October 10, 2019
Brian Mitts
President
NexPoint Real Estate Finance, Inc.
300 Crescent Court
Suite 700
Dallas, Texas 75201
Re: NexPoint Real Estate Finance, Inc.
Draft Registration Statement on Form S-11
Filed September 13, 2019
File No. 377-02831
Dear Mr. Mitts:
We have reviewed your draft registration statement and have the
following comments. In
some of our comments, we may ask you to provide us with information so we may
better
understand your disclosure.
Please respond to this letter by providing the requested information and
either submitting
an amended draft registration statement or publicly filing your registration
statement on
EDGAR. If you do not believe our comments apply to your facts and circumstances
or do not
believe an amendment is appropriate, please tell us why in your response.
After reviewing the information you provide in response to these comments
and your
amended draft registration statement or filed registration statement, we may
have additional
comments.
Draft Registration Statement on Form S-11 Submitted September 13, 2019
Our Manager, page 2
1. Please clarify whether you will reimburse your Manager for the salaries
and benefits to be
paid to your other named executive officers. Please also provide an
estimate of the
amount of fees to be paid to your manager for the first year based on
the offering
proceeds. In addition, in future filings that require Item 402 or Item
404 of Regulation S-K
disclosure, please disclose the amount of fees paid to the Manager,
break out the amounts
paid pursuant to the annual management fee and the reimbursement
provision, and within
reimbursements specify any amounts reimbursed for salaries or benefits
of a named
executive officer.
Brian Mitts
FirstNameReal Estate Finance, Inc.
NexPoint LastNameBrian Mitts
Comapany NameNexPoint Real Estate Finance, Inc.
October 10, 2019
Page 2
October 10, 2019 Page 2
FirstName LastName
The Formation Transaction, page 2
2. We note your disclosure that, "[u]pon completion of the Formation
Transaction, [y]our
Initial Portfolio based on total assets (and equity invested) will be
approximately
86%(62%) senior pooled mortgage loans backed by SFR properties, 8%(8%)
multifamily
CMBS B-Piece and 7%(30%) mezzanine loan and preferred equity
investments in real
estate companies and properties and other structured real estate
investments within the
multifamily, SFR and self-storage asset classes." Please revise this
disclosure to briefly
describe the liabilities associated with your portfolio of
approximately $2 billion and
clarify your use of the term "equity invested."
Our Strategic Relationship with Highland, page 3
3. We note your disclosure on page 4 that "[a]s of June 30, 2019,
according to S&P Global
Market Intelligence, NXRT was the top performing REIT in the MSCI
Index, or RMZ, for
the trailing three-year period, returning an annualized 35.2% total
return to stockholders."
We further note the disclosure on page 6 that "NXRT delivered a 259%
total return to
stockholders outperforming the RMZ by 233% since NXRT's listing on
April 1, 2015
through June 30, 2019" and that NXRT resulted from a spin-off. Please
revise to move
such disclosure from the summary and explain to us how you determined
that these
measures are appropriate and balanced. To the extent you retain such
return information,
please more specifically explain the basis for the return, valuation
discussions, calculations and how the amounts were determined.
Although we note the
footnote on page 7, please more specifically describe the companies
that comprise the
index and how those companies may differ from NXRT. In addition,
please describe whether return amounts may have been impacted by
general market trends
or other external factors unrelated to management action. Please also
disclose any adverse
business developments relating to your management's prior experience.
Our Financing Strategy, page 14
4. We note in your table on page 16, and elsewhere in your filing, you
disclose or discuss
your investments in CMBS on a net basis. As the trusts that issued the
securities are
consolidated by the company, please consider balancing your disclosure
by also providing
or discussing this information on a gross basis.
Prospectus Summary
Investment Company Act Exclusion, page 25
5. We note that you intend to operate your business in a manner that will
permit you to
maintain an exemption from registration under the Investment Company
Act of 1940, as
amended. Please provide us with a supplemental detailed analysis of:
the specific exemption that you and each of your subsidiaries
intend to rely on; and
how your and each of your subsidiaries' investment strategy and
business model will
Brian Mitts
FirstNameReal Estate Finance, Inc.
NexPoint LastNameBrian Mitts
Comapany NameNexPoint Real Estate Finance, Inc.
October 10, 2019
October 10, 2019 Page 3
Page 3
FirstName LastName
support that exemption.
Please ensure that the disclosure in your prospectus is consistent
with your supplemental
analysis. We will refer your response to the Division of Investment
Management for
further review.
Risk Factors, page 31
6. You state on page 190 that your bylaws provide that the Circuit Court
for Baltimore City,
Maryland, or, if that Court does not have jurisdiction, the United
States District Court for
the District of Maryland, Baltimore Division, will be the sole and
exclusive forum for any
derivative action or proceeding brought on your behalf other than
actions arising under the
federal securities laws. Please provide related risk factor
disclosure, which discusses the
impact of the provision to investors, such as increased costs to bring
a claim and that these
provisions can discourage claims or limit investors' ability to bring
a claim in a judicial
forum that they find favorable.
Our Manager can resign on 180 days notice from its role as Manager or terminate
the
Management Agreement, page 61
7. Please clarify whether you can remove the Manager for "cause." If
applicable, discuss the
difficulty of terminating your relationship with the Manager, even for
poor performance,
or the inability to terminate the Manager at all.
Use of Proceeds, page 80
8. On page 52, you state that you will have approximately $1.0 billion of
indebtedness
outstanding related to the Initial Portfolio. If any material part of
the proceeds is to be
used to discharge indebtedness, disclose the interest rate and
maturity of such
indebtedness. Refer to Instruction 4 of Regulation S-K.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Freddie Mac Credit Facility, page 95
9. Please file as exhibit to the registration statement the Credit
Facility entered into on July
12, 2019 with Freddie Mac or explain to us why such agreement is not
material.
Contractual Obligations and Commitments, page 96
10. Please tell us the consideration you have given to including a pro
forma contractual
obligations table that is consistent with the information presented in
your unaudited pro
forma consolidated financial statements.
Business, page 99
11. We note your disclosure regarding the underlying properties within
your Initial Portfolio.
Please revise to clarify if the metrics provided in the first
paragraph on page 111 apply to
Brian Mitts
FirstNameReal Estate Finance, Inc.
NexPoint LastNameBrian Mitts
Comapany NameNexPoint Real Estate Finance, Inc.
October 10, 2019
October 10, 2019 Page 4
Page 4
FirstName LastName
your entire portfolio or solely to the senior loans and provide
disclosure relating to the
geographic diversification of the collateral associated with your
portfolio. With a view
toward disclosure, please tell us how you consider prepayment and
delinquency rates in
evaluating your portfolio and whether you considered any historical
rates associated with
your initial portfolio.
12. With respect to the Formation Transaction, please revise to provide
each step of the series
of transactions you plan to engage in prior to the closing of the
offering.
Conflicts of Interest
Allocation Policy, page 144
13. Please revise to provide the size of the competing funds.
Unaudited Pro Forma Consolidated Balance Sheet As of June 30, 2019, page F-7
14. We note that you classify redeemable noncontrolling interests in
temporary equity on the
pro forma consolidated balance sheets. Please tell us, and consider
disclosing, your
accounting policy regarding the recognition, measurement, and
classification of your
redeemable noncontrolling interests. Please cite any relevant
accounting guidance in your
response.
Note 2. Formation Transaction and Initial Public Offering, page F-11
15. We note from your disclosure that the pro forma consolidated balance
sheets as of
December 31, 2018 and June 30, 2019 give effect to the formation
transaction as if it
had occurred on January 1, 2018. Please explain to us how you
considered the guidance in
Rule 11-02(b)(6) which states that pro forma adjustments related to
the pro forma
condensed balance sheet shall be computed assuming the transaction was
consummated at
the end of the most recent period.
Note 3. Summary of Significant Accounting Policies
Acquisition Accounting, page F-15
16. We note from your disclosure that you used the acquisition method of
accounting pursuant
to ASC 805 for the acquisitions of the SFR Loans and the CMBS B-Piece.
Please tell us
your basis for accounting for the acquisitions under the acquisition
method. In your
response, please clarify for us whether you have determined that the
acquired portfolio
meets the definition of a business under ASC 805 and the basis for
your conclusions.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
Note 4. Pro Forma Adjustments, page F-19
Brian Mitts
FirstNameReal Estate Finance, Inc.
NexPoint LastNameBrian Mitts
Comapany NameNexPoint Real Estate Finance, Inc.
October 10, 2019
Page 5
October 10, 2019 Page 5
FirstName LastName
17. Please provide us with a more detailed explanation of how you have
derived income,
expense and amortization amounts for purposes of calculating your pro
forma
adjustments. In your response, please provide us with an example of
how these amounts
were calculated, both for fixed rate and variable rate assets and
liabilities and explain to us
how you determined these adjustments were factually supportable.
18. We note your disclosure in notes (e) and (f) that you intend to
account for your
investments in preferred equity investments as loans carried at costs.
Please explain to us
how you arrived at this conclusion with references to any relevant
accounting literature.
In your response, please tell us whether your preferred equity
investments entitle you to
exert significant influence over the related entities.
19. Please explain to us how you concluded that the following adjustments
are factually
supportable:
estimated distributions (balance sheet note g)
the repurchase agreement (balance sheet note j)
corporate general and administrative expenses (statement of
operations note o)
servicing fees (statement of operations note p)
costs of operating the CMBS Entity (statement of operations note q)
20. For those assets and liabilities that either earn or charge interest
at a variable rate, please
tell us what consideration you gave to providing a sensitivity
analysis reflecting the
impact on net earnings of a 1/8th percent variance in interest rates.
Note 9. Net Interest Income, page F-31
21. Please explain to us how your calculation of net yield is consistent
with the definition
pursuant to Item I.B.5 of Industry Guide 3.
General
22. We note that you intend to operate in a manner that will allow you to
qualify as a real
estate investment trust. You state on page 80 that your subsidiary
partnerships intend to
use the net proceeds from the offering to acquire your target assets
in a manner consistent
with your investment strategy, and the subsidiary partnerships may
also use the proceeds
from the offering to purchase a portion of the assets that will be
contributed to the
company from the Contribution Group in the Formation Transaction. It
does not appear
that you have identified any mortgage-related assets to acquire with a
significant portion
the net proceeds of the offering. As a result, your offering appears
to constitute a "blind
pool" offering. Accordingly, please tell us how you considered the
applicability of
Industry Guide 5, or revise to provide the disclosure required by
Industry Guide 5. See
Securities Act Release 33-6900 (June 17, 1991).
23. Please supplementally provide us with copies of all written
communications, as defined in
Rule 405 under the Securities Act, that you, or anyone authorized to
do so on your behalf,
present to potential investors in reliance on Section 5(d) of the
Securities Act, whether or
Brian Mitts
NexPoint Real Estate Finance, Inc.
October 10, 2019
Page 6
not they retain copies of the communications.
You may contact Isaac Esquivel, Staff Accountant, at (202) 551-3395 or
Robert
Telewicz, Accounting Branch Chief, at (202) 551-3438 if you have questions
regarding
comments on the financial statements and related matters. Please contact Folake
Ayoola, Senior
Counsel, at (202) 551-3673 or Jennifer Gowetski, Senior Counsel, at (202)
551-3401 with any
other questions.
Sincerely,
FirstName LastNameBrian Mitts
Division of
Corporation Finance
Comapany NameNexPoint Real Estate Finance, Inc.
Office of Real Estate
& Construction
October 10, 2019 Page 6
cc: Charlie Haag
FirstName LastName