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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
March 31, 2023
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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Delaware | 80-0139099 | ||||
| (State or other Jurisdiction of
| (I.R.S. Employer
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300 Crescent Court, Suite 700, Dallas, Texas (Address of Principal Executive Offices) | 75201 (Zip Code) |
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Common Shares, par value $0.001 per share | NXDT | New York Stock Exchange | ||||||||||||
| 5.50% Series A Cumulative Preferred Shares, par value
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NXDT-PA | New York Stock Exchange
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| Large Accelerated Filer |
| Accelerated Filer |
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Non-Accelerated Filer |
| Smaller reporting company |
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Emerging growth company |
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March 31, 2023
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Item 2. |
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Cautionary Statement Regarding Forward-Looking Statements
SHEETS September 30, 2022 ASSETS Operating Real Estate Investments Land Buildings and improvements Intangible lease assets Construction in progress Furniture, fixtures, and equipment Total Gross Operating Real Estate Investments Accumulated depreciation and amortization ) Total Net Operating Real Estate Investments Investments, at fair value Equity method investments Life insurance policies, at fair value Cash and cash equivalents Restricted cash Accounts receivable, net Prepaid and other assets Accrued interest and dividends TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgages payable, net Notes payable, net Prime brokerage borrowing Accounts payable and other accrued liabilities Accrued real estate taxes payable Accrued interest payable Security deposit liability Prepaid rents Intangible lease liabilities, net Due to affiliates Total Liabilities Shareholders' Equity: Preferred shares, $0.001 par value: 4,800,000 shares authorized; 3,359,593 shares issued and outstanding Common shares, $0.001 par value: unlimited shares authorized; 37,171,807 shares issued and outstanding Additional paid-in capital Accumulated earnings less dividends Total Shareholders' Equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITYSHEET(Unaudited) March 31, 2023 (Unaudited) December 31, 2022 ASSETS Consolidated Real Estate Investments Consolidated Real Estate Investments $ 47,708 Land $ 47,708 $ 47,708 161,695 Buildings and improvements 174,471 174,469 10,979 Intangible lease assets 10,979 10,979 43,973 Construction in progress 44,894 39,731 354 Furniture, fixtures, and equipment 362 354 264,709 Total Gross Consolidated Real Estate Investments Total Gross Consolidated Real Estate Investments 278,414 273,241 (3,630 Accumulated depreciation and amortization (10,603) (7,158) 261,079 704,475 141,373 Total Net Consolidated Real Estate Investments Total Net Consolidated Real Estate Investments 267,811 266,083 Investments, at fair value ($561,873 and $576,419 with related parties, respectively) Investments, at fair value ($561,873 and $576,419 with related parties, respectively) 727,856 754,910 Equity method investments ($7,289 and $7,272 with related parties, respectively) Equity method investments ($7,289 and $7,272 with related parties, respectively) 69,852 70,656 66,150 Life insurance policies, at fair value 66,384 67,711 29,211 Cash and cash equivalents 8,348 13,360 34,487 Restricted cash 36,453 35,289 8,278 Accounts receivable, net 1,919 1,903 6,172 Prepaid and other assets 4,959 6,441 3,653 Accrued interest and dividends 5,292 4,302 Deferred tax asset, net Deferred tax asset, net 2,363 2,247 $ 1,254,878 TOTAL ASSETS $ 1,191,237 $ 1,222,902 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: $ 144,913 Mortgages payable, net $ 143,918 $ 144,414 27,250 Notes payable Notes payable 21,250 24,250 10,059 Prime brokerage borrowing 736 2,624 11,521 Accounts payable and other accrued liabilities 12,512 13,865 Income tax payable Income tax payable 11,641 10,720 3,432 Accrued real estate taxes payable 1,131 254 820 Accrued interest payable 1,128 1,115 449 Security deposit liability 422 416 2,077 Prepaid rents 1,150 1,273 6,399 Intangible lease liabilities, net 5,656 6,027 901 Due to affiliates 112 112 207,821 Total Liabilities $ 199,656 $ 205,070 Shareholders' Equity: 3 37 998,465 48,552 1,047,057 $ 1,254,878
| Preferred shares, $0.001 par value: 4,800,000 shares authorized; 3,359,593 shares issued and outstanding | 3 | 3 | |||||||||
| Common shares, $0.001 par value: unlimited shares authorized; 37,171,807 shares issued and outstanding | 37 | 37 | |||||||||
| Additional paid-in capital | 999,845 | 999,845 | |||||||||
| Accumulated earnings (loss) | (8,304) | 17,947 | |||||||||
| Total Shareholders' Equity | 991,581 | 1,017,832 | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,191,237 | $ | 1,222,902 | |||||||
COMPREHENSIVE INCOME (LOSS) December 31, 2021 Assets: Investments, at fair value (a) Affiliated investments, at fair value Total investments, at fair value Cash and cash equivalents Restricted cash - securities sold short Foreign tax reclaim receivable Receivable for: Due from custodian Other assets Company shares sold Dividends and interest Prepaid expenses and other assets TOTAL ASSETS Liabilities: Notes payable Due to custodian Securities sold short, at value Due to broker Payable for: Investment advisory fees Interest expense and commitment fee Accounting services fees Accrued expenses and other liabilities Total Liabilities Mezzanine equity Series A cumulative preferred shares, net of deferred financing costs ) Net assets applicable to common shares Net assets consist of: Paid-in capital in excess of par Total accumulated loss ) Net assets applicable to common shares Investments, at cost Affiliated investments, at cost Cash equivalents, at cost Proceeds from securities sold short Common Shares Net assets Shares outstanding (unlimited authorization) Net asset value per share (net assets/shares outstanding)ASSETS OPERATIONSLIABILITIES (Predecessor Basis) $ 169,884 872,101 1,041,985 2,238 440 1,250 192 277 209 913 510 $ 1,048,014 $ 42,500 110 430 9,188 1,005 63 72 186 53,554 (83,252 $ 911,208 $ 913,920 (2,712 $ 911,208 $ 279,216 828,659 2,157 765 $ 911,208 37,080 $ 24.57
(a) includes fair value of securities on loan of $1,248
| For the Three Months Ended March 31, | |||||
| 2023 | |||||
| Revenues | |||||
| Rental income | $ | 4,720 | |||
| Interest income ($625 with related parties) | 2,018 | ||||
| Dividend income ($6,426 with related parties) | 8,119 | ||||
| Other income | 9 | ||||
| Total revenues | 14,866 | ||||
| Expenses | |||||
| Property operating expenses | 1,506 | ||||
| Property management fees | 171 | ||||
| Real estate taxes and insurance | 1,357 | ||||
| Advisory and administrative fees | 3,578 | ||||
| Property general and administrative expenses | 743 | ||||
| Corporate general and administrative expenses | 1,496 | ||||
| Conversion expenses | 163 | ||||
| Depreciation and amortization | 3,524 | ||||
| Total expenses | 12,538 | ||||
| Operating income | 2,328 | ||||
| Interest expense | (3,462) | ||||
| Equity in income (losses) of unconsolidated equity method ventures | (76) | ||||
| Change in unrealized gain (losses) | (18,640) | ||||
| Realized gains (losses) | 1,135 | ||||
| Net loss before income taxes | (18,715) | ||||
| Income tax expense | (806) | ||||
| Net loss | (19,521) | ||||
| Net income attributable to preferred shareholders | (1,155) | ||||
| Net loss attributable to common shareholders | $ | (20,676) | |||
| Weighted average common shares outstanding - basic | 37,172 | ||||
| Weighted average common shares outstanding - diluted | 37,172 | ||||
| Loss per share - basic | $ | (0.56) | |||
| Loss per share - diluted | $ | (0.56) | |||
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
AND COMPREHENSIVE INCOME (LOSS)
(Predecessor Basis)
thousands)
For the three months ended September 30, | ||||
2022 | ||||
Revenues | ||||
Rental income | $ | 4,603 | ||
Interest and dividends | 36,142 | |||
Other income | 18 | |||
Total revenues | 40,763 | |||
Expenses | ||||
Property operating expenses | 1,756 | |||
Property management fees | 166 | |||
Real estate taxes and insurance | 1,502 | |||
Advisory and administrative fees | 2,939 | |||
Property general and administrative expenses | 858 | |||
Corporate general and administrative expenses | 1,938 | |||
Depreciation and amortization | 3,561 | |||
Total expenses | 12,720 | |||
Operating income | 28,043 | |||
Interest expense | (2,541 | ) | ||
Equity in losses of unconsolidated ventures | (1,581 | ) | ||
Tax expense | (7,516 | ) | ||
Change in unrealized losses | (78,238 | ) | ||
Realized gains | 2,846 | |||
Net loss | (58,987 | ) | ||
Net income attributable to preferred shareholders | (1,155 | ) | ||
Net loss attributable to common shareholders | $ | (60,142 | ) | |
Weighted average common shares outstanding - basic | 37,172 | |||
Weighted average common shares outstanding - diluted | 37,172 | |||
Loss per share - basic | $ | (1.62 | ) | |
Loss per share - diluted | $ | (1.62 | ) | |
| For the Three Months Ended March 31, | |||||
| 2022 | |||||
| Investment income: | |||||
| Income: | |||||
| Dividends from unaffiliated issuers | $ | 7,530 | |||
| Dividends from affiliated issuers | 6,247 | ||||
| Interest from unaffiliated issuers | 795 | ||||
| Interest from affiliated issuers | 143 | ||||
| Total income | 14,715 | ||||
| Expenses: | |||||
| Investment advisory | 3,055 | ||||
| Legal fees | 524 | ||||
| Interest expense and commitment fees | 323 | ||||
| Conversion expense | 363 | ||||
| Accounting services fees | 163 | ||||
| Insurance | 46 | ||||
| Reports to shareholders | 68 | ||||
| Trustees fees | 68 | ||||
| Audit and tax preparation fees | 38 | ||||
| Transfer agent fees | 30 | ||||
| Pricing fees | 26 | ||||
| Registration fees | 26 | ||||
| Other | 192 | ||||
| Total operating expenses | 4,922 | ||||
| Net investment income | 9,793 | ||||
| Preferred dividend expenses | (1,155) | ||||
| Net realized and unrealized gain (loss) on investments | |||||
| Realized gain on: | |||||
| Investments from unaffiliated issuers | 27,591 | ||||
| Net change in unrealized gain on: | |||||
| Investments from unaffiliated issuers | (14,688) | ||||
| Investments from affiliated issuers | 36,582 | ||||
| Securities sold short | 153 | ||||
| Net realized and unrealized gain on investments | 49,638 | ||||
| Total increase in net assets resulting from operations | $ | 58,276 | |||
For the six months ended June 30, 2022 Investment income: Income: Dividends from unaffiliated issuers Dividends from affiliated issuers Interest from unaffiliated issuers Interest from affiliated issuers Total income Expenses: Investment advisory Tax fees Legal fees Interest expense and commitment fees Conversion expense Accounting services fees Insurance Reports to shareholders Trustees fees Audit and tax preparation fees Transfer agent fees Pricing fees Registration fees Other Total operating expenses Net investment income Preferred dividend expenses ) Net realized and unrealized gain (loss) on investments Realized gain on: Investments from unaffiliated issuers Investments from affiliated issuers Securities sold short Net change in unrealized gain on: Investments from unaffiliated issuers Investments from affiliated issuers Net realized and unrealized gain on investments Total increase in net assets resulting from operations For the three months ended September 30, For the nine months ended September 30, 2021 2021 Investment income: Income: Dividends from unaffiliated issuers Dividends from affiliated issuers Securities lending income Interest from unaffiliated issuers Interest from affiliated issuers ROC Reclass ) Total income Expenses: Investment advisory Legal fees Interest expense and commitment fees Conversion expense Accounting services fees Insurance Reports to shareholders Trustees fees Audit and tax preparation fees Transfer agent fees Pricing fees Registration fees Other Total operating expenses Net investment income (loss) ) Preferred dividend expenses ) ) Net realized and unrealized gain (loss) on investments Realized loss on: Investments from unaffiliated issuers ) ) Net change in unrealized appreciation on: Investments from unaffiliated issuers Investments from affiliated issuers Securities sold short Net realized and unrealized gain on investments Total increase in net assets resulting from operations CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY Preferred Shares Common Shares Additional Accumulated Earnings (Loss) Three Months ended September 30, 2022 Number of Shares Par Value Number of Shares Par Value Paid-in Capital Less Dividends Total Balances, June 30, 2022 Costs associated with Business Change ) ) Net loss attributable to common shareholders ) ) Net income attributable to preferred shareholders Common stock dividends declared ($0.15 per share) ) ) Preferred stock dividends declared ($0.34375 per share) ) ) Balances, September 30, 2022CONSOLIDATED STATEMENT OF OPERATIONS (Predecessor Basis)(in thousands, except per share amounts)(Unaudited) $ 60,178 15,025 991 3,002 79,196 6,279 2,000 987 696 471 334 185 136 109 77 72 68 56 322 11,792 67,404 (2,310 28,893 1,288 253 (38,237 ) 70,830 63,027 $ 128,121 See Notes to Consolidated Financial StatementsNEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS (Predecessor Basis)(in thousands, except per share amounts)(Unaudited) $ 323 $ 8,837 4,299 12,287 1 1 64 1,803 585 2,059 - (11,850 5,272 13,137 3,046 8,122 382 1,041 582 2,199 260 971 147 404 35 110 108 289 55 157 101 273 27 109 48 84 12 45 185 381 4,988 14,185 284 (1,048 (1,153 (3,392 (18,684 (16,385 34,196 103,636 33,746 80,948 234 651 49,492 168,850 $ 48,623 $ 164,410 See Notes to Consolidated Financial StatementsNEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES 3,359,593 $ 3 37,171,807 $ 37 $ 998,557 $ 114,271 $ 1,112,868 — — — — (92 — (92 — — — — — (60,142 (60,142 — — — — — 1,155 1,155 — — — — — (5,577 (5,577 — — — — — (1,155 (1,155 3,359,593 $ 3 37,171,807 $ 37 $ 998,465 $ 48,552 $ 1,047,057 Preferred Shares Common Shares Additional
Paid-in
CapitalAccumulated
Earnings (Loss)Total Three Months Ended March 31, 2023 Number of
SharesAmount Number of
SharesAmount Balances, December 31, 2022 3,359,593 $ 3 37,171,807 $ 37 $ 999,845 $ 17,947 $ 1,017,832 Net loss attributable to common shareholders — — — — — (20,676) (20,676) Net income attributable to preferred shareholders — — — — — 1,155 1,155 Common share dividends declared ($0.15 per share) — — — — — (5,575) (5,575) Preferred share dividends declared ($0.34375 per share) — — — — — (1,155) (1,155) Balances, March 31, 2023 3,359,593 $ 3 37,171,807 $ 37 $ 999,845 $ (8,304) $ 991,581
thousands, except share amounts) For the six months ended June 30, 2022 Increase (decrease) in net assets operations: Net investment income Preferred dividend expenses ) Accumulated net realized gain (loss) on investments, securities sold short, written options, futures contracts, and foreign currency transactions Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency Net increase from operations Distributions declared to common shareholders: Distribution ) Total distributions declared to common shareholders: ) Increase in net assets from operations and distributions Share transactions: Value of distributions reinvested Net increase from shares transactions Total increase in net assets Net assets Beginning of period End of period Change in Common Shares Issued for distribution reinvested Net increase in common sharesthousands) $ 67,404 (2,310 30,434 32,593 128,121 (11,138 (11,138 116,983 1,425 1,425 118,408 911,208 $ 1,029,616 92 92 For the Three Months Ended March 31, 2022 Increase (decrease) in net assets operations: Net investment income $ 9,793 Preferred dividend expenses (1,155) Accumulated net realized gain (loss) on investments, securities sold short, written options, futures contracts, and foreign currency transactions 27,591 Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency 22,047 Net increase from operations 58,276 Distributions declared to common shareholders: Distribution (5,566) Total distributions declared to common shareholders: (5,566) Increase in net assets from operations and distributions 52,710 Share transactions: Value of distributions reinvested 447 Proceeds from sale of shares 1,526 Net increase from shares transactions 1,973 Total increase in net assets 54,683 Net assets Beginning of period 911,208 End of period $ 965,891 Change in Common Shares Issued for distribution reinvested 46 Net increase in common shares 46
CASH FLOWS For the three months ended September 30, For the nine months ended September 30, 2021 2021 Increase in net assets operations: Net investment income (loss) ) Preferred dividend expenses ) ) Accumulated net realized loss on investments, securities sold short, written options, futures contracts, and foreign currency transactions ) ) Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency Net increase from operations 48,623 Distributions declared to common shareholders: Distribution ) ) Total distributions declared to common shareholders: ) ) Increase in net assets from operations and distributions Share transactions: Value of distributions reinvested Cost of shares redeemed ) Capital gains from the retirement of tendered shares Net increase (decrease) from shares transactions ) Total increase in net assets Net assets Beginning of period End of period Change in Common Shares Issued for distribution reinvested Shares redeemed ) Net increase (decrease) in common shares )STATEMENTSSTATEMENT OF CHANGES IN NET ASSETS (Predecessor Basis) $ 284 $ (1,048 (1,153 (3,392 (18,684 (16,385 68,176 185,235 164,410 (5,552 (16,642 (5,552 (16,642 43,071 147,768 602 1,504 — (152,320 — 47,319 602 (103,497 43,673 44,271 791,423 790,825 $ 835,096 $ 835,096 39 117 - (8,750 39 (8,633 For the Three Months Ended March 31, 2023 Cash flows from operating activities Net loss $ (19,521) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,524 Amortization of intangible lease liabilities (371) Amortization of deferred financing costs 474 Paid-in-kind interest ($0 with related parties) (1,008) Realized (gain) loss (1,135) Change in unrealized (gain) loss on investments held at fair value ($(16,009) with related parties) 18,640 Equity in (income) losses of unconsolidated equity method ventures ($213 with related parties) 76 Distributions of earnings from unconsolidated ventures ($195 with related parties) 727 Cash paid for life settlement premiums (1,266) Changes in operating assets and liabilities Deferred tax asset (116) Income tax payable 921 Real estate taxes payable 877 Other operating assets 476 Other operating liabilities (1,793) Net cash provided by operating activities 505 Cash flows from investing activities Distributions from CLO investments — Proceeds from sale of investments 14,549 Purchases of investments (1,464) Additions to consolidated real estate investments (4,851) Net cash provided by investing activities 8,234 Cash flows from financing activities Mortgage payments (591) Prime brokerage borrowing 6,397 Credit facilities payments (2,999) Prime brokerage payments (8,285) Deferred financing costs paid (379) Dividends paid to preferred shareholders (1,155) Dividends paid to common shareholders (5,575) Net cash used in financing activities (12,587) Net decrease in cash, cash equivalents and restricted cash (3,848)
| Cash, cash equivalents and restricted cash, beginning of period | 48,649 | ||||
| Cash, cash equivalents and restricted cash, end of period | $ | 44,801 | |||
| Supplemental Disclosure of Cash Flow Information | |||||
| Interest paid | $ | 2,504 | |||
| Income tax paid | $ | 1,501 | |||
| Supplemental Disclosure of Noncash Activities | |||||
| Change in capitalized construction costs included in accounts payable and other accrued liabilities | $ | 322 | |||
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
(Predecessor Basis)
| For the Three Months Ended March 31, | |||||
| 2022 | |||||
| Cash flows from operating activities: | |||||
| Net increase in net assets resulting from operations | $ | 58,276 | |||
| Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: | |||||
| Purchases of investment securities from unaffiliated issuers | (116,182) | ||||
| Purchases of investment securities from affiliated issuers | (15,147) | ||||
| Proceeds from the disposition of investment securities from unaffiliated issuers | 159,220 | ||||
| Proceeds from the disposition of investment securities from affiliated issuers | 2,086 | ||||
| Amortization (accretion) of premiums | (89) | ||||
| Net realized (gain) loss on investments from unaffiliated issuers | (27,591) | ||||
| Net realized (gain) loss on securities sold short | (153) | ||||
| Net change in unrealized depreciation on unaffiliated investments | 14,688 | ||||
| Net change in unrealized appreciation on investments in affiliated investments | (36,582) | ||||
| Changes in operating assets and liabilities | |||||
| Dividends and interest receivable | 684 | ||||
| Prepaid expenses and other assets | 421 | ||||
| Decrease in payable for investments purchased | 511 | ||||
| Due to broker | 6,902 | ||||
| Accrued expenses and other liabilities | 49 | ||||
| Net cash provided by operating activities | 47,093 | ||||
| Cash flows from financing activities: | |||||
| Payments on notes payable | (10,000) | ||||
| Distributions paid in cash | (5,119) | ||||
| Proceeds from shares sold | 1,498 | ||||
| Net cash used in financing activities | (13,621) | ||||
| Net increase in cash | 33,472 | ||||
| Cash, cash equivalents and restricted cash: | |||||
| Beginning of period | 2,678 | ||||
| End of period | $ | 36,150 | |||
| Supplemental disclosure of cash flow information | |||||
| Reinvestment of distributions | $ | 447 | |||
| Cash paid during the period for interest expense and commitment fees | $ | 312 | |||
For the three months ended September 30, | ||||
2022 | ||||
Cash flows from operating activities | ||||
Net loss | $ | (58,987 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||
Depreciation and amortization | 3,643 | |||
| Amortization of intangible lease liabilities | (371 | ) | ||
Amortization of deferred financing costs | (25 | ) | ||
Paid in kind interest | (1,016 | ) | ||
Realized (gain)/loss | (2,846 | ) | ||
Net change in unrealized (gain) loss on investments held at fair value | 78,238 | |||
Equity in losses of unconsolidated ventures | 1,581 | |||
Distributions of earnings from unconsolidated ventures | 1,692 | |||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||
Operating assets | (3,795 | ) | ||
Operating liabilities | 9,459 | |||
Net cash provided by operating activities | 27,573 | |||
Cash flows from investing activities | ||||
Proceeds from asset redemptions | 10,872 | |||
Distributions from CLO investments | 18,100 | |||
Purchases of investments | (9,925 | ) | ||
Contributions to equity method investments | (1,382 | ) | ||
Additions to real estate investments | (1,317 | ) | ||
Acquisitions of real estate investments | (26,500 | ) | ||
Cash paid for life settlement premiums | (3,022 | ) | ||
Net cash used in investing activities | (13,174 | ) | ||
Cash flows from financing activities | ||||
Proceeds received from notes payable | 13,250 | |||
Mortgage payments | (591 | ) | ||
Prime brokerage borrowing | 2,567 | |||
Credit facilities payments | (9,500 | ) | ||
Payment of costs associated with the Business Change | (92 | ) | ||
Deferred financing costs paid | (379 | ) | ||
Dividends paid to preferred shareholders | (1,155 | ) | ||
Dividends paid to common shareholders | (5,577 | ) | ||
Net cash used in financing activities | (1,477 | ) | ||
Net increase in cash, cash equivalents and restricted cash | 12,922 | |||
Cash, cash equivalents and restricted cash, beginning of period (Note 3) | 50,776 | |||
Cash, cash equivalents and restricted cash, end of period | $ | 63,698 | ||
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Supplemental Disclosure of Cash Flow Information | ||||
Interest paid | $ | (2,722 | ) |
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Predecessor Basis)
(in thousands) (Unaudited)
For the six months ended June 30, | ||||
2022 | ||||
Cash flows used in operating activities: | ||||
Net increase in net assets resulting from operations | $ | 128,121 | ||
Adjustments to reconcile increase in net assets to net cash provided by operating activities: | ||||
Purchases of investment securities from unaffiliated issuers | (215,064 | ) | ||
Purchases of investment securities from affiliated issuers | (173,562 | ) | ||
Proceeds from the disposition of investment securities from unaffiliated issuers | 355,103 | |||
Proceeds from the disposition of investment securities from affiliated issuers | 8,910 | |||
Purchases of securities sold short | (177 | ) | ||
Amortization/(accretion) of premiums | (171 | ) | ||
Net realized (gain)/loss on investments from unaffiliated issuers | (28,893 | ) | ||
Net realized (gain)/loss on investments from affiliated issuers | (1,288 | ) | ||
Net realized (gain)/loss on securities sold short | (253 | ) | ||
Net change in unrealized depreciation on unaffiliated investments | 38,237 | |||
Net change in unrealized appreciation on investments in affiliated investments | (70,830 | ) | ||
Changes in operating assets and liabilities | ||||
Dividends and interest receivable | 742 | |||
Due from custodian | 193 | |||
Prepaid expenses and other assets | (1,584 | ) | ||
Reclaim receivable | 1,250 | |||
Foreign tax reclaim receivable | (1,274 | ) | ||
Due to broker | (1,696 | ) | ||
Payable for administrative fees | (11 | ) | ||
Payable for investment advisory fees | 49 | |||
Due to custodian | (110 | ) | ||
Payable for interest expense and commitment fees | 82 | |||
Accrued expenses and other liabilities | (151 | ) | ||
Net cash provided by operating activities | 37,623 | |||
Cash flows used in financing activities: | ||||
Payments on notes payable | (26,500 | ) | ||
Distributions paid in cash | (9,714 | ) | ||
Proceeds from shares sold | (44 | ) | ||
Net cash used in financing activities | (36,258 | ) | ||
Net increase in cash | 1,365 | |||
Cash, cash equivalents, foreign currency and restricted cash: | ||||
Beginning of period | 2,679 | |||
End of period | $ | 4,044 | ||
Supplemental disclosure of cash flow information | ||||
Reinvestment of distributions | $ | 1,425 | ||
Cash paid during the period for interest expense and commitment fees | $ | 614 | ||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Predecessor Basis)
(in thousands)
(Unaudited)
For the nine months ended September 30, | ||||
2021 | ||||
Cash flows used in operating activities: | ||||
Net increase in net assets resulting from operations | $ | 164,410 | ||
Adjustments to reconcile increase in net assets to net cash provided by operating activities: | ||||
Purchases of investment securities from unaffiliated issuers | (972,965 | ) | ||
Purchases of investment securities from affiliated issuers | (51,722 | ) | ||
Proceeds from the disposition of investment securities from unaffiliated issues | 748,298 | |||
Proceeds from the disposition of investment securities from affiliated issues | 307,254 | |||
Amortization/(accretion) of premiums | (224 | ) | ||
Net realized (gain)/loss on unaffiliated issuers | 16,385 | |||
Net change in unrealized depreciation on unaffiliated investments | (104,287 | ) | ||
Net change in unrealized depreciation on investments in affiliated investments | (80,948 | ) | ||
Changes in operating assets and liabilities | ||||
Dividends and interest receivable | 514 | |||
Due from broker | (166 | ) | ||
Fund shares sold | (57 | ) | ||
Prepaid expenses and other assets | (827 | ) | ||
Due to broker | (1,958 | ) | ||
Payable for admin fees | (25 | ) | ||
Payable for audit fees | 59 | |||
Payable for investment advisory fees | 16 | |||
Payable for interest expense and commitment fees | 67 | |||
Accrued expenses and other liabilities | 36 | |||
Net cash flow provided by operating activities | 23,860 | |||
Cash flows used in financing activities: | ||||
Proceeds from issuance of cumulative preferred shares | 83,990 | |||
Payments on notes payable | 7,500 | |||
Distributions paid in cash | (15,140 | ) | ||
Payments on shares redeemed | (105,001 | ) | ||
Net cash flow used in financing activities | (28,651 | ) | ||
Net decrease in cash | (4,791 | ) | ||
Cash, cash equivalents, foreign currency and restricted cash: | ||||
Beginning of period | 9,004 | |||
End of period | $ | 4,213 | ||
Supplemental disclosure of cash flow information | ||||
Reinvestment of distributions | $ | 1,504 | ||
Cash paid during the period for interest expense and commitment fees | $ | 2,129 | ||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the Company’s investments and consolidated operating properties as of the Deregistration Date became the new basis in accordance with FASB ASC 946. Due to this change, the Company reallocated these fair values to the assets and liabilities of operating properties. Income Taxes The Company has not recorded any uncertain tax positions for the three months ended March 31, 2023. Deferred Tax Asset Capital loss carryover from December 31, 2021 Capital loss carryover utilized in 2022 ) Unrealized tax loss on investments Total deferred tax assets Valuation allowance ) Net deferred tax asset earned which is included in rental income in the accompanying consolidated statements of operations. Realized Gain (Loss) on Investments - The Company recognizes the excess, or deficiency, of net proceeds received, less the carrying value of such investments, as realized gains or losses, respectively. The Company reverses cumulative, unrealized gains or losses previously reported in its Equity Method Investments. The Company has elected for certain of the equity method investments to be measured using fair value. Investments in privately held entities that report NAV per share– Investments in privately held entities that elect the fair value option that report NAV per share, such as our privately held investments in limited partnerships, are presented at fair value using NAV, investment has occurred that is other than temporary. If such indicators are present, we are required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value. 3. Business Change June 30, 2022 Difference July 1, 2022 (Predecessor Basis) (Successor Basis) ASSETS Operating Real Estate Investments Land Buildings and improvements Intangible lease assets Construction in progress Furniture, fixtures, and equipment Total Operating Real Estate Investments Investments, at fair value Equity method investments Life insurance policies, at fair value Cash and cash equivalents Restricted cash Accounts receivable, net Accrued interest and dividends Prepaid and other assets TOTAL ASSETS Liabilities: Mortgages payable, net Notes payable, net Prime brokerage borrowing Accounts payable and other accrued liabilities Accrued real estate taxes payable Accrued interest payable Security deposit liability Prepaid rents Intangible lease liabilities Due to affiliates Total Liabilities Series A cumulative preferred shares, net of deferred financing costs Stockholders' Equity: Preferred stock, $0.001 par value: 4,800,000 shares authorized; 3,359,593 shares issued and outstanding Common stock, $0.001 par value: unlimited shares authorized; 37,171,807 shares issued and outstanding Additional paid-in capital Accumulated earnings less dividends Total Stockholders' Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 4. Investments in Real Estate Subsidiaries Effective Ownership Percentage at Property Name Location Year Acquired September 30, 2022 December 31, 2021 White Rock Center Dallas, Texas 2013 % % 5916 W Loop 289 Lubbock, Texas 2013 % % Cityplace Tower Dallas, Texas 2018 % % NexPoint Dominion Land, LLC Plano, Texas 2022 % % Average Effective Monthly Occupied Rent Per Square Foot (1) as of % Occupied (2) as of Property Name Rentable Square Footage (in thousands) Property Type Date Acquired September 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021 White Rock Center Retail 6/13/2013 % % 5916 W Loop 289 Retail 7/23/2013 % % Cityplace Tower Office 8/15/2018 % % Operating Properties Land Buildings and Improvements Intangible Lease Assets Intangible Lease Liabilities Construction in Progress Furniture, Fixtures, and Equipment Totals White Rock Center ) 5916 W Loop 289 Cityplace Tower ) NexPoint Dominion Land, LLC ) Accumulated depreciation and amortization ) ) ) ) Total Operating Properties ) March 31, 2023. The net amount amortized as an increase to rental revenue for capitalized above and below-market lease intangibles was $0.4 million for the three months ended March 31, 2023. Investment Vehicle Location Property Type Date of Acquisition Purchase Price Debt Effective Ownership (1) NexPoint Dominion Land, LLC Plano, Texas Land August 9, 2022 % Outstanding principal as of September 30, 2022 Interest Rate Maturity Date (1) Note A-1 % 2/7/2023 Note A-2 % 2/7/2023 Note B-1 % 2/7/2023 Note B-2 % 2/7/2023 Mezzanine Note 1 % 2/7/2023 Mezzanine Note 2 % 2/7/2023 Mortgages payable Deferred financing costs, net ) Mortgages payable, net March 31, 2023. Due to the short term nature of the debt, the fair value of the debt is approximately the outstanding balance. Management believes that the Company has sufficient access to capital to ensure the Company is able to meet its obligations as they become due. Due to the floating interest rate nature of the debt, the fair value of the debt is approximately the outstanding balance. Real Estate Debt Notes Payable Total 2022 2023 2024 2025 2026 Thereafter Total Investee Name Instrument Asset Type NXDT Percentage Ownership Investment Basis Share of Investee's Net Assets (7) Basis Difference Sandstone Pasadena Apartments, LLC LLC interest Multifamily % SAFStor NREA JV-I, LLC LLC interest Self-storage % SAFStor NREA JV-III, LLC LLC interest Self-storage % AM Uptown Hotel, LLC LLC interest Hospitality % SFR WLIF III, LLC LLC interest Single-family rental Las Vegas Land Owner, LLC LLC interest Land % Perilune Aero Equity Holdings One, LLC LLC interest Aircraft % Claymore Holdings, LLC LLC interest % Allenby, LLC LLC interest % NexPoint Real Estate Finance Operating Partnership, L.P. LP interest Mortgage % VineBrook Homes Operating Partnership, L.P. LP interest Single-family rental % NexPoint Storage Partners, Inc. Common stock Self-storage % NexPoint SFR Operating Partnership, L.P. LP interest Single-family rental % NexPoint Hospitality Trust Common stock Hospitality % LLV Holdco, LLC LLC interest Land % Joint venture Date entered Properties beneficially owned Storage units beneficially owned Basis NXDT Ownership SAFStor NREA JV I, LLC 10/3/2017 % SAFStor NREA JV III, LLC 12/21/2018 % Total Marriott Uptown method. However, management has elected to account for the investment using the fair value option. fair value option. fair value option. NREF VineBrook NSP ASSETS Investments Real estate assets Cash and cash equivalents Other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Debt Other liabilities Total Liabilities Redeemable noncontrolling interests in the OP Total Shareholders' Equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY The table below presents the unaudited summary statement of operations for the three months ended NREF VineBrook NSP Revenues Rental income Net interest income Other income Total revenues Expenses Total expenses Gain/(loss) on sales of real estate ) Other income/(expense) ) ) Unrealized gain/(loss) on derivatives Total comprehensive gain/(loss) ) ) The fair value of the Company’s common stocks, rights, and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. At the end of each calendar quarter, the Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. Fair Value Cost Basis Level 1 Level 2 Level 3 Total Assets Bond CLO Common stock Convertible notes Life settlement LLC interest LP interest Rights and warrants Senior loan March 31, 2023 (in thousands): July 1, 2022 Contributions/ Purchases Paid in- kind dividends Redemptions/ Conversions Realized gain/(loss) Unrealized gain/(loss) September 30, 2022 Common stock ) Convertible notes Life settlement LP interest CLO ) ) LLC interest Rights and warrants Senior loan ) ) Total ) ) Category Valuation Technique Unobservable Inputs Input/Range Values Market Value Common stock Multiples Analysis Unadjusted Price/MHz-PoP $0.09 Multiple of EBITDA 2.75x Discounted Cash Flow Discount Rate Transaction Indication of Value Enterprise Value ($mm) Offer Price per Share Direct Capitalization Method Capitalization Rates Net Asset Value NAV Approach Discount Rate Black–Scholes Model Volatility Convertible notes Transaction Indication of Value Cost Price Life settlement Discounted Cash Flow Discount Rate LP interest Net Asset Value Transaction Indication of Value Cost Price ($mm) LLC interest Discounted Cash Flow Discount Rate CLO NAV Approach Discount Rate Rights and warrants Liquidation Analysis Senior loan Discounted Cash Flow Discount Rate Transaction Indication of Value Net purchase price ($mm) Total consolidation and the financial assets held by SFP are measured at fair value. Number of Policies Face Value (Death Benefit) Acquisition Cost Premium Cost Estimated Fair Value Total Range Total Range Total Range Total Range Total Remaining Life Expectancy (in years) Number Face Value Fair Value Thereafter Total The premiums to be paid for each of the five succeeding Year Premiums 2022 2023 2024 2025 2026 2027 No shares were issued during the three months ended March 31, 2023. record on March 15, 2023. The Company may exercise its call option at the Company's discretion. As a result, these are included in permanent equity. For the Three Months Ended September 30, 2022 Numerator for loss per share: Net loss attributable to common shareholders ) Denominator for loss per share: Weighted average common shares outstanding Denominator for basic and diluted loss per share Loss per weighted average common share: Basic ) Diluted ) policies, and/or (iv) any other means. The Former Adviser was permitted to waive a portion of its fees. restrictions including that in no event shall the common shares issued to the Adviser under the Advisory Agreement exceed five percent of the number of common shares or five percent of the voting power of the Company outstanding prior to the first such issuance (the “Share Cap”) and that in no event shall the common shares issued to the Adviser under the Advisory agreement exceed 6,000,000 common shares; provided, however, that the Share Cap will not apply if the Company’s shareholders have approved issuances in excess of the Share Cap. The Advisory Agreement has an initial term of three years that will expire on July 1, 2025, and Fees. receipts, payable monthly. Adviser. Related Party Investment Fair Value/Carrying Value Change in Unrealized Gain/(Loss) Realized Gain/(Loss) Interest and Dividends Total Income SFR WLIF III, LLC LLC Units NexPoint Residential Trust, Inc. Common Stock ) ) NexPoint Hospitality Trust Common Stock NexPoint Hospitality Trust Convertible Notes NexPoint Storage Partners, Inc. Common Stock ) ) NexPoint SFR Operating Partnership, L.P. Partnership Units NexPoint SFR Operating Partnership, L.P. Convertible Notes Claymore Holdings, LLC LLC Units Allenby, LLC LLC Units NexPoint Real Estate Finance Operating Partnership, L.P. Partnership Units ) ) VineBrook Homes Operating Partnership, L.P. Partnership Units Total ) ) 14. Commitments and Contingencies 2023. Also on April 24, 2023, the Board approved a quarterly dividend of $0.34375 per Series A Preferred Share, payable on June 30, 2023 to shareholders of record on June 23, 2023. Item 2. our Sponsor. growth. Interest the conversion. These conversion expenses are included in the consolidated statement of operations and comprehensive income (loss) as conversion expenses. TRSs. For the Three Months Ended September 30, 2022 Total revenues Total expenses ) Operating income Interest expense ) Equity in losses of unconsolidated ventures ) Tax expense ) Change in unrealized losses ) Realized gains Net loss ) Net income attributable to preferred shareholders ) Net loss attributable to common shareholders ) March 31, 2023 compared to $3.2 million for the three months ended December 31, 2022, which was an increase of $0.3 million. The increase between periods was primarily due to an increase in interest expense at Cityplace Tower attributed to an increase in interest rates. The change in our FFO between the periods primarily relates to a decrease in unrealized losses of $4.3 million. Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional properties, make additional accretive investments pursuant to our investment strategy, renovations and other capital expenditures to improve our properties and scheduled debt payments and distributions. We expect to meet our long-term liquidity requirements through various sources of capital, which may include a revolving credit facility and future debt or equity issuances, existing working capital, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings, and property and non-real estate asset dispositions. 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, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating performance and liquidity, market perceptions about us and restrictions on sales of properties under the Code. The success of our business strategy will depend, in part, on our ability to access these various capital sources. March 31, 2023. For the Three Months Ended September 30, 2022 Net cash provided by operating activities Net cash used in investing activities ) Net cash used in financing activities ) Net increase in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash, beginning of period Cash, cash equivalents and restricted cash, end of period We intend to invest in additional real estate investments as suitable opportunities arise and adequate sources of equity and debt financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly acquired properties, will depend on and will be financed by, in whole or in part, our 6. Payments Due by Period (in thousands) Total 2022 2023 2024 2025 2026 Thereafter Property Level Debt Principal payments Interest expense Total Prime Brokerage Borrowing Principal payments Interest expense Total Preferred Shares Dividend payments Credit Facility Principal payments Interest expense Total Total contractual obligations and commitments March 31, 2023. Cityplace Debt The Adviser may, at its discretion and at any time, waive its right to reimbursement for eligible out-of-pocket expenses paid on the Company’s behalf. Once waived, these expenses are considered permanently waived and become non-recoupable in the future. We recognize our tax positions and evaluate them using a two-step process. First, we determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, we will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement. The real estate market has not been directly affected Item 3. Quantitative and Qualitative Disclosures About Market Risk 31.2* 101.INS* Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document) 101.SCH* Inline XBRL Taxonomy Extension Schema 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) President Jim Dondero (Principal Executive Officer) /s/ Brian Mitts Chief Financial Officer, Executive VP-Finance, Brian Mitts (Principal Financial Officer and Principal“Company”"Company", “we”"we", “us”"us", or “our”"our") was formed in Delaware and has elected to be taxed as a real estate investment trust (“REIT”(a “REIT”). Substantially all of the Company’s business is conducted through NexPoint Diversified Real Estate Trust Operating Partnership, L.P. (the “OP”"OP"), the Company’s operating partnership. The Company conducts its business (the “Portfolio”"Portfolio") through the OP and its wholly owned taxable REIT subsidiary (“TRS”subsidiaries ("TRSs"). The Company’sCompany's wholly owned subsidiary, NexPoint Diversified Real Estate Trust OP GP, LLC (the “OP GP”"OP GP"), is the sole general partner of the OP. As of September 30, 2022, March 31, 2023, there were 2,000 commonpartnership units inof the OP (“OP(the “OP Units”) outstanding, of which 100.0% were owned by the Company.(the(the “Deregistration Date”), the SECSecurities and Exchange Commission (the “SEC”) issued an order pursuant to Section 8(f)8(f) of the Investment Company Act of 1940 (the “1940“Investment Company Act”) declaring that the Company has ceased to be an investment company under the 1940Investment Company Act (the “Deregistration Order”). The issuance of the Deregistration Order enablesenabled the Company to proceed with full implementation of its new business mandate to operate as a diversified REIT that focuses primarily on investing in various commercial real estate property types and across the capital structure, including but not limited to equity, mortgage debt, mezzanine debt and preferred equity (the “Business Change”).for an initial three-year termand April 11, 2023, (the “Advisory Agreement”), by and among the Company and the Adviser.Adviser for an initial three-year term that will expire on July 1, 2025 and successive one-year terms thereafter unless earlier terminated. The Adviser manages the day-to-day operations of the Company and provides investment management services. The Company expects it will only have accountinghad no employees while the Advisory Agreement is in effect.as of March 31, 2023. All of the Company’s investment decisions are made by the Adviser, subject to general oversight by the Adviser’s investment committee and the Company’sour board of trustees (the “Board”). The Adviser is wholly owned by NexPoint Advisors, L.P. (the “Sponsor” or “NexPoint”).(“FASB”("FASB") Accounting Standards Codification (“ASC”("ASC") 946,Financial Services – Investment Companies,, or the Predecessor“Predecessor Basis.” Upon the Deregistration Order, the Company discontinued the use of the guidance in FASB ASC 946 and prospectively applied the guidance under U.S.United States generally accepted accounting principles (“GAAP”) required for companies that are not investment companies, or what we refer to as the Successor Basis.“Successor Basis". As a result of these changes, our consolidated financial statements as of and for the three months ended September 30, 2022, March 31, 2023, are accounted for using the Successor Basis and are presented separately from our consolidated financial statements on the Predecessor Basis, as of and for the periods prior to the Deregistration Date.GAAP. GAAP which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation.The accompanying unaudited consolidated financial statements have been prepared accordingrules and regulationsinherent uncertainty 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.In the opinion of management, all adjustments and eliminations necessary fordetermining the fair presentationvalue of investments that do not have a readily available fair market value, the fair value of the Company’s financial position asinvestments may fluctuate from period to period. Additionally, the fair value of September 30, 2022, investments may differ significantly from the values that would have been used had an active market existed for such investments and December 31, 2021 (Predecessor Basis)may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and resultsother restrictions on resale or otherwise be less liquid than publicly traded securities.operationsConsolidationthree months ended September 30, 2022, historical cost accounting basis, thesix months ended June 30, 2022 (Predecessor Basis) and three and nine months ended September 30, 2021 (Predecessor Basis) have been included. Such adjustments are normal and recurring in nature. The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021, and notes thereto included in its Annual Report on Form N-CSR filed with the SEC on March 11, 2022, together with the amendment thereto filed with the SEC on April 4, 2022 (our “Annual Report”).Principles of ConsolidationThe Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with FASB ASC 810,13TableThe Company evaluates all of Contentsits 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 of the following factors: (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. The Company considers its variable interests, as well as any variable interests of its related parties in making this determination. Where both of these factors are present, the Company is deemed to be the primary beneficiary, and it consolidates the VIE. Where either one of these factors is not present, the Company is not the primary beneficiary, and it does not consolidate the VIE. Acquisition costs are capitalized in accordance with FASB ASC 805. The fair value of the Company’s consolidated operating properties as of the Deregistration Date became the new basis in accordance with FASB ASC 946. Due to this change, the Company reallocated these fair values to the assets and liabilities of operating properties.9)9), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets and liabilities represents the value associated with the in-place leases and above and below market leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents and tenants. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.Years Land Not depreciated Buildings 30 - 40 Improvements 5 - 40 Furniture, fixtures, and equipment 5 - 10 Intangible lease assets and liabilities Over lease term September 30, 2022, March 31, 2023, the Company has not recorded any impairment on its real estate assets.debtreal estate liabilities associated with the real estate held for sale separately in its consolidated balance sheet, and the Company ceases recording depreciation and amortization expense related to that property. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell. As of September 30, 2022, March 31, 2023, there are no properties held for sale.14“Code”“Code"), effective for our taxable year ended December 31, 2021, and expects to continue to qualify as a REIT.2021. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its shareholders. As a REIT, the Company will be subject to federal income tax on its undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions it pays with respect to any calendar year are less than the sum of (1) (1) 85% of its ordinary income, (2) (2) 95% of its capital gain net income and (3) (3) 100% of its undistributed income from prior years. The Company intends to operate in such a manner so as to qualify as a REIT, but no assurance can be given that the Company will operate in a manner so as to qualify as a REIT. 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. The Company has recorded a current income tax expense of $10.8 million associated with the TRS for the three months ended September 30, 2022, which is largely driven by income from the Company’s legacy CLO investments. The tax expense is partially offset by removing the valuation allowance on a deferred tax asset of $3.3 million for a net expense of $7.5 million that is recorded on the Consolidated Statement of Operations.September 30, 2022, March 31, 2023, the Company believes it is in compliance with all applicable REIT requirements.“more-likely-than-not”“more-likely-than-not” (greater than 50% probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-notmore-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Company’s management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. As of September 30, 2022 March 31, 2023 and to the knowledge of the Company, the Company has no examinations in progress and none are expected at this time.two-steptwo-step process. First, the Company determines whether a tax position is more-likely-than-notmore-likely-than-not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.September 30, 2022. March 31, 2023. The Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2022, 20212020 and 2020 and 2019 tax years remain open to examination by tax jurisdictions to which the Company and its subsidiaries are subject. When applicable, the Company recognizes interest and/or penalties related toSeptember 30, 2022, March 31, 2023, significant components of the TRS’s net deferred tax assets (“DTA”) of the Company's TRSs were as follows (in thousands): $ 2,050 (2,050 18,534 18,534 (15,246 $ 3,288 Deferred Tax Asset Capital loss carryover from December 31, 2022 $ 126 Net operating loss carryover from December 31, 2022 471 Net operating loss carryover to be utilized in 2023 (30) Unrealized tax loss on investments 16,596 Total deferred tax assets 17,163 Valuation allowance (14,800) Net deferred tax asset $ 2,363 $15.7$1.5 million for the ninethree months ended September 30, 2022. March 31, 2023. The Company believes it is more likely than not that it will be able to harvest capital losses within this TRS during the TRS in either the fourth quarter of 2022, or within the three succeeding taxable years to be eligible for a capital loss carryback refund claim and has therefore not applied a valuation allowance to the extent of the expected future refund claim. As such, the Company has recorded a valuation allowance of $15.2$14.8 million against the Company’s gross deferred tax assets to arrive at a net DTA of $3.3$3.8 million to reflect the expected tax benefit associated with the unrealized tax losses at this TRS. NREO TRS, Inc. ("NREO TRS"), one of the Company's TRSs, has an estimated net operating loss balance of $2.2 million as of December 31, 2022 compared to $2.1 million as of March 31, 2023, as well as an estimated $0.6 million capital loss balance as of December 31, 2022, compared to $0.6 million as of March 31, 2023. NREO TRS's net operating loss balance does not have an expiration date and its capital loss balance will expire if not utilized prior to December 31, 2027. Additionally, NREO TRS has unrealized tax gains of $8.6 million as of December 31, 2022 compared to $9.4 million as of March 31, 2023 resulting in a Deferred Tax Liability of $1.8 million and $2.0 million, respectively. The Company believes that it will be able to fully utilize the tax assets from NREO TRS and has not therefore applied a valuation allowance to the $0.6 million DTA generated by this TRS.threesix months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. Substantially all amounts on deposit with major financial institutions exceed insured limits. Restricted cash represents cash deposited in accounts related to security deposits, property taxes, insurance premiums and deductibles and other lender-required escrows. Amounts deposited in the reserve accounts associated with the loans can only be used as provided for in the respective loan agreements, and security deposits held pursuant to lease agreements are required to be segregated.residents and tenants under lease agreements. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. The Company records an allowance to reflect revenue that may not be collectable. This is recorded through a provision for bad debts which is included in rental income in the accompanying consolidated statements of operations. Tenant and resident reimbursements and other income consist of charges billed to tenants for utilities, administrative, application and other fees and are recognized when earned. net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available and is verified.15Consolidated Statementsconsolidated statement of Operationsoperations on both the Successor and Predecessor basis with respect to the investment sold at the time of the sale.Accounting Standards Update 2020-04,ASU 2020-04, Reference Rate Reform (Topic 848)848) (“ASU 2020-04”2020-04”). ASU 2020-042020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-042020-04 is optional and may be elected over time as reference rate reform activities occur. The Company will continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.As a REIT, the Company generally limits its ownership of each individual entity’s voting stock to less than 10%.Each investment is evaluated to determine whether the Company has the ability to exercise significant influence, but not control, over an investee. Investments are evaluated in which Company ownership is equal to or greater than 20%, but less than or equal to 50%, of an investee’s voting stock with a presumption that the Company has this ability. For our investments in limited partnerships and functional equivalents that maintain specific ownership accounts, we presume that such ability exists when our ownership interest exceeds 3% to 5%. In addition to the Company’s ownership interest, the Company also considers whether it has a board seat or whether it participates in the policy-making process, among other criteria, to determine if we have an ability to exert significant influence, but not control, over an investee. If we determine that we have such ability, but we do not control, we account for the investment under the equity method of accounting, as described below.accountedthat qualify for under the equity method of accounting – Under the equity method of accounting, the Company initially recognizes its investment at cost and subsequently adjusts the carrying amount of the investments for its share of earnings and losses reported by the investee, distributions received, and other-than-temporary impairments. The Company has elected the fair value option for several of its investments that would otherwise be accounted for under the equity method (See Note 8)8). Distributions from these investments are accounted for as Interest and Dividend income and mark-to-market gains and losses are included in Change in Unrealized Gains/(Losses) on the consolidated Statement of Operations. For more information about the Company’s investments accounted for under the equity method, refer to Note 8 – Investments in unconsolidated ventures.investment incomechange in unrealized gain (loss) in our consolidated statement of operations. The fair values of our investments in publicly traded companies are determined based on sales prices or quotes available on securities exchanges.16 as a practical expedient, with changes in fair value recognized in net income. We use NAV per share reported by limited partnerships generally without adjustment, unless we are aware of information indicating that the NAV reported by a limited partnership does not accurately reflect the fair value of the investment at our reporting date.measurement alternative using the fair value proceduresvaluation technique described further in Note 9 - Fair Value of Derivatives and Financial Instruments.and investments in privately held entities that do not report NAV per share throughout the year for new developments including operating results. These investments are evaluated on the basis of qualitative assessment reported at fair value for indicators of impairment by monitoringthat a decrease in the presencevalue of the following triggering events or impairment indicators:(i)a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee(ii)a significant adverse change in the regulatory, economic, or technological environment of the investee;(iii)a significant adverse change in the general market condition, including rising interest rates(iv)significant concerns about the investee’s ability to continue as a going concern; and/or(v)a decision by investors to cease providing support or reduce their financial commitment to the investee.If we lack the information necessary to apply this approach in the future, we will be required to apply the “cumulative earnings” approach as an accounting change on a retrospective basis. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized are classified as cash inflows from operating activities, and those in excess of that amount are classified as cash inflows from investing activities.178(f)8(f) of the 1940Investment Company Act declaring that the Company has ceased to be an investment company under the 1940Investment Company Act. The issuance of the Deregistration Order enabled the Company to proceed with full implementation of the Business Change. Upon the Deregistration Order, the Company discontinued the use of guidance in FASB ASC 946. To effectuate this change, the fair market values of the Company’s investments became the July 1, 2022 cost basis. The change also required the consolidation of several investments that were previously not required to be consolidated under FASB ASC 946. The table below illustrates the changes from the June 30, 2022 balance sheet using the Predecessor Basis and the July 1, 2022 opening balance sheet using the Successor Basis (dollars in thousands). $ — $ 21,208 (1) $ 21,208 - 158,304 (1) 158,304 - 10,979 (1) 10,979 - 46,052 (1) 46,052 - 349 (1) 349 - 236,892 236,892 1,129,544 (324,927 ) (2) 804,617 — 143,264 (3) 143,264 — 56,440 (2) 56,440 4,044 12,092 (1) 16,136 — 34,640 (1) 34,640 — 4,849 (1) 4,849 172 3,873 (1) 4,045 3,896 1,518 (1) 5,414 $ 1,137,656 $ 168,641 $ 1,306,297 $ — $ 145,908 (1) $ 145,908 16,000 7,500 (1) 23,500 7,492 - 7,492 1,296 2,294 (1) 3,590 - 2,323 (1) 2,323 - 639 (1) 639 - 434 (1) 434 - 1,845 (1) 1,845 - 6,770 (1) 6,770 - 928 (1) 928 24,788 168,641 193,429 83,252 (83,252 ) (4) — 3 - 3 37 - 37 915,305 83,252 (4) 998,557 114,271 - 114,271 1,029,616 83,252 1,112,868 $ 1,137,656 $ 168,641 $ 1,306,297 (1)Change due to consolidation of subsidiaries that were previously accounted for at fair value.(2)Change due to investments that were previously accounted for at fair value being consolidated or accounted for using the equity method.(3)Change due to applying the equity method to investments that were previously carried at fair value. See Note 8 for more information on the Company's equity method investments.(4)The mandatory redemption feature of the Series A Preferred Shares (defined below) expired on the Deregistration Date. As such, the Series A Preferred Shares are now accounted for as a component permanent equity.18 direct real estate properties through single asset limited liability companies that are special purpose entities (“SPEs”). The Company consolidates the SPEs that it controls as well as any VIEs where it is the primary beneficiary. The Company controls and consolidates the OP as a VIE. In connection with its indirect equity investments in the properties acquired, the Company, through the OP and the TRS, directly or indirectly holds 100% of the membership interests in SPEs that directly own the properties. All of the properties the SPEs own are consolidated in the Company’s consolidated financial statements. The assets of each entity can only be used to settle obligations of that particular entity, and the creditors of each entity have no recourse to the assets of other entities or the Company.September 30, 2022, March 31, 2023, the Company, through the OP, owned 4four properties through SPEs. The following table represents the Company’s ownership in each property by virtue of its 100% ownership of the SPEs that directly own the title to each property as of September 30, 2022 and DecemberMarch 31, 2021: 100 100 100 100 100 100 (1) 100 0 (2) Effective Ownership Percentage at Property Name Location Year Acquired March 31, 2023 White Rock Center Dallas, Texas 2013 100 % 5916 W Loop 289 Lubbock, Texas 2013 100 % Cityplace Tower Dallas, Texas 2018 100 % NexPoint Dominion Land, LLC (1) Plano, Texas 2022 100 % (1)(2)Property was acquired in 2022; therefore, no ownership as of December 31, 2021.5. Real Estate Investments StatisticsAs of September 30, 2022, the Company was invested in two retail properties and one office property (excluding investments in undeveloped land), as listed below: 82,793 $ 1.46 $ 1.46 72.9 78.4 30,140 0.40 0.40 100.0 100.0 1,353,087 2.10 2.18 32.9 41.8 1,466,020 (1)Average effective monthly occupied rent per square foot is equal to the average of the contractual rent for commenced leases as of September 30, 2022 and December 31, 2021, respectively, minus any tenant concessions over the term of the lease, divided by the occupied square footage of commenced leases as of September 30, 2022 and December 31, 2021, respectively.(2)Percent occupied is calculated as the rentable square footage occupied as of September 30, 2022 and December 31, 2021, divided by the total rentable square footage, expressed as a percentage.19186.5. Consolidated Real Estate InvestmentsSeptember 30, 2022, March 31, 2023, the major components of the Company’s investments in real estate held by SPEs the Company consolidates, which are included in "Consolidated Real Estate Investments" on the Consolidated balance sheet, were as follows (in thousands): $ 1,315 $ 10,314 $ 1,921 $ (101 $ — $ 5 $ 13,454 1,081 2,938 — — — — 4,019 18,812 148,443 9,058 (6,669 43,973 349 213,966 26,500 - — — — — 26,500 47,708 161,695 10,979 (6,770 43,973 354 257,939 — (2,016 (1,445 371 - (168 (3,259 $ 47,708 $ 159,679 $ 9,534 $ (6,399 $ 43,973 $ 186 $ 254,680 Operating Properties Land Buildings and
ImprovementsIntangible Lease Assets Intangible Lease
LiabilitiesConstruction in Progress Furniture, Fixtures, and
EquipmentTotals White Rock Center $ 1,315 $ 10,314 $ 1,921 $ (101) $ — $ 5 $ 13,454 5916 W Loop 289 1,081 2,939 — — — — 4,020 Cityplace Tower 18,812 161,218 9,058 (6,669) 44,894 357 227,670 NexPoint Dominion Land, LLC 26,500 — — — — — 26,500 47,708 174,471 10,979 (6,770) 44,894 362 271,644 Accumulated depreciation and amortization — (6,230) (4,178) 1,114 — (195) (9,489) Total Operating Properties $ 47,708 $ 168,241 $ 6,801 $ (5,656) $ 44,894 $ 167 $ 262,155 $2.2$2.1 million for the three months ended September 30, 2022. March 31, 2023. Amortization expense related to the Company’s intangible lease assets was $1.5$1.3 million and $0.4 million for the Company’s intangible lease liabilities for the three months ended September 30, 2022. On August 9, 2022, purchased undeveloped land in Plano, Texas through a wholly owned SPE, as detailed in the table below (dollars in thousands). The details of the Company’s acquisitions held by SPEs the Company consolidates for the three months ended September 30, 2022 were as follows (dollars in thousands): $ 26,500 $ 13,250 100 $ 26,500 $ 13,250 (1)Represents ownership of underlying property. The Company, through the OP, owns 100% of NexPoint Dominion Land, LLC as of September 30, 2022.DispositionsOn August 5, 2022, the Company’s investment in Caddo Sustainable Timberlands was redeemed for approximately $10.9 million.7.property.property pursuant a Loan Agreement, originally dated August 15, 2018 and subsequently amended (the “Loan Agreement”). The debt is non-recourselimited recourse to the Company and encumbers the property. The debt had an original maturity of September 7, 2022. The8, 2022, and the Company has deferred the maturity date with the lender to February 7,May 8, 2023, with the possibility to extend for an additional four months to September 8, 2023 provided certain metrics are met. On May 8, 2023, the lender agreed to defer the maturity of the Cityplace debt by four months to September 8, 2023. Also on May 8, 2023, the parties to the Loan Agreement agreed to convert the index upon which the interest rate is based to the one-month secured overnight financing rate ("SOFR") effective as of the first interest period beginning on or after May 8, 2023. The purpose of the deferral was to allow for continued discussions around refinancing the debt. Management recognizes that finding an alternative source of funding is necessary to repay the debt by the maturity date. Management is evaluating multiple options to fund the repayment of the $145.3$144.1 million principal balance outstanding as of March 31, 2023, including recastingrefinancing the debt, securing additional equity or debt financing, selling a portion of the portfolio, or any combination thereof. Management believes that there is sufficient time before the maturity date and that the Company has sufficient access to capital to ensure the Company is able to meet its obligations as they become due. The debt can be pre-paid in full on any date at par plus 0.25% if the Company gives 20 days prior written noticeDue to the administrative agent.short term nature of the debt, the fair value of the debt is approximately the outstanding balance. The below table contains summary information related to the real estate notesmortgages payable (dollars in thousands): $ 103,216 4.94 22,578 8.94 12,993 4.94 3,225 8.94 2,842 8.94 406 8.94 $ 145,260 (347 $ 144,913 (1)Reflective of the lender consent dated November 8, 2022 that defers the maturity date to February 7, 2023.2019Outstanding principal as of
March 31, 2023Interest Rate Maturity Date (1) Note A-1 $ 102,375 6.96 % 5/8/2023 Note A-2 22,394 10.96 % 5/8/2023 Note B-1 12,888 6.96 % 5/8/2023 Note B-2 3,199 10.96 % 5/8/2023 Mezzanine Note 1 2,819 10.96 % 5/8/2023 Mezzanine Note 2 403 10.96 % 5/8/2023 Mortgages payable 144,078 Deferred financing costs, net (160) Mortgages payable, net $ 143,918 5.7%7.8% as of September 30, 2022.September 30, 2022, March 31, 2023, the Company believes it is in compliance with all covenants.agreementfacility (the “Credit Facility”"Credit Facility") with Raymond James Bank, N.A. and drew the full balance. TheAs of March 31, 2023, the Credit Facility, as amended, bearsbore interest at one-month LIBORthe one-month London Inter-Bank Offered Rate ("LIBOR") plus 3.5%3.50% and matures on November 6, 2023. On March 6, 2023. The Company paid down $10.0 million2023, the interest rate on the Credit Facility during the year ended December 31, 2021. increased to one-month LIBOR plus 4.25%. During the ninethree months ended September 30, 2022, March 31, 2023, the Company paid down $6.0$3.0 million on the Credit Facility. As of September 30, 2022, March 31, 2023, the Credit Facility had an outstanding balance of $14.0$8.0 million.As of September 30,maintainsentered a prime brokerage account with Merrill Lynch Professional Clearing Corp (“BAML”)Jefferies to hold securities owned by the TRS.Company. The Company from time to time borrows against the value of these securities. As of September 30, 2022, March 31, 2023, the Company had a margin balance of approximately $10.1$0.7 million outstanding with BAMLJefferies bearing interest at the Overnight Bank Funding Rate plus 0.60%0.50%. Securities with a fair market value of approximately $20.8$11.4 million are pledged as collateral againstfourfive calendar years subsequent to September 30, 2022 March 31, 2023 are as follows (in thousands): $ 591 $ 3,000 $ 3,591 144,669 11,000 155,669 - — - - 13,250 13,250 - — — - — — $ 145,260 $ 27,250 $ 172,510 Mortgages Payable Notes Payable Total 2023 $ 144,078 $ 8,000 $ 152,078 2024 — — — 2025 — 13,250 13,250 2026 — — — 2027 — — — Thereafter — — — Total $ 144,078 $ 21,250 $ 165,328 217. Variable Interest EntitiesTableThe Company reassesses its initial evaluation of Contentswhether an entity is a VIE when certain reconsideration events occur. The Company reassesses its determination of whether it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.Entities Instrument Asset Type Percentage Ownership as of March 31, 2023 Relationship as of March 31, 2023 Unconsolidated Entities: NexPoint Real Estate Finance Operating Partnership, L.P. LP interest Mortgage 16.1 % VIE VineBrook Homes Operating Partnership, L.P. LP interest Single-family rental 11.5 % VIE NexPoint Storage Partners Operating Company, LLC LLC interest Self-storage 29.7 % VIE NexPoint Storage Partners, Inc. Common stock Self-storage 53.0 % VIE Perilune Aero Equity Holdings One, LLC LLC interest Aircraft 16.4 % VIE SFR WLIF III, LLC LLC interest Single-family rental 20.0 % VIE IQHQ Holdings, LP LP interest Life science 1.1 % VIE September 30, 2022 (dollarsMarch 31, 2023 (dollars in thousands): 50.0 $ 13,229 $ — $ 13,229 81.3 (3) 57,152 16,747 40,405 73.6 (3) 13,127 3,023 10,104 60.0 (3) 28,015 21,334 6,681 20.0 % 7,254 7,466 (212 ) 77.0 (4) 12,312 12,312 — 16.4 10,284 8,751 1,533 N/A 50.0 (6) — (1) — — N/A 50.0 (6) — (1) — — (5) 23.0 104,397 (1) 104,397 — 10.6 (2) 169,473 (1) 169,473 — 53.0 (3) 114,714 (1) 114,714 — 28.4 52,461 (1) 52,461 — 46.2 27,074 (1) 27,074 — 26.8 4,333 (1) 4,333 — $ 613,825 $ 542,085 $ 71,740 Investee Name Instrument Asset Type NXDT Percentage Ownership Investment Basis Share of Investee's Net Assets (1) Basis Difference (2) Share of Earnings (Loss) Sandstone Pasadena Apartments, LLC LLC interest Multifamily 50.0 % $ 12,548 $ (9,590) $ 22,138 $ (16) AM Uptown Hotel, LLC LLC interest Hospitality 60.0 % (3) 26,455 21,334 5,121 (80) SFR WLIF III, LLC LLC interest Single-family rental 20.0 % 7,289 7,466 (177) 195 Las Vegas Land Owner, LLC LLC interest Land 77.0 % (4) 12,312 12,312 — — Perilune Aero Equity Holdings One, LLC LLC interest Aircraft 16.4 % 11,248 9,990 1,258 360 Claymore Holdings, LLC LLC interest N/A 50.0 % (5) — (6) — — — Allenby, LLC LLC interest N/A 50.0 % (5) — (6) — — — $ 69,852 $ 41,512 $ 28,340 $ 459 Investee Name Instrument Asset Type NXDT Percentage Ownership Investment Basis Share of Investee's Net Assets (1) Basis Difference (2) Share of Earnings (Loss) Sandstone Pasadena Apartments, LLC LLC interest Multifamily 50.0 % $ 13,013 $ — $ — $ 13,013 $ (217) AM Uptown Hotel, LLC LLC interest Hospitality 60.0 % (3) 27,136 21,334 — 5,802 (227) SFR WLIF III, LLC LLC interest Single-family rental 20.0 % 7,272 7,466 — (194) 280 Las Vegas Land Owner, LLC LLC interest Land 77.0 % (4) 12,312 12,312 — — — Perilune Aero Equity Holdings One, LLC LLC interest Aircraft 16.4 % 10,923 8,751 — 2,172 665 Claymore Holdings, LLC LLC interest N/A 50.0 % (5) — (6) — — — — Allenby, LLC LLC interest N/A 50.0 % (5) — (6) — — — — $ 70,656 $ 49,863 $ — $ 20,793 $ 501 Investee Name Instrument Asset Type NXDT Percentage Ownership Investment Basis NexPoint Real Estate Finance Operating Partnership, L.P. LP interest Mortgage 16.1 % (7) $ 76,299 (6) NexPoint Real Estate Finance, Inc. Common stock Mortgage 12.2 % (7) 32,907 (6) VineBrook Homes Operating Partnership, L.P. LP interest Single-family rental 11.5 % (7) 166,463 (6) NexPoint Storage Partners, Inc. Common stock Self-storage 53.0 % (3) 103,194 (6) NexPoint Storage Partners Operating Company, LLC LLC interest Self-storage 29.7 % 56,232 (6) NexPoint SFR Operating Partnership, L.P. LP interest Single-family rental 30.8 % 48,666 (6) NexPoint Hospitality Trust Common stock Hospitality 45.4 % 22,935 (6) LLV Holdco, LLC LLC interest Land 26.8 % 3,896 (6) $ 510,592 (1September 30, 2022 March 31, 2023 fair market value.(2) (3) The Company owns greater than 50% of the outstanding common equity but is not deemed by the Company to be the primary beneficiary of the investee and as such, accounts for the investee using the equity method.(4) The Company owns 100% of Las Vegas Land Owner, LLC which owns 77% of the Tivoli North Property as described below. Through the TIC, the Company shares control and as such accounts for this investment using the equity method.(5) NexPoint Real Estate Finance Operating Partnership, L.P. (“NREF OP”) focuses on originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity, multifamily properties and common stock investments across multiple real estate asset classes, as well as multifamily commercial mortgage-backed securities securitizations.(6) The Company has a 50% non-controlling interest in Claymore Holdings, LLC (“Claymore”) and Allenby, LLC, (“Allenby”). As such, the Company has determined it is not the primary beneficiary and does not consolidate these entities.(7) Represents the Company’s percentage share of net assets of the investee per the investee’s books and records.$12.0$12 million in Sandstone Pasadena Apartments, LLC (“Sandstone”("Sandstone"), which beneficially owns a 696 unit696-unit multifamily property (the “Ashmore”) located in Pasadena, TX.Texas. This contribution by the Company gave it an initial ownership percentage of 83.3%. Sandstone and the Ashmore are managed by Knightvest 2015, LLC (the “Sandstone Manager”). The LLC agreement of Sandstone vests the Sandstone Manager with the exclusive right, power, authority and discretion in conducting the business of Sandstone, subject to certain exceptions. Since the Company is does not the have a controlling member,financial interest, it did does not consolidate this Sandstone investment and therefore useduses the equity method to account for Sandstone.of accounting. Per the Sandstone organizational documents, the Company was entitled to a return on unreturned equity of 10.0%10%, which compounded annually. There was a capital event in 2018 which led to a full return of the Company’s and the other member’s equity in Sandstone. This triggered a change in the distribution-sharing percentage, which is now effectively 50% for the Company. The Sandstone Manager determines the monthly distributions at their discretion. Since the Company fully realized its investment basis, all distributions from Sandstone are now recognized as realized gains. As of September 30, 2022, March 31, 2023, the Company still maintains 50.0%50% ownership of Sandstone.SAFStor VenturesThe Company has invested in joint ventures (collectively, the “SAFStor Ventures”) with SAFStor NREA GP – I, LLC and SAFStor NREA GP – II, LLC (collectively, the “SAFStor GPs”). The SAFStor Ventures invest, through subsidiaries, in various self-storage real estate development projects primarily located on the east coast of the United States. The SAFStor GPs are the controlling and managing members of the SAFStor Ventures as they have exclusive management and oversight authority of the SAFStor Ventures, subject to certain exceptions. Since the Company is not the controlling member, it did not consolidate the SAFStor Ventures and therefore used the equity method to account for the investment. The Company is entitled to an annual compounding return on unreturned equity of 10.0% and pro rata distributions upon the occurrence of major capital events. See below for further detail on the SAFStor Ventures the Company owns as of September 30, 2022 (amount of storage units owned is unaudited, dollars in thousands): 7 5,417 $ 57,152 81 1 851 13,127 74 8 6,268 $ 70,279 23Theownedinvested amounts in exchange for which it received an approximately 85% interest in AM Uptown Hotel, LLC, (“AM Uptown”) which beneficially owns a 255 key upper255-key upscale hotel (the “Marriott Uptown”) located in Dallas, Texas. AM Uptown appointed Alamo Manhattan Properties, LLC (“Alamo Manhattan”) as the manager to manage and operate the Marriott Uptown. The management, control and direction of AM Uptown and its operations, business and affairs is vested exclusively in Alamo Manhattan, which has the right, power, and authority, acting solely by itself to carry out all the purposes of AM Uptown. The Company does not participate in the management, control, or direction of AM Uptown’s operations, business, or affairs.affairs and has no substantive kickout rights over Alamo Manhattan. Since the Company is does not the have a controlling member,financial interest, it did does not consolidate this AM Uptown investment and therefore useduses the equity method to account for AM Uptown.of accounting. As of September 30, 2022, March 31, 2023, the Company maintains 60% ownership interest of AM Uptown due to previous capital events that triggered a change in the distribution-sharing percentage and ownership percentage.Tivoli(“Tivoli”("Tivoli"), a joint venture that owns the Tivoli North Property, comprised of an 8.5 acre8.5-acre tract of land, (the “Tivoli North Property”) upon which site Tivoli plans to develop a 300-unit300-unit multifamily apartment community directly adjacent to Tivoli Village, a high-end mixed-use center in Las Vegas, Clark County, Nevada. On August 8, 2022 the joint venture was restructured to a tenants-in-common arrangement (the “TIC”"TIC"). Post restructure, the Company owns 100% of Tivoli, and Tivoli owns 77% of the underlying land investment. Members of the TIC must unanimously agree on certain major decisions regarding the underlying investment giving the Company shared control, and as such, the Company is notaccounts for the controlling member and usesTIC investment using the equity method to account for Tivoli.SFR WLIF IIIThe Company owns approximately a 20.0% interest in SFR WLIF III, LLC, an SPE designed to hold an investment in debt issued to VineBrook Homes Operating Partnership, L.P. (“VB OP”), an entity that manages single family rental properties, whose parent is advised by an affiliate of the Adviser. The loan to VB OP bears interest at 1-month LIBOR plus 155 basis points, matures on November 1, 2025, and has an outstanding principal balance of $241.2 million. SFR WLIF III, LLC is managed by an affiliate of the Adviser. As the Company has a non-controlling interest in this entity, it is accounted for as an equity method investment.Claymore and AllenbyThe Company owns minority interests in two LLCs created to hold litigation claims, Claymore and Allenby. The probability, timing, and potential amount of recovery, if any, are unknown as of September 30, 2022. Since the Company has non-controlling interests in these entities, they are accounted for as equity method investments. (“Perilune”("Perilune"). Perilune is a pooled investment vehicle created to finance, acquire, lease and/or sell two aircraft through subordinated or other lending arrangements and/or direct or indirect equity investments. Perilune preparesDue to the timing of the receipt of financial statements on an annual basis. Thefrom Perilune, the Company applies up to a 90 day lag reporting for this investment. In instances where the timing of the receipt of financial statements exceeds the 90 day window, earnings for the period are estimated. Since Perilune is presumed to holda partnership-like LLC, and the Company holds more than virtually no influence as itsan insignificant ownership percentage in Perilunebut is greater than 3-5% and as such accountsnot the primary beneficiary, the investment is accounted for it using the equity method.NREF OP,NexPoint Real Estate Finance Operating Partnership, L.P. (the "NREF OP"), the operating partnership of a publicly traded mortgage REIT, in exchange for equity in those subsidiaries. The equity in the subsidiaries owned by the Company, including additional equity received upon receipt of liquidating distributions from other vehicles that contributed to the NREF OP, was subsequently contributed to the Company's wholly owned subsidiary NexPoint Real Estate Opportunities, LLC (“NREO”("NREO") and redeemed for limited partnership units in the NREF OP. The NREF OP is the operating partnership forof NexPoint Real Estate Finance, Inc. ("NREF"), (NYSE: NREF) a public mortgage REIT managed by an affiliate of the Adviser. The Company, through NREO, owns approximately 23%16.1% of the common units of limited partnership of the NREF OP ("NREF OP Units"), and is not considered the primary beneficiary.accountsthe investment qualifies to be accounted for it using the equity method.forof VineBrook Homes Trust, Inc. (“VineBrook”("VineBrook"), a private single-family rental REIT managed by an affiliate of the Adviser. The Company owns less than 20% of the investee but has significant influence due to members of the management team serving on the board of VineBrook and as such, the investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. The Company, through NREO, owns approximately 10.6%11.5% of the common units of the VB OP as of September 30, 2022.March 31, 2023 and is not considered the primary beneficiary.2425(“NSP”("NSP") as part of a transaction where affiliates of the Adviser took Jernigan Capital, Inc. private. NSP is a privately owned self-storage REIT. As of September 30, 2022, March 31, 2023, the Company owns 53.0% of the outstanding common stock of NSP. The Company has determined that it is not the primary beneficiary of NSP. The investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option.due toOC. The NSP OC is the board seatoperating company of NSP. As of March 31, 2023, the Company owns approximately 29.7% of the outstanding combined classes of common units of the NSP OC (the “NSP OC Common Units") and other rights granted tois not the owner of NSP’s preferred stock,primary beneficiary, and as such, accountsthe investment qualifies to be accounted for thisusing the equity method. However, management has elected to account for the investment using the equity method.(“SFR OP”(the "SFR OP") in exchange for common units of the SFR OP (“SFR(the “SFR OP Units”Units"). Additionally, on June 8, 2022, the Company, directly or through one or more subsidiaries, loaned $25.0 million to the SFR OP in exchange for $25.0 million of 7.50% convertible notes of the SFR OP (“SFR(the “SFR OP Convertible Notes”Notes") that are interest only during the term and mature on June 30, 2027. The SFR OP is a subsidiary of NexPoint Homes Trust, Inc., a single-family rental REIT managed by an affiliate of the Adviser. Subsequent to June 8, 2022 and before September 30,through December 31, 2022, the Company, directly or through one or more subsidiaries, contributed approximately an additional $27.5 million to the SFR OP in exchange for SFR OP Units. Additionally, subsequentSubsequent to June 8, 2022 and before September 30,through December 31, 2022, the Company, directly or through one or more subsidiaries, contributed approximately an additional $1.0 million to the SFR OP in exchange for SFR OP Units through distribution reinvestments. Additionally, subsequent to June 8, 2022 and through December 31, 2022, the Company, directly or through one or more subsidiaries, loaned an additional $5.0 million to the SFR OP in exchange for $5.0 million of SFR OP Convertible Notes. Through March 31, 2023, the Company did not loan any additional funds to the SFR OP. As of September 30, 2022, March 31, 2023, the Company, owns approximately 28.4%30.8% of the outstanding units of SFR OP and as such accountsdoes not have a controlling financial interest. The investment qualifies to be accounted for thisusing the equity method. However, management has elected to account for the investment using the equity method.September 30, 2022, March 31, 2023, the Company owns 46.2%45.4% of the outstanding common stock of NexPoint Hospitality Trust. (“NHT”Trust ("NHT"), and does not have a controlling financial interest. The investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. NHT is a publicly traded hospitality REIT that owns 1110 properties located throughout the United States. NHT is managed by an affiliate of the Adviser. NHT is listed on the TSX Venture Exchange under the ticker NHT.U.September 30, 2022, March 31, 2023, the Company owns approximately 26.8% of the series A and B equity units of LLV Holdco, LLC (“LLV”). and does not have a controlling financial interest. The investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. Additionally, the Company owns $12,280,646 par of LLV's senior revolving loan maturing December 31, 2023 and paying interest at a fixed rate of 5% per annum. LLV specializes in managing real estate assets, which are ultimately sold to both residential and commercial developers. LLV owns approximately 300 gross acres of undeveloped land, of which 115 acres are developable near Lake Las Vegas in Henderson, Nevada.September 30, 2022 (dollarsMarch 31, 2023 (dollars in thousands). NREF, NSP and VineBrook do not prepare standalone financials for their operating partnershipscompanies as all operations and investments are owned through their operating partnershipscompanies and are consolidated by the corporate entities. As such, only the financial information for NREF, NSP and VineBrook are presented below in lieu of their operating partnerships. NREF, VineBrook and NSP account for their real estate assets at historical cost rather than at fair market value. $ 8,170,243 $ 2,500 $ — 59,940 3,463,082 763,318 22,100 92,566 72,167 23,661 193,309 150,746 $ 8,275,944 $ 3,751,457 $ 986,231 $ 7,758,491 $ 2,451,375 $ 907,278 22,361 155,141 26,696 7,780,852 2,606,516 933,974 143,165 348,040 — 351,927 796,901 52,257 $ 8,275,944 $ 3,751,457 $ 986,231 NREF VineBrook NSP ASSETS Investments $ 7,943,558 $ 2,500 $ — Real estate assets 59,072 3,566,053 1,297,814 Cash and cash equivalents 38,830 82,128 9,751 Other assets 1,106 95,365 173,979 TOTAL ASSETS 8,042,566 3,746,046 1,481,544 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Debt 1,275,290 2,622,755 914,999 Other liabilities 6,294,300 126,974 397,768 Total Liabilities 7,569,590 2,749,729 1,312,767 Redeemable noncontrolling interests in the operating company 95,712 467,290 205,114 Noncontrolling interests in consolidated VIEs — 8,685 4,035 Total Shareholders' Equity 377,264 520,342 (40,372) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,042,566 $ 3,746,046 $ 1,481,544 25September 30, 2022 March 31, 2023 for the Company’s significant equity method investments (dollars in thousands). $ — $ 71,594 $ 52,697 5,779 — 4,169 — 2,044 2,904 $ 5,779 $ 73,638 $ 59,770 $ 3,611 $ 88,119 $ 52,242 — (224 27,220 (10,841 84 (52,594 — 29,356 — $ (8,673 $ 14,735 $ (17,846 NREF VineBrook NSP Revenues Rental income $ 1,018 $ 84,497 $ 26,877 Net interest income 3,949 — 809 Other income — 1,608 1,472 Total revenues 4,967 86,105 29,158 Expenses Total expenses 5,520 120,987 31,833 Gain (loss) on sales of real estate — (15,853) — Other income (expense) 9,931 (41,662) (34,885) Unrealized gain (loss) on derivatives — (9,485) — Total comprehensive income (loss) $ 9,378 $ (101,882) $ (37,560) 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 utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.●Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as 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 the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.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. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date.September 30, 2022, March 31, 2023, the Company’s fair valued investments consisted of senior loans, corporate bonds, collateralized loan obligations,CLOs, convertible notes, common stocks, rights, warrants, life settlement contracts, LP interests and LLC interests. The fair value of the Company’s senior loans, bonds, and collateralized loan obligationsCLOs are generally based on quotes received from brokers or independent pricing services. Senior loans, bonds, and collateralized loan obligationsCLOs with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Senior loans, bonds, and collateralized loan obligationsCLOs that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.26third-partythird-party valuation specialist using a life settlement pricing model and are categorized as Level 3 assets in the fair value hierarchy. Key assumptions utilized in determining fair value include but are not limited to: (i) life expectancy estimates provided by independent third-partythird-party underwriters based on actuarially developed mortality tables and industry life expectancy reports; (ii) future premium estimates; (iii) rates of return consistent with those sought by independent purchasers of life policies at the time of purchase; and (iv) offers and/or commitments from purchasers. In addition, the valuation agent will also consider recent sales as well as offers received for the life policies deemed likely to close in the near future in estimating fair value.Consolidated Statementconsolidated statement of Operationsoperations (Successor Basis). Upon the death of an insured or the sale of a life policy, the Company will recognize the difference between the proceeds received and the cost of the life policy as a realized gain or loss in the Company's Consolidated Statementconsolidated statement of Operationsoperations (Successor basis)Basis).Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities.2728September 30, 2022. $ 17 $ — $ 15 $ — $ 15 34,962 — 563 5,092 5,655 284,454 23,231 — 254,735 277,966 53,958 — — 53,958 53,958 64,267 — — 66,150 66,150 3,982 — — 4,333 4,333 362,605 104,397 — 221,934 326,331 3,947 — 2,037 1,784 3,821 42,073 — 66 32,330 32,396 $ 850,265 $ 127,628 $ 2,681 $ 640,316 $ 770,625 Fair Value Cost Basis Level 1 Level 2 Level 3 Total Assets Bond $ 17 $ — $ 21 $ — $ 21 CLO 34,958 — 563 6,900 7,463 Common stock 316,867 45,239 — 228,867 274,106 Convertible notes 54,802 — — 51,302 51,302 Life settlement 64,267 — — 66,384 66,384 LLC interest 66,492 — — 60,128 60,128 LP interest 322,453 — 76,300 215,129 291,429 Rights and warrants 3,937 — 3,795 — 3,795 Senior loan 39,447 — 59 39,553 39,612 $ 903,240 $ 45,239 $ 80,738 $ 668,263 $ 794,240 Fair Value Cost Basis Level 1 Level 2 Level 3 Total Assets Bond $ 17 $ — $ 20 $ — $ 20 CLO 34,958 — 563 6,412 6,975 Common stock 325,275 53,872 — 234,667 288,539 Convertible notes 54,802 — — 50,828 50,828 Life settlement 64,267 — — 67,711 67,711 LLC interest 66,492 — — 60,836 60,836 LP interest 321,026 — 77,370 223,141 300,511 Rights and warrants 3,947 — 3,794 — 3,794 Senior loan 43,399 — 66 43,341 43,407 $ 914,183 $ 53,872 $ 81,813 $ 686,936 $ 822,621 September 30, 2022 (inMarch 31, 2023 (in thousands): $ 257,346 $ 3,000 $ - $ - $ - $ (5,611 $ 254,735 51,858 2,100 - - - - 53,958 56,440 3,022 - - 3,435 3,253 66,150 216,550 4,792 - - - 592 221,934 52,500 - - (18,100 - (29,308 5,092 3,982 - - - - 351 4,333 1,784 - - - - - 1,784 40,997 - 1,016 - (5 (9,678 32,330 $ 681,457 $ 12,914 $ 1,016 $ (18,100 $ 3,430 $ (40,401 $ 640,316 December 31, 2022 Contributions/
PurchasesPaid in-
kind
dividendsRedemptions/
ConversionsReturn of capital Realized
gain/(loss)Unrealized gain/(loss) March 31, 2023 CLO $ 6,412 $ — $ — $ — $ — $ — $ 488 $ 6,900 Common stock 234,667 — — — — — (5,800) 228,867 Convertible notes 50,828 — — — — — 474 51,302 Life settlement 67,711 1,266 — — — — (2,593) 66,384 LLC interest 60,836 — — — — — (708) 60,128 LP interest 223,141 1,427 — — — — (9,439) 215,129 Senior loan 43,341 — 1,008 (4,971) — 11 164 39,553 Total $ 686,936 $ 2,693 $ 1,008 $ (4,971) $ — $ 11 $ (17,414) $ 668,263 2830September 30, 2022. - $0.95 ($0.515) $ 254,735 - 4.00x (3.37x) 8.63% - 15.5% (10.34%) $905 110.0% 7.625% - 9.25% (8.61%) N/A $28 10.0% 87.9% N/A 53,958 14.0% 66,150 N/A N/A 221,934 $52 4.73% - 29.50% (13.17%) 4,333 70.0% 5,092 N/A 500.0% 1,784 11.50% - 17.50% (14.50%) 32,330 636.0% $ 640,316 Category Valuation Technique Significant Unobservable Inputs Input Value(s)
(Arithmetic Mean)Fair Value CLO Discounted Net Asset Value Discount 70% $ 6,900 Common Stock Market Approach Unadjusted Price/MHz-PoP $0.09 — $0.95 (0.52%) $ 228,867 NAV / sh multiple $1.10x — $1.45x $(1.28)x Discounted Cash Flow Discount Rate 8.63% — 12.00% (9.85)% Market Rent (per sqft) $16.00 — $58.00 $(37.00) RevPAR $74.00 — $192.00 $113.00 Capitalization Rates 5.38% — 9.75% (8.67)% Recent Transaction Implied Enterprise Value from Transaction Price ($mm) $841.00 N/A $25.31 — $28.00 $(26.655) Convertible Notes Discounted Cash Flow Discount Rate 7.00% — 9.25% (8.13)% 51,302 Life Settlement Discounted Cash Flow Discount Rate 14% 66,384 Life Expectancy (Months) 12 — 302 63 Months LLC Interest Discounted Cash Flow Discount Rate 8.75% — 30.00% (19.375)% 60,128 Market Rent (per sqft) $16 — $58 $(37) Capitalization Rate 5.375% LP Interest Discounted Cash Flow Discount Rate 6.40% — 9.10% (7.75)% 215,129 Capitalization Rate 3.6% — 7.0% (5.3)% Recent Transaction Price per Share $22.75 Senior Loan Discounted Cash Flow Discount Rate 11.30% — 20.00% (15.65)% $ 39,553 Total $ 668,263 named Specialty Financial Products, Ltd.(“SFP”),and a Designated Activity Company. SFP was formed for the purpose of from time to time, and at the proposal of NexAnnuity Asset Management, L.P. (“NexAnnuity,”("NexAnnuity"), an affiliate of the Adviser),Adviser, entering into approved transactions relating to the acquisitionacquisitions of U.S. life settlement policies approved by NexAnnuity and funded by the issuance of debt securities, (the “Structured Note”)or the Structured Note purchased by the Company. SFP utilizes proceeds from maturing life settlement contracts to repay the Structured Note and to further invest in life settlement contracts. As the Company owns the outstanding equity of and Structured Note issued by SFP, the Company consolidates SFP in its entirety. SFP’s equity and the Structured NotesNote are eliminated during consolidation.September 30, 2022, March 31, 2023, the Company’s life settlement portfolio consists of the following (dollars in thousands): 28 $1,500 - $15,000 $ 142,907 $350 - $3,895 $ 48,132 $0 - $580 $ 4,589 $114 - $6,020 $ 66,150 0 - 1 2 $ 7,000 $ 5,950 1 - 2 1 2,350 1,537 2 - 3 5 22,540 13,601 3 - 4 7 34,851 18,795 4 - 5 5 35,100 16,529 8 41,066 9,738 28 $ 142,907 $ 66,150 Number of Policies Face Value (Death Benefit) Acquisition Cost Premium Cost Estimated Fair Value Total Range Total Range Total Range Total Range Total 28 $1,500 -$15,000 $ 142,952 $350 - $3,895 $ 48,132 $0 - $570 $ 4,006 $65 - $6,163 $ 66,384 Remaining Life Expectancy (in years) Number Face Value Fair Value 0 - 1 — $ — $ — 1 - 2 3 10,351 7,406 2 - 3 10 49,412 29,685 3 - 4 3 21,000 10,815 4 - 5 3 17,100 8,160 Thereafter 9 45,089 10,318 Total 28 $ 142,952 $ 66,384 29fiscalcalendar years to keep the life settlement contracts in force as of September 30, 2022, March 31, 2023, assuming no maturities occur in that period, are as follows (dollars in thousands): $ 724 5,279 5,769 6,295 7,011 7,675 Year Premiums 2023 4,006 2024 5,768 2025 6,291 2026 7,004 2027 7,675 September 30, 2022, March 31, 2023, the Company purchased 3did not purchase any policies, with a combined face value of $28.0 million for $8.7 million, had 3no policies mature, with an aggregate net death benefit of $11.0 million, and paid $3.0$1.3 million in premiums.premiums to keep the life settlement contracts in force.During the six months ended June 30, 2022, the Company issued 107,453 common shares pursuant to its dividend reinvestment plan that was terminated on July 1, 2022. No shares were issued during the three months ended September 30, 2022.September 30, 2022, March 31, 2023, the Company had 37,171,807 common shares, par value $0.001 per share, issued and outstanding.September 30, 2022, March 31, 2023, the Company paid distributionsa distribution of $0.15 per share on its common shares on August 1, 2022, AugustMarch 31, 2022 and September 30, 2022, in each case in the amount2023 to shareholders of $0.05 per share. shares of its 5.50% Series A Cumulative Preferred Shares, par value $0.001 per share, liquidation preference $25.00 per share (the “Series("Series A Preferred Shares”Shares"), with an aggregate liquidation preference of approximately $84.0 million. The Series A Preferred Shares were issued as part of the consideration for an exchange offer for a portion of the Company’s common shares. The Series A Preferred Shares are callable startingbeginning on December 15, 2023 at a price of $25 per share.September 30, 2022, March 31, 2023, the Company paiddeclared distributions on its Series A Preferred Shares on September 30, 2022 in the amount of $0.34375 per share.Egan-Jones Ratings Company assigned an investment grade corporate ratingshare, which was paid to holders of BBB- to the Series A Preferred Shares and a ratingon March 31, 2023 to shareholders of BBB to the Company. record on March 24, 2023.5.50%5.5% of the $25 per share liquidation preference and are payable quarterly on March 31, June 30, September 30, October 31, and December 31 of each year, or in each case on the next succeeding business day.lossearnings (loss) per share (in thousands, except per share and share amounts): $ (60,142 37,172 37,172 $ (1.62 $ (1.62 Three Months Ended March 31, 2023 Numerator for loss per share: Net loss attributable to common shareholders $ (20,676) Denominator for loss per share: Weighted average common shares outstanding 37,171,807 Denominator for basic and diluted loss per share 37,171,807 Loss per weighted average common share: Basic $ (0.56) Diluted $ (0.56) 303313. Related Party TransactionsAdvisoryreinvestment of collateral received for securities loaned in accordance with the Company’s investment objectives and Administrative FeeSeptember 30, 2022, March 31, 2023, as consideration for the Adviser’s services under the Advisory Agreement, we pay our Adviser an annual fee (the “Advisory Fee”"Advisory Fee") of 1.00% of Managed Assets (as defined below) and an annual fee (the “Administrative Fee”"Administrative Fee" and, together with the Advisory Fee, the “Fees”"Fees") of 0.20% of the Company’s Managed Assets in each case(defined below). The Advisory Agreement provides that the first portion of the monthly installment of the Advisory Fee shall be paid monthly, in cash or ourup to $1.0 million and the remainder of the monthly installment of the Advisory Fee, if any, shall be paid in common shares of the Company, subject to certain restrictions related to maintaining the Company’s status as provideda REIT and compliance with federal securities laws and rules promulgated by the New York Stock Exchange. In addition, in no event will the common shares issued to the Adviser under the Advisory Agreement exceed five percent of the number of common shares or five percent of the voting power of the Company outstanding prior to the first such issuance. The number of common shares payable to the Adviser under the Advisory Agreement as a portion of the Advisory Fee shall equal (i) the total dollar amount of the monthly installment of the Advisory Fee payable minus the $1.0 million cash portion of the monthly installment of the Advisory Fee divided by (ii) the volume-weighted average price per share for the 10 trading days prior to the end of the month for which the Fees will be paid. The Fees shall be payable independent of the performance of the Company or its investments. The Advisory Agreement also provides that the Administrative Fee shall be paid in cash.restrictions. See Note 15 for additional information.(“CMBS”("CMBS") where the Company holds the controlling tranche of the securitization and is required to consolidate under GAAP all assets and liabilities of a specific CMBS trust, the consolidated assets and liabilities of the consolidated trust will be netted to calculate the allowable amount to be included as Managed Assets. In addition, in the event the Company consolidates another personentity it does not wholly own as a result of owning a controlling interest in such personentity or otherwise, Managed Assets will be calculated without giving effect to such consolidation and instead such person’sentity’s assets, leverage, expenses, liabilities and obligations will, on a pro rata basis consistent with the Company’s percentage ownership, be considered those of the Company for purposes of calculation of Managed Assets. The Adviser computes Managed Assets as of the end of each fiscal quarter and then computes each installment of the Fees as promptly as possible after the end of the month with respect to which such installment is payable.underwriters’underwriters' discounts) paid or to be paid by us in connection with an offering of our securities, including, without limitation, our legal, accounting, printing, mailing and filing fees and other documented offering expenses (collectively, “Offering Expenses”"Offering Expenses"), paid or incurred by the Adviser or its affiliates in connection with the services it provides to us pursuant to the Advisory Agreement. Direct payment of operating expenses by us together with reimbursement of operating expenses to the Adviser, plus compensation expenses relating to equity awards granted under a long-term incentive plan and all other corporate general and administrative expenses of the Company, including the Fees payable under the Advisory Agreement, may not exceed 1.5% (the "Expense Cap") of Managed Assets, (the “Expense Cap”),calculated as of the end of each quarter, for the twelve-monthtwelve-month period following the Company’s receipt of the Deregistration Order, calculated as of the end of each quarter;Order; 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 or 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;investments; provided, further, in the event the Company consolidates another entity that it does not wholly own as a result of owning a controlling interest in such entity or otherwise, expenses will be calculated without giving effect to such consolidation and instead such entity’s expenses will, on a pro rata basis consistent with the Company’s percentage ownership, be considered those of the Company for purposes of calculation of expenses. On occasion, the Adviser may waive additional fees to the extent assets are invested in certain affiliated investments. The Adviser may, at its discretion and at any time, waive its right to reimbursement for eligible out-of-pocket expenses paid on the Company’s behalf. Once waived, these expenses are considered permanently waived and become non-recoupable in the future.31 is automatically renewed thereafter for successive additional one-yearone-year terms thereafter unless earlier terminated. We have the right to terminate the Advisory Agreement on 30 days’ written notice forupon the occurrence of a cause event (as defined in the Advisory Agreement). The Advisory Agreement can be terminated by us or the Adviser without cause upon the expiration of the then-current term with at least 180 days’ written notice to the other party.party prior to the expiration of s term. The Adviser may also terminate the agreement with 30 days’ written notice if we have materially breached the agreement and such breach has continued for 30 days. days before we are given such notice. In addition, the Advisory Agreement shallwill automatically terminate in the event of an assignmentAdvisers Act Assignment (as defined in Section 202(a)(1) of the Investment Advisers Act of 1940) of the Advisory Agreement (an “Advisers Act Assignment”).Agreement) unless we provide written consent. A termination fee will be payable to the Adviser by us upon termination of the Advisory Agreement for any reason, including non-renewal, other than a termination by us forupon the occurrence of a cause event or a termination due to an Advisers Act Assignment. The termination fee will be equal to three times the Fees earned by the Adviser during the twelve month period immediately preceding the most recently completed calendar quarter prior to the effective termination date; provided, however, if the Advisory Agreement is terminated prior to the one year anniversary of the date of the Advisory Agreement, the Fees earned during such period will be annualized for purposes of calculating the Fee.September 30, 2022, March 31, 2023, the Company incurred Administrative Fees and Advisory Fees of $2.9$3.6 million, inclusive of $0.9which excludes $0.4 million in expensesfees that were deferred to comply with the Expense Cap. Should the Company’s Fees and expenses and any other items subject to the Expense Cap be less than the 1.5% limit for the twelve monthtwelve-month period subsequent to the Deregistration Date, some or all of the deferred expenses could be recouped by the Adviser up to the Expense Cap.the BSa loan agreement (the "BS Loan Agreement (defined below)Agreement"), pursuant to which the Company guaranteed certain obligations of the borrowers (“BS Borrower”) under the BS Loan Agreement, dated September 14, 2022, by and among BS Borrower, JPM as administrative agent and BS Lender (the “BS Loan Agreement”).Agreement. The Company, through its ownership in NSP, owns an indirect interest in BS Borrower and entered into the BS Guaranties as a condition of BS Lender lending to BS Borrower under the BS Loan Agreement. Pursuant to the BS Guaranties, the Company guaranteed certain carrying obligations, including interest payments, of BS Borrower and certain recourse obligations of BS Borrower pertaining to exculpation or indemnification of BS Lender. The BS Guaranties also provide that the Company may be required to repayone-yearone-year terms upon the satisfaction of certain terms and conditions. Borrowings outstanding under the BS Loan Agreement are secured by mortgages on real property owned by one or more of the borrowers comprising BS Borrower and bear interest at the one-monthone-month SOFR, subject to a floor of 0.50%0.5%, plus an applicable spread of 4.0017%approximately 4.0% with respect to approximately $184.9 million of initial principal thereunder and 5.3750%approximately 5.4% with respect to approximately $36.9 million of initial principal thereunder.(the(the “CMBS Guaranty”) for the benefit of JPM and any additional or subsequent lenders from time to time (collectively, the “CMBS Lender”) under thea loan agreement (the "CMBS Loan Agreement, dated September 14, 2022 (the “CMBS Loan Agreement”Agreement"), by and among the borrowers thereunder (collectively, “CMBS Borrower”) and the CMBS Lender. The Company, through its ownership in NSP, owns an indirect interest in CMBS Borrower and entered into the CMBS Guaranty as a condition of CMBS Lender lending to CMBS Borrower under the CMBS Loan Agreement. Pursuant to the CMBS Guaranty, the Company guaranteed certain recourse obligations of CMBS Borrower pertaining to exculpation or indemnification of CMBS Lender. The CMBS Guaranty also provides that the Company may be required to repay principal amounts upon the occurrence of certain events, including certain action or inaction by CMBS Borrower, but does not provide for a full guarantee of repayment in all circumstances. The CMBS Loan Agreement provides for a loan of $356.5 million to CMBS Borrower. Amounts outstanding under the CMBS Loan Agreement are due and payable on September 9, 2024 which date may, at the option of CMBS Borrower, be extended for three successive one-yearone-year terms upon the satisfaction of certain terms and conditions. Borrowings outstanding under the CMBS Loan Agreement are secured by mortgages on real property owned by one or more of the borrowers comprising CMBS Borrower and bear interest at one-monthone-month SOFR plus a spread of 3.55%approximately 3.6%, which will increase by 0.1% upon a second extension of the loan maturity and by an additional approximately 0.15% upon a third extension of the loan maturity.ana management agreement (the “SFP IMA”"SFP IMA") with NexAnnuity pursuant to which NexAnnuity provides investment management services to SFP. Mr. Dondero serves as President of NexAnnuity, which is indirectly owned by a trust of which Mr. Dondero is the primary beneficiary.“SFP"SFP Management Fee”Fee") paid monthly in an amount equal to 1.00%1.0% of the average weekly value of an amount equal to the total assets of SFP, including any form of leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the investment objective, investment guidelines and policies under the SFP IMA, and/or (iv) any other means, plus any value added tax or any other applicable tax, if any, thereon. NexAnnuity may waive all or a portion of the SFP Management Fee.3236SSB, an affiliate of the Adviser through common beneficial ownership. The Company’s direct real estate investmentsoperating properties, other than undeveloped land, are managed by NexVest Realty Advisors, LLC (“NexVest”("NexVest"), an affiliate of the Adviser. For the three and nine months ended September 30, 2022, March 31, 2023, the Company through its subsidiaries has paid $0.2approximately $0.1 million and $0.6 million, respectively, in property management fees to NexVest. The property management agreement with NexVest for the retail property in Lubbock, Texas is dated January 1, 2014 and hashad a fixed fee of $750 per month. Effective January 1, 2023, the property management agreement was amended and the property management fee was increased to $1,200 per month. The property management agreement with NexVest for Cityplace Tower is dated August 15, 2018, and the management fee is calculated on 3% of gross revenues, with a minimum fee of $20,000.$20,000 per month. The property management agreement with NexVest for the White Rock Center is dated June 1, 2013, and the management fee is calculated on 4% of gross receipts.thea limited guarantor and an indemnitor on twoone of NHT's loans made to NHT, an affiliate of the Adviser, with an aggregate principal amount of 77.4$77.4 million as of September 30, 2022. March 31, 2023. The obligations include a customary environmental indemnity and a so-called "bad boy" guarantee, which is generally only applicable if and when the borrower directly, or indirectly through an agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper. The Company has not recorded a contingent liability as NHT is current on all debt payments and in compliance with all debt compliance provisions.aan unconsolidated subsidiary, borrowed approximately $13.5 million from NREF, an entity advised by an affiliate of the Adviser, to finance its acquisition of a 77%77.0% interest in Tivoli North Property. The bridge note bore interest at an annual rate equal to the WSJ Prime Rate plus 1.5% and had a maturity date of October 1, 2022. The Company refinanced this bridge note with PNC Bank, N.A.N.A ("PNC Bank") on August 8, 2022. The new loan is forhad a principal amount of $13.5 million, matures on August 7, 2023, and bears interest at an annual rate of Daily Simpledaily simple SOFR plus 3.5%. Proceeds from the note with PNC Bank were used to repay in full the financing provided by NREF on August 9, 2022.discussed in Note 8, Tivoliof March 31, 2023, the Company owns approximately 47,064 units, or 29.7%, of the outstanding NSP OC Common Units.accounted for using the equity method and as such,operating partnership of NREF, a publicly traded mortgage REIT managed by an affiliate of the note with PNC Bank is not consolidated by the Company. September 30, 2022, March 31, 2023, the Company has the following investments in entities managed or advised by, or directly or indirectly owned by entities managed or advised by, affiliates of the Adviser. $ 7,254 $ 131 $ - $ - $ 131 4,061 (1,421 - 33 (1,388 27,074 475 - - 475 23,958 - - 66 66 114,714 (6,565 - - (6,565 52,461 - - - - 30,000 - - 575 575 - - - - - - - - - - 104,397 (36,866 - 3,485 (33,381 169,473 592 - 1,427 2,019 $ 533,392 $ (43,654 $ - $ 5,586 $ (38,068 Related Party Investment Fair
ValueChange in Unrealized
Gain/(Loss)Realized
Gain/(Loss)Interest and
DividendsTotal Income SFR WLIF III, LLC LLC Units $ 7,289 $ 213 $ — $ — $ 213 NexPoint Residential Trust, Inc. Common Stock 3,875 13 — 37 50 NexPoint Hospitality Trust Common Stock 22,935 (4,750) — — (4,750) NexPoint Hospitality Trust Convertible Notes 21,677 198 — 62 260 NexPoint Storage Partners, Inc. Common Stock 103,194 (501) — — (501) NexPoint Storage Partners Operating Company, LLC LLC Units 56,232 (273) — — (273) NexPoint SFR Operating Partnership, L.P. Partnership Units 48,666 (4,813) — 602 (4,211) NexPoint SFR Operating Partnership, L.P. Convertible Notes 29,625 275 — 563 838 Claymore Holdings, LLC LLC Units — — — — — Allenby, LLC LLC Units — — — — — NexPoint Real Estate Finance Operating Partnership, L.P. Partnership Units 76,299 (1,071) — 2,921 1,850 NexPoint Real Estate Finance, Inc. Common Stock 32,907 (462) — 1,439 — 977 VineBrook Homes Operating Partnership, L.P. Partnership Units 166,463 (4,625) — 1,427 — (3,198) Total $ 569,162 $ (15,796) $ — $7,051 $ (8,745) 3338Theistogether with the guarantor on three secured loans madeCo-Guarantors, as guarantors, entered into a Sponsor Guaranty Agreement in favor of Extra Space pursuant to which the Company and the Co-Guarantors guaranteed obligations of NSP an affiliate of the Adviser, with respect to NSP’s newly created Series D Preferred Stock and two promissory notes in an aggregate principal amount of approximately $578.3$64.2 million issued to Extra Space. The guaranties by the Company 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 the Company 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. As of March 31, 2023, the Company owns approximately 53.0% of the total outstanding asshares of September 30, 2022. common stock of NSP. NSP is current on all debt and dividend payments and in compliance with all debt compliance provisions. See Note 13 for additional information.thea limited guarantor and an indemnitor on twoone of NHT's loans made to NHT, an affiliate of the Adviser, with an aggregate principal amount of $77.4 million outstanding, as of September 30, 2022. March 31, 2023. The obligations include a customary environmental indemnity and a so-called "bad boy" guarantee, which is generally only applicable if and when the borrower directly, or indirectly through an agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper. The Company has not recorded a contingent liability as NHT is current on all debt payments and in compliance with all debt compliance provisions.September 30, 2022, March 31, 2023, the Company was not aware of any environmental liabilities. There can be no assurance that material environmental liabilities do not exist.isand Allenby are engaged in ongoing litigation that could result in a possible gain contingency to the Company. The probability, timing, and potential amount of recovery, if any, are unknown.Year: Operating Leases 2023 $7,369 2024 6,398 2025 6,089 2026 4,773 2027 3,959 Thereafter 3,308 Total $31,896 Three Months Ended March 31, 2023 Tenant Rental Income Hudson Advisors, LLC $712 OctoberApril 24, 2022, 2023, the Board approved a quarterly dividend of $0.15 per common share, payable on DecemberJune 30, 2022 2023 to stockholdersshareholders of record on DecemberJune 15, 2022.October 25, 2022, April 11, 2023, the Company entered into the Advisory Agreement was amended to changewhereby the structuremonthly installment of the Advisory Fee such thatFees shall be paid in cash unless the Adviser elects, in its sole discretion, to receive all or a portion of the monthly installment of the Advisory Fee shall be paid in cash up to $1.0 million and the remainder of the monthly installment of the Advisory Fee, if any, shall be paidFees in common shares of the Company, subject to certain restrictions. Therestrictions including that in no event shall the common shares issued to the Adviser under the Advisory Agreement was also amendedexceed the Share Cap and that in no event shall the common shares issued to providethe Adviser under the Advisory Agreement exceed 6,000,000 common shares; provided, however, that the Administrative Fee shall be paidShare Cap will not apply if the Company’s shareholders have approved issuances in cash.excess of the Share Cap.3440Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operationsherein and with our Annual Report, filed with the Securities and Exchange Commission (the “SEC”) on April 4, 2022.herein. 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” in this report.September 30, 2022,March 31, 2023, our Portfolio consisted primarily of debt and equity investments in the single-family rental, self-storage, office, hospitality, life science and multifamily sectors. Substantially all of our business is conducted through the OP. The OP GP is the sole general partner of the OP and is owned 100% by the Company. As of September 30, 2022,March 31, 2023, there were 2,000 OP Units outstanding, of which 100%, were owned by us.Order.Order pursuant to Section 8(f) of the Investment Company Act declaring that the Company has ceased to be an investment company under the Investment Company Act. The issuance of the Deregistration Order enablesenabled the Company to proceed with full implementation of the Business Change. As a result of the Business Change, we have not provided a comparison of our financial statements to prior periods in which we were operating as a registered investment company because it would not be useful to our shareholders. The discussion herein is principally limited to our financial condition and results of operations during the period from the Deregistration Date to September 30, 2022.term.term that will expire on July 1, 2025 and successive one-year terms thereafter unless earlier terminated. The Adviser is wholly owned by NexPoint Advisors, L.P.Code, and expect to continue to qualify as a REIT.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 to our shareholders. 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 believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through aone or more TRS entities and isare subject to applicable federal, state, and local income and margin taxes.lawsuit was filed by a trust set uplitigation subtrust formed in connection with the bankruptcy proceedings of Highland, Capital Management, L.P. bankruptcy in the United States Bankruptcy Court for the Northern Districta former affiliate of Texas. Theour Sponsor, filed a lawsuit makes claims(the “Bankruptcy Trust Lawsuit”) against a number ofvarious persons and entities, including our Sponsor and James Dondero. TheIn addition, on February 8, 2023, UBS Securities and its affiliate (collectively “UBS”) filed a lawsuit does notin the Supreme Court of the State of New York, County of New York against Mr. Dondero and a number of entities currently or previously affiliated with Mr. Dondero, seeking to collect on $1.3 billion in judgments UBS obtained against entities that were managed indirectly by Highland (the “UBS Lawsuit”). Neither the Bankruptcy Trust Lawsuit nor the UBS Lawsuit include claims related to our business or our assets or operations.assets. Our Sponsor and Mr. Dondero have informed us they believe the lawsuitBankruptcy Trust Lawsuit has no merit and theyMr. 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 lawsuitBankruptcy Trust Lawsuit or the UBS Lawsuit will have a material effect on our business, results of operations or financial condition.recently started raisingraised interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the remainder of 2022.stability. In addition, to the extent our exposure to increases in interest rates on any of our debt is not eliminated through interest rate swaps and interest rate protection agreements, such increases will result in higher debt service costs which will adversely affect our cash flows. We cannot make assurances that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings. Such future constraints could increase our borrowing costs, which would make it more difficult or expensive to obtain additional financing or refinance existing obligations and commitments, which could slow or deter future growthproperties (see Note 5 to our consolidated financial statements). Also included areproperties. Our rental income also includes utility reimbursements, late fees, common area maintenance reimbursements, and other rental fees charged to tenants.and dividends. income. Interest and dividends includeincome includes interest earned from our debt investments andinvestments.Property management fees. Property management fees include fees paid to NexVest, our property manager, for managing each property directly or indirectly owned by us (see Note 13 to our consolidated financial statements).Property general and administrative expenses. Property general and administrativemarketing, professionalthe Business Change in conjunction with the Deregistration Order, which primarily include legal fees general office supplies, and other administrative related costsfees incurred in preparation for or as a direct result of each property owned directly or indirectly by us.expense. Expense. Interest expense primarily includes the cost of interest expense on debt, the amortization of deferred financing costs, if any, and the related impact of interest rate derivatives, if any, used to manage our interest rate risk.earnings (losses)Earnings (Losses) of unconsolidated venturesUnconsolidated Ventures. 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.TaxIncometax expense is primarily derived from taxable gains from asset sales and other income earned from investments held in our TRS.Average Effective Monthly
Occupied Rent Per Square Foot
*(1) as of% Occupied *(2) as of Property Name Rentable Square
Footage*
(in thousands)Property Type Date
AcquiredMarch 31,
2023March 31,
2023White Rock Center 82,793 Retail 6/13/2013 $ 1.50 66.5 % 5916 W Loop 289 30,140 Retail 7/23/2013 $ 0.40 100.0 % Cityplace Tower 1,353,087 Office & Hospitality (3) 8/15/2018 $ 2.10 56.4 % 1,466,020 3643September 30,March 31, 2023 and December 31, 2022The three months ended September 30, 2022As a result of the Business Change, we have not provided a comparison of our financial statements to prior periods in which we were operating as a registered investment company because it would not be useful to our shareholders. The discussion herein is principally limited to our financial condition and results of operations during the period from the Deregistration Date to September 30, 2022.September 30,March 31, 2023 and December 31, 2022 (in thousands): $ 40,763 (12,720 28,043 (2,541 (1,581 (7,516 (78,238 2,846 (58,987 (1,155 $ (60,142 For the Three Months Ended March 31, For the Three Months Ended December 31, 2023 2022 Total revenues $14,866 $14,367 Total expenses (12,538) (11,638) Operating income 2,328 2,729 Interest expense (3,462) (3,218) Equity in losses of unconsolidated ventures (76) (676) Income tax expense (806) (2,459) Change in unrealized losses (18,640) (13,793) Realized loss 1,135 (5,169) Net loss (19,521) (22,586) Net income attributable to preferred shareholders (1,155) (1,155) Net loss attributable to common shareholders $ (20,676) $ (23,741) September 30,March 31, 2023 as compared to the net loss for the three months ended December 31, 2022 primarily relates to mark-to-market losses on our investments accounted for at fair value partially offset by interest and dividends.$4.6$4.7 million for the three months ended September 30, 2022.March 31, 2023 compared to $5.5 million for the three months ended December 31, 2022, which was a decrease of $0.7 million. The decrease between the periods was primarily due to a decrease in lease cancellations and buy outs. Rental income primarily consists of lease revenue from our investment in Cityplace Tower.$36.1$10.1 million for the three months ended September 30, 2022. Interest and dividends consists primarily of dividends from CLO equity investments of $29.1 million, NREF OP distributions of $3.5 million and VB OP distributions of $1.4 million.Other income. Other income was approximately $18,000 for the three months ended September 30, 2022. ExpensesProperty operating expenses. Property operating expenses were $1.8March 31, 2023 compared to $8.9 million for the three months ended September 30, 2022.December 31, 2022, which was an increase of $1.2 million. The increase between periods was primarily due to an increase in CLO proceeds.Real estate taxes and insurance. Real estate taxes and insurance costs were $1.5 million for the three months ended September 30, 2022. Real estate taxes and insurance expenses consist primarily of expenses from our investment in Cityplace Tower.September 30, 2022.March 31, 2023 compared to $0.1 million for the three months ended December 31, 2022, which was an increase of $41.0 thousand. The increase between periods was primarily due to an increase in property management fees at 5916 W Loop 289. Property management fees are primarily based on gross revenues derived primarily from our investment in Cityplace Tower.September 30, 2022,March 31, 2023, the Company incurred Administrative Fees and Advisory Fees of $2.9$3.6 million, inclusive of $0.9which excludes $0.4 million in expensesfees that were deferred to comply with the Expense Cap compared to $2.6 million for the three months ended December 31, 2022, which excludes $1.1 million in fees that were deferred to comply with the Expense Cap which was an increase of $1.0 million. The increase in periods was primarily due to a decrease in fees that were required to be deferred to comply with the Expense Cap. Should the Company’s Fees and expenses subject to the Expense Cap be less than the 1.5% limit for the twelve month period subsequent to the Deregistration Date, some or all of the deferred expenses could be recouped by the Adviser up to the Expense Cap.Corporate CorporateProperty general and administrative expenses were $1.9$0.7 million for the three months ended September 30, 2022. Corporate general and administrative expenses were primarily driven by legal fees $0.6 million and valuation fees of $0.4 million.Property general and administrative expenses. Property general and administrative expenses were $0.9March 31, 2023 compared to $(0.6) million for the three months ended September 30,December 31, 2022, which was an increase of $1.3 million. The increase between the periods was primarily due to a write-off of a related party payable at December 31, 2022. Property general and administrative expenses consist primarily of expenses from our investment in Cityplace Tower.37TableCorporate general and administrative expenses. Corporate general and administrative expenses were $1.5 million for the three months ended March 31, 2023 compared to $1.1 million for the three months ended December 31, 2022, which was an increase of Contents$0.4 million. The increase/decrease between periods was primarily driven by audit fees of $0.5 million.September 30, 2022.December 31, 2022, which was a decrease of $0.1 million. The decrease between periods was primarily due to a decrease in amortization of leases. Depreciation and amortization expenses consist primarily of expenses from our investment in Cityplace Tower. Due to the Business Change, the fair value of our real estate properties as of July 1, 2022 became the new cost basis for the Company. This change reset the depreciable basis of our properties as well as caused the recognition of new intangible lease assets. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the first year from the date of the Business Change.$2.5$3.5 million for the three months ended September 30, 2022.$1.6$0.1 million for the three months ended September 30,March 31, 2023 compared to $0.7 million for the three months ended December 31, 2022, andwhich was an increase of $0.6 million. The increase between periods was primarily driven by amortization of the basis difference on the SAFStor Ventures of approximately $1.3 million.Tax$1.0 million for the three months ended December 31, 2022.$10.8$0.9 million associated with the TRSTRSs for the three months ended September 30,March 31, 2023, compared to $2.5 million for the three months ended December 31, 2022, which was a decrease of $1.7 million. The decrease is largely driven by income from the Company’s legacy CLO investments.investments and investments in debt instruments not secured by mortgages on real property. The tax expense is partially offset by removing the quarterly change in valuation allowance on a deferred tax asset of $3.3$0.1 million for a net expense of $7.5$0.8 million for the three months ended March 31, 2023, that is recorded on the Consolidated Statement of Operations.$78.2$18.6 million for the three months ended September 30, 2022. Losses were primarilyMarch 31, 2023 compared to $13.8 million for the three months ended December 31, 2022, which was a decrease of $4.8 million. The decrease is largely driven by mark-to-market losses on NREFSFR OP unitsUnits of $36.9$4.8 million, mark-to-market losses on NHT common stock of $4.7 million and losses on our CLO equity portfolioVB OP common units of $27.2$4.6 million. Our CLO equity portfolio consists primarily$2.9$1.1 million for the three months ended September 30,March 31, 2023 compared to $(5.2) million for the three months ended December 31, 2022, drivenwhich was an increase of $6.3 million. The increase was primarily by gains on life settlement maturities of $3.4 million partially offsetdriven by a legacyrealized loss of $6.8 million on the contribution of the SAFStor Ventures to the NSP OC.was written offresult from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Equity in income (losses) of unconsolidated equity method ventures are eliminated because they do not reflect continuing operating costs of the property. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale, which will usually change from period to period. Also, expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of the property owner. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. Non-operating property investment revenue and realized and unrealized gains (losses) from non-real estate investments are eliminated as they do not reflect continuing operating costs of the properties. We believe that eliminating these items from net income (loss) is useful because the resulting measure captures the actual ongoing revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.For the Three Months Ended March 31 For the Three Months Ended December 31 2023 2022 Net loss $ (19,521) $ (22,585) Adjustments to reconcile net loss to NOI: Advisory and administrative fees 3,578 2,575 Corporate general and administrative expenses 1,496 1,142 Conversion expense 163 1,615 Income tax expense 806 2,459 Depreciation and amortization 3,524 3,614 Interest expense 3,462 3,218 Property general and administrative expenses (1) — (824) Non-operating property investment revenue (10,137) (8,901) Realized gains (losses) from non-real estate investments (1,135) 5,169 Change in unrealized gains (losses) from non-real estate investments 18,640 13,793 Equity in income (losses) of unconsolidated equity method ventures 76 676 NOI $ 952 $ 1,951 Less Non-Same Store Revenues $ (4,382) $ (5,074) Operating expenses 3,644 3,368 Same Store NOI $ 214 $ 245 For the Three Months Ended March 31 For the Three Months Ended December 31 2023 2022 $ Change % Change Revenues Same Store Rental income $ 347 $ 393 $ (46) (11.7) % Same Store revenues 347 393 (46) (11.7) % Non-Same Store Rental income 4,373 5,074 (701) (13.8) % Other income 9 0 9 — % Non-Same Store revenues 4,382 5,074 (692) (13.6) % Total revenues 4,729 5,467 (737) (13.5) % Operating expenses Same Store Property operating expenses 24 29 (5) (17.2) % Real estate taxes and insurance 82 84 (2) (2.4) % Property management fees 17 18 (1) (5.6) % Property general and administrative expenses 10 17 (7) (41.2) % Same Store operating expenses 133 148 (15) (10.1) % Non-Same Store Property operating expenses 1,482 1,834 (352) (19.2) % Real estate taxes and insurance 1,275 1,109 166 15.0 % Property management fees 153 174 (21) (12.1) % Property general and administrative expenses 733 251 482 192.0 % Non-Same Store operating expenses 3,644 3,368 276 8.2 % Total operating expenses 3,777 3,516 262 7.4 % NOI Same Store 214 245 (31) (12.7) % Non-Same Store 738 1,706 (968) N/M Total NOI $ 952 $ 1,951 $ (999) N/M For the Three Months Ended March 31, For the Three Months Ended December 31, 2023 2022 Net loss $(19,521) $(22,586) Depreciation and amortization 3,524 3,614 Realized gains (1,135) 5,169 FFO (17,132) (13,803) Distributions to preferred shareholders (1,155) (1,155) FFO attributable to common shareholders (18,287) (14,958) FFO per share - basic $ (0.49) $ (0.40) FFO per share - diluted $ (0.49) $ (0.40) — Amortization of deferred financing costs - long term debt (474) (92) Change in unrealized losses 18,640 13,793 AFFO attributable to common shareholders (121) (1,257) AFFO per share - basic $ 0.00 $ (0.03) AFFO per share - diluted $ 0.00 $ (0.03) Weighted average common shares outstanding - basic $ 37,172 $ 37,172 Weighted average common shares outstanding - diluted 37,172 37,172 Dividends declared per common share $ 0.15 $ 0.15 FFO Coverage - diluted (1) -3.28x -2.68x AFFO Coverage - diluted (1) -0.02x -0.23x Net income (loss) coverage -3.5x -4.05x ●capital expenditures to continue the ongoing development of Cityplace Tower;●interest expense and scheduled principal payments on outstanding indebtedness (see “—Obligations and Commitments” below);●recurring maintenance necessary to maintain our properties;●distributions necessary to qualify for taxation as a REIT;●income taxes for taxable income generated by the TRS;●acquisition of additional properties or investments;●advisory and administrative fees payable to our Adviser;●general and administrative expenses;●reimbursements to our Adviser; and●property management fees.September 30, 2022,March 31, 2023, we had $29.2$10.9 million of cash available to meet our short-term liquidity requirements. As of September 30, 2022,March 31, 2023, we also had $34.5$36.5 million of restricted cash held in reserve by the lender on the Cityplace debt. These reserves include escrows for property taxes and insurance, reserves for tenant improvements as well as required excess collateral.$120$190 million to $130$210 million of capital expenditures to complete the Cityplace renovation. Also, acquisitions, redevelopments, or expansions of our properties will requireSeptember 30, 2022.September 30,March 31, 2023 and December 31, 2022 (in thousands): $ 27,944 (13,545 (1,477 12,922 50,776 $ 63,698 For the Three Months Ended March 31 For the Three Months Ended December 31 2023 2022 Net cash provided by operating activities $505 $3,858 Net cash provided by (used in) investing activities 8,234 (1,244) Net cash used in financing activities (12,587) (17,663) Net decrease in cash, cash equivalents and restricted cash (3,848) (15,049) Cash, cash equivalents and restricted cash, beginning of period 48,649 63,698 Cash, cash equivalents and restricted cash, end of period $44,801 $48,649 September 30, 2022,March 31, 2023, net cash provided by operating activities was $27.9 million.$0.5 million compared to net cash provided by operating activities of $3.9 million for the three months ended December 31, 2022. The change in cash flows from operating activities was primarily due to a decrease in mark-to-market assets. Operating cash flows were primarily driven by dividends received from our CLO equity portfolio.September 30, 2022,March 31, 2023, net cash provided by investing activities was $8.2 million compared to net cash used in investing activities of $1.2 million for the three months ended December 31, 2022. The change in cash flows from investing activities was $13.6primarily due to an increase in proceeds from the sale of investments of $13.1 million. Cash flows from investing activities was primarily driven by acquisitions of new real estate investments of $26.5 million partially offset by proceeds from the redemptionsale of our Caddo Sustainable Timberlands investment of $10.9several equities for $8.1 million.September 30, 2022,March 31, 2023, net cash used in financing activities was $1.5$12.6 million compared to net cash used in financing activities of $17.7 million for the three months ended December 31, 2022. The change in cash flows from financing activities was primarily due to a decrease in prime brokerage borrowing repayments of $6.1 million. Cash flows from financing activities was primarily driven by prime brokerage borrowings of $13.3$6.4 million, offset by credit facility repayments of $9.5$3.0 million, prime brokerage repayments of $8.3 million and dividends paid to common shareholders of $5.6 million.September 30, 2022,March 31, 2023, our consolidated subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $145.3$144.1 million at a weighted average interest rate of 5.7%7.8%. See Note 7 to our unaudited consolidated financial statements for additional information. $30.0 million Credit Facility with Raymond James Bank, N.A. and drew the full balance. TheAs of March 31, 2023, the Credit Facility, as amended, bearsbore interest at one-month LIBOR plus 3.5% and matures on November 6, 2023. On March 6, 2023. The Company paid down $10.0 million2023, the interest rate on the Credit Facility during the year ended December 31, 2021.increased to one-month LIBOR plus 4.25%. During the ninethree months ended September 30, 2022,March 31, 2023, the Company paid down $6.0$3.0 million on the Credit Facility. As of September 30, 2022,March 31, 2023, the Credit Facility had an outstanding balance of $14.0$8.0 million. For additional information regarding our Credit Facility, see Note 7.September 30, 2022March 31, 2023 for the next fourfive calendar years subsequent to September 30, 2022. $ 158,510 $ 591 $ 144,669 $ - $ 13,250 $ - $ - 5,316 2,291 1,695 830 499 - - $ 163,826 $ 2,882 $ 146,364 $ 830 $ 13,749 $ - $ - $ 10,059 $ - $ - $ - $ - $ - $ 10,059 (1) 1,571 93 369 370 369 369 - (1) $ 11,630 $ 93 $ 369 $ 370 $ 369 $ 369 $ 10,059 $ - $ 1,155 $ 4,620 $ 4,620 $ 4,620 $ 4,620 N/A (2) $ 14,000 $ 3,000 $ 11,000 $ — $ — $ — $ — 333 213 120 — — — — $ 14,333 $ 3,213 $ 11,120 $ - $ - $ - $ - $ 189,789 $ 7,343 $ 162,474 $ 5,821 $ 18,738 $ 4,989 $ 10,059 (1)Assumes no additional borrowings or repayments. The Prime Brokerage balance has no stated maturity date.(2)The Series A Preferred Shares are perpetual.Payments Due by Period (in thousands) Total 2023 2024 2025 2026 2027 Thereafter Property Level Debt Principal payments $ 157,328 $ 144,078 $ — $ 13,250 $ — $ — $ — Interest expense 6,684 4,982 1,063 639 — — — Total $ 164,012 $ 149,060 $ 1,063 $ 13,889 $ — $ — $ — Prime Brokerage Borrowing Principal payments $ 736 $ — $ — $ — $ — $ — $ 736 (1) Interest expense 195 39 39 39 39 39 — (1) Total $ 931 $ 39 $ 39 $ 39 $ 39 $ 39 $ 736 Preferred Shares Dividend payments N/A (2) $ 3,465 $ 4,620 $ 4,620 $ 4,620 $ 4,620 N/A (2) Credit Facility Principal payments $ 8,000 $ 8,000 $ — $ — $ — $ — $ — Interest expense 435 435 — — — — — Total $ 8,435 $ 8,435 $ — $ — $ — $ — $ — Total contractual obligations and commitments $ 173,378 $ 161,000 $ 5,722 $ 18,548 $ 4,659 $ 4,659 $ 736 MarchNovember 6, 2023 and is subject to monthly amortization payments through the maturity date. We believe we will have adequate liquidity to pay these obligations when they come due.7,8, 2023. On February 8, 2023, the lenders agreed to defer the maturity of the debt by three months to May 8, 2023 with the possibility to extend for an additional four months to September 8, 2023 provided certain metrics are met. Also on May 8, 2023, the parties to the loan agreement agreed to convert the index upon which the interest rate is based to one-month SOFR effective as of the first interest period beginning on or after May 8, 2023. The purpose of the deferral was to allow for continued discussions around refinancing the debt. Management recognizes that finding an alternative source of funding is necessary to repay the debt by the maturity date. Management is evaluating multiple options to fund the repayment of the $145.3 million principal balance outstanding, including recasting the debt, securing additional equity or debt financing, selling a portion of the portfolio, or any combination thereof. Management believes that there is sufficient time before the maturity date and that the Company has sufficient access to capital to ensure the Company is able to meet its obligations as they become due.first $1 millionAdvisory Agreement provides that the Fees shall be paid in cash, unless the Adviser, in its sole discretion, elects to have all or a portion of the monthly installment of the Advisory Fee isFees paid in cash and the remaindercommon shares of the monthly installment, if any, is paid in our common shares,Company, subject to certain restrictions. The Administrative Fee is paidFor additional information, see Notes 14 and 17 to our unaudited consolidated financial statements.cash.connection with the services it performs for us. Direct payment of operating expenses by us together with reimbursement of operating expenses to the Adviser, plus compensation expenses relating to equity awards granted under a long-term incentive plan and all other corporate general and administrative expenses of the Company, including the Fees payable under the Advisory Agreement, may not exceed the Expense Cap of 1.5% of Managed Assets, calculated as of the end of each quarter, for the twelve-month period following the Company’s receipt of the Deregistration Order, calculated as of the end of each quarter;Order; 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 or 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; provided, further, in the event the Company consolidates another entity that it does not wholly own as a result of owning a controlling interest in such entity or otherwise, expenses will be calculated without giving effect to such consolidation and instead such entity’s expenses will, on a pro rata basis consistent with the Company’s percentage ownership, be considered those of the Company for purposes of calculation of expenses. $10.8$0.9 million associated with the TRSTRSs for the three months ended September 30, 2022,March 31, 2023, which is largely driven by income from the Company’s legacy CLO investments.investments and investments in debt instruments not secured by mortgages on real property. The tax expense is partially offset by removing the quarterly change in valuation allowance on a deferred tax asset of $3.3$0.1 million for a net expense of $7.5$0.8 million for the three months ended March 31, 2023, that is recorded on the Consolidated Statement of Operations.September 30, 2022,March 31, 2023, we believe we are in compliance with all applicable REIT requirements.September 30, 2022March 31, 2023 and to our knowledge, we have no examinations in progress and none are expected at this time.share of common stock,share, 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, investments held through our TRSs, book/tax differences on income derived from partnerships, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Our Board declared our ninth monthlya dividend of 2022 on our common shares of $0.05$0.15 per share which was paid on September 30, 2022March 31, 2023 to shareholders of record on September 19, 2022.March 15, 2023. Our Board declared our third quarterlya dividend of 2022 on our Series A Preferred Shares of $0.34375 per share which was paid on September 30, 2022March 31, 2023 to shareholders of record on September 23, 2022. Starting October 1, 2022, weMarch 24, 2023. We expect that dividends on our common shares, when, if and as declared by our Board, will be declared on a quarterly basis.September 30, 2022,March 31, 2023, we had nothe following off-balance sheet arrangements that have or are 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.Critical AccountingPoliciesEstimatesManagement’s discussiondividend payments with respect to Series D Preferred Stock of NSP, an affiliate of the Adviser, with the secured loans having an aggregate principal amount of approximately $662.1 million outstanding as of March 31, 2023. NSP is current on all debt and analysis of financial conditiondividend payments and results of operations is based upon our consolidated financial statements, which have been prepared in accordancecompliance with GAAP. all debt compliance provisions. See Note 13 for additional information.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. BelowCompany is a discussionlimited guarantor and an indemnitor on one of NHT's loans with an aggregate principal amount of $77.4 million as of March 31, 2023. The obligations include a customary environmental indemnity and a so-called "bad boy" guarantee, which is generally only applicable if and when the accounting policies that we consider critical to understanding our financial conditionborrower directly, or results of operations where there is uncertainty or where significant judgment is required.See Note 2, “Summary of Significant Accounting Policies”, for further discussion of our accounting estimates and policies.Fair Value MeasurementsFair value measurements are determined based on the assumptions that market participants would use in pricingindirectly through 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):
agreement●Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.●Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as 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 the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.The Company’s assessment of the significance ofparticular input to the fair value measurement in its entirety requires judgment and considers factors specific to the assetbankruptcy or liability. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date.Valuation of InvestmentsAs of September 30, 2022, the Company’s fair valued investments consisted of senior loans, corporate bonds, collateralized loan obligations, convertible notes, common stocks, rights, warrants, life settlement contracts, LP interests and LLC interests. The fair value of the Company’s senior loans, bonds, and collateralized loan obligations are generally based on quotes received from brokerssimilar liquidation or independent pricing services. Senior loans, bonds, and collateralized loan obligations with quotesreorganization action or takes other actions that are basedfraudulent or improper. NHT is current on actual tradesall debt payments and in compliance with a sufficient level of activity on or nearall debt compliance provisions.measurement date are classified as Level 2 assets. Senior loans, bonds, and collateralized loan obligations that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.The fair value of the Company’s common stocks, rights, and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. At the end of each calendar quarter, the Adviser evaluates the Level 2 and 3 assets and liabilities forthree months ended March 31, 2023, there have been no material changes in liquidity, including but not limited to: whether a broker is willing to execute atour critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K filed with the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Adviser evaluates the Level 1 and 2 assets and liabilitiesSEC on a quarterly basis for changes in listings or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities.The fair value of the Company’s common stocks, exchange-traded funds, other registered investment companies and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The Company’s real estate investments include equity interests in limited liability companies and equity issued by REITs that invest in commercial real estate. The fair value of real estate investments that are not actively traded on national exchanges are based on internal models developed by the Adviser. The significant inputs to the models include cash flow projections for the underlying properties, capitalization rates and appraisals performed by independent valuation firms. These inputs are not readily observable, and the Company has classified the investments as Level 3 assets. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option.The fair value of the Company’s convertible notes are categorized as Level 3 assets in the fair value hierarchy. Convertible notes are valued using a discounted cash flow model using discount rates derived from observable market data applied to the internal rate of return implied by the expected contractual cash flows.Upon initial acquisition, the Company’s life settlement contracts are recognized at the transaction price. For each subsequent reporting period, the investments are measured at fair value by a third-party valuation specialist using a life settlement pricing model and are categorized as Level 3 assets in the fair value hierarchy. Key assumptions utilized in determining fair value include but are not limited to: (i) life expectancy estimates provided by independent third party underwriters based on actuarially developed mortality tables and industry life expectancy reports; (ii) future premium estimates; (iii) rates of return consistent with those sought by independent purchasers of life policies at the time of purchase; and (iv) offers and/or commitments from purchasers. In addition, the valuation agent will also consider recent sales as well as offers received for the life policies deemed likely to close in the near future in estimating fair value.43The assumptions used to value life policies are by nature, inherently uncertain and the effect of changes in estimates may be material. The fair value measurement used in estimating the present value calculations are derived from valuation techniques that include inputs that are not based on observable market data. Changes in the fair value of the life settlement contracts are reported as net unrealized gains or losses on the Consolidated Statement of Operations (Successor Basis). Upon the death of an insured or the sale of a life policy, the Company will recognize the difference between the proceeds received and the cost of the life policy as a realized gain or loss in the Company's Consolidated Statement of Operations (Successor basis).Purchase Price AllocationUpon acquisition of a property considered to be an asset acquisition, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets based on relative fair value in accordance with FASB ASC 805, Business Combinations. Acquisition costs related to asset acquisitions are capitalized in accordance with FASB ASC 805.The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (see Note 9 to our consolidated financial statements), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.ImpairmentReal estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, we will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. The Company’s impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment.Inflation significantly by inflation in the past several years due to increases in rents nationwide. Our lease terms are generally for a period of one year or more and rental rates reset to market if renewed. The majority of our leases also contain protection provisions applicable to reimbursement billings for utilities.Currently, theThe Federal Reserve has recently started raising interest rates to combat inflation and restore price stability and is expected to continue to raising interest rates in response to or in anticipation of continued inflation concerns. We intend to mitigate these risks through long-term fixed interest rate loans and interest rate hedges.Code and expect to continue to qualify as a REIT.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 shareholders. Taxable income from certain non-REIT activities isare managed through aone or more TRS entities and is subject to applicable federal, state, and local income and margin taxes. The Company has recorded a current income tax expense of $10.8$0.9 million associated with the TRSTRSs for the three months ended September 30, 2022,March 31, 2023, which is largely driven by income from the Company’s legacy CLO investments.investments and investments in debt investments not secured by mortgages on real property. The tax expense is partially offset by removingthe quarterly change in the valuation allowance on a deferred tax asset of $3.3$0.1 million for a net expense of $7.5$0.8 million for the three months ended March 31, 2023, that is recorded on the Consolidated Statement of Operations. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.44September 30, 2022,March 31, 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 effective as of September 30, 2022,March 31, 2023, 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.September 30, 2022March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.None for the three months ended September 30, 2022.None.46TableOn May 8, 2023, the Company, CP Tower, CP Land, CP Equity Owner, LLC, CP Equity Land Owner, LLC, NexPoint Real Estate Partners, Delphi CRE Funding LLC, ACORE Credit IV REIT II SPV, LLC, ACORE Credit IV (Offshore) SPV II, LLC and ACORE Capital Mortgage, LP entered into the Amendment Agreement, amending the Loan Agreement pursuant to which the lenders party thereto made a loan in an original principal amount of Contents$153.7 million to CP Tower and CP Land secured by a mortgage interest in Cityplace Tower in Dallas, Texas. Prior to the execution of the Amendment Agreement, the maturity date for borrowings under the Loan Agreement was May 8, 2023. The Amendment Agreement defers the maturity date to September 8, 2023.ExhibitNumberDescriptionExhibit
NumberDescription 3.110.1 3.23.310.1*10.2*10.3*10.410.510.3* 10.4* 10.5 31.1*31.1* 32.1+104*4760SignatureTitleDateSignature Title Date /s/ Jim Dondero November 14, 2022
Treasurer, and Assistant SecretaryNovember 14, 2022
Accounting Officer)4861