NREF - NexPoint Real Estate Finance finds 'material weakness' in reporting control

2023-03-31 14:42:44 ET

NexPoint Real Estate Finance ( NYSE: NREF ) stock slipped as much as 2.6% in Friday trading after the REIT disclosed a material weakness in its 10-K filing. The company identified a "single material weakness" in its internal control over financial reporting related to the Elysian at Hughes Center investment, a 368-unit multifamily property in Las Vegas.

Essentially, the company, which had acquired common equity interests in the multifamily property in addition to preferred equity it already owned, said it should have included the investment in its consolidated financial statements as of Q1 2022. Instead, the Elysian had been accounted for as an unconsolidated investment.

"While there are no material restatements to the financials, we view the event as a negative and believe this disclosre could weigh on shares over the near-term," wrote Piper Sandler analyst Crispin Love, which has a Neutral rating on the stock.

The material weakness resulted in an immaterial revision of its consolidated financial statements for the YTD periods ended March 31, June 30, and Sept. 30, 2022.

"Management has determined that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2022," it said.

NexPoint ( NREF ) said it's taking actions to remediate the underlying cause of the weakness and may take additional measures to control deficiencies.

With an expected restructuring of the transaction after Dec. 31, 2022, the investment is expected to be deconsolidated in 2023 and presented solely as a preferred equity investment.

SA contributor Ryan Bowen explains why he's staying to the sidelines on NexPoint Series A preferred shares.

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