NEXPOINT DIVERSIFIED REAL ESTATE TRUST [NXDT] Filings

10-Q 1 nxdt-20240630.htm 10-Q nxdt-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________________________________________

FORM 10-Q

_____________________________________________________________________________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-32921

_____________________________________________________________________________________

NexPoint Diversified Real Estate Trust

(Exact Name of Registrant as Specified in Its Charter)

_____________________________________________________________________________________


Delaware			80-0139099
(State or other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)


300 Crescent Court, Suite 700, Dallas, Texas (Address of Principal Executive Offices)			75201 (Zip Code)

(214) 276-6300

(Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Shares, par value $0.001 per share

NXDT

New York Stock Exchange

5.50% Series A Cumulative Preferred Shares, par value
$0.001 per share ($25.00 liquidation preference per share)

NXDT-PA

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

☒

Non-Accelerated Filer

Smaller reporting company

☒

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 9, 2024, the registrant had 40,650,118 common shares, par value $0.001 per share, outstanding.

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST

Form 10-Q

Quarter Ended June 30, 2024

INDEX


		Page
Cautionary Statement Regarding Forward Looking Statements		ii

	PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2024 (Unaudited) and December 31, 2023	1
	Consolidated Unaudited Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2024 and 2023	2
	Consolidated Unaudited Statements of Shareholder's Equity for the Three and Six Months Ended June 30, 2024 and 2023	3
	Consolidated Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023	7
	Notes to Consolidated Unaudited Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	47
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
Item 4.	Controls and Procedures	74

	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sale of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	81
Item 3.	Defaults Upon Senior Securities	81
Item 4.	Mine Safety Disclosures	81
Item 5.	Other Information	81
Item 6.	Exhibits	82
Signatures		84

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Cautionary Statement Regarding Forward-Looking Statements

This quarterly report (this "Quarterly Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. In particular, statements relating to our liquidity and capital resources, our performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions and demographics) are forward-looking statements. We caution investors that any forward-looking statements presented in this Quarterly Report are based on management’s current beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” "plan," "potential," “estimate,” “project,” "target," “should,” “will,” “would,” “result,” "goal," "could," "future," "continue," "if," the negative version of these words and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

•Unfavorable changes in economic conditions and their effects on the real estate industry generally and our operations and financial condition, including inflation, rising or high interest rates, tightening monetary policy or recession, which may limit our ability to access funding and generate returns for shareholders;

•Our loans and investments expose us to risks similar to and associated with real estate investments generally;

•Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us;

•Risks associated with the ownership of real estate, including dependence on tenants and compliance with laws and regulations related to ownership of real property;

•Risks associated with our investment in diverse issuers, industries and investment forms and classes, both in real estate and in non-real estate sectors, including common equity, preferred equity, options or other derivatives, short sale contracts, secured loans of securities, reverse repurchase agreements, structured finance securities, below investment grade senior loans, bonds, convertible instruments, joint ventures, and emerging markets;

•Fluctuations in interest rate and credit spreads, could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments;

•The use of leverage to finance our investments;

•Risks associated with our loans and investments in debt instruments including, senior loans, mezzanine loans, collateralized loan obligations ("CLOs"), and structured finance securities;

•Our loans and investments are concentrated in terms of type of interest, geography, asset types, industry and sponsors and may continue to be so in the future;

•We have a substantial amount of indebtedness which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs;

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•We have limited operating history as a standalone company and may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our shareholders;

•We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of NexPoint Advisors, L.P. (“NexPoint” or our “Sponsor”), members of the NexPoint Real Estate Advisors X, L.P. (our “Adviser”) management team or their affiliates.

•We are dependent upon our Adviser and its affiliates to conduct our day-to-day operations; thus, adverse changes in their financial health or our relationship with them could cause our operations to suffer;

•Our Adviser and its affiliates face conflicts of interest, including significant conflicts created by our Adviser’s compensation arrangements with us, including compensation which may be required to be paid to our Adviser if our advisory agreement is terminated, which could result in decisions that are not in the best interests of our shareholders;

•We pay substantial fees and expenses to our Adviser and its affiliates, which payments increase the risk that you will not earn a profit on your investment;

•If we fail to qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes, cash available for distributions to be paid to our shareholders could decrease materially, which would limit our ability to make distributions to our shareholders; and

•Any other risks included under Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2024.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this Quarterly Report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

iii

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value amounts)


	June 30, 2024 (Unaudited)		December 31, 2023

ASSETS
Consolidated Real Estate Investments
Land	$	70,381	$	47,708
Buildings and improvements	336,269		206,213
Intangible lease assets	10,979		10,979
Construction in progress	25,935		19,177
Furniture, fixtures, and equipment	13,134		362
Right-of-use assets	1,465		—
Total Gross Consolidated Real Estate Investments	458,163		284,439
Accumulated depreciation and amortization	(27,123)		(20,525)
Total Net Consolidated Real Estate Investments	431,040		263,914
Investments, at fair value ($505,599 and $533,065 with related parties, respectively)	655,644		691,238
Equity method investments ($6,948 and $7,079 with related parties, respectively)	63,518		66,263

Cash and cash equivalents	28,372		20,608
Restricted cash	45,935		32,561
Accounts receivable, net	4,029		4,347
Prepaid and other assets	12,748		10,431
Accrued interest and dividends	4,546		6,078
Interest rate caps	815		—
Deferred tax asset, net	3,086		2,896
Total Assets	$	1,249,733	$	1,098,336

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable, net	$	252,580	$	142,186
Notes payable, net ($70,980 and $20,000 with related party, respectively)	101,085		52,919
Prime brokerage borrowing	1,349		1,782
Accounts payable and other accrued liabilities	19,990		8,633
Income tax payable	—		356
Accrued real estate taxes payable	2,035		231
Accrued interest payable	7,877		1,398
Security deposit liability	422		422
Prepaid rents	1,354		768
Intangible lease liabilities, net	3,975		4,567

Total Liabilities	$	390,667	$	213,262

Shareholders' Equity:
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; 40,650,118 and 38,389,600 shares issued and outstanding, respectively	41		38
Additional paid-in capital	1,025,144		1,011,613
Accumulated earnings (loss)	(171,101)		(126,580)
Noncontrolling interests	4,979		—
Total Shareholders' Equity	859,066		885,074

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,249,733	$	1,098,336

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30
	2024		2023		2024		2023
Revenues
Rental income	$	3,985	$	5,417	$	8,032	$	10,137
Rooms	8,200		—		8,200		—
Food and beverage	812		—		812		—
Interest income ($584, $692, $1,066 and $1,317 with related parties, respectively)	1,708		1,751		3,390		3,769
Dividend income ($6,948, $6,438, $13,853 and $12,864 with related parties, respectively)	7,196		6,690		14,245		14,809
Other income	373		22		400		31
Total revenues	22,274		13,880		35,079		28,746
Expenses
Property operating expenses	6,756		2,520		8,333		4,026
Property management fees	185		191		361		362
Real estate taxes and insurance	1,775		1,340		3,014		2,697
Advisory and administrative fees	3,443		1,660		6,689		5,238
Property general and administrative expenses	2,225		1,025		2,892		1,768
Corporate general and administrative expenses	3,195		2,252		6,030		3,748
Conversion expenses	—		1,281		—		1,444
Depreciation and amortization	4,102		3,584		6,898		7,108
Total expenses	21,681		13,853		34,217		26,391
Operating income (loss)	593		27		862		2,355
Interest expense	(7,851)		(3,762)		(12,382)		(7,224)
Equity in income (losses) of unconsolidated equity method ventures ($156, $209, $370 and $421 with related parties, respectively)	196		422		(958)		346
Change in unrealized gains (losses) ($3,295, $(1,303), $(12,381) and $(17,311) with related parties, respectively)	(3,154)		(9,332)		3,136		(27,972)
Realized gains (losses)	(3)		(914)		(21,875)		221

Net income (loss) before income taxes	(10,219)		(13,559)		(31,217)		(32,274)
Income tax expense	(303)		(308)		(853)		(1,114)
Net income (loss)	(10,522)		(13,867)		(32,070)		(33,388)
Net (income) loss attributable to preferred shareholders	(1,155)		(1,155)		(2,310)		(2,310)
Net (income) loss attributable to noncontrolling interests	1,894		—		1,894		—
Net income (loss) attributable to common shareholders	$	(9,783)	$	(15,022)	$	(32,486)	$	(35,698)

Weighted average common shares outstanding - basic	39,616		37,172		39,094		37,172
Weighted average common shares outstanding - diluted	39,616		37,172		39,094		37,172

Earnings (loss) per share - basic	$	(0.24)	$	(0.40)	$	(0.83)	$	(0.96)
Earnings (loss) per share - diluted	$	(0.24)	$	(0.40)	$	(0.83)	$	(0.96)

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

(Unaudited)


	Preferred Shares			Common Shares			Additional Paid-in Capital		Accumulated Earnings (Loss)		Noncontrolling Interest		Total
Three Months Ended June 30, 2024	Number of Shares	Amount		Number of Shares	Amount
Balances, March 31, 2024	3,359,593	$	3	39,301,419	$	39	$	1,018,136	$	(155,155)	$	—	$	863,023
Noncontrolling interests from NHT Acquisition	—	—		—	—		—		—		6,873		6,873
Vesting of stock-based compensation	—	—		145,433	—		900		—		—		900
Shares issued to Adviser for admin and advisory fees	—	—		208,117	1		1,353		—		—		1,354
Net loss attributable to common shareholders	—	—		—	—		—		(9,783)		—		(9,783)
Net loss attributable to noncontrolling interests	—	—		—	—		—		—		(1,894)		(1,894)
Net income attributable to preferred shareholders	—	—		—	—		—		1,155		—		1,155
Common stock dividends declared ($0.15 per share)	—	—		995,149	1		4,755		(6,163)		—		(1,407)
Preferred stock dividends declared ($0.34375 per share)	—	—		—	—		—		(1,155)		—		(1,155)
Balances, June 30, 2024	3,359,593	$	3	40,650,118	$	41	$	1,025,144	$	(171,101)	$	4,979	$	859,066

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

(Unaudited)


	Preferred Shares			Common Shares			Additional Paid-in Capital		Accumulated Earnings (Loss)		Noncontrolling Interest		Total
Six Months Ended June 30, 2024	Number of Shares	Amount		Number of Shares	Amount
Balances, December 31, 2023	3,359,593	$	3	38,389,600	$	38	$	1,011,613	$	(126,580)	$	—	$	885,074
Noncontrolling interests from NHT Acquisition	—	—		—	—		—		—		6,873		6,873
Stock-based compensation expense	—	—		145,433	—		1,447		—		—		1,447
Shares issued to Adviser for admin and advisory fees	—	—		378,038	1		2,704		—		—		2,705
Net loss attributable to common shareholders	—	—		—	—		—		(32,486)		—		(32,486)
Net loss attributable to noncontrolling interests	—	—		—	—		—		—		(1,894)		(1,894)
Net income attributable to preferred shareholders	—	—		—	—		—		2,310		—		2,310
Common share dividends declared ($0.30 per share)	—	—		1,737,047	2		9,380		(12,035)		—		(2,653)
Preferred share dividends declared ($0.68750 per share)	—	—		—	—		—		(2,310)		—		(2,310)
Balances, June 30, 2024	3,359,593	$	3	40,650,118	$	41	$	1,025,144	$	(171,101)	$	4,979	$	859,066

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

(Unaudited)


	Preferred Shares			Common Shares			Additional Paid-in Capital		Accumulated Earnings (Loss)		Total
Three Months Ended June 30, 2023	Number of Shares	Amount		Number of Shares	Amount
Balances, March 31, 2023	3,359,593	$	3	37,171,807	$	37	$	999,845	$	(8,304)	$	991,581

Vesting of stock-based compensation	—	—		—	—		436		—		436

Net loss attributable to common shareholders	—	—		—	—		—		(15,022)		(15,022)
Net income attributable to preferred shareholders	—	—		—	—		—		1,155		1,155
Common share dividends declared ($0.15 per share)	—	—		—	—		—		(5,666)		(5,666)
Preferred share dividends declared ($0.34375 per share)	—	—		—	—		—		(1,155)		(1,155)
Balances, June 30, 2023	3,359,593	$	3	37,171,807	$	37	$	1,000,281	$	(28,992)	$	971,329

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

(Unaudited)


	Preferred Shares			Common Shares			Additional Paid-in Capital		Accumulated Earnings (Loss)		Total
Six Months Ended June 30, 2023	Number of Shares	Amount		Number of Shares	Amount
Balances, December 31, 2022	3,359,593	$	3	37,171,807	$	37	$	999,845	$	17,947	$	1,017,832

Vesting of stock-based compensation	—	—		—	—		436		—		436

Net loss attributable to common shareholders	—	—		—	—		—		(35,698)		(35,698)
Net loss attributable to preferred shareholders	—	—		—	—		—		2,310		2,310
Common stock dividends declared ($0.30 per share)	—	—		—	—		—		(11,241)		(11,241)
Preferred stock dividends declared ($0.68750 per share)	—	—		—	—		—		(2,310)		(2,310)
Balances, June 30, 2023	3,359,593	$	3	37,171,807	$	37	$	1,000,281	$	(28,992)	$	971,329

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Six Months Ended June 30,
	2024		2023
Cash flows from operating activities
Net loss	$	(32,070)	$	(33,388)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	6,898		7,108
Amortization of intangible lease assets and liabilities	(525)		(581)
Amortization of deferred financing costs	447		244
Amortization of fair value adjustment of assumed debt	286		—
Paid-in-kind interest ($(2,613) and $0 with related parties, respectively)	(4,748)		(1,961)
Proceeds from paid-in-kind interest on paydowns or sales from investments	2,272		—
Net cash received on derivative settlements	330		—
Realized (gain) loss	21,875		(221)
Net change in unrealized (gain) loss on investments held at fair value ($12,381 and $17,311 with related parties, respectively)	(3,136)		27,972
Unrealized (gain) loss on interest rate derivatives	(81)		—
Equity in (income) losses of unconsolidated ventures ($(370) and $421 with related parties, respectively)	958		(346)
Distributions of earnings from unconsolidated ventures ($502 and $386 with related parties, respectively)	1,787		1,412
Stock-based compensation expense	1,779		436
Cash paid for life settlement premiums	—		(2,532)
Equity security dividends reinvested ($(4,185) and $0 with related parties, respectively)	(4,258)		—
Deferred tax (benefit) expense	(190)		264
Changes in operating assets and liabilities, net of effects of acquisitions:
Income tax payable	(356)		(10,720)
Real estate taxes payable	571		2,008
Operating assets	(567)		(5,064)
Operating liabilities	681		(5,480)
Net cash used in operating activities	(8,047)		(20,849)

Cash flows from investing activities
Proceeds from asset redemptions ($1,700 and $0 with related parties, respectively)	1,700		—
Distributions from CLO investments	1,266		—
Proceeds from sale of investments	2,437		25,084
Proceeds from paydowns of investments	5,977		—
Net cash acquired in acquisition of NexPoint Hospitality Trust	42,749		—
Purchases of investments ($(6,632) and $0 with related parties, respectively)	(6,862)		(2,102)

Additions to consolidated real estate investments	(5,045)		(7,348)


Proceeds from life settlement policy maturities	—		2,999
Net cash provided by investing activities	42,222		18,633

Cash flows from financing activities
Proceeds received from notes payable	—		20,000
Mortgage payments	(4,121)		(1,182)
Prime brokerage borrowing	155		9,922
Credit facilities payments	(3,000)		(6,000)
Prime brokerage payments	(588)		(10,428)
Deferred financing costs paid	(385)		(403)
Payments for taxes related to net share settlement of stock-based compensation	(332)		—
Dividends paid to preferred shareholders	(2,310)		(2,310)
Dividends paid to common shareholders	(2,456)		(11,241)
Net cash used in financing activities	(13,037)		(1,642)

Net increase (decrease) in cash, cash equivalents and restricted cash	21,138		(3,858)
Cash, cash equivalents and restricted cash, beginning of period	53,169		48,649
Cash, cash equivalents and restricted cash, end of period	$	74,307	$	44,791

Supplemental Disclosure of Cash Flow Information
Interest paid	$	5,903	$	7,053
Income tax paid	$	—	$	13,700
Supplemental Disclosure of Noncash Activities
Non-cash dividend payment	$	9,384	$	—

Non-cash advisory fee payment	$	2,705	$	—
Increase in dividends payable upon vesting of restricted stock units	$	197	$	—
Real estate investments assumed in acquisition of NexPoint Hospitality Trust	$	(167,624)	$	—
Investments at fair value assumed in acquisition of NexPoint Hospitality Trust	$	(5,000)	$	—
Interest rate caps assumed in acquisition of NexPoint Hospitality Trust	$	(1,064)	$	—
Notes payable assumed in acquisition of NexPoint Hospitality Trust	$	50,694	$	—
Mortgages payable assumed in acquisition of NexPoint Hospitality Trust	$	114,640	$	—
Right of use assets assumed in acquisition of NexPoint Hospitality Trust	$	(1,465)	$	—

Accrued interest payable assumed in acquisition of NexPoint Hospitality Trust	$	6,353	$	—
Noncontrolling interests assumed in acquisition of NexPoint Hospitality Trust	$	6,873	$	—

Deconsolidated investments at fair value from the acquisition of NexPoint Hospitality Trust	$	24,981	$	—


Accounts receivable and other assets assumed in acquisition of NexPoint Hospitality Trust	$	(1,305)	$	—
Prepaid assets and other assets assumed in acquisition of NexPoint Hospitality Trust	$	(1,492)	$	—
Accounts payable and other liabilities assumed in acquisition of NexPoint Hospitality Trust	$	14,276	$	—

Real estate taxes payable assumed in acquisition of NexPoint Hospitality Trust	$	1,233	$	—
Fair value assets acquired from equity security dividends reinvested	$	4,258	$	—
Change in capitalized construction costs included in accounts payable and other accrued liabilities	$	(410)	$	—

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

NexPoint Diversified Real Estate Trust (the "Company", "we", "us", or "our") was formed in Delaware and has elected to be taxed as a real estate investment trust (a “REIT”). Substantially all of the Company’s business is conducted through NexPoint Diversified Real Estate Trust Operating Partnership, L.P. (the "OP"), the Company’s operating partnership. The Company conducts its business (the "Portfolio") through the OP and its wholly owned taxable REIT subsidiaries ("TRSs"). The Company's wholly owned subsidiary, NexPoint Diversified Real Estate Trust OP GP, LLC (the "OP GP"), is the sole general partner of the OP. As of June 30, 2024, there were 2,000 partnership units of the OP (the “OP Units”) outstanding, of which 100.0% were owned by the Company.

On July 1, 2022 (the “Deregistration Date”), the Securities and Exchange Commission (the “SEC”) issued an order pursuant to Section 8(f) of the Investment Company Act of 1940 (the “Investment Company Act”) declaring that the Company has ceased to be an investment company under the Investment Company Act (the “Deregistration Order”). The issuance of the Deregistration Order enabled 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”).

The Company is externally managed by NexPoint Real Estate Advisors X, L.P. (the “Adviser”), through an agreement dated July 1, 2022, amended on October 25, 2022, April 11, 2023 and July 22, 2024 (the “Advisory Agreement”), by and among the Company and the 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 had no employees as of June 30, 2024. All of the Company’s investment decisions are made by the Adviser, subject to general oversight by the Adviser’s investment committee and our board of trustees (the “Board”). The Adviser is wholly owned by NexPoint Advisors, L.P. (the “Sponsor” or “NexPoint”).

As a diversified REIT, the Company’s primary investment objective is to provide both current income and capital appreciation. The Company seeks to achieve this objective through the Business Change. Target underlying property types primarily include, but are not limited to, single-family rentals, multifamily, self-storage, life science, office, industrial, hospitality, net lease and retail. The Company may, to a limited extent, hold, acquire or transact in certain non-real estate securities.

2. Asset Acquisition

NHT Acquisition

On April 10, 2024, NexPoint Real Estate Partners, LLC (“NREP”), an entity advised by an affiliate of the Adviser, and Highland Capital Management, L.P. (“Highland”), a third party, entered into a Purchase Agreement ("Purchase Agreement") whereby Highland agreed to sell, among other things, 2,176,257 units of NexPoint Hospitality Trust (“NHT”) (the “NHT Units”) to NREP. The Purchase Agreement was funded in part by cash of $0.8 million provided to NREP by the Company that was allocated for the sale of the NHT Units. Then on April 19, 2024, the Company, NexPoint Real Estate Opportunities, LLC ("NREO"), a wholly owned subsidiary of the Company, and NREP entered into an Assignment of Interests Agreement whereby NREP distributed, assigned, conveyed, transferred, set over, and delivered to NREO its right to purchase the NHT Units under the Purchase Agreement and all of its rights, title and interest in, to and under the NHT Units, including all voting, consent and financial rights, free and clear of all liens and encumbrances (the “NHT Acquisition”). As a result, the Company owned 53.65% of the outstanding NHT Units and was determined to hold the controlling financial interest in NHT and as a result consolidated NHT. The NHT Acquisition was accounted for as an asset acquisition under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations.

Because the Company does not wholly own NHT, the Company recognized a noncontrolling interest of $6.9 million, which was recorded at fair value when the controlling financial interest was acquired. The Company also recorded an unrealized gain on its previously held interest in NHT of $3.9 million.

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The accumulated cost of the acquisition was allocated to the acquired assets and liabilities based on their relative fair values as follows:


Description
Land	$	22,673
Buildings and improvements	128,616

Construction in progress	3,613
Furniture, fixtures, and equipment	12,722
Investments, at fair value	5,000
Cash and cash equivalents	38,467
Restricted cash	5,065
Prepaid and other assets	4,001
Right-of-use asset	1,465
Interest-rate cap	1,064
Mortgages payable	(114,640)
Notes payable	(70,529)
Accounts payable and other accrued liabilities	(21,826)
Accrued real estate taxes	(1,233)
Identifiable Net Assets Acquired	$	14,458

3. Summary of Significant Accounting Policies

Basis of Accounting

Readers of this Quarterly Report on Form 10-Q ("Quarterly Report") should refer to the audited financial statements and notes to consolidated financial statements of the Company for the year ended December 31, 2023, which are included in our 2023 Annual Report on Form 10-K ("202 3 Annual Report"), filed with the SEC and also available on our website (nxdt.nexpoint.com), since we have omitted from this Quarterly Report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to Note 2, Summary of Significant Accounting Policies, in the notes to consolidated financial statements in our 2023 Annual Report for further discussion of our significant accounting policies and estimates. Information contained on, or accessible through, our website is not incorporated by reference into and does not constitute a part of this Quarterly Report or any other report or documents we file or furnish with the SEC.

Income Taxes

I.Canadian mutual fund status

NHT is a mutual fund trust pursuant to the Income Tax Act (Canada) (the “Tax Act”). Under current tax legislation, a mutual fund trust that is not a specified investment flow-through trust (“SIFT”) pursuant to the Tax Act generally is entitled to deduct distributions of taxable income such that it is not liable to pay Canadian income taxes provided that its taxable income is fully distributed to unitholders. NHT intends to qualify as a mutual fund trust that is not a SIFT and to make distributions not less than the amount necessary to ensure that NHT will not be liable to pay Canadian income taxes.

II.U.S REIT Status

The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code"), and expects to continue to qualify as a REIT. 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

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amount by which distributions it pays with respect to any calendar year are less than the sum of (1) 85% of its ordinary income, (2) 95% of its capital gain net income and (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.

If the Company fails to meet these requirements, it could be subject to federal income tax on all of the Company’s taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to shareholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless the Company is entitled to relief under specific statutory provisions. As of June 30, 2024, the Company believes it is in compliance with all applicable REIT requirements.

As a REIT for U.S. federal income tax purposes, the Company may deduct earnings distributed to shareholders against the income generated by our REIT operations. The Company continues to be subject to income taxes on the income of its taxable REIT subsidiaries. Our consolidated net loss before income taxes was $10.2 million and $13.6 million for the three months ended June 30, 2024 and 2023, respectively. Our consolidated net loss before income taxes was $31.2 million and $32.3 million for the six months ended June 30, 2024 and 2023, respectively. The Company’s Consolidated Balance Sheet as of June 30, 2024 consists of a $4.8 million net deferred tax asset at NHF TRS, LLC, a $1.7 million net deferred tax liability at NREO TRS, Inc., a $6.0 million gross deferred tax asset at NHT's TRSs, a gross deferred tax liability of $0.0 million at NHT's TRSs, and a valuation allowance of $6.0 million at NHT's TRSs for a consolidated net deferred tax asset of $3.1 million. The Company's Consolidated Balance Sheet as of December 31, 2023 consisted of a $4.5 million net deferred tax asset at NHF TRS, LLC and a $1.6 million net deferred tax liability at NREO TRS, Inc. for a consolidated net deferred tax asset of $2.9 million.

The Company’s tax provision for interim periods is determined using an estimate of its annual current and deferred effective tax rates, adjusted for discrete items. Our effective tax rates for the three months ended June 30, 2024 and 2023 were (2.97)% and (2.27)%, respectively. Our effective tax rates for the six months ended June 30, 2024 and 2023 were (2.73)% and (3.45)%, respectively. Our effective tax rate differs from the U.S. federal statutory corporate tax rate of 21.0% primarily due to our REIT operations generally not being subject to federal income taxes.

The Company recognizes its tax positions and evaluates them using a two-step process. First, the Company determines whether a tax position is more-likely-than-not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of June 30, 2024 and 2023. The Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2023, 2022, 2021 and 2020 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 to uncertain tax positions on its Consolidated Statement of Operations and Comprehensive Income (Loss). The Company has not recorded any uncertain tax positions for the six months ended June 30, 2024 and 2023.

A reconciliation of the statutory income tax provisions to the effective income tax provisions for the periods indicated is as follows (in thousands):


	For the Period Ended June 30,
	2024				2023
Expected tax at statutory rate	$	(6,556)	21.0	%	$	(6,778)	21.0	%
Non-taxable REIT income	7,600		-24.3	%	7,628		-23.6	%

Change in valuation allowance	(191)		0.6	%	264		-0.8	%
Total provision	$	853	-2.7	%	$	1,114	-3.5	%

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Segment Reporting

Under the provision of ASC 280, Segment Reporting, the Company has determined that it has two reportable segments: NXDT and NHT. The NXDT segment primarily consists of activities focused 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 majority of NXDT’s revenue comprise of Rental income, Dividend income, and Interest income. The NHT segment primarily consists of acquiring additional U.S. located hospitality assets that meet its investment objectives and criteria and seeking to own, renovate and operate its portfolio of income-producing hotel properties. The majority of NHT’s revenue is comprised of revenue from renting rooms and selling food and beverages ("F&B"). Our chief operating decision maker (“CODM”) regularly reviews the performance of our segments based in part on the Net Operating Income (“NOI”). We eliminate any inter-segment transactions and balances upon consolidation.

Leases

The Company’s leasing activities are accounted for under ASC 842, Leases, if an identified contract is, or contains, a lease.

Lessors classify leases as either sales-type, direct financing or operating leases. A lease is classified as a sales-type lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonabl

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