NREF 10-Q Quarterly Report Sept. 30, 2023 | Alphaminr
NexPoint Real Estate Finance, Inc.
ALPHAMINR

NREF 10-Q Quarter ended Sept. 30, 2023

Balance Sheet
Cash Flow
Income Statement
Debt
nref-20230930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-39210
__________________________________
NexPoint Real Estate Finance, Inc.
(Exact Name of Registrant as Specified in Its Charter)
__________________________________
Maryland 84-2178264
(State or other Jurisdiction of
Incorporation or Organization) 		(I.R.S. Employer
Identification No.)
300 Crescent Court, Suite 700 , Dallas , Texas
75201
(Address of Principal Executive Offices) (Zip Code)
( 214 ) 276-6300
(Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, par value $0.01 per share NREF New York Stock Exchange
8.50% Series A Cumulative Redeemable Preferred
Stock, par value 0.01 per share 		NREF-PRA New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer o
Non-Accelerated Filer x Smaller reporting company x
Emerging growth company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 13, 2023, the registrant had 17,231,913 shares of its common stock, par value $0.01 per share, outstanding.
i
NEXPOINT REAL ESTATE FINANCE, INC.
Form 10-Q
Quarter Ended September 30, 2023
INDEX
Page
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
ii
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. In particular, statements relating to our liquidity and capital resources, our performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions and demographics) are forward-looking statements. We caution investors that any forward-looking statements presented in this quarterly report are based on management’s then-current beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result,” the negative version of these words and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.
Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
• Our loans and investments expose us to risks similar to and associated with debt-oriented real estate investments generally;
• Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us;
• Fluctuations in interest rate and credit spreads could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments;
• Risks associated with the ownership of real estate;
• Our loans and investments are concentrated in terms of type of interest, geography, asset types and sponsors and may continue to be so in the future;
• We have a substantial amount of indebtedness which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs;
• We have limited operating history as a standalone company and may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our stockholders;
• We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of NexPoint Advisors, L.P. (our “Sponsor”), members of the management team of NexPoint Real Estate Advisors VII, L.P. (our “Manager”) or their affiliates;
• We are dependent upon our Manager and its affiliates to conduct our day-to-day operations; thus, adverse changes in their financial health or our relationship with them could cause our operations to suffer;
• Our Manager and its affiliates face conflicts of interest, including significant conflicts created by our Manager’s compensation arrangements with us, including compensation which may be required to be paid to our Manager if our management agreement is terminated, which could result in decisions that are not in the best interests of our stockholders;
• We pay substantial fees and expenses to our Manager and its affiliates, which payments increase the risk that you will not earn a profit on your investment;
• If we fail to qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes, cash available for distributions (“CAD”) to be paid to our stockholders could decrease materially, which would limit our ability to make distributions to our stockholders;
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• Risks associated with the current COVID-19 pandemic, including unpredictable variants and the future outbreak of other highly infectious or contagious diseases;
• Risks associated with the Highland Capital Management, L.P. (“Highland”) bankruptcy, including related litigation and potential conflicts of interest;
• Risks associated with a single material weakness that was identified in our review of internal control over financial reporting and the determination that our internal control over financial reporting and disclosure controls and procedures were therefore not effective as of December 31, 2022; and
• Any other risks included under Part I, Item1A, “Risk Factors,” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023 (our “Annual Report”).
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this quarterly report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.
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PART 1 — FINANCIAL INFORMATION
Item 1. Financial Statements
NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2023 December 31, 2022
(Unaudited)
ASSETS
Cash and cash equivalents $ 10,977 $ 20,048
Restricted cash 1,942 299
Real estate investments, net 58,563 245,222
Loans, held-for-investment, net ($ 31,416 and $ 46,022 with related parties, respectively)
320,151 256,147
Common stock investments, at fair value ($ 33,759 and $ 50,380 with related parties, respectively)
60,709 78,264
Mortgage loans, held-for-investment, net 708,003 726,531
Accrued interest and dividends 21,489 15,665
Mortgage loans held in variable interest entities, at fair value 5,612,472 6,720,246
CMBS structured pass-through certificates, at fair value 42,471 46,876
MSCR notes, at fair value 10,325 10,313
Mortgage backed securities, at fair value 37,975 32,328
Accounts receivable and other assets 1,276 2,197
TOTAL ASSETS $ 6,886,353 $ 8,154,136
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Secured financing agreements, net $ 676,900 $ 687,885
Master repurchase agreements 298,009 331,020
Unsecured notes, net 205,625 204,960
Mortgages payable, net 32,205 121,236
Accounts payable and other accrued liabilities 3,405 6,231
Accrued interest payable 10,124 7,986
Bonds payable held in variable interest entities, at fair value 5,225,922 6,249,804
Total Liabilities 6,452,190 7,609,122
Redeemable noncontrolling interests in the OP 89,148 96,501
Stockholders' Equity:
Noncontrolling interest in subsidiary 95 64,529
Preferred stock, $ 0.01 par value: 100,000,000 shares authorized; 2,000,000 and 2,000,000 shares issued and 1,645,000 and 1,645,000 shares outstanding, respectively
16 16
Common stock, $ 0.01 par value: 500,000,000 shares authorized; 17,518,900 and 17,366,930 shares issued and 17,231,913 and 17,079,943 shares outstanding, respectively
172 171
Additional paid-in capital 394,720 392,124
Retained earnings (accumulated deficit) ( 37,226 ) 4,435
Preferred stock held in treasury at cost; 355,000 shares and 355,000 , respectively
( 8,567 ) ( 8,567 )
Common stock held in treasury at cost; 286,987 shares and 286,987 shares, respectively
( 4,195 ) ( 4,195 )
Total Stockholders' Equity 345,015 448,513
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,886,353 $ 8,154,136
See Notes to Consolidated Financial Statements
1
NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2023 2022 2023 2022
Net interest income
Interest income $ 18,014 $ 14,893 $ 51,474 $ 62,420
Interest expense ( 13,197 ) ( 10,682 ) ( 38,503 ) ( 28,607 )
Total net interest income 4,817 4,211 12,971 33,813
Other income (loss)
Change in net assets related to consolidated CMBS variable interest entities 7,037 ( 2,648 ) 24,926 5,319
Change in unrealized gain (loss) on CMBS structured pass-through certificates 710 ( 3,904 ) 926 ( 11,555 )
Change in unrealized gain (loss) on common stock investments ( 16,464 ) ( 3,189 ) ( 17,556 ) 159
Change in unrealized gain (loss) on MSCR notes ( 15 ) 44 13 ( 147 )
Change in unrealized (loss) on mortgage backed securities 27 ( 317 ) 247 ( 356 )
Reversal of (provision for) credit losses ( 6,276 ) 7 ( 6,236 ) ( 57 )
Realized Losses — ( 1,084 ) — ( 1,084 )
Other income 38 115 391 353
Gain on deconsolidation of real estate owned — — 1,490 —
Gain on extinguishment of debt — — — 17
Equity in income (losses) of equity method investments ( 1,675 ) — ( 2,564 ) —
Revenues from consolidated real estate owned 1,083 3,455 3,147 9,108
Total other income (loss) ( 15,535 ) ( 7,521 ) 4,784 1,757
Operating expenses
General and administrative expenses 2,524 1,677 7,053 5,308
Loan servicing fees 1,049 1,112 3,155 3,333
Management fees 820 822 2,470 2,330
Expenses from consolidated real estate owned 1,939 2,442 4,272 8,419
Total operating expenses 6,332 6,053 16,950 19,390
Net income (loss) ( 17,050 ) ( 9,363 ) 805 16,180
Net (income) loss attributable to preferred shareholders ( 874 ) ( 874 ) ( 2,622 ) ( 2,630 )
Net (income) loss attributable to redeemable noncontrolling interests 2,374 1,889 ( 1,419 ) ( 5,080 )
Net (income) loss attributable to redeemable noncontrolling interests in subsidiaries — ( 941 ) — ( 1,503 )
Net income (loss) attributable to common stockholders $ ( 15,550 ) $ ( 9,289 ) $ ( 3,236 ) $ 6,967
Weighted-average common shares outstanding - basic 17,232 14,962 17,188 14,526
Weighted-average common shares outstanding - diluted 23,086 22,678 22,950 22,402
Earnings (loss) per share outstanding - basic $ ( 0.90 ) $ ( 0.62 ) $ ( 0.19 ) $ 0.48
Earnings (loss) per share outstanding - diluted $ ( 0.90 ) $ ( 0.62 ) $ ( 0.19 ) $ 0.48
Dividends declared per common share $ 0.6850 $ 0.5000 $ 2.0550 $ 1.5000
See Notes to Consolidated Financial Statements
2
NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY
(dollars in thousands)
(Unaudited)

Three Months Ended September 30, 2023
Series A Preferred Stock Common Stock Additional
Paid-in Capital 		Retained
Earnings (accumulated deficit)
Less Dividends 		Common Stock
Held in Treasury
at Cost 		Preferred Stock
Held in Treasury
at Cost 		Noncontrolling
interest
in Subsidiary 		Total
Number of Shares Par Value Number of Shares Par Value
Balances, June 30, 2023 1,645,000 $ 16 17,231,913 $ 172 $ 393,435 $ ( 9,313 ) $ ( 4,195 ) $ ( 8,567 ) $ 95 $ 371,643
Stock-based compensation expense — — — — 1,285 — — — — 1,285
Net income attributable to preferred stockholders — — — — — 874 — — — 874
Net loss attributable to common stockholders — — — — — ( 15,550 ) — — — ( 15,550 )
Preferred stock dividends declared ($ 0.5313 per share)
— — — — — ( 874 ) — — — ( 874 )
Common stock dividends declared ($ 0.6850 per share)
— — — — — ( 12,363 ) — — — ( 12,363 )
Balances, September 30, 2023
1,645,000 $ 16 17,231,913 $ 172 $ 394,720 $ ( 37,226 ) $ ( 4,195 ) $ ( 8,567 ) $ 95 $ 345,015
Nine Months Ended September 30, 2023
Series A Preferred Stock Common Stock Additional
Paid-in Capital 		Retained
Earnings
Less Dividends 		Common Stock
Held in Treasury
at Cost 		Preferred Stock
Held in Treasury
at Cost 		Noncontrolling
interest
in Subsidiary 		Total
Number of Shares Par Value Number of Shares Par Value
Balances, December 31, 2022 1,645,000 $ 16 17,079,943 $ 171 $ 392,124 $ 4,435 $ ( 4,195 ) $ ( 8,567 ) $ 64,529 $ 448,513
Vesting of stock-based compensation — — 151,970 1 2,596 — — — — 2,597
Adjustment to noncontrolling interest in subsidiary on deconsolidation of real estate — — — — — — — — ( 64,434 ) ( 64,434 )
Cumulative effect of adoption of ASU 2016-13 (See Note 2) — — — ( 1,624 ) — — — ( 1,624 )
Net income attributable to preferred stockholders — — — — — 2,622 — — — 2,622
Net loss attributable to common stockholders — — — — — ( 3,236 ) — — — ( 3,236 )
Preferred stock dividends declared ($ 1.0626 per share)
— — — — — ( 2,622 ) — — — ( 2,622 )
Common stock dividends declared ($ 2.0550 per share)
— — — — — ( 36,801 ) — — — ( 36,801 )
Balances, September 30, 2023
1,645,000 $ 16 17,231,913 $ 172 $ 394,720 $ ( 37,226 ) $ ( 4,195 ) $ ( 8,567 ) $ 95 $ 345,015





3
NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY
(dollars in thousands)
(Unaudited)
Three Months Ended September 30, 2022 Series A Preferred Stock Common Stock Additional
Paid-in Capital 		Retained
Earnings (accumulated deficit)
Less Dividends 		Common Stock
Held in Treasury
at Cost 		Preferred Stock
Held in Treasury
at Cost 		Noncontrolling
interest
in Subsidiary 		Total
Number of Shares Par Value Number of Shares Par Value
Balances, June 30, 2022 1,645,000 $ 16 14,949,631 $ 150 $ 348,266 $ 29,339 $ ( 4,195 ) $ ( 8,567 ) $ 33,942 $ 398,951
Stock-based compensation expense — — — — 870 — — — — 870
Adjustment to noncontrolling interest in subsidiary on consolidation of real estate — — — — — — — — 18,096 18,096
Issuance of common shares through at-the-market offering, net — — 30,128 — 573 — — — — 573
Net income attributable to preferred stockholders — — — — — 874 — — — 874
Net income attributable to common stockholders — — — — — ( 9,289 ) — — — ( 9,289 )
Preferred stock dividends declared ($ 0.5313 per share)
— — — — — ( 874 ) — — — ( 874 )
Common stock dividends declared ($ 0.5000 per share)
— — — — — ( 7,776 ) — — — ( 7,776 )
Balances, September30, 2022 1,645,000 $ 16 14,979,759 $ 150 $ 349,709 $ 12,274 $ ( 4,195 ) $ ( 8,567 ) $ 52,038 $ 401,425
Nine Months Ended September 30, 2022 Series A Preferred Stock Common Stock Additional
Paid-in Capital 		Retained
Earnings
Less Dividends 		Common Stock
Held in Treasury
at Cost 		Preferred Stock
Held in Treasury
at Cost 		Noncontrolling
interest
in CMBS VIEs 		Noncontrolling
interest
in Subsidiary 		Total
Number of Shares Par Value Number of Shares Par Value
Balances, December 31, 2021 1,645,000 $ 16 9,163,934 $ 92 $ 222,300 $ 28,367 $ ( 4,195 ) $ ( 8,567 ) $ 7,175 $ 95 $ 245,283
Vesting of stock-based compensation — — 114,494 1 1,923 — — — — — 1,924
Adjustment to noncontrolling interest in subsidiary on consolidation of real estate — — — — 490 — — — — 51,943 52,433
Issuance of common shares through at-the-market offering, net — — 531,728 5 11,513 — — — — — 11,518
Conversion of redeemable noncontrolling interests in the OP — — 5,169,603 52 113,483 — — — — — 113,535
Noncontrolling interest in CMBS VIEs — — — — — — — — ( 7,175 ) — ( 7,175 )
Net income attributable to preferred stockholders — — — — — 2,630 — — — — 2,630
Net income attributable to common stockholders — — — — — 6,967 — — — — 6,967
Preferred stock dividends declared ($ 1.0626 per share)
— — — — — ( 2,630 ) — — — — ( 2,630 )
Common stock dividends declared ($ 1.5000 per share)
— — — — — ( 23,060 ) — — — — ( 23,060 )
Balances, September 30, 2022 1,645,000 $ 16 14,979,759 $ 150 $ 349,709 $ 12,274 $ ( 4,195 ) $ ( 8,567 ) $ — $ 52,038 $ 401,425
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NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
For the Nine Months Ended September 30,
2023 2022
Cash flows from operating activities
Net income $ 805 $ 16,180
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums 10,867 17,179
Accretion of discounts ( 10,110 ) ( 9,791 )
Depreciation and amortization of real estate investment 1,430 2,435
Amortization of deferred financing costs ( 4 ) 36
Provision for (reversal of) credit losses, net 6,236 57
Net change in unrealized (gain) loss on investments held at fair value 22,780 32,202
Realized Losses — 1,084
Equity in (income) losses of unconsolidated equity method ventures 2,564 —
Realized gain on deconsolidation of real estate owned ( 1,490 ) —
Stock-based compensation expense 3,394 2,414
Payment in kind income ( 4,076 ) ( 528 )
Gain on extinguishment of debt — ( 17 )
Changes in operating assets and liabilities:
Accrued interest and dividends receivable ( 3,775 ) ( 7,605 )
Accounts receivable and other assets 122 ( 317 )
Accrued interest payable 3,225 4,264
Accounts payable, accrued expenses and other liabilities ( 3,540 ) 1,202
Net cash provided by operating activities 28,428 58,795
Cash flows from investing activities
Proceeds from payments received on mortgage loans held in variable interest entities 626,053 964,225
Proceeds from payments received on mortgage loans held for investment 58,246 178,306
Proceeds from payments received on bridge loan — 13,500
Proceeds from payments received on mortgage backed securities 546 —
Originations of bridge loan — ( 13,434 )
Originations of loans, held-for-investment, net ( 76,355 ) ( 91,587 )
Purchases of equity method investments ( 2,564 ) —
Purchases of CMBS certificates, at fair value — ( 4,542 )
Proceeds from sales of CMBS certificates, at fair value 44,788 6,962
Purchases of CMBS securitizations held in variable interest entities, at fair value — ( 115,276 )
Purchases of MSCR notes, at fair value — ( 10,365 )
Purchases of mortgage backed securities, at fair value ( 5,733 ) ( 25,946 )
Proceeds held in escrow for unsettled purchase — ( 3,990 )
Adjustment on deconsolidation of real estate ( 4,992 ) —
Acquisitions of real estate investments — ( 184,552 )
Additions to real estate investments ( 504 ) ( 106 )
Net cash provided by investing activities 639,485 713,195
Cash flows from financing activities
Principal repayments on borrowings under secured financing agreements ( 10,985 ) ( 97,724 )
Distributions to bondholders of variable interest entities ( 583,462 ) ( 892,138 )
Borrowings under master repurchase agreements 44,892 128,988
Principal repayments on borrowings under master repurchase agreements ( 77,903 ) ( 64,275 )
Proceeds received on borrowings under secured financing agreements — 89,634
Proceeds received from unsecured notes offering — 34,174
Repurchase of unsecured notes — ( 4,829 )
Borrowings under bridge facility — 55,000
Bridge facility payments — ( 55,000 )
Proceeds from the issuance of common stock through public offering, net of offering costs — 11,518
Proceeds from the issuance of common stock — 113,535
Proceeds from issuance of common stock through at-the-market offering, net of offering costs — ( 113,535 )
Principal repayments on mortgages payable ( 16 ) —
Payments for taxes related to net share settlement of stock-based compensation ( 797 ) ( 490 )
Dividends paid to common stockholders ( 35,379 ) ( 22,161 )
Dividends paid to preferred stockholders ( 2,622 ) ( 2,630 )
Distributions to redeemable noncontrolling interests in the OP ( 9,069 ) ( 10,812 )
Contributions from noncontrolling interests — 56,704
Net cash used in financing activities ( 675,341 ) ( 774,041 )
Net decrease in cash, cash equivalents and restricted cash ( 7,428 ) ( 2,051 )
Cash, cash equivalents and restricted cash, beginning of period 20,347 33,232
Cash, cash equivalents and restricted cash, end of period $ 12,919 $ 31,181
Supplemental Disclosure of Cash Flow Information
Interest paid 35,700 23,723
Supplemental Disclosure of Noncash Investing and Financing Activities
Adjustment to loans, held for investment, net on deconsolidation of real estate 36,022 —
Adjustment to real estate investments, net on deconsolidation of real estate ( 185,732 ) —
Adjustment to accrued interest and dividends on deconsolidation of real estate 2,049 —
Adjustment to accounts receivable and other assets on deconsolidation of real estate ( 799 ) —
Adjustment to mortgages payable, net on deconsolidation of real estate 89,012 —
Adjustment to accounts payable and accrued liabilities on deconsolidation of real estate 705 —
Adjustment to accrued interest payable on deconsolidation of real estate 1,087 —
Adjustment to noncontrolling interest in subsidiary on deconsolidation of real estate 64,434 —
Adjustment to retained earnings on deconsolidation of real estate 1,490 —
Adjustment to redeemable noncontrolling interest in the OP on deconsolidation of real estate ( 297 ) —
Increase in dividends payable upon vesting of restricted stock units 863 899
Consolidation of mortgage loans and bonds payable held in variable interest entities — 1,244,826
Conversion of convertible notes to common stock — 25,000
Due to brokers for repurchase of unsecured notes, not yet settled — 7,980
See Notes to Consolidated Financial Statements
5
NEXPOINT REAL ESTATE FINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 . Organization and Description of Business
NexPoint Real Estate Finance, Inc. (the “Company”, “we”, “our”) is a commercial mortgage real estate investment trust (a "REIT") incorporated in Maryland on June 7, 2019. The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2020 and the Company believes the current organization and method of operation will enable it to maintain its status as a REIT. The Company is focused on originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity, convertible notes, multifamily properties and common equity investments, as well as multifamily 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 September 30, 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 13).
The OP also directly owns all of the membership interests of a limited liability company (the “Mezz LLC”) through which it owns a portfolio of mezzanine loans, as further discussed below. NexPoint Real Estate Finance OP GP, LLC (the “OP GP”) is the sole general partner of the OP.
The Company commenced operations on February 11, 2020 upon the closing of its initial public offering of shares of its common stock (the “IPO”). Prior to the closing of the IPO, the Company engaged in a series of transactions through which it acquired an initial portfolio consisting of senior pooled mortgage loans backed by 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
Readers of this Quarterly Report on Form 10-Q (the "Quarterly Report") should refer to the audited financial statements and notes to consolidated financial statements of the Company for the year ended December 31, 2022, which are included in our Annual Report on Form 10-K ("Annual Report"), filed with the United States Securities and Exchange Commission (the "SEC") and also available on our website (nref.nexpoint.com), since we have omitted from this Quarterly Report certain footnote disclosures which would substantially duplicate those contained in such audited financial
6
statements. You should also refer to Note 2, Summary of Significant Accounting Policies, in the notes to consolidated financial statements in our Annual Report for further discussion of our significant accounting policies and estimates. Information contained on, or accessible through, our website is not incorporated by reference into and does not constitute a part of this Quarterly Report or any other report or documents we file or furnish with the SEC.
General
In accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the SEC, these Condensed Consolidated Financial Statements do not include all of the information and disclosures required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. Readers of this Quarterly Report should refer to the Company's audited Consolidated Financial Statements, which are included in the Company’s Annual Report. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows, and equity for the interim periods have been included. The results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, and future fiscal years.
Basis of Accounting
The accompanying unaudited consolidated financial statements are presented in accordance with GAAP. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. There have been no significant changes to the Company’s significant accounting policies during the nine months ended September 30, 2023.
The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.
Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. It is at least reasonably possible that these estimates could change in the near term. Estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.
Principles of Consolidation
The Company accounts for subsidiary partnerships in which it holds an ownership interest in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest. As of September 30, 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
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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 September 30, 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.
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.
Allowance for Credit Losses
In periods ending on or prior to December 31, 2022, 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
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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 reasonable and supportable forecast period is determined based on the Company’s assessment of the most likely scenario of assumptions and plausible outcomes for the U.S. economy, current portfolio composition, level of historical loss forecast estimates, material changes in growth and credit strategy and other factors that may affect its loss experience. The Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed. The Company has determined that economic forecasts used in our CECL model can be reasonable and supportable over four quarters as it provides enough time to account for the expected changes of the economic conditions and the performance of the underlying assets. Beyond the Company’s reasonable and supportable forecast period, the Company immediately reverts to historical loss information. The Company considers an immediate reversion period appropriate in the CECL model because it provides a suitable balance between the stability of historical data and the flexibility to account for changing market conditions. The 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, was $ 2.3 million. As such, the cumulative effect of adoption of ASU 2016-13 was a $ 1.6 million reduction in retained earnings. The provision for credit losses of $ 6.28 million for the three and nine months ended September 30, 2023 is included in other income on the accompanying Consolidated Statements of Operations, resulting in an ending allowance for credit loss of $ 8.54 million as of September 30, 2023.
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;
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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 nine months ended September 30, 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 nine months ended September 30, 2023, there were no loans acquired with deteriorated credit quality.
The Company also recognizes a liability for expected credit losses for off-balance sheet exposures if the Company has a present contractual obligation to extend the credit and the obligation is not unconditionally cancelable by the entity.
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
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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 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 nine months ended September 30, 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 September 30, 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)
September 30, 2023
Mortgage loans, held-for-investment $ 675,844 $ 708,003 13 100.00 % 4.79 % 4.64
Mezzanine loans, held-for-investment 133,207 135,079 22 78.31 % 9.60 % 5.55
Preferred equity, held-for-investment 187,173 180,072 16 46.22 % 12.18 % 2.58
Promissory note, held-for-investment 5,000 5,000 1 11.00 % 11.00 % 1.00
$ 1,001,224 $ 1,028,154 52 86.62 % 6.85 % 4.36
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.
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For the nine months ended September 30, 2023 and 2022, the loan and preferred equity portfolio activity was as follows (in thousands):
For the Nine Months Ended September 30,
2023 2022
Balance at January 1, $ 982,678 $ 1,088,881
Recognition of retained preferred equity investment upon deconsolidation of real estate (Note 14) 36,022 —
Cumulative effect of adoption of ASU 2016-13 (See Note 2) ( 1,624 ) —
Conversion of convertible bonds to common stock — ( 25,000 )
Originations 76,355 156,934
Proceeds from principal repayments ( 58,246 ) ( 196,825 )
PIK distribution reinvested in Preferred Units 4,076 528
Amortization of loan premium, net (1) ( 4,871 ) ( 11,591 )
(Provision for) reversal of credit losses, net ( 6,236 ) ( 57 )
Balance at September 30, $ 1,028,154 $ 1,012,870
(1) Includes net amortization of loan purchase premiums.
As of September 30, 2023, and December 31, 2022, there were $ 36.0 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 September 30, 2023
Number of
Loans 		Carrying
Value 		% of Loan
Portfolio
1 — $ — —
2 — — —
3 48 999,080 97.17 %
4 3 25,199 2.45 %
5 1 3,875 0.38 %
52 $ 1,028,154 100.00 %
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 September 30, 2023, 52 loans held-for-investment in our portfolio were rated “3,” or “Satisfactory”, 3 loans held-for-investment in our portfolio were rated "4," or "Underperformance", and 1 loan held-for-investment in our portfolio
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was rated "5," or "Risk of Impairment/Default", based on the factors assessed by the Company and discussed in Note 2. Our loan portfolio had a weighted-average risk rating of 3.04 as of September 30, 2023, and 3.00 as of December 31, 2022.
During the three months ended September 30, 2023, the Company identified a preferred equity investment secured by the underlying property in Atlanta, Georgia that was assigned a risk rating of “5” due to certain conditions that negatively impacted the preferred investment’s cash flow. The Company replaced the existing manager and took over the property’s operations. See Note 16 for additional information regarding Alexander at the District. As the loan was considered a collateral-dependent financial asset under GAAP, a specific allowance for credit losses of $ 5.8 million was recorded as of September 30, 2023 based on the Company’s estimation of the fair value of the underlying collateral property and the loan’s amortized cost basis.
The following tables present the carrying value of the loan portfolio by the Company's internal risk rating and year of origination as of September 30, 2023 and December 31, 2022 (dollars in thousands):
September 30, 2023
Carrying Value by Year of Origination (1)
Risk Rating Number of
Loans 		Outstanding Face Amount 2023 2022 2021 2020 2019 Prior Total Carrying Value
1 — $ — $ — $ — $ — $ — $ — $ — $ —
2 — — — — — — — — —
3 48 966,711 70,402 70,733 44,133 19,159 774,691 19,962 999,080
4 3 24,763 — 8,438 — — 16,761 — 25,199
5 1 9,750 — — 3,875 — — — 3,875
52 $ 1,001,224 $ 70,402 $ 79,171 $ 48,008 $ 19,159 $ 791,452 $ 19,962 $ 1,028,154
December 31, 2022
Carrying Value by Year of Origination (1)
Risk Rating Number of
Loans 		Outstanding Face Amount 2022 2021 2020 2019 2018 Prior Total Carrying Value
1 — $ — $ — $ — $ — $ — $ — $ — $ —
2 — — — — — — — — —
3 48 999,080 72,606 98,129 17,500 774,381 20,062 — 982,678
4 — — — — — — — — —
5 — — — — — — — — —
48 $ 999,080 $ 72,606 $ 98,129 $ 17,500 $ 774,381 $ 20,062 $ — $ 982,678
(1) Represents the date a loan was originated or acquired.
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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 September 30, 2023 December 31, 2022
Georgia 32.45 % 34.04 %
Florida 18.45 % 19.34 %
Texas 12.65 % 11.21 %
Nevada 2.75 % *
Maryland 5.34 % 5.59 %
Minnesota 6.65 % 6.97 %
California 4.39 % 4.66 %
Alabama 3.63 % 3.81 %
North Carolina 2.69 % 2.65 %
Virginia 1.66 % *
Arkansas 1.35 % 1.42 %
Other (18 and 19 states each at <1%) 7.99 % 10.31 %
100.00 % 100.00 %
*Included in “Other.”
Collateral Property Type September 30, 2023 December 31, 2022
Single Family Rental 69.26 % 72.26 %
Multifamily 23.32 % 23.11 %
Life Science 5.71 % 2.85 %
Self-Storage 1.70 % 1.79 %
100.00 % 100.00 %
4 . CMBS Trusts
As of September 30, 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 September 30, 2023 December 31, 2022
Mortgage loans held in variable interest entities, at fair value $ 5,612,472 $ 6,720,246
Accrued interest receivable 3,390 4,029
Trust's Liabilities
Bonds payable held in variable interest entities, at fair value ( 5,225,922 ) ( 6,249,804 )
Accrued interest payable ( 2,740 ) ( 3,207 )
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The following table presents “Change in net assets related to consolidated CMBS variable interest entities” (in thousands):
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2023 2022 2023 2022
Net interest earned $ 9,804 $ 9,455 $ 31,334 $ 25,623
Unrealized gain (loss) ( 2,767 ) ( 12,103 ) ( 6,408 ) ( 20,304 )
Change in net assets related to consolidated CMBS variable interest entities $ 7,037 $ ( 2,648 ) $ 24,926 $ 5,319
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 September 30, 2023 December 31, 2022
Texas 15.77 % 17.95 %
Florida 14.07 % 13.82 %
Arizona 4.02 % 6.98 %
California 8.64 % 9.28 %
Georgia 4.33 % 4.68 %
Washington 7.71 % 6.88 %
New Jersey 3.99 % 3.97 %
Nevada 2.48 % 1.99 %
Pennsylvania 1.26 % 1.01 %
Colorado 7.70 % 6.21 %
Connecticut 2.04 % 3.64 %
North Carolina 4.14 % 3.53 %
New York 3.35 % 2.76 %
Ohio 2.48 % 2.00 %
Virginia 2.02 % 1.62 %
Indiana 2.11 % 1.69 %
Illinois 1.64 % 1.37 %
Michigan 1.37 % 1.11 %
Maryland 1.17 % *
Missouri 1.55 % 1.25 %
Other (21 and 22 states each at <1%) 8.16 % 8.26 %
100.00 % 100.00 %
*Included in “Other.”
Collateral Property Type September 30, 2023 December 31, 2022
Multifamily 97.35 % 98.45 %
Manufactured Housing 2.65 % 1.55 %
100.00 % 100.00 %
5. Common Stock Investments
The Company owns approximately 25.7 % of the total outstanding shares of common stock of NexPoint Storage Partners, Inc. ("NSP") and thus can exercise significant influence over NSP. NSP is a VIE and the Company has
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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 a private ground lease REIT (the "Private REIT") as of September 30, 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 September 30, 2023, the Company valued this investment based on the Private REIT's market approach price of $ 19.33 per share.
The Company owns approximately 98.0 % of the total outstanding common equity of each of Resmark Forney Gateway Holdings, LLC ("RFGH") and Resmark The Brook, LLC ("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 September 30, 2023 and December 31, 2022, respectively (in thousands, except share amounts):
Investment Investment
Date 		Property Type Shares Fair Value
September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022
Common Stock
NexPoint Storage Partners 11/6/2020 Self-storage 41,963 41,963 $ 33,759 $ 50,380
Private REIT 4/14/2022 Ground lease 1,394,213 1,394,213 26,950 27,884
The following table presents “Change in unrealized gain on common stock investments” (in thousands):
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2023 2022 2023 2022
Change in unrealized gain on NexPoint Storage Partners $ ( 17,258 ) $ ( 3,189 ) $ ( 16,621 ) $ ( 2,726 )
Change in unrealized gain (loss) on Private REIT 794 — ( 935 ) 2,885
Change in unrealized gain on common stock investments $ ( 16,464 ) $ ( 3,189 ) $ ( 17,556 ) $ 159
6. Variable Interest Entities
Consolidated VIEs
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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 September 30, 2023, the Company has accounted for the following investments as unconsolidated VIEs:
Entities Instrument Asset Type
Percentage Ownership as of September 30, 2023
Relationship as of September 30, 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
Alexander at the District Common Equity Multifamily 25.7 % VIE
The Company's maximum exposure to loss of value for the NSP investment, inclusive of a related guaranty, is the fair value of the Company's $ 33.8 million NSP common stock investment and the guaranteed obligations with respect to NSP under the Sponsor Guaranty Agreement as defined below and described in Note 14 of $ 83.8 million. The Company's maximum exposure to loss of value for the RFGH and RTB common equity investments is the $ 1.0 million carrying value for each investment and may include an additional $ 2.8 million in unfunded commitments for each investment to the extent those commitments are funded. The Company's maximum exposure to loss of value for the Alexander at the District common equity investment is the $ 0.6 million carrying value of the investment. See Note 3 for further details.
7. CMBS Structured Pass-Through Certificates, MSCR Notes and Mortgage Backed Securities
As of September 30, 2023, the Company held twelve CMBS interest only strips ("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.
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The following table presents the CMBS I/O Strips, MSCR Notes and mortgage backed securities as of September 30, 2023 (dollars 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 $ 1,638 Multifamily 2.09 % 15.13 % 9/25/2046
CMBS I/O Strip 8/6/2020 16,840 Multifamily 3.08 % 18.00 % 6/25/2030
CMBS I/O Strip 4/28/2021 (2) 5,078 Multifamily 1.71 % 18.36 % 1/25/2030
CMBS I/O Strip 5/27/2021 3,446 Multifamily 3.50 % 17.77 % 5/25/2030
CMBS I/O Strip 6/7/2021 404 Multifamily 2.39 % 22.06 % 11/25/2028
CMBS I/O Strip 6/11/2021 (3) 3,610 Multifamily 1.32 % 16.11 % 5/25/2029
CMBS I/O Strip 6/21/2021 815 Multifamily 1.28 % 19.34 % 5/25/2030
CMBS I/O Strip 8/10/2021 2,270 Multifamily 1.96 % 18.03 % 4/25/2030
CMBS I/O Strip 8/11/2021 1,225 Multifamily 3.20 % 15.30 % 7/25/2031
CMBS I/O Strip 8/24/2021 227 Multifamily 2.70 % 16.21 % 1/25/2031
CMBS I/O Strip 9/1/2021 3,400 Multifamily 2.04 % 17.47 % 6/25/2030
CMBS I/O Strip 9/11/2021 3,518 Multifamily 3.05 % 15.24 % 9/25/2031
Total $ 42,471 2.58 % 17.46 %
MSCR Notes
MSCR Notes 5/25/2022 $ 4,020 Multifamily 14.79 % 14.79 % 5/25/2052
MSCR Notes 5/25/2022 5,000 Multifamily 11.79 % 11.79 % 5/25/2052
MSCR Notes 9/23/2022 1,305 Multifamily 12.14 % 13.34 % 11/25/2051
Total $ 10,325 13.00 % 13.15 %
Mortgage Backed Securities
Mortgage Backed Securities 6/1/2022 $ 9,898 Single-Family 8.63 % 8.93 % 4/17/2026
Mortgage Backed Securities 6/1/2022 9,173 Single-Family 4.87 % 5.03 % 11/19/2025
Mortgage Backed Securities 7/28/2022 529 Single-Family 6.23 % 6.32 % 10/17/2027
Mortgage Backed Securities 7/28/2022 845 Single-Family 3.60 % 4.15 % 6/20/2028
Mortgage Backed Securities 9/12/2022 3,937 Multifamily 11.35 % 11.33 % 1/25/2031
Mortgage Backed Securities 9/29/2022 7,856 Self Storage 11.09 % 11.11 % 9/15/2027
Mortgage Backed Securities 3/10/2023 5,737 Multifamily 13.72 % 13.75 % 2/25/2025
Total $ 37,975 9.14 % 9.27 %
(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.
18
The following table presents the CMBS I/O Strips, MSCR Notes and Mortgage Backed Securities as of December 31, 2022 (dollars 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 September 30,
For the Nine Months Ended September 30,
2023 2022 2023 2022
Net interest earned $ 775 $ 2,237 $ 2,270 $ 4,811
Change in unrealized gain (loss) on CMBS structured pass-through certificates 710 ( 3,904 ) 926 ( 11,555 )
Change in unrealized gain (loss) on MSCR notes ( 15 ) 44 13 ( 147 )
Change in unrealized (loss) on mortgage backed securities 27 ( 317 ) 247 ( 356 )
Total $ 1,497 $ ( 1,940 ) $ 3,456 $ ( 7,247 )
19
8. Real Estate Investments, net
On December 31, 2021 , the Company acquired a 204 -unit multifamily property in Charlotte, North Carolina (Hudson Montford). The property was 95.1 % and 96.1 % occupied, with effective rent per occupied unit of $ 1,689 per month and $ 1,663 , per month as of September 30, 2023, 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 September 30, 2023, the major components of the Company's investment in multifamily property was 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 $ 49,856 $ — $ 401 $ 680 $ 61,933
Accumulated depreciation and amortization — ( 3,025 ) — — ( 345 ) ( 3,370 )
Total Real Estate Investment, Net $ 10,996 $ 46,831 $ — $ 401 $ 335 $ 58,563
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
20
The following table reflects the revenue and expenses for the three and nine months ended September 30, 2023 and 2022, for our multifamily property (in thousands).
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2023 2022 2023 2022
Revenues
Rental income $ 1,032 $ 3,061 $ 3,057 $ 8,136
Other income 51 394 90 972
Total revenues 1,083 3,455 3,147 9,108
Expenses
Interest expense 664 1,016 1,876 2,886
Real estate taxes and insurance 164 363 512 1,135
Property operating expenses 201 793 590 1,793
Property general and administrative expenses 39 56 111 247
Property management fees 31 79 90 220
Depreciation and amortization 476 545 1,430 2,435
Rate cap (income) expense 345 ( 420 ) ( 181 ) ( 923 )
Debt service bridge — 10 — 626
Casualty loss 19 — ( 156 ) —
Total expenses 1,939 2,442 4,272 8,419
Net income (loss) from consolidated real estate owned $ ( 856 ) $ 1,013 $ ( 1,125 ) $ 689
21
9. Debt
The following table summarizes the Company’s financing arrangements in place as of September 30, 2023 (dollars in thousands):
September 30, 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 $ 298,009 $ 298,009 N/A (5) 7.23 % 0.1 $ 853,574 $ 434,890 $ 425,949 6.6
Asset Specific Financing
Single Family Rental loans
Freddie Mac 7/12/2019 617,648 617,648 7/12/2029 2.34 % 4.6 675,844 708,003 708,003 4.6
Mezzanine loans
Freddie Mac 10/20/2020 59,252 59,252 8/1/2031 0.30 % 6.5 96,817 98,898 98,898 6.5
Multifamily properties
CBRE 12/31/2021 32,425 32,205 6/1/2028 (6) 7.78 % 4.7 N/A 58,563 58,563 4.7
Unsecured Financing
Various 10/15/2020 36,500 35,768 10/25/2025 7.50 % 2.1 N/A N/A N/A N/A
Various 4/20/2021 165,000 163,357 4/15/2026 5.75 % 2.5 N/A N/A N/A N/A
Various 10/18/2022 6,500 6,500 10/18/2027 7.50 % 4.1 N/A N/A N/A N/A
Total/weighted average $ 1,215,334 $ 1,212,739 4.23 % 3.2 $ 1,626,235 $ 1,300,354 $ 1,291,413 5.7
(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.
22
The following table summarizes the Company’s financing arrangements in place as of December 31, 2022 (dollars in thousands):
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 N/A
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.
We, through the Subsidiary OPs, have borrowed approximately $ 298.0 million under our repurchase agreements and posted $ 1.2 billion par value of our CMBS B-Piece, CMBS I/O Strip, MSCR Notes and mortgage backed security investments as collateral as of September 30, 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, as described in our Annual Report.
As of September 30, 2023, the outstanding principal balances related to the SFR Loans and levered Mezzanine Loans consisted of the following (dollars in thousands):
23
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 34,112 Various Single-family Fixed 2.70 % 11/1/2028
Senior loan 2/11/2020 9,170 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 8,558 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 7,913 Various Single-family Fixed 3.14 % 1/1/2029
Senior loan 2/11/2020 6,524 Various Single-family Fixed 2.98 % 2/1/2029
Senior loan 2/11/2020 5,874 Various Single-family Fixed 2.99 % 3/1/2029
Senior loan 2/11/2020 5,435 Various Single-family Fixed 2.40 % 2/1/2024
Senior loan 2/11/2020 5,240 Various Single-family Fixed 3.14 % 12/1/2028
Senior loan 2/11/2020 4,949 Various Single-family Fixed 2.64 % 10/1/2028
Total $ 617,648 2.34 %
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 %
24
(1) Outstanding principal balance represents the total repurchase agreement balance outstanding as of September 30, 2023.
For the nine months ended September 30, 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 Nine Months Ended September 30,
2023 2022
Balances as of January 1, $ 1,345,101 $ 1,273,051
Adjustment to mortgages payable, net on deconsolidation of real estate ( 89,012 ) —
Principal borrowings 44,892 252,796
Principal repayments ( 88,888 ) ( 161,999 )
Repurchase of unsecured notes — ( 2,879 )
Repurchase of unsecured notes, not yet settled — ( 1,950 )
Accretion of discounts 666 572
Amortization of deferred financing costs ( 20 ) 36
Balances as of September 30, $ 1,212,739 $ 1,359,627
Schedule of Debt Maturities
The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years subsequent to September 30, 2023 are as follows (in thousands):
Year Recourse Non-recourse Total
2023(1) $ — $ 298,009 $ 298,009
2024 — 5,435 5,435
2025 36,500 46,094 82,594
2026 197,426 9,284 206,710
2027 6,500 — 6,500
Thereafter — 616,086 616,086
$ 240,426 $ 974,908 $ 1,215,334
(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.
10. 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.
25
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
In the normal course of business, our operations are exposed to market risks, including the effect of changes in interest rates. We may enter into derivative financial instruments to offset this underlying market risk. There have been no significant changes in our policy and strategy from what was disclosed in the financial statements included in our Annual Report.
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.
26
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 September 30, 2023 (in thousands):
Fair Value
Carrying
Value 		Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents $ 10,977 $ 10,977 $ — $ — $ 10,977
Restricted cash 1,942 1,942 — — 1,942
Loans, held-for-investment, net 320,151 — — 329,344 329,344
Common stock investments, at fair value 60,709 — — 60,709 60,709
Mortgage loans, held-for-investment, net 708,003 — — 689,312 689,312
Accrued interest 21,489 21,489 — — 21,489
Mortgage loans held in variable interest entities, at fair value 5,612,472 — 5,612,472 — 5,612,472
CMBS structured pass-through certificates, at fair value 42,471 — 42,471 — 42,471
MSCR notes, at fair value 10,325 — 10,325 — 10,325
Mortgage backed securities, at fair value 37,975 — 37,975 — 37,975
Accounts receivable and other assets 1,276 1,276 — — 1,276
$ 6,827,790 $ 35,684 $ 5,703,243 $ 1,079,365 $ 6,818,292
Liabilities
Secured financing agreements, net $ 676,900 $ — $ — $ 691,428 $ 691,428
Master repurchase agreements 298,009 — — 298,009 298,009
Unsecured notes, net 205,625 — 178,116 — 178,116
Mortgages payable, net 32,205 — — 25,471 25,471
Accounts payable and other accrued liabilities 3,405 3,405 — — 3,405
Accrued interest payable 10,124 10,124 — — 10,124
Bonds payable held in variable interest entities, at fair value 5,225,922 — 5,225,922 — 5,225,922
$ 6,452,190 $ 13,529 $ 5,404,038 $ 1,014,908 $ 6,432,475
27
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
Loans, held-for-investment, net 256,147 — — 255,254 255,254
Common stock investment, 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
$ 7,908,914 $ 38,209 $ 6,809,763 $ 1,061,051 $ 7,909,023
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 as of September 30, 2023 (dollars in thousands):
Carrying
Value 		Valuation Technique Unobservable Inputs Range Weighted Average (1)
NexPoint Storage Partners $ 33,759 Discounted cash flow Terminal cap rate
5.13 % - 5.63 %
5.38 %
Discount rate
7.75 % - 9.75 %
8.75 %
Private REIT $ 26,950 Market approach NAV per share multiple
1.00 - 1.21 x
1.11 x
(1) Averages are weighted based on the fair value of the related instrument
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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 nine months ended September 30, 2023:
Balance as of 12/31/22 Change in Unrealized Gains/(Losses) Balance as of 9/30/23
NexPoint Storage Partners $ 50,380 $ ( 16,621 ) $ 33,759
Private REIT $ 27,884 $ ( 934 ) $ 26,950
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 13). 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 September 30, 2023, the redeemable noncontrolling interests in the OP are valued at their carrying value on the Consolidated Balance Sheets (see Note 13).
11. Stockholders’ Equity
Common Stock
During the nine months ended September 30, 2023, the Company issued 151,970 shares of common stock pursuant to the NexPoint Real Estate Finance 2020 Long Term Incentive Plan (the "2020 LTIP").
As of September 30, 2023, the Company had 17,518,900 shares of common stock, par value $ 0.01 per share, issued and 17,231,913 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.
As of September 30, 2023, the Company has 1,645,000 shares of Series A Preferred Stock issued and outstanding.
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
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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.
The following table includes the number of restricted stock units granted, vested, forfeited and outstanding as of September 30, 2023:
2023
Number of Units Weighted Average
Grant Date Fair Value
Outstanding January 1, 2023 577,360 $ 17.88
Granted 440,055 15.14
Vested ( 201,678 ) (1) 17.27
Forfeited — —
Outstanding September 30, 2023 815,737 $ 16.71
(1) Certain key employees of the Manager elected to net the taxes owed upon vesting against the shares issued resulting in 151,970 shares being issued as shown on the consolidated statements of stockholders' equity.
The following table includes the number of restricted stock units granted, vested, forfeited and outstanding as of September 30, 2023:
Shares Vesting
February April May Total
2024 120,640 126,042 68,564 315,246
2025 120,646 104,672 — 225,318
2026 65,832 104,670 — 170,502
2027 — 104,671 — 104,671
Total 307,118 440,055 68,564 815,737
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.
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The following table contains summary information of the 2022 ATM Program since its inception through September 30, 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 13,758,906 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. As of September 30, 2023 and December 31, 2022, the Company had redeemed and 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.
The Board declared the second regular quarterly dividend of 2023 to common stockholders of $ 0.50 per share on April 24, 2023, which was 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, which was paid on June 30, 2023, to common stockholders of record on June 15, 2023.
The Board declared a dividend to preferred stockholders of $ 0.53125 per share on June 13, 2023, which was paid on July 25, 2023, to preferred stockholders of record as of July 13, 2023.
The Board declared the third regular quarterly dividend of 2023 to common stockholders of $ 0.50 per share on July 25, 2023, which was paid on September 29, 2023, to common stockholders of record on September 15, 2023.
The Board declared a special dividend to common stockholders of $ 0.185 per share on July 25, 2023, which was paid on September 29, 2023, to common stockholders of record on September 15, 2023.
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The Board declared a dividend to preferred stockholders of $ 0.53125 per share on September 19, 2023, which was paid on October 25, 2023, to preferred stockholders of record as of October 13, 2023.
12. 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 September 30,
For the Nine Months Ended September 30,
2023 2022 2023 2022
Net income (loss) attributable to common stockholders $ ( 15,550 ) $ ( 9,289 ) $ ( 3,236 ) $ 6,967
Earnings for basic computations
Net income (loss) attributable to redeemable noncontrolling interests ( 2,374 ) ( 1,889 ) 1,419 5,080
Net income for diluted computations $ ( 17,924 ) $ ( 11,178 ) $ ( 1,817 ) $ 12,047
Weighted-average common shares outstanding
Average number of common shares outstanding - basic 17,232 14,962 17,188 14,526
Average number of unvested restricted stock units 816 578 723 569
Average number of OP Units and SubOP Units 5,038 7,138 5,038 7,307
Average number of common shares outstanding - diluted 23,086 22,678 22,949 22,402
Earnings per weighted average common share:
Basic $ ( 0.90 ) $ ( 0.62 ) $ ( 0.19 ) $ 0.48
Diluted $ ( 0.90 ) $ ( 0.62 ) $ ( 0.19 ) $ 0.48
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13. Noncontrolling Interests
Redeemable Noncontrolling Interests in the OP
The following table sets forth the redeemable noncontrolling interests in the OP (reflecting the OP’s consolidation of the Subsidiary OPs) for the nine months ended September 30, 2023, and September 30, 2022 (in thousands):
For the Nine Months Ended September 30,
2023 2022
Redeemable noncontrolling interests in the OP, January 1, $ 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 1,419 5,080
Redemption of redeemable noncontrolling interests in the OP — ( 113,535 )
Distributions to redeemable noncontrolling interests in the OP ( 9,069 ) ( 10,708 )
Redeemable noncontrolling interests in the OP, September 30, $ 89,148 $ 142,260
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
September 30, 2023 17,231,913 5,038,382 22,270,295
14. 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.
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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 nine months ended September 30, 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 $ 1.7 million on January 9, 2023, March 6, 2023, March 28, 2023, May 25, 2023, and August 16, 2023. Buffalo Pointe owns a stabilized multifamily property located in Houston, Texas with 90.5 % occupancy as of September 30, 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 75.6 % 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, 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, and on April 4, 2023, the Company granted 418,685 restricted stock units to its officers and other employees of the Manager and 21,370 restricted stock units to its directors.
OP Unit Redemptions
At the 2021 annual meeting of the Company, the Company's stockholders approved the potential issuance of 13,758,906 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. As of September 30, 2023 and December 31, 2022, the Company had redeemed and issued 8,748,735 shares of the Company's common stock to 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 nine months ended September 30, 2023, and 2022, operating expenses did not exceed the Expense Cap.
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For the nine months ended September 30, 2023 and 2022, the Company incurred management fees of $ 2.5 million and $ 2.3 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 to a subsidiary of an entity advised by an affiliate of the Manager. 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.
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 one promissory note in an aggregate principal amount of approximately $ 49.2 million issued to Extra Space (the "Sponsor Guaranty Agreement"). The guaranties by REIT Sub and the Co-Guarantors are capped at $ 97.6 million, which 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 the Company under the guaranties is approximately $ 83.8 million.
NSP Promissory Note
On September 29, 2023, a subsidiary of NSP issued $ 5.0 million aggregate amount of a 11.00 % note maturing on September 29, 2024 to a subsidiary of the Company (the "Promissory Note").
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
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equity investment using a market approach and performing a benchmarking analysis to comparable transactions. As of September 30, 2023, $ 50.5 million of the Company's preferred investment in Elysian at Hughes Center had been redeemed, resulting in a remaining principal balance of $ 14.8 million.
Cellipont
On May 17, 2023, the Company, through one of the Subsidiary OPs, committed to purchase $ 4.2 million of the preferred units with respect to a life sciences property development located in Houston, Texas, of which $ 0.2 million was unfunded as of September 30, 2023. The investment was entered into as a co-investment with affiliates of the Company.
15. 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. On September, 22, 2023, the issuer exercised its right to extend the final obligation date to purchase any additional Preferred Units to September 29, 2024. As of September 30, 2023, the Company may have the obligation to fund an additional $ 6.6 million by September 29, 2024, which the issuer may extend for up to one year 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 1.25 x for unstabilized PropCos and 1.10 x for stabilized PropCos. As of September 30, 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.
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 single-family property located in Phoenix, Arizona, of which $ 20.1 million was unfunded as of September 30, 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 1.30 x and 1.0 % placement fee. The Company was also issued a common interest at the time of its first funding of preferred equity on May 16, 2023. The common interest allows the Company to receive a 10 % profit share once aggregate distributions exceed the 20 % IRR hurdle as shown below. There was no value ascribed to the common interest as of September 30, 2023. Further, once the Company's preferred equity and accrued interest has been repaid, any additional cash flow and net sale proceeds shall be distributed as follows:
• 0 % to the Company and 100 % to issuer up to a 20.0 % internal rate of return ("IRR")
• 10 % to the Company and 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 $ 9.4 million was unfunded as of September 30, 2023. Further, the Company committed to purchase $ 4.3 million of common equity with respect to the same property, of which $ 3.3 million was unfunded as of September 30, 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 $ 16.1 million was unfunded as of September 30, 2023. Further, the Company committed to
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purchase $ 4.3 million of common equity with respect to the same property, of which $ 3.3 million was unfunded as of September 30, 2023.
The table below shows the Company's unfunded commitments by investment type as of September 30, 2023 and December 31, 2022 (in thousands):
Investment Type September 30, 2023 December 31, 2022
Unfunded Commitments Unfunded Commitments
Preferred Equity $ 52,200 $ 25,000
Common Equity 6,600 —
$ 58,800 $ 25,000
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16. Subsequent Events
Alexander at the District
The Company, through its subsidiaries, holds a preferred equity investment in SPG Alexander JV LLC, which owns a 280 unit multifamily property in Atlanta, Georgia. On October 10, 2023, the Company exercised its right to terminate and replace the existing manager of SPG Alexander JV, LLC, with NREF Alexander Manager, LLC, which the Company has 100 % ownership of through the OP. The OP is the primary beneficiary of SPG Alexander JV LLC as of October 10, 2023, the property is expected to be consolidated in our consolidated financial statements in the fourth quarter.
Dividends Declared
The Board declared the fourth regular quarterly dividend of 2023 to common stockholders of $ 0.50 per share on October 30, 2023, to be paid on December 29, 2023, to common stockholders of record on December 15, 2023.
The Board declared a special dividend to common stockholders of $ 0.185 per share on October 30, 2023, to be paid on December 29, 2023, to common stockholders of record on December 15, 2023.
Series B Preferred Stock Offering
On November 2, 2023, the Company announced the launch of a continuous public offering of up to 16,000,000 shares of its newly designated 9.00 % Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”) at a price to the public of $ 25.00 per share, for gross proceeds of $ 400 million. NexPoint Securities, Inc., an affiliate of the Manager, will serve as the Company’s dealer manager (the "Dealer Manager") in connection with the offering. The Dealer Manager will use its reasonable best efforts to sell the shares of Series B Preferred Stock offered in the offering, and the Company will pay the Dealer Manager, subject to the discounts and other special circumstances described or referenced therein, (i) selling commissions of 7.0 % of the aggregate gross proceeds from sales of Series B Preferred Stock in the offering (“Selling Commissions”) and (ii) a dealer manager fee of 3.0 % of the gross proceeds from sales of Series B Preferred Stock in the offering (the “Dealer Manager Fee”). The Dealer Manager, subject to federal and state securities laws, will reallow all or any portion of the Selling Commissions and may reallow a portion of the Dealer Manager Fee to other securities dealers that the Dealer Manager may retain who sold the shares of Series B Preferred Stock as will be described more fully in the agreements between such dealers and the Dealer Manager. The Company expects that the offering will terminate on the earlier of the date the Company sells all 16,000,000 shares of the Series B Preferred Stock in the offering or March 14, 2025 (which is the third anniversary of the effective date of the Company’s registration statement), which may be extended by the Company’s board of directors in its sole discretion. The board of directors may elect to terminate this offering at any time.
Preferred Equity Investments
The Company, through one of the Subsidiary OPs, purchased $ 11.0 million of preferred units on November 9, 2023 with respect to a life science focused real estate company.
NSP Promissory Note
On October 27, 2023, the Promissory Note of $ 5.0 million was repaid in full plus accrued interest.


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Item 2. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our financial condition and results of operations. The following should be read in conjunction with our financial statements and accompanying notes included herein and with our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this quarterly report. See “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022. Our management believes the assumptions underlying the Company's financial statements and accompanying notes are reasonable. However, the Company's financial statements and accompanying notes may not be an indication of our financial condition and results of operations in the future.
Overview
We are a commercial mortgage REIT incorporated in Maryland on June 7, 2019. Our strategy is to originate, structure and invest in first-lien mortgage loans, mezzanine loans, preferred equity, convertible notes, multifamily properties and common equity investments, as well as multifamily CMBS securitizations, MSCR Notes and mortgage-backed securities, or our target assets. We primarily focus on investments in real estate sectors where our senior management team has operating expertise, including in the multifamily, SFR, self-storage, life science, hospitality and office sectors predominantly in the top 50 MSAs. In addition, we target lending or investing in properties that are stabilized or have a light-transitional business plan.
Our investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term. We seek to employ a flexible and relative-value focused investment strategy and expect to re-allocate capital periodically among our target investment classes. We believe this flexibility will enable us to efficiently manage risk and deliver attractive risk-adjusted returns under a variety of market conditions and economic cycles.
We are externally managed by our Manager, a subsidiary of our Sponsor, an SEC-registered investment advisor, which has extensive real estate experience, having completed as of September 30, 2023 approximately $22.0 billion of gross real estate transactions since the beginning of 2012. In addition, our Sponsor, together with its affiliates, including NexBank, is one of the most experienced global alternative credit managers managing approximately $26.4 billion of loans and debt or credit related investments as of September 30, 2023 and has managed credit investments for over 25 years. We believe our relationship with our Sponsor benefits us by providing access to resources including research capabilities, an extensive relationship network, other proprietary information, scalability, and a vast wealth of knowledge of information on real estate in our target assets and sectors.
We elected to be treated as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2020. We also intend to operate our business in a manner that will permit us to maintain one or more exclusions or exemptions from registration under the Investment Company Act.
On October 15, 2021, a lawsuit (the “Bankruptcy Trust Lawsuit”) was filed by a litigation subtrust formed in connection with Highland’s bankruptcy against various persons and entities, including our Sponsor and James Dondero. In addition, on February 8, 2023, a lawsuit (the “UBS Lawsuit”) was filed by UBS Securities LLC and its affiliate against Mr. Dondero and a number of other persons and entities. Neither the Bankruptcy Trust Lawsuit nor the UBS Lawsuit include claims related to our business or our assets or operations. Our Sponsor and Mr. Dondero have informed us they believe the Bankruptcy Trust Lawsuit has no merit, and Mr. Dondero has informed us he believes the UBS Lawsuit has no merit; we have been advised that the defendants named in each of the lawsuits intend to vigorously defend against the claims. We do not expect the Bankruptcy Trust Lawsuit or the UBS Lawsuit will have a material effect on our business, results of operations or financial condition.
On February 22, 2023, as previously disclosed, the Board formed an independent special committee to oversee a review of the potential impact to the Company of the UBS Lawsuit and the Bankruptcy Trust Lawsuit. The special committee retained Reichman Jorgensen Lehman Feldberg LLP (“Reichman Jorgensen”) as independent legal counsel to advise the special committee on the review. Reichman Jorgensen has reported to the special committee that they have substantially completed their review and found no evidence that the Company engaged in any conduct that would expose it to liability from the UBS Lawsuit or the Bankruptcy Trust Lawsuit. On June 13, 2023, the special committee delivered these findings to the Board. Following the review of the special committee, we reaffirm our expectation that neither the
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Bankruptcy Trust Lawsuit nor the UBS Lawsuit will have a material effect on our business, results of operations or financial condition.
Purchases and Dispositions in the Quarter
Acquisitions and Originations
The Company acquired or originated the following investments through the Subsidiary OPs in the three months ended September 30, 2023. The amounts in the table below are as of the purchase or investment date:
Investment Property Type Investment Date Outstanding Principal
Amount 		Cost (% of Par Value) Coupon (1) Current Yield (1) Maturity Date Interest Rate Type
Preferred Equity Life Science 7/11/2023 $ 241,528 99.0 % 13.00 % 13.13 % 6/1/2026 Floating Rate
Preferred Equity Single-family 7/14/2023 2,720,000 (2) 99.0 % 13.50 % 13.64 % 4/28/2027 Floating Rate
Preferred Equity Multifamily 7/27/2023 6,900,000 (3) 99.0 % 11.00 % 11.11 % 2/10/2025 Floating Rate
Preferred Equity Multifamily 8/16/2023 303,841 100.0 % 11.00 % 11.00 % 5/1/2030 Fixed Rate
Preferred Equity Multifamily 8/24/2023 3,000,000 (4) 99.0 % 11.00 % 11.11 % 2/10/2025 Floating Rate
Common Equity Multifamily 8/28/2023 500,000 100.0 % N/A N/A N/A N/A
Common Equity Multifamily 8/28/2023 500,000 100.0 % N/A N/A N/A N/A
Common Equity Multifamily 9/8/2023 846,511 (5) 66.7 % N/A N/A N/A N/A
Preferred Equity Life Science 9/27/2023 3,173,932 99.5 % 10.00 % 10.05 % 9/29/2024 Fixed Rate
Promissory Note Self-Storage 9/29/2023 5,000,000 100.0 % 11.00 % 11.00 % 9/29/2024 Fixed Rate
$ 23,185,812
(1) Current yield and coupon as of September 30, 2023.
(2) Includes investments made on July 14, 2023, August 11, 2023, and September 12, 2023.
(3) Includes investments made on July 27, 2023, August 24, 2023, and September 18, 2023.
(4) Includes investments made on August 24, 2023, and September 18, 2023.
(5) Includes investments made on September 8, 2023, September 14, 2023, September 22, 2023, and September 28, 2023.
Redemptions and Sales
The following investments were redeemed or sold during the three months ended September 30, 2023:
Investment Property Type Investment Date Disposition Date Amortized Cost Basis Redemption/Sales Proceeds Prepayment Penalties Net Gain (Loss) on Repayment
Preferred Equity Multifamily 12/28/2021 8/4/2023 $ 3,470,504 $ 3,470,504 $ — $ —
Preferred Equity Multifamily 12/28/2021 9/12/2023 64,635 64,635 — —
CMBS B-Piece Multifamily 12/9/2021 9/27/2023 45,411,874 44,787,461 — (624,413)
$ 48,947,014 $ 48,322,600 $ — $ (624,413)

Components of Our Revenues and Expenses
Net Interest Income
Interest income . Our earnings are primarily attributable to the interest income from mortgage loans, mezzanine loan and preferred equity investments. Loan premium/discount amortization and prepayment penalties are also included as components of interest income.
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Interest expense. Interest expense represents interest accrued on our various financing obligations used to fund our investments and is shown as a deduction to arrive at net interest income.
The following table presents the components of net interest income for the nine months ended September 30, 2023 and 2022 (dollars in thousands):
For the Nine Months Ended September 30,
$ Change % Change
2023 2022
Interest income/
(expense) 		Average
Balance (1) 		Yield (2) Interest income/
(expense) 		Average
Balance (1) 		Yield (2)
Interest income
SFR Loans, held-for-investment $ 20,650 $ 722,066 5.72 % $ 37,105 $ 746,111 7.92 % $ (16,455) (44.3) %
Mezzanine loans, held-for-investment 10,781 147,871 14.58 % 10,981 157,789 9.20 % (200) (1.8) %
Preferred equity, held-for-investment 14,585 152,370 19.14 % 6,667 102,471 14.98 % 7,918 118.8 %
Convertible notes, held-for-investment — — N/A 2,545 47,821 10.64 % (2,545) (100.0) %
CMBS structured pass-through certificates, at fair value 1,760 45,034 7.82 % 4,017 66,442 7.94 % (2,257) (56.2) %
Bridge loan — N/A N/A 346 6,787 6.51 % (346) (100.0) %
MSCR notes 988 10,169 19.44 % 299 4,385 8.71 % 689 230.4 %
Mortgage backed securities 2,710 35,592 15.22 % 460 11,025 5.70 % 2,250 489.1 %
Total interest income $ 51,474 $ 1,113,103 9.25 % $ 62,420 $ 1,142,831 8.79 % $ (10,946) (17.5) %
Interest expense
Master repurchase agreements, net $ (17,029) $ (333,771) 10.20 % $ (6,832) $ (317,117) 2.27 % $ (10,197) 149.3 %
Long-term seller financing, net (11,271) (685,072) 3.30 % (11,993) (711,001) 2.21 % 722 (6.0) %
Unsecured notes, net (10,203) (205,196) 9.94 % (9,782) (201,697) 6.49 % (421) 4.3 %
Total interest expense $ (38,503) $ (1,224,039) 6.30 % $ (28,607) $ (1,229,815) 2.92 % $ (9,896) 34.6 %
Net interest income (3) $ 12,971 $ 33,813 $ (20,842) (61.6) %
(1) Average balances for the SFR Loans, the mezzanine loan and preferred equity are calculated based upon carrying values.
(2) Yield calculated on an annualized basis.
(3) Net interest income is calculated as the difference between total interest income and total interest expense.

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The following table presents the components of net interest income for the three months ended September 30, 2023 and 2022 (dollars in thousands):
For the Three Months Ended September 30,
$ Change % Change
2023 2022
Interest income/
(expense) 		Average
Balance (1) 		Yield (2) Interest income/
(expense) 		Average
Balance (1) 		Yield (2)
Interest income
SFR Loans, held-for-investment $ 7,142 $ 718,299 3.98 % $ 7,297 $ 733,505 4.16 % $ (155) (2.1) %
Mezzanine loans, held-for-investment 3,348 140,444 9.54 % 3,908 165,939 9.23 % (560) (14.3) %
Preferred equity, held-for-investment 5,577 166,012 13.44 % 1,664 118,567 12.78 % 3,913 235.2 %
Convertible bond, held-for-investment — N/A N/A — — 18.73 % N/A N/A
CMBS structured pass through certificates, at fair value 617 44,049 5.60 % 1,310 62,960 8.99 % (693) (52.9) %
Bridge loan — N/A N/A 125 4,500 6.55 % (125) (100.0) %
MSCR notes 345 10,123 13.63 % 221 9,500 8.76 % 124 56.1 %
Mortgage backed securities 985 37,297 10.56 % 368 26,455 5.73 % 617 167.7 %
Total interest income $ 18,014 $ 1,116,224 6.46 % $ 14,893 $ 1,121,426 6.36 % $ 3,121 21.0 %
Interest expense
Repurchase agreements $ (6,013) $ (336,141) 7.16 % $ (3,362) $ (340,438) 2.50 % $ (2,651) 78.9 %
Long-term seller financing (3,777) (682,515) 2.21 % (4,052) (693,405) 2.20 % 275 (6.8) %
Unsecured Notes (3,407) (205,324) 6.64 % (3,268) (203,500) 6.50 % (139) 4.3 %
Total interest expense $ (13,197) $ (1,223,980) 4.31 % $ (10,682) $ (1,237,343) 3.00 % $ (2,515) 23.5 %
Net interest income (3) $ 4,817 $ 4,211 $ 606 14.4 %
(1) Average balances for the SFR Loans, the mezzanine loan and preferred equity are calculated based upon carrying values.
(2) Yield calculated on an annualized basis.
(3) Net interest income is calculated as the difference between total interest income and total interest expense.
Other Income (Loss)
Change in net assets related to consolidated CMBS variable interest entities. Includes unrealized gain (loss) based on changes in the fair value of the assets and liabilities of the CMBS trusts and net interest earned on the consolidated CMBS trusts. See Note 4 to our consolidated financial statements for additional information.
Change in unrealized gain (loss) on CMBS structured pass-through certificates. Includes unrealized gain (loss) based on changes in the fair value of the CMBS I/O Strips. See Note 7 to our consolidated financial statements for additional information.
Change in unrealized gain on common stock investments. Includes unrealized gain (loss) based on changes in the fair value of our common stock investments in NSP and the Private REIT. See Note 5 to our consolidated financial statements for additional information.
Change in unrealized gain (loss) on MSCR notes. Includes unrealized gain (loss) based on changes in the fair value of our MSCR Notes. See Note 7 to our consolidated financial statements for additional information.
Change in unrealized gain on mortgage-backed securities. Includes unrealized gain (loss) based on changes in the fair value of our mortgage backed securities. See Note 7 to our consolidated financial statements for additional information.
Reversal of (provision for) credit losses, net. Reversal of (provision for) credit losses, net represents the change in our allowance for loan losses. See Note 2 to our consolidated financial statements for additional information.
Realized losses. Realized losses include the excess, or deficiency, of net proceeds received, less the carrying value of such investments, as realized losses. 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.
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Revenues from consolidated real estate owned (Note 8). Reflects the total revenues for our multifamily property. Revenues include rental income from the multifamily property.
Equity in Income (Losses) of Equity Method Investments. Equity in earnings (losses) of unconsolidated ventures represents the change in our basis in equity method investments resulting from our share of the investments’ income and expenses. Profit and loss from equity method investments for which we’ve elected the fair value option are classified in divided income, change in unrealized gains and realized gains as applicable.
Other income. Includes placement fees, exit fees and other miscellaneous income items.
Operating Expenses
G&A expenses. G&A expenses include, but are not limited to, audit fees, legal fees, listing fees, Board fees, equity-based and other compensation expenses, investor-relations costs and payments of reimbursements to our Manager. The Manager will be reimbursed for expenses it incurs on behalf of the Company. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that 50% of the salary of our VP of Finance is allocated to us and we may grant equity awards to our officers under the NexPoint Real Estate Finance, Inc. 2020 Long Term Incentive Plan (the “2020 LTIP”). Direct payment of operating expenses by us, which includes compensation expense relating to equity awards granted under the 2020 LTIP, together with reimbursement of operating expenses to our Manager, plus the Annual Fee, may not exceed 2.5% of equity book value determined in accordance with GAAP, 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 our 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. To the extent total corporate G&A expenses would otherwise exceed 2.5% of equity book value, our Manager will waive all or a portion of its Annual Fee to keep our total corporate G&A expenses at or below 2.5% of equity book value.
Loan servicing fees. We pay various service providers fees for loan servicing of our SFR Loans, mezzanine loans and consolidated CMBS trusts. We classify the expenses related to the administration of the SFR Loans and mezzanine loans as servicing fees while the fees associated with the CMBS trusts are included as a component of the change in net assets related to consolidated CMBS variable interest entities (“VIEs”).
Management fees. Management fees include fees paid to our Manager pursuant to the Management Agreement.
Expenses from consolidated real estate owned (Note 8). Reflects the total expenses for our multifamily properties. Expenses include interest, real estate taxes and insurance, operating, general and administrative, management fees, depreciation and amortization, rate cap (income) expense, and debt service bridge expenses of the multifamily properties.
Results of Operations for the Three Months Ended September 30, 2023 and 2022
The following table sets forth a summary of our operating results for the three months ended September 30, 2023 and 2022 (in thousands):
For the Three Months Ended September 30,
$ Change % Change
2023 2022
Net interest income $4,817 $4,211 $606 14.4 %
Other income (loss) (15,535) (7,521) (8,014) 106.6 %
Operating expenses (6,332) (6,053) (279) 4.6 %
Net income (17,050) (9,363) (7,687) 82.1 %
Net (income) attributable to preferred shareholders (874) (874) N/A N/A
Net (income) attributable to redeemable noncontrolling interests 2,374 1,889 485 25.7 %
Net (income) loss attributable to redeemable noncontrolling interests in subsidiaries — (941) 941 (100.0) %
Net (loss) attributable to common stockholders $ (15,550) $ (9,289) $ (6,261) 67.4 %
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The change in our net income for the three months ended September 30, 2023 as compared to the net income for the three months ended September 30, 2022 primarily relates to an increase in interest expense. Our net income attributable to common stockholders for the three months ended September 30, 2023 was approximately $(15.6) million. We earned approximately $4.8 million in net interest income, generated income of $(15.5) million in other income, incurred operating expenses of $6.3 million, allocated $0.9 million of income to preferred stockholders and allocated $2.4 million of income to redeemable noncontrolling interests for the three months ended September 30, 2023.
Revenues
Net interest income. Net interest income was $4.8 million for the three months ended September 30, 2023, compared to $4.2 million for the three months ended September 30, 2022, which was an increase of approximately $0.6 million. The increase between the periods is primarily due to an increase of preferred equity investments in the portfolio compared to the prior period. As of September 30, 2023, we owned 89 discrete investments compared to 81 as of September 30, 2022.
Other income (loss). Other loss was $15.5 million for the three months ended September 30, 2023, compared to other loss of $7.5 million for the three months ended September 30, 2022, which was a decrease of approximately $8.0 million. This was primarily due to an increase in unrealized losses on our common stock investments and an increase in our provision for credit losses compared to the prior period.
Expenses
G&A expenses. G&A expenses were $2.5 million for the three months ended September 30, 2023, compared to $1.7 million for the three months ended September 30, 2022, which was an increase of approximately $0.8 million. The increase between the periods was primarily due to an increase in accounting, auditing and legal fees compared to the prior period.
Loan servicing fees. Loan servicing fees were $1.0 million for the three months ended September 30, 2023, compared to $1.1 million for the three months ended September 30, 2022, which was a decrease of approximately $0.1 million. The decrease between the periods was primarily due to a decrease in SFR Loans and mezzanine loans in the portfolio compared to the prior period.
Management fees. Management fees were $0.8 million for the three months ended September 30, 2023, compared to $0.8 million for the three months ended September 30, 2022.
Expenses from consolidated real estate owned . Expenses from consolidated real estate owned were $1.9 million for the three months ended September 30, 2023, compared to $2.4 million for the three months ended September 30, 2022. The decrease is due to the deconsolidation of Elysian at Hughes Center.
Results of Operations for the Nine Months Ended September 30, 2023 and 2022
The following table sets forth a summary of our operating results for the nine months ended September 30, 2023 and 2022 (in thousands):
For the Nine Months Ended September 30,
$ Change % Change
2023 2022
Net interest income $ 12,971 $ 33,813 $ (20,842) (61.6) %
Other income (loss) 4,784 1,757 3,027 172.3 %
Operating expenses (16,950) (19,390) 2,440 (12.6) %
Net income 805 16,180 (15,375) (95.0) %
Net (income) attributable to preferred shareholders (2,622) (2,630) 8 (0.3) %
Net (income) attributable to redeemable noncontrolling interests (1,419) (5,080) 3,661 (72.1) %
Net (income) loss attributable to redeemable noncontrolling interests in subsidiaries — (1,503) 1,503 (100.0) %
Net income (loss) attributable to common stockholders $ (3,236) $ 6,967 $ (10,203) (146.4) %
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The change in our net income for the nine months ended September 30, 2023 as compared to the net income for the nine months ended September 30, 2022 primarily relates to a decrease in prepayment penalty income and an increase in unrealized losses on our common stock investments. Our net loss attributable to common stockholders for the nine months ended September 30, 2023 was approximately $3.2 million. We earned approximately $13.0 million in net interest income, generated income of $4.8 million in other income, incurred operating expenses of $17.0 million, allocated $2.6 million of income to preferred stockholders and allocated $1.4 million of income to redeemable noncontrolling interests for the nine months ended September 30, 2023.
Revenues
Net interest income. Net interest income was $13.0 million for the nine months ended September 30, 2023, compared to $33.8 million for the nine months ended September 30, 2022, which was a decrease of approximately $20.8 million. The decrease between the periods is primarily due to a decrease in prepayment penalty income related to early paydowns as well as an increase in interest costs on borrowings. As of September 30, 2023, we owned 89 discrete investments compared to 81 as of September 30, 2022.
Other income (loss). Other income was $4.8 million for the nine months ended September 30, 2023, compared to other income of $1.8 million for the nine months ended September 30, 2022, which was an increase of approximately $3.0 million. This was primarily due to an increase in the change in net assets related to consolidated CMBS VIEs.
Expenses
G&A expenses. G&A expenses were $7.1 million for the nine months ended September 30, 2023, compared to $5.3 million for the nine months ended September 30, 2022, which was an increase of approximately $1.5 million. The increase between the periods was primarily due to an increase in accounting, auditing and legal fees compared to the prior period.
Loan servicing fees. Loan servicing fees were $3.2 million for the nine months ended September 30, 2023, compared to $3.3 million for the nine months ended September 30, 2022, which was a decrease of approximately $0.1 million. The decrease between the periods was primarily due to a decrease in SFR Loans in the portfolio compared to the prior period.
Management fees. Management fees were $2.5 million for the nine months ended September 30, 2023, compared to     $2.3 million for the nine months ended September 30, 2022, which was an increase of approximately $0.2 million. The increase between the periods was primarily due to an increase in equity as defined by the Management Agreement.
Expenses from consolidated real estate owned . Expenses from consolidated real estate owned were $4.3 million for the nine months ended September 30, 2023, compared to $8.4 for the nine months ended September 30, 2022. The decrease is due to the deconsolidation of Elysian at Hughes Center.
Key Financial Measures and Indicators
As a real estate finance company, we believe the key financial measures and indicators for our business are earnings per share, dividends declared, EAD, CAD and book value per share.
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Earnings Per Share and Dividends Declared
The following table sets forth the calculation of basic and diluted net income per share and dividends declared per share (in thousands, except per share data):
For the Three Months Ended September 30,
% Change
For the Nine Months Ended September 30,
% Change
2023 2022 2023 2022
Net income attributable to common stockholders $ (15,550) $ (9,289) 67.4 % $ (3,236) $ 6,967 (146.4) %
Net income attributable to redeemable noncontrolling interests (2,374) (1,889) 25.7 % 1,419 5,080 (72.1) %
Weighted-average number of shares of common stock outstanding
Basic 17,232 14,962 15.2 % 17,188 14,526 18.3 %
Diluted 23,086 22,678 1.8 % 22,950 22,402 2.4 %
Net income per share, basic $ (0.90) $ (0.62) 45.4 % $ (0.19) $ 0.48 (139.3) %
Net income per share, diluted $ (0.90) $ (0.62) 45.2 % $ (0.19) $ 0.48 (139.6) %
Dividends declared per share $ 0.6850 $ 0.5000 37.0 % $ 2.0550 $ 1.5000 37.0 %
Earnings Available for Distribution and Cash Available for Distribution
EAD is a non-GAAP financial measure. We believe EAD serves as a useful indicator for investors in evaluating our performance and our long-term ability to pay distributions. EAD is defined as the net income (loss) attributable to our common stockholders 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. 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 our current operations.
We use EAD to evaluate our performance which excludes the effects of certain GAAP adjustments and transactions that we believe are not indicative of our current operations and to assess our long-term ability to pay distributions. We believe providing EAD as a supplement to GAAP net income (loss) to our investors is helpful to their assessment of our performance and our long term ability to pay distributions. EAD does not represent net income or cash flows from operating activities and should not be considered as an alternative to GAAP net income, an indication of our GAAP cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. Our computation of EAD may not be comparable to EAD reported by other REITs.
We also use EAD as a component of the management fee paid to our Manager. As consideration for the Manager’s services, we will pay our Manager an annual management fee of 1.5% of Equity, paid monthly, in cash or shares of our common stock at the election of our Manager. “Equity” means (a) the sum of (1) total stockholders’ equity immediately prior to the closing of our IPO, plus (2) the net proceeds received by us from all issuances of our equity securities in and after the IPO, plus (3) our cumulative EAD from and after the IPO to the end of the most recently completed calendar quarter, (b) less (1) any distributions to our holders of common stock from and after the IPO to the end of the most recently completed calendar quarter and (2) all amounts that we have paid to repurchase for cash the shares of our equity securities from and after the IPO to the end of the most recently completed calendar quarter. In our calculation of Equity, we will adjust our calculation of EAD to remove the compensation expense relating to awards granted under one or more of our long-term incentive plans that is added back in our calculation of EAD. Additionally, for the avoidance of doubt, Equity does not include the assets contributed to us in the Formation Transaction. For the purpose of calculating EAD for the management fee, net income (loss) attributable to common stockholders may be adjusted for the effects of certain GAAP adjustments and transactions that may not be indicative of our current operations, in each case after discussions between the Manager and the independent directors of our Board and approved by a majority of the independent directors of our Board.
CAD is a non-GAAP financial measure. We calculate CAD by adjusting EAD by adding back amortization of premiums, depreciation and amortization of real estate investment, amortization of deferred financing costs and by
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removing accretion of discounts and non-cash items, such as stock dividends. We use CAD to evaluate our performance and our current ability to pay distributions. We also believe that providing CAD as a supplement to GAAP net income (loss) to our investors is helpful to their assessment of our performance and our current ability to pay distributions. CAD does not represent net income or cash flows from operating activities and should not be considered as an alternative to GAAP net income, an indication of our GAAP cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. Our computation of CAD may not be comparable to CAD reported by other REITs.
The following table provides a reconciliation of EAD and CAD to GAAP net income (loss) attributable to common stockholders for the three and nine months ended September 30, 2023 and 2022 (in thousands, except per share amounts):
For the Three Months Ended September 30,
% Change
For the Nine Months Ended September 30,
% Change
2023 2022 2023 2022
Net income attributable to common stockholders $ (15,550) $ (9,289) 67.4 % $ (3,236) $ 6,967 (146.4) %
Adjustments
Amortization of stock-based compensation 1,285 870 47.7 % 3,394 2,414 40.6 %
Provision for (reversal of) credit losses 5,235 — N/A 5,202 — N/A
Equity in income (losses) of equity method investments (1) 1,397 — N/A 2,139 — N/A
Unrealized (gains) or losses (2) 15,438 14,054 (9.8) % 19,001 23,868 (20.4) %
EAD attributable to common stockholders $ 7,805 $ 5,635 38.5 % $ 26,499 $ 33,249 (20.3) %
EAD per Diluted Weighted-Average Share $ 0.43 $ 0.36 19.3 % $ 1.48 $ 2.20 (32.7) %
Adjustments
Amortization of premiums $ 2,944 $ 2,617 12.5 % $ 9,064 $ 13,108 (30.8) %
Accretion of discounts (2,534) (2,688) 5.7 % (8,433) (7,476) 12.8 %
Depreciation and amortization of real estate investment 397 417 4.8 % 1,193 1,859 (35.8) %
Amortization of deferred financing costs (21) 9 337.1 % (3) 27 (112.4) %
CAD attributable to common stockholders $ 8,591 $ 5,990 43.4 % $ 28,320 $ 40,767 (30.5) %
CAD per Diluted Weighted-Average Share $ 0.48 $ 0.39 23.5 % $ 1.58 $ 2.70 (41.5) %
Weighted-average common shares outstanding - basic 17,232 14,962 15.2 % 17,188 14,526 18.3 %
Weighted-average common shares outstanding - diluted (3) 18,048 15,540 16.1 % 17,911 15,095 18.7 %
(1) Starting in the third quarter of 2023, we are adjusting EAD to remove the (income) / loss from equity method investments as it does not represent distributable earnings. We will include income from equity method investments to the extent that we receive cash distributions and upon realizing gains and/or losses.
(2) Unrealized gains are the net change in unrealized loss on investments held at fair value applicable to common stockholders.
(3) Weighted-average diluted shares outstanding does not include dilutive effect of redeemable non-controlling interests.
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The following table provides a reconciliation of EAD and CAD to GAAP net income including the dilutive effect of non-controlling interests for the three and nine months ended September 30, 2023 and 2022 (in thousands, except per share amounts):
For the Three Months Ended September 30,
% Change
For the Nine Months Ended September 30,
% Change
2023 2022 2023 2022
Net income (loss) attributable to common stockholders (15,550) (9,289) 67.4 % (3,236) 6,967 (146.4) %
Net income attributable to redeemable noncontrolling interests (2,374) (1,889) 25.7 % 1,419 (2,630) (154.0) %
Adjustments
Amortization of stock-based compensation 1,285 870 47.7 % 3,394 2,414 40.6 %
Provision for (reversal of) credit losses 6,276 — N/A 6,236 — N/A
Equity in income (losses) of equity method investments (1) 1,675 — N/A 2,564 — N/A
Unrealized (gains) or losses (2) 18,508 19,473 (5.0) % 22,780 32,202 29.3 %
EAD $ 9,820 $ 9,165 7.1 % $ 33,157 $ 38,953 (14.9) %
EAD per Diluted Weighted-Average Share $ 0.43 $ 0.40 7.5 % $ 1.44 $ 1.74 (17.2) %
Adjustments
Amortization of premiums $ 3,530 $ 3,425 3.1 % $ 10,867 $ 17,179 (36.7) %
Accretion of discounts (3,038) (3,517) (13.6) % (10,110) (9,791) (3.3) %
Depreciation and amortization of real estate investment 476 545 (12.7) % 1,430 2,435 41.3 %
Amortization of deferred financing costs (26) 12 (316.7) % (4) 36 111.1 %
CAD $ 10,762 $ 9,630 11.8 % $ 35,340 $ 48,812 (27.6) %
CAD per Diluted Weighted-Average Share $ 0.47 $ 0.42 11.9 % $ 1.54 $ 2.18 (29.4) %
Weighted-average common shares outstanding - basic 17,232 14,962 15.2 % 17,188 14,526 18.3 %
Weighted-average common shares outstanding - diluted 23,086 22,678 1.8 % 22,950 22,402 2.4 %
(1) Starting in the third quarter of 2023, we are adjusting EAD to remove the (income) / loss from equity method investments as it does not represent distributable earnings. We will include income from equity method investments to the extent that we receive cash distributions and upon realizing gains and/or losses.
(2) Unrealized gains are the net change in unrealized loss on investments held at fair value.
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Book Value per Share / Unit
The following table calculates our book value per share (in thousands, except per share data):
September 30, 2023 December 31, 2022
Common stockholders' equity $ 307,410 $ 346,474
Shares of common stock outstanding at period end 17,232 17,080
Book value per share of common stock $ 17.84 $ 20.29
Due to the large noncontrolling interest in the OP (see Note 13 to our consolidated financial statements, for more information), we believe it is useful to also look at book value on a combined basis as shown in the table below (in thousands, except per share data):
September 30, 2023 December 31, 2022
Common stockholders' equity $ 307,410 $ 346,474
Redeemable noncontrolling interests in the OP 89,148 96,501
Total equity $ 396,558 $ 442,975
Redeemable OP Units at period end 5,038 5,038
Shares of common stock outstanding at period end 17,232 17,080
Combined shares of common stock and redeemable OP Units 22,270 22,118
Combined book value per share / unit $ 17.81 $ 20.03
Our Portfolio
Our portfolio consists of SFR Loans, CMBS B-Pieces, CMBS I/O Strips, mezzanine loans, preferred equity investments, common equity investments, a multifamily property, MSCR Notes and mortgage backed securities with a combined unpaid principal balance of $2.0 billion as of September 30, 2023 and assumes the CMBS Entities’ assets and liabilities are not consolidated. The following table sets forth additional information relating to our portfolio as of September 30, 2023 (dollars in thousands):
Investment (1) Investment
Date 		Current
Principal
Amount 		Net Equity (2) Location Property Type Coupon Current Yield (3) Remaining
Term (4)
(years)
SFR Loans
1 Senior loan 2/11/2020 $ 508,700 $ 69,689 Various Single-family 4.65 % 4.42 % 4.93
2 Senior loan 2/11/2020 9,832 1,462 Various Single-family 5.35 % 5.25 % 4.34
3 Senior loan 2/11/2020 10,045 1,386 Various Single-family 5.30 % 5.04 % 4.93
4 Senior loan 2/11/2020 5,386 737 Various Single-family 5.24 % 4.96 % 5.01
5 Senior loan 2/11/2020 51,304 6,502 Various Single-family 4.74 % 4.62 % 2.01
6 Senior loan 2/11/2020 9,494 1,286 Various Single-family 6.10 % 5.74 % 5.01
7 Senior loan 2/11/2020 36,319 4,782 Various Single-family 5.55 % 5.18 % 5.09
8 Senior loan 2/11/2020 5,645 766 Various Single-family 5.99 % 5.63 % 5.18
9 Senior loan 2/11/2020 8,676 1,223 Various Single-family 5.88 % 5.58 % 5.26
10 Senior loan 2/11/2020 6,218 810 Various Single-family 4.83 % 4.81 % 0.34
11 Senior loan 2/11/2020 7,200 1,022 Various Single-family 5.34 % 5.10 % 5.35
12 Senior loan 2/11/2020 6,501 927 Various Single-family 5.46 % 5.22 % 5.42
13 Senior loan 2/11/2020 10,523 1,450 Various Single-family 4.72 % 4.63 % 2.42
Total 675,843 92,042 4.79 % 4.57 % 4.64
CMBS B-Piece
1 CMBS B-Piece 2/11/2020 22,624 (5) 8,032 Various Multifamily 9.76 % 9.77 % 2.41
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2 CMBS B-Piece 2/11/2020 28,581 (5) 10,292 Various Multifamily 10.92 % 10.91 % 3.16
3 CMBS B-Piece 4/23/2020 81,999 (5) 23,543 Various Multifamily 3.62 % 5.36 % 6.41
4 CMBS B-Piece 7/30/2020 16,906 (5) 5,747 Various Multifamily 14.22 % 14.22 % 3.74
5 CMBS B-Piece 8/6/2020 108,643 (5) 20,826 Various Multifamily 0.00 % 9.28 % 6.74
6 CMBS B-Piece 4/20/2021 29,306 (5) 9,990 Various Multifamily 11.35 % 11.35 % 7.41
7 CMBS B-Piece 6/30/2021 108,305 (5) 26,800 Various Multifamily 0.00 % 10.38 % 3.25
8 CMBS B-Piece 5/2/2022 33,327 (5) 9,982 Various Multifamily 4.35 % 4.68 % 15.16
9 CMBS B-Piece 7/28/2022 63,399 (5) 22,706 Various Multifamily 10.35 % 10.35 % 5.82
Total 493,090 137,918 4.47 % 9.11 % 5.90
CMBS I/O Strip
1 CMBS I/O Strip 5/18/2020 17,590 (6) 438 Various Multifamily 2.09 % 15.13 % 23.00
2 CMBS I/O Strip 8/6/2020 108,643 (6) 5,005 Various Multifamily 3.08 % 18.00 % 6.74
3 CMBS I/O Strip 4/28/2021 (7) 64,609 (6) 1,054 Various Multifamily 1.71 % 18.36 % 6.33
4 CMBS I/O Strip 5/27/2021 20,000 (6) 1,031 Various Multifamily 3.50 % 17.77 % 6.65
5 CMBS I/O Strip 6/7/2021 4,266 (6) 113 Various Multifamily 2.39 % 22.06 % 5.16
6 CMBS I/O Strip 6/11/2021 (8) 109,072 (6) 2,042 Various Multifamily 1.32 % 16.11 % 5.65
7 CMBS I/O Strip 6/24/2021 25,630 (6) 235 Various Multifamily 1.28 % 19.34 % 6.65
8 CMBS I/O Strip 8/10/2021 25,000 (6) 542 Various Multifamily 1.96 % 18.03 % 6.57
9 CMBS I/O Strip 8/11/2021 6,942 (6) 350 Various Multifamily 3.20 % 15.30 % 7.82
10 CMBS I/O Strip 8/24/2021 1,625 (6) 227 Various Multifamily 2.70 % 16.21 % 7.33
11 CMBS I/O Strip 9/1/2021 34,625 (6) 3,400 Various Multifamily 2.04 % 17.47 % 6.74
12 CMBS I/O Strip 9/11/2021 20,902 (6) 3,518 Various Multifamily 3.05 % 15.24 % 7.99
Total 438,904 17,955 2.16 % 17.35 % 7.11
Mezzanine
1 Mezzanine 6/12/2020 7,500 7,500 Houston, TX Multifamily 11.00 % 11.00 % 0.75
2 Mezzanine 10/20/2020 5,470 2,253 Wilmington, DE Multifamily 7.50 % 7.32 % 5.59
3 Mezzanine 10/20/2020 10,380 4,301 White Marsh, MD Multifamily 7.42 % 7.23 % 7.76
4 Mezzanine 10/20/2020 14,253 5,892 Philadelphia, PA Multifamily 7.59 % 7.40 % 5.67
5 Mezzanine 10/20/2020 3,700 1,521 Daytona Beach, FL Multifamily 7.83 % 7.65 % 5.01
6 Mezzanine 10/20/2020 12,000 4,971 Laurel, MD Multifamily 7.71 % 7.51 % 7.51
7 Mezzanine 10/20/2020 3,000 1,243 Temple Hills, MD Multifamily 7.32 % 7.13 % 7.84
8 Mezzanine 10/20/2020 1,500 622 Temple Hills, MD Multifamily 7.22 % 7.03 % 7.84
9 Mezzanine 10/20/2020 5,540 2,282 Lakewood, NJ Multifamily 7.33 % 7.16 % 5.59
10 Mezzanine 10/20/2020 6,829 2,810 Rosedale, MD Multifamily 7.53 % 7.36 % 5.26
11 Mezzanine 10/20/2020 3,620 1,500 North Aurora, IL Multifamily 7.42 % 7.23 % 7.76
12 Mezzanine 10/20/2020 9,610 3,982 Cockeysville, MD Multifamily 7.42 % 7.23 % 7.76
13 Mezzanine 10/20/2020 7,390 3,062 Laurel, MD Multifamily 7.42 % 7.23 % 7.76
14 Mezzanine 10/20/2020 2,135 878 Tyler, TX Multifamily 7.74 % 7.56 % 5.01
15 Mezzanine 10/20/2020 1,190 490 Las Vegas, NV Multifamily 7.71 % 7.53 % 5.42
16 Mezzanine 10/20/2020 3,310 1,364 Atlanta, GA Multifamily 6.91 % 6.75 % 5.76
17 Mezzanine 10/20/2020 2,880 1,185 Des Moines, IA Multifamily 7.89 % 7.71 % 5.09
18 Mezzanine 10/20/2020 4,010 1,649 Urbandale, IA Multifamily 7.89 % 7.71 % 5.09
19 Mezzanine 11/18/2021 12,600 12,502 Irving, TX Multifamily 16.27 % 16.40 % 5.18
20 Mezzanine 12/29/2021 7,760 7,709 Rogers, AR Multifamily 16.27 % 16.38 % 1.28
21 Mezzanine 6/9/2022 4,500 4,473 Rogers, AR Multifamily 16.01 % 16.11 % 1.69
22 Mezzanine 10/5/2022 (9) 4,030 3,996 Kirkland, WA Multifamily 16.01 % 16.15 % 4.26
Total 133,207 76,185 9.60 % 9.49 % 5.55
Preferred Equity
1 Preferred Equity 5/29/2020 (10) 11,698 11,698 Houston, TX Multifamily 11.00 % 11.00 % 6.59
2 Preferred Equity 9/29/2021 9,268 9,252 Holly Springs, NC Life Science 10.00 % 10.02 % 1.00
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3 Preferred Equity 10/26/2021 9,750 9,712 Atlanta, GA Multifamily 11.00 % 11.04 % 1.10
4 Preferred Equity 12/28/2021 (11) 14,823 14,823 Las Vegas, NV Multifamily 10.50 % 10.50 % 8.42
5 Preferred Equity 1/14/2022 22,802 22,805 Vacaville, CA Life Science 10.00 % 10.00 % 1.00
6 Preferred Equity 4/7/2022 (12) 4,000 3,966 Beaumont, TX Self-Storage 15.27 % 15.40 % 6.93
7 Preferred Equity 6/8/2022 4,000 3,966 Temple, TX Self-Storage 14.55 % 14.68 % 6.93
8 Preferred Equity 7/1/2022 (13) 9,000 8,930 Medley, FL Self-Storage 11.00 % 11.09 % 3.75
9 Preferred Equity 8/10/2022 8,500 8,443 Plano, TX Multifamily 16.10 % 16.21 % 1.95
10 Preferred Equity 9/30/2022 9,000 8,936 Fort Worth, TX Multifamily 15.01 % 15.12 % 2.01
11 Preferred Equity 10/19/2022 18,174 18,184 Woodbury, MN Life Science 10.00 % 9.99 % 1.00
12 Preferred Equity 2/10/2023 20,900 20,769 Forney, TX Multifamily 11.00 % 11.07 % 1.37
13 Preferred Equity 2/24/2023 14,200 14,115 Richmond, VA Multifamily 11.00 % 11.07 % 1.37
14 Preferred Equity 4/6/2023 22,945 22,936 Temecula, CA Life Science 17.50 % 17.51 % 1.00
15 Preferred Equity 5/16/2023 (14) 3,920 3,882 Phoenix, AZ Single-family 13.50 % 13.63 % 3.58
16 Preferred Equity 5/17/2023 (15) 4,192 4,150 Houston, TX Life Science 13.00 % 13.13 % 2.67
Total 187,172 186,567 12.18 % 12.22 % 2.58
Common Equity
1 Common Stock 11/6/2020 N/A 33,759 N/A Self-Storage N/A N/A N/A
2 Common Stock 4/14/2022 N/A 26,950 N/A Ground Lease N/A N/A N/A
3 Common Equity 2/10/2023 N/A — Forney, TX Multifamily N/A N/A N/A
4 Common Equity 2/24/2023 N/A — Richmond, VA Multifamily N/A N/A N/A
5 Common Equity 9/8/2023 N/A — Atlanta, GA Multifamily N/A N/A N/A
Total 60,709
Real Estate
1 Real Estate 12/31/2021 (16) N/A 26,358 Charlotte, NC Multifamily N/A N/A N/A
Promissory Note
1 Promissory Note 9/29/2023 5,000 5,000 Dallas, TX Self-Storage 11.00 % 11.00 % 1.00
MSCR Notes
1 MSCR Note 5/25/2022 4,000 2,021 Various Multifamily 14.79 % 14.79 % 28.67
2 MSCR Note 5/25/2022 5,000 2,250 Various Multifamily 11.79 % 11.79 % 28.67
3 MSCR Note 9/23/2022 1,500 1,305 Various Multifamily 12.14 % 13.34 % 28.17
Total 10,500 5,576 12.98 % 13.15 % 28.60
Mortgage Backed Securities
1 Mortgage Backed Securities 6/1/2022 10,074 2,535 Various Single-family 4.87 % 5.03 % 2.14
2 Mortgage Backed Securities 6/1/2022 10,419 3,498 Various Single-family 8.63 % 8.93 % 2.55
3 Mortgage Backed Securities 7/28/2022 575 266 Various Single-family 6.23 % 6.32 % 4.05
4 Mortgage Backed Securities 7/28/2022 1,057 350 Various Single-family 3.60 % 4.15 % 4.73
5 Mortgage Backed Securities 9/12/2022 3,927 1,378 Various Multifamily 11.35 % 11.33 % 7.33
6 Mortgage Backed Securities 9/29/2022 8,000 7,856 Various Self-Storage 11.09 % 11.11 % 3.96
7 Mortgage Backed Securities 3/10/2023 5,747 1,983 Various Multifamily 13.72 % 13.75 % 1.41
Total 39,799 17,866 9.01 % 9.15 % 3.12
(1) Our total portfolio represents the current principal amount of the consolidated SFR Loans, CMBS I/O Strips, mezzanine loans, preferred equity, multifamily properties, MSCR Notes and mortgage backed securities as well as the net equity of our CMBS B-Piece investments.
(2) Net equity represents the carrying value less borrowings collateralized by the investment.
(3) Current yield is the annualized income earned divided by the cost basis of the investment.
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(4) The weighted-average life is weighted on current principal balance and assumes no prepayments. The maturity date for preferred equity investments represents the maturity date of the senior mortgage, as the preferred equity investments require repayment upon the sale or refinancing of the asset.
(5) The CMBS B-Pieces are shown on an unconsolidated basis reflecting the value of our investments.
(6) The number shown represents the notional value on which interest is calculated for the CMBS I/O Strips. CMBS I/O Strips receive no principal payments and the notional value decreases as the underlying loans are paid off.
(7) 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.
(8) 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 and September 29, 2021, February 3, 2022 and March 18, 2022, respectively.
(9) The Company reclassified this investment from preferred equity to a mezzanine loan effective January 1, 2023.
(10) The Company, through the Subsidiary OPs, invested $10.0 million on May 29, 2020, an aggregate of $1.2 million on January 9, 2023, March 6, 2023 and March 28, 2023, and $0.2 million on May 25, 2023 in this preferred equity investment.
(11) The Company, through the Subsidiary OPs, invested $5.0 million, $1.8 million, $40.1 million and $18.5 million in this real estate investment on December 28, 2021, January, 27, 2022, February 1, 2022 and July 26, 2022, respectively.
(12) The Company, through the Subsidiary OPs, invested $2.7 million and $1.3 million in this preferred equity investment on April 7, 2022 and May 3, 2022, respectively.
(13) The Company reclassified this investment from a mezzanine loan to preferred equity effective January 1, 2023.
(14) The Company, through the Subsidiary OPs, invested $0.5 million and $0.7 million in this preferred equity investment on May 16, 2023 and June 12, 2023, respectively.
(15) The Company, through the Subsidiary OPs, invested $3.7 million and $0.3 million in this preferred equity investment on May 17, 2023 and June 24, 2023, respectively.
(16) Real Estate is a 204-unit multifamily property.
The following table details overall statistics for our portfolio as of September 30, 2023 (dollars in thousands):
Total
Portfolio 		Floating Rate
Investments 		Fixed Rate
Investments 		Common Equity
Investments 		Real Estate
Investment
Number of investments 89 26 57 5 1
Principal balance (1) $ 1,594,353 $ 328,956 $ 1,265,397 N/A N/A
Carrying value $ 1,633,287 $ 325,879 $ 1,188,136 $ 60,709 $ 58,563
Weighted-average cash coupon 5.92 % 10.01 % 4.86 % N/A N/A
Weighted-average all-in yield 6.90 % 12.44 % 5.38 % N/A N/A
(1) Cost is used in lieu of principal balance for CMBS I/O Strips.
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds necessary to pay for our ongoing commitments to repay borrowings, maintain our investments, make distributions to our stockholders and other general business needs. Our investments generate liquidity on an ongoing basis through principal and interest payments, prepayments and dividends. We believe that our available cash, expected operating cash flows, and potential debt or equity financings will provide sufficient funds for our operations, anticipated scheduled debt service payments, potential obligations to purchase up to $30.9 million of the Preferred Units (defined below) and dividend requirements for the twelve-month period following September 30, 2023.
Our long-term liquidity requirements consist primarily of acquiring additional investments, scheduled debt payments and distributions. We expect to meet our long-term liquidity requirements through various sources of capital, which may include future debt or equity issuances, net cash provided by operations and other secured and unsecured borrowings. Our leverage is matched in term and structure to provide stable contractual spreads which will protect us from fluctuations in market interest rates over the long-term. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, borrowing restrictions imposed by lenders, general market conditions for REITs and our operating performance and liquidity. We believe that our various sources of capital, which may include future debt or equity issuances, net cash provided by operations and other secured and unsecured borrowings, will provide sufficient funds for our operations,
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anticipated debt service payments, potential obligations to purchase investments under the Company's commitments noted in Note 15 to our consolidated financial statements and dividend requirements for the long-term.
Asset Metrics Debt Metrics
Investment Fixed/Floating Rate Interest Rate Maturity Date Fixed/Floating Rate Interest Rate Maturity Date Net Spread
SFR Loans
Senior loan Fixed 4.65% 9/1/2028 Fixed 2.24% 9/1/2028 2.41%
Senior loan Fixed 5.35% 2/1/2028 Fixed 3.51% 2/1/2028 1.84%
Senior loan Fixed 5.30% 9/1/2028 Fixed 2.79% 9/1/2028 2.51%
Senior loan Fixed 5.24% 10/1/2028 Fixed 2.64% 10/1/2028 2.60%
Senior loan Fixed 4.74% 10/1/2025 Fixed 2.14% 10/1/2025 2.60%
Senior loan Fixed 6.10% 10/1/2028 Fixed 3.30% 10/1/2028 2.80%
Senior loan Fixed 5.55% 11/1/2028 Fixed 2.70% 11/1/2028 2.85%
Senior loan Fixed 5.99% 12/1/2028 Fixed 3.14% 12/1/2028 2.85%
Senior loan Fixed 5.88% 1/1/2029 Fixed 3.14% 1/1/2029 2.74%
Senior loan Fixed 4.83% 2/1/2024 Fixed 2.40% 2/1/2024 2.43%
Senior loan Fixed 5.34% 2/1/2029 Fixed 2.98% 2/1/2029 2.36%
Senior loan Fixed 5.46% 3/1/2029 Fixed 2.99% 3/1/2029 2.47%
Senior loan Fixed 4.72% 3/1/2026 Fixed 2.45% 3/1/2026 2.27%
Mezzanine Loan
Mezzanine Fixed 7.50% 5/1/2029 Fixed 0.30% 5/1/2029 7.20%
Mezzanine Fixed 7.42% 7/1/2031 Fixed 0.30% 7/1/2031 7.12%
Mezzanine Fixed 7.59% 6/1/2029 Fixed 0.30% 6/1/2029 7.29%
Mezzanine Fixed 7.83% 10/1/2028 Fixed 0.30% 10/1/2028 7.53%
Mezzanine Fixed 7.71% 4/1/2031 Fixed 0.30% 4/1/2031 7.41%
Mezzanine Fixed 7.32% 8/1/2031 Fixed 0.30% 8/1/2031 7.02%
Mezzanine Fixed 7.22% 8/1/2031 Fixed 0.30% 8/1/2031 6.92%
Mezzanine Fixed 7.33% 5/1/2029 Fixed 0.30% 5/1/2029 7.03%
Mezzanine Fixed 7.53% 7/1/2031 Fixed 0.30% 7/1/2031 7.23%
Mezzanine Fixed 7.42% 1/1/2029 Fixed 0.30% 1/1/2029 7.12%
Mezzanine Fixed 7.42% 7/1/2031 Fixed 0.30% 7/1/2031 7.12%
Mezzanine Fixed 7.42% 4/1/2031 Fixed 0.30% 4/1/2031 7.12%
Mezzanine Fixed 7.74% 10/1/2028 Fixed 0.30% 10/1/2028 7.44%
Mezzanine Fixed 7.71% 3/1/2029 Fixed 0.30% 3/1/2029 7.41%
Mezzanine Fixed 6.91% 7/1/2029 Fixed 0.30% 7/1/2029 6.61%
Mezzanine Fixed 7.89% 11/1/2028 Fixed 0.30% 11/1/2028 7.59%
Mezzanine Fixed 7.89% 11/1/2028 Fixed 0.30% 11/1/2028 7.59%
Our primary sources of liquidity and capital resources to date consist of cash generated from our operating results and the following:
Freddie Mac Credit Facilities
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
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Underlying Loans. The Credit Facility was assumed by the Company as part of the Formation Transaction. As such, the remaining outstanding balance of $788.8 million was contributed to the Company on February 11, 2020. Our borrowings under the Credit Facility will mature on July 12, 2029; however, if an Underlying Loan matures prior to July 12, 2029, we will be required to repay the portion of the Credit Facility that is allocated to that loan. As of September 30, 2023, the outstanding balance on the Credit Facility was $617.6 million.
Repurchase Agreements
From time to time, we may enter into repurchase agreements to finance the acquisition of our target assets. Repurchase agreements will effectively allow us to borrow against loans and securities that we own in an amount equal to (1) the market value of such loans and/or securities multiplied by (2) the applicable advance rate. Under these agreements, we will sell our loans and securities to a counterparty and agree to repurchase the same loans and securities from the counterparty at a price equal to the original sales price plus an interest factor. During the term of a repurchase agreement, we will receive the principal and interest on the related loans and securities and pay interest to the lender under the repurchase agreement. At any point in time, the amounts and the cost of our repurchase borrowings will be based on the assets being financed. For example, higher risk assets will result in lower advance rates (i.e., levels of leverage) at higher borrowing costs. In addition, these facilities may include various financial covenants and limited recourse guarantees.
As discussed in Note 9 to our consolidated financial statements, in connection with our CMBS acquisitions, we, through the OP and the Subsidiary OPs, have borrowed approximately $298.0 million under our repurchase agreements and posted approximately $853.6 million par value of our CMBS B-Piece, CMBS I/O Strip, MSCR Notes and mortgage backed security investments as collateral. 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 as described in our Annual Report.
The table below provides additional details regarding recent borrowings under the master repurchase agreements (dollars in thousands):
September 30, 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 298,009 298,009 N/A (5) 7.23 % 0.1 853,574 434,890 425,949 6.6
(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.
(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.
At-The-Market Offering
On March 15, 2022, the Company, the OP and the Manager separately entered into the 2022 Equity Distribution Agreements with the 2022 Sales Agents, pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock and Series A Preferred Stock having an aggregate sales price of up to $100.0 million in the 2022 ATM Program. The 2022 Equity Distribution Agreements provide for the issuance and sale of common stock or Series A Preferred Stock by the Company through a sales agent acting as a sales agent or directly to the sales agent acting as principal for its own account at a price agreed upon at the time of sale. As of September 30, 2023, pursuant to the 2022 Equity Distribution Agreements, the Company has sold 531,728 shares of its common stock and zero shares of Series A Preferred Stock for total gross sales of $12.6 million. For additional information about the 2022 ATM Program, see Note 11 to our consolidated financial statements.
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Company Notes Offering
On January 25, 2022, the Company issued $35.0 million in aggregate principal amount of its 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.
LIBOR Transition
Following June 30, 2023, all of the U.S. Dollar London Interbank Offered Rate ("LIBOR") settings have ceased to be provided by any administrator and are no longer representative. Approximately 13.3% of our portfolio by unpaid principal balance as of September 30, 2023 pays interest at a variable rate that is tied to the Secured Overnight Financing Rate ("SOFR”), and it is anticipated that future investments we make may have variable interest rates tied to SOFR. As of June 30, 2023, the Company received LIBOR transition notices under its loan agreements tied to LIBOR stating such loans will transition to SOFR on the first adjustment date subsequent to June 30, 2023. As of September 30, 2023, the transition has had an immaterial effect on the effected loans' interest rates. Any changes to benchmark interest rates could increase our financing costs, which could impact our results of operations, cash flows and the market value of our investments and result in mismatches with the interest rate of investments that we are financing.
Other Potential Sources of Financing
We may seek additional sources of liquidity from further repurchase facilities, other borrowings and future offerings of common and preferred equity and debt securities and contributions from existing holders of the OP or Subsidiary OPs. In addition, we may apply our existing cash and cash equivalents and cash flows from operations to any liquidity needs. As of September 30, 2023, our cash and cash equivalents were $12.9 million.
Cash Flows
The following table presents selected data from our Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and September 30, 2022 (in thousands):
For the Nine Months Ended September 30,
2023 2022
Net cash provided by operating activities $ 28,428 $ 58,795
Net cash provided by investing activities 639,485 713,195
Net cash (used in) financing activities (675,341) (774,041)
Net decrease in cash, cash equivalents and restricted cash (7,428) (2,051)
Cash, cash equivalents and restricted cash, beginning of period 20,347 33,232
Cash, cash equivalents and restricted cash, end of period $ 12,919 $ 31,181
Cash flows from operating activities. During the nine months ended September 30, 2023, net cash provided by operating activities was $28.4 million, compared to net cash provided by operating activities of $58.8 million for the nine months ended September 30, 2022. This decrease was due to an increase in provision for credit losses and a decrease in unrealized losses on investments held at fair value.
Cash flows from investing activities. During the nine months ended September 30, 2023, net cash provided by investing activities was $639.5 million, compared to net cash provided by operating activities of $713.2 million for the nine months ended September 30, 2022. This decrease was primarily driven by the decrease in proceeds from payments on mortgage loans held in variable interest entities.
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Cash flows from financing activities. During the nine months ended September 30, 2023, net cash used in financing activities was $675.3 million, compared to net cash used in financing activities of $774.0 million for the nine months ended September 30, 2022. This decrease was primarily driven by the decrease in distributions to bondholders of VIEs.
Emerging Growth Company and Smaller Reporting Company Status
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of 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. We have 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. We 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.
We are also a “smaller reporting company” as defined in Regulation S-K under the Securities Act, and may elect to take advantage of certain of the scaled disclosures available to smaller reporting companies. We may be a smaller reporting company even after we are no longer an “emerging growth company.”
Dividends
We intend to make regular quarterly dividend payments to holders of our common stock. We also intend to make the accrued dividend payments on the Series A Preferred Stock, which are payable quarterly in arrears as provided in the articles supplementary setting forth the terms of the Series A Preferred Stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income, which is not used to pay a dividend on the Series A Preferred Stock, to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.
We will make dividend payments to holders of our common stock based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair-value adjustments, differences in premium amortization and discount accretion and non-deductible G&A expenses. Our quarterly dividends per share of our common stock may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Our Board declared the second regular quarterly dividend of 2023 to common stockholders of $0.50 per share on April 24, 2023, which was paid on June 30, 2023, to common stockholders of record as of June 15, 2023. Our Board declared the third regular quarterly dividend to common stockholders of $0.50 per share on July 24, 2023, which was paid on September 29, 2023, to stockholders of record as of September 15, 2023. Our Board also declared a special dividend to common stockholders of $0.185 per share on April 24, 2023, which was paid on June 30, 2023, to common stockholders of record as of June 15, 2023. Our Board also declared a special dividend to common stockholders of $0.185 per share on July 24, 2023, which was paid on September 29, 2023, to common stockholders of record as of September 15, 2023. On December 15, 2022, our Board declared a preferred stock dividend of $0.53125 per share, which was paid on January 25, 2023 to preferred stockholders of record as of January 13, 2023. On February 22, 2023, our Board declared a preferred stock dividend of $0.53125 per share, which was paid on April 25, 2023 to preferred stockholders of record as of April 13, 2023. On June 13, 2023, our Board declared a dividend to preferred stockholders of $0.53125 per share, which was paid on July 25, 2023 to preferred stockholders of record as of July 13, 2023.
Off-Balance Sheet Arrangements
As of September 30, 2023, we had one off balance sheet arrangement that has or is reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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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 one promissory note in an aggregate principal amount of approximately $49.2 million issued to Extra Space. The guaranties by REIT Sub and the Co-Guarantors are capped at $97.6 million, which 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 September 30, 2023, the Company owns approximately 25.7% of the total outstanding shares of common stock of NSP.
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. On September, 22, 2023, the issuer exercised its right to extend the final obligation date to purchase any additional Preferred Units to September 29, 2024. As of September 30, 2023, the Company may have the obligation to fund an additional $6.6 million by September 29, 2024, which the issuer may extend for up to one year 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 MOIC equal to 1.25x for unstabilized PropCos and 1.10x for stabilized PropCos. As of September 30, 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 September 30, 2023.
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 September 30, 2023, the Company owns approximately 25.7% of the total outstanding shares of common stock of NSP.
The Company provides certain guarantees in connection with the NSP Sponsor Guaranty Agreement. See Note 14 to our Consolidated Financial Statements for further details.
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 single-family property located in Phoenix, Arizona, of which $20.1 million was unfunded as of September 30, 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. The Company was also issued a common interest at the time of its first funding of preferred equity on May 16, 2023. The common interest allows the Company to receive a 10% profit share once aggregate distributions exceed the 20% IRR hurdle as shown below. There was no value ascribed to the common interest as of September 30, 2023. Further, once the Company's preferred equity and accrued interest has been repaid, any additional cash flow and net sale proceeds shall be distributed as follows:
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• 0% to the Company and 100% to issuer up to a 20.0% IRR
• 10% to the Company and 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 $9.4 million was unfunded as of September 30, 2023. Further, the Company committed to purchase $4.3 million of common equity with respect to the same property, of which $3.3 million was unfunded as of September 30, 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 $16.1 million was unfunded as of September 30, 2023. Further, the Company committed to purchase $4.3 million of common equity with respect to the same property, of which $3.3 million was unfunded as of September 30, 2023.
The table below shows the Company's unfunded commitments by investment type as of September 30, 2023 and December 31, 2022 (in thousands):
Investment Type September 30, 2023 December 31, 2022
Unfunded Commitments Unfunded Commitments
Preferred Equity $ 52,200 $ 25,000
Common Equity 6,600 —
$ 58,800 $ 25,000
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes that would affect the reported amounts. These estimates are based on management’s historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. Below is a discussion of the accounting policies and estimates that involve significant estimation uncertainty that have or are reasonably likely to have a material impact on our financial condition or results of operations. A discussion of recent accounting pronouncements and our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2 to our consolidated financial statements.
Allowance for Credit Losses
In periods ending on or prior to December 31, 2022, 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.
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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 provision for credit losses of $6.3 million and $6.2 million for the three and nine months ended September 30, 2023 is included in other income on the accompanying Consolidated Statements of Operations, resulting in a September 30, 2023 ending allowance for credit loss of $8.5 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.
Valuation of Common Equity
As of September 30, 2023, the Company owns approximately 25.7% of the total outstanding shares of NSP and thus can exercise significant influence over NSP. The Company elected the fair-value option in accordance with ASC 825-10-10. On a quarterly basis, the Company, with the assistance of an independent third-party valuation firm, determines the fair value for subsequent measurement absent a readily available market price. The valuation is determined using widely accepted valuation techniques consistent with the principles of ASC 820. Specifically, these techniques include the discounted cash flow methodology whereby observable market terminal capitalization rates and discount rates are applied to projected cash flows generated by self-storage assets owned by NSP. The necessary inputs for the valuation include projected cash flows of NSP, terminal capitalization rates and discount rates. These inputs are reflective of public company comparables, but are assumptions and estimates. As a result, the determination of fair value involves significant estimation uncertainty because it involves subjective judgments and estimates that are based on unobservable inputs. For the nine months ended September 30, 2023, the unrealized loss related to the change in fair value estimate is $16.6 million. See Notes 5 and 10 to our consolidated financial statements for additional disclosures regarding the valuation of NSP.
As of September 30, 2023, the Company owns approximately 6.36% of the total outstanding common equity of the Private REIT. The Company records the Private REIT at fair value in accordance with ASC 321. The valuation is determined using a market approach. The necessary input for the valuation includes the yield of the Private REIT. As a result, the determination of fair value is uncertain because it involves subjective judgments and estimates that are unobservable. For the nine months ended September 30, 2023, the unrealized loss related to the change in fair value estimate is $0.9 million. See Notes 5 and 10 to our consolidated financial statements for additional disclosures regarding the valuation of the Private REIT.
As of September 30, 2023, the Company owns approximately 98.0% of the total outstanding common equity of each of RFGH and RTB. The Company holds RFGH and RTB based on the Company's proportionate share of income (losses) for the three and nine months ended September 30, 2023. See Notes 5 and 10 to our consolidated financial statements for additional disclosures regarding the equity method investments RFGH and RTB.
Considerations Related to Tightening Monetary Policy
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The macroeconomic environment remains challenging as central banks have continued to rapidly raise interest rates. The rising rate environment, coupled with large bank failures in early 2023 and ongoing economic uncertainty, has limited credit availability to commercial real estate. Less available and more expensive debt capital has had pronounced effects on the capital markets, making property acquisitions and other investments harder to finance. Similar factors also impact the timing of and proceeds generated from asset sales and our ability to obtain debt capital.
REIT Tax Election
We elected to be treated as a REIT under Sections 856 through 860 of the Code. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the nine months ended September 30, 2023 and September 30, 2022. We believe that our organization and current and proposed method of operation will allow us to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our President and Chief Financial Officer, evaluated, as of September 30, 2023, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023, due to the material weakness described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2022 (the "Material Weakness"), to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management nonetheless determined that the consolidated financial statements and related financial information included in this quarterly report fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with GAAP. Management’s determination is based on a number of factors, including, but not limited to, management’s performance of additional analysis and other post-closing procedures as of and for the three months ended September 30, 2023.
Remediation Plan
Management is committed to implementing changes to our internal control over financial reporting to ensure that the Material Weakness is remediated. We have evaluated the impact of the Material Weakness and have implemented the following changes:
We implemented a pre-close and post-close acquisition checklist for proposed investments. The pre-close checklist includes a formal accounting analysis and review of the contract terms and structure of the proposed investment. Subsequently, after a transaction closes, accounting personnel will obtain the final executed documents and compare and review for any changes to initial accounting conclusions reached in the pre-check review. Any differences will be corrected prior to the quarter close. Management believes that this control will prevent the conditions that led to the Material Weakness.
While we believe that these actions will remediate the Material Weakness, as of September 30, 2023, the corrective processes had not been in place for a sufficient period of time for evaluation.
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Until the remediation steps set forth above, including evaluation and any additional measures we may take, are fully implemented and concluded to be operating effectively for a sufficient period of time, the Material Weakness will not be considered remediated.
Changes in Internal Control over Financial Reporting
Other than ongoing remediation to address the Material Weakness in internal control over financial reporting described above, there has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 31, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On November 9, 2023 (the “Separation Date”), Matt Goetz resigned from his position as Senior VP-Investments and Asset Management of the Company. Mr. Goetz’s resignation is not a result of any disagreement with the Company on any matter relating to its operations, policies or practices.
In connection with his resignation from the Company and its affiliates, Mr. Goetz and the Company, the Manager, NexPoint Advisors, L.P. (“NREA”), NexPoint Residential Trust, Inc. (“NXRT”), NexPoint Real Estate Advisors, L.P., NexPoint Diversified Real Estate Trust (“NXDT”), NexPoint Real Estate Advisors X, L.P., VineBrook Homes Trust, Inc. (“VineBrook”), and NexPoint Real Estate Advisors V, L.P. entered into a Separation Agreement, dated November 9, 2023 (the “Separation Agreement”). Pursuant to the Separation Agreement, NREA will subsidize Mr. Goetz’s COBRA premium for a period of twelve months and 72,675 restricted stock units granted to Mr. Goetz by the Company will immediately vest as of the Separation Date and will settle on the original scheduled vesting dates, subject to Mr. Goetz’s continued compliance with existing restrictive covenants. In addition, pursuant to the Separation Agreement, 11,453 restricted stock units granted to Mr. Goetz by NXRT, 11,300 restricted share units granted to Mr. Goetz by NXDT and 4,279 restricted stock units granted to Mr. Goetz by VineBrook will immediately vest as of the Separation Date and will settle on the original scheduled vesting dates, subject to Mr. Goetz’s continued compliance with existing restrictive covenants. The approximate value of the restricted stock units of the Company that are vesting on the Separation Date is $1.2 million and the approximate value of the aggregate restricted stock units of the Company, NXRT, NXDT and VineBrook that are vesting on the Separation Date is $2 million.
The Separation Agreement additionally contains, among other things, mutual non-disparagement provisions and a mutual release of claims by Mr. Goetz and the Company.
In connection with the Separation Agreement, Mr. Goetz, the Company, NXRT, NXDT and VineBrook entered into a vesting agreement pursuant to which, among other things, the award agreements between Mr. Goetz and the Company relating to his restricted stock unit grants were amended to account for his separation and accelerated vesting of a portion of his outstanding restricted stock unit grants pursuant to the Separation Agreement.

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The foregoing summary of the Separation Agreement does not purport to be complete and is qualified in its entirety by reference to the Separation Agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report and is incorporated herein by reference.
Item 6. Exhibits
EXHIBIT INDEX
Exhibit Number Description
10.1*
31.1*
31.2*
32.1+
101.INS* Inline XBRL Instance Document (The instance document does not appear in the interactive date file because its XBRL tags are embedded within the inline XBRL document)
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
______________________
*    Filed herewith.
+    Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEXPOINT REAL ESTATE FINANCE, INC.
Signature Title Date
/s/ Jim Dondero Chairman of the Board and President
(Principal Executive Officer) 		November 13, 2023
Jim Dondero
/s/ Brian Mitts Director, Chief Financial Officer, Executive VP-Finance, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer) 		November 13, 2023
Brian Mitts
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