73.4% and a maturity date of May 1, 2030.
Pursuant to the OP LPA 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 LPA, 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. On May 11, 2021, our stockholders approved the issuance of such shares upon the exercise of the BP Contributors' redemption rights.
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, on February 22, 2021, the Company granted 233,385 restricted stock units to its directors, officers employees and certain key employees of the Manager and its affiliates, the Company granted 1,201 restricted stock units to the sole member of the general partner of one of the Company's subsidiaries, and on February 21, 2022, the Company granted 264,476 restricted stock units to its officers and other employees of the Manager and 12,464 restricted stock units to its directors. See Note 12 for additional disclosures.
OP Unit Redemptions
At the 2021 annual meeting of the Company, the Company's stockholders approved the potential issuance of 13,758,905.9 shares of the Company's common stock to related parties in connection with the redemption of their OP Units or SubOP Units that may be redeemed for OP Units. On September 8, 2021, the Company redeemed approximately 1,479,132 OP Units and issued 1,479,132 shares of common stock to the redeeming unitholders. On January 7, 2022, the Company redeemed approximately 4,774,570 OP Units and issued 4,774,570 shares of common stock to the redeeming unitholders. On February 14, 2022, the Company redeemed approximately 395,033 OP Units and issued 395,033 shares of common stock to the redeeming unitholders. On December 23, 2022, the Company redeemed 2,100,000 OP Units and issued 2,100,000 shares of common stock to the redeeming unitholders.
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 of 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, 2023, operating expenses did not exceed the Expense Cap.
For the three months ended March 31, 2023 and 2022, the Company incurred management fees of $0.8 million and $0.7 million, respectively.
Notes Offering
On April 20, 2021, the Company issued $75.0 million aggregate amount of its 5.75% Notes at a price equal to 99.5% 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% Notes at issuance.
Bridge Loan
On March 31, 2022, the Company, through one of the Subsidiary OPs, originated a bridge loan for $13.5 million. The bridge loan was secured by a development property in Las Vegas, Nevada, and was used by the borrower to finance the acquisition of the property prior to obtaining construction financing. The loan bore interest at a rate of 1.50% plus the WSJ Prime Rate and was set to mature on October 1, 2022. On August 9, 2022, the bridge loan was paid off. The borrower under the bridge loan was a subsidiary of an entity advised by an affiliate of the Manager.
NSP Guaranty
On December 8, 2022 and in connection with a restructuring of NSP, the Company, through REIT Sub, together with NexPoint Diversified Real Estate Trust, Highland Income Fund and NexPoint Real Estate Strategies Fund (collectively, the "Co-Guarantors"), as guarantors, entered into a Sponsor Guaranty Agreement in favor of Extra Space Storage, LP ("Extra Space") pursuant to which REIT Sub and the Co-Guarantors guaranteed obligations of NSP with respect to NSP’s newly created Series D Preferred Stock and two promissory notes in an aggregate principal amount of approximately $64.2 million issued to Extra Space. The guaranties by REIT Sub and the Co-Guarantors are capped at $97.6 million, which cap amount will be reduced as the guaranteed obligations of NSP are paid. Each of REIT Sub and the Co-Guarantors generally guaranteed the foregoing obligations of NSP up to the cap amount on a pro rata basis with respect to its percentage ownership of NSP’s common stock. The maximum liability of REIT Sub under the guaranties is approximately $83.8 million. As of March 31, 2023, the Company owns approximately 25.7% of the total outstanding shares of common stock of NSP.
Convertible Promissory Note
On October 18, 2022, the Company, through a subsidiary, borrowed $6.5 million from NFRO REIT Sub, LLC (the "Holder") and issued $6.5 million aggregate amount of a 7.50% note to the Holder maturing on October 18, 2027. Beginning on January 1, 2023 through June 30, 2027, the Holder may elect to convert all or any part of the outstanding principal and accrued but unpaid interest due, and all other amounts due and payable to the Holder thereunder or in connection therewith, into equity interests of an affiliate of the borrower.
Elysian at Hughes Center
On February 1, 2022, the Company, through a subsidiary (the “Trust”), purchased the Elysian at Hughes Center, a 368-unit multifamily property in Las Vegas, Nevada, for a total of $184.1 million. The Trust is managed by an affiliate of the Manager (the “Asset Manager”). Effective January 1, 2023, the Company restructured this investment such that it does not meet the requirements for consolidation under ASC 810 – Consolidation and has been deconsolidated herein as of January 1, 2023 and presented as a preferred equity investment. As of December 31, 2022, the Company owned a preferred equity investment and indirect common equity interests in Elysian at Hughes Center, which resulted in the consolidation at year end. However, the common equity interests have been transferred to the Asset Manager in exchange for $54,000 and a guarantee of payments due to the Company in respect of its preferred equity investment if the investment is not redeemed prior to the close of the ongoing private offering of Class I Beneficial Interests in the Trust, which will continue until the maximum offering amount of $115.3 million has been reached or, if earlier, until December 31, 2023. The Company’s preferred investments were initially made from December 28, 2021 through July 26, 2022 and totaled $65.3 million. Following the transfer of the common equity interests, the Company no longer is the primary beneficiary of the Trust and as such does not consolidate it. The Company recognized a gain on deconsolidation of $1.5 million related to the residual effect of removing the consolidated assets and liabilities from the Consolidated Balance Sheets. The fair value of the preferred equity investment still approximates its par value so no portion of the gain on deconsolidation is related to a remeasurement of the fair value of the preferred equity investment. Management determined the fair value of the preferred equity investment using a market approach and performing a benchmarking analysis to comparable transactions.
16. Commitments and Contingencies
Except as otherwise disclosed below, 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.
On September 29, 2021, the Company, through one of the Subsidiary OPs, entered into an agreement to purchase up to $50.0 million in a new preferred equity investment (the “Preferred Units”) upon notice from the issuer. Subject to certain conditions, the Company may be required to purchase an additional $25.0 million of Preferred Units at the option of the issuer. The funds are expected to be used to capitalize special purpose limited liability companies (“PropCos”) to engage in sale-and-leaseback transactions and development transactions on life science real property. The Company funded $3.0 million on September 29, 2021, on November 8, 2021, the Company funded $30.0 million which was subsequently redeemed in 2022, on December 20, 2021, the Company funded $3.8 million, on January 14, 2022, the Company funded $0.9 million, on January 19, 2022, the Company funded $0.2 million, on January 27, 2022, the Company funded $18.5 million, on October 19, 2022, the Company funded $15.0 million, on January, 12, 2023, the Company funded $1.0 million, and on March 3, 2023, the Company funded $1.7 million. As of March 31, 2023, the Company may have the obligation to fund an additional $30.9 million by September 29, 2023, which the issuer may extend for up to two years at its option for an extension fee. The Preferred Units accrue distributions at a rate of 10.0% annually, compounded monthly. Distributions on the Preferred Units will be paid in cash with respect to stabilized PropCos and paid in kind with respect to unstabilized PropCos. The obligations of the issuer will be supported by a pledge of all equity units of the PropCos. All or a portion of the Preferred Units may be redeemed at any time for a redemption price equal to the purchase price of the Preferred Units to be redeemed plus any accrued and unpaid distributions thereon and a cash redemption fee. Upon the redemption of any Preferred Units and if the parties agree, the remaining amount to be funded by the Company may be increased by the aggregate purchase price of the redeemed Preferred Units. In addition, if the issuer experiences a change of control, the redemption price will also include a payment equal to the amount needed to achieve a multiple on invested capital ("MOIC") equal to 1.25x for unstabilized PropCos and 1.10x for stabilized PropCos. As of March 31, 2023, the Company has not recorded any contingencies on its Consolidated Balance Sheets as the obligation to fund additional Preferred Units other than under the existing commitment is considered remote for the three months ended March 31, 2023.
On December 8, 2022 and in connection with a restructuring of NSP, the Company, through REIT Sub, together with the Co-Guarantors, as guarantors, entered into a Sponsor Guaranty Agreement in favor of Extra Space pursuant to which REIT Sub and the Co-Guarantors guaranteed obligations of NSP with respect to NSP’s newly created Series D Preferred Stock and two promissory notes in an aggregate principal amount of approximately $64.2 million issued to Extra Space. The guaranties by REIT Sub and the Co-Guarantors are capped at $97.6 million, which cap amount will be reduced as the guaranteed obligations of NSP are paid. Each of REIT Sub and the Co-Guarantors generally guaranteed the foregoing obligations of NSP up to the cap amount on a pro rata basis with respect to its percentage ownership of NSP’s common stock. The maximum liability of REIT Sub under the guaranties is approximately $83.8 million. As of March 31, 2023, the Company owns approximately 25.7% of the total outstanding shares of common stock of NSP. As of March 31, 2023, the Company has not recorded any contingencies on its Consolidated Balance Sheets as the obligation under the guaranty is considered remote.
The OP Notes previously described in Note 10 are fully guaranteed by the Company. As of March 31, 2023, there has been no indication that the OP will not be able to satisfy the terms of the OP Notes. The Company considers any action required under the guaranty to be remote.
On March 14, 2023, the Company, through one of the Subsidiary OPs, committed to fund $24.0 million of preferred equity with respect to a ground up construction horizontal multifamily property located in Surprise, Arizona. The Company has not funded this investment as of March 31, 2023. The preferred equity investment provides a floating annual return that is the greater of prime rate plus 5.0% or 11.25%, compounded monthly with a MOIC of 1.30x and 1.0% placement fee. Further, participation rights following the distribution of the Company's preferred return and return of capital, additional cash flow and net sale proceeds shall be distributed as follows:
•0% to the Company/100% to issuer up to a 20.0% internal rate of return ("IRR")
•10% to the Company/90% to issuer thereafter
On February 10, 2023, the Company, through one of the Subsidiary OPs, through a unit purchase agreement, committed to purchase $30.3 million of the preferred units with respect to a multifamily property development located in Forney, Texas, of which $16.3 million was unfunded as of March 31, 2023. Further, the Company committed to purchase
$4.3 million of common equity with respect to the same property, of which $3.8 million was unfunded as of March 31, 2023.
On February 10, 2023, the Company, through one of the Subsidiary OPs, through a unit purchase agreement, committed to purchase $30.3 million of the preferred units with respect to a multifamily property development located in Richmond, Virginia, of which $19.1 million was unfunded as of March 31, 2023. Further, the Company committed to purchase $4.3 million of common equity with respect to the same property, of which $3.8 million was unfunded as of March 31, 2023.
17. Subsequent Events
Preferred Equity Investment
The Company, through one of the Subsidiary OPs, purchased $21.0 million of the Preferred Units on April 6, 2023, in accordance with the terms of the Company's existing purchase agreement.
Dividends Declared
The Board declared the second regular quarterly dividend of 2023 to common stockholders of $0.50 per share on April 24, 2023, to be paid on June 30, 2023, to common stockholders of record on June 15, 2023.
The Board declared a special dividend to common stockholders of $0.185 per share on April 24, 2023, to be paid on June 30, 2023, to common stockholders of record on June 15, 2023.