NEXPOINT DIVERSIFIED REAL ESTATE TRUST [NXDT] Filings

10-Q 1 nexsof20220930_10q.htm FORM 10-Q nexsof20220930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

☐	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

5.50% Series A Cumulative Preferred Shares, par value

$0.001 per share ($25.00 liquidation preference per share)

NXDT

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 ☒ No ☐

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 ☒ No ☐

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. ☐

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

As of November 14, 2022, the registrant had 37,171,807 common shares, par value $0.001 per share, outstanding.

Table of Contents

NEXPOINT DIVERSIFIED REAL ESTATE TRUST

Form 10-Q

Quarter Ended September 30, 2022

INDEX

		Page
Cautionary Statement Regarding Forward-Looking Statements		ii

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheet as of September 30, 2022 (unaudited)	1
	Consolidated Statement of Assets and Liabilities as of December 31, 2021 (predecessor basis)	2
	Consolidated Unaudited Statement of Operations and Comprehensive Income (Loss) for the Three Months Ended September 30, 2022	3
	Consolidated Unaudited Statement of Operations for the Six Months Ended June 30, 2022 (predecessor basis)	4
	Consolidated Unaudited Statements of Operations for the Three and Nine Months Ended September 30, 2021 (predecessor basis)	5
	Consolidated Unaudited Statement of Shareholders’ Equity for the Three Months Ended September 30, 2022	6
	Consolidated Unaudited Statement of Changes in Net Assets for the Six Months Ended June 30, 2022 (predecessor basis)	7
	Consolidated Unaudited Statements of Changes in Net Assets for the Three and Nine Months Ended September 30, 2021 (predecessor basis)	8
	Consolidated Unaudited Statement of Cash Flows for the Three Months Ended September 30, 2022	9
	Consolidated Unaudited Statement of Cash Flows for the Six Months Ended June 30, 2022 (predecessor basis)	11
	Consolidated Unaudited Statement of Cash Flows for the Nine Months Ended September 30, 2021 (predecessor basis)	12
	Notes to Consolidated Unaudited Financial Statements	13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
Signatures		48

Table of Contents

Cautionary Statement Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s current expectations, assumptions and beliefs. Forward-looking statements can often be identified by words such as “enable,” “proceed”, “focus,” “will,” “intend,” “expect” and similar expressions, and variations or negatives of these words. They are not guarantees of future results and forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. Actual results may vary materially from those contained in forward-looking statements based on a number of factors including, without limitation, (1) risks related to the real estate industry, including (a) changes in general economic and market conditions; (b) changes in the value of real estate properties; (c) risks related to local economic conditions, overbuilding and increased competition; (d) increases in property taxes and operating expenses; (e) changes in zoning laws; (f) casualty and condemnation losses; (g) variations in rental income, neighborhood values or the appeal of property to tenants; (h) the availability of financing; (i) changes in interest rates and leverage and (j) recessions or general economic downturn where properties are located and (2) risks related to non-diversification and other focused strategies, including that a significant amount of the our investments could be invested in the instruments of only a few companies or other issuers or that at any particular point in time one investment strategy could be more heavily weighted than the others. Readers should not place undue reliance on any forward-looking statements and are encouraged to review our filings with the Securities and Exchange Commission (the “SEC”) for a more complete discussion of risks and other factors that could affect any forward-looking statement. The statements made herein speak only as of the date of this report and except as required by law, we do not undertake any obligation to publicly update or revise any forward-looking statements.

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in thousands, except share and par value amounts)

(Unaudited)

	September 30, 2022

ASSETS
Operating Real Estate Investments
Land	$	47,708
Buildings and improvements		161,695
Intangible lease assets		10,979
Construction in progress		43,973
Furniture, fixtures, and equipment		354
Total Gross Operating Real Estate Investments		264,709
Accumulated depreciation and amortization		(3,630	)
Total Net Operating Real Estate Investments		261,079
Investments, at fair value		704,475
Equity method investments		141,373
Life insurance policies, at fair value		66,150
Cash and cash equivalents		29,211
Restricted cash		34,487
Accounts receivable, net		8,278
Prepaid and other assets		6,172
Accrued interest and dividends		3,653
TOTAL ASSETS	$	1,254,878

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable, net	$	144,913
Notes payable, net		27,250
Prime brokerage borrowing		10,059
Accounts payable and other accrued liabilities		11,521
Accrued real estate taxes payable		3,432
Accrued interest payable		820
Security deposit liability		449
Prepaid rents		2,077
Intangible lease liabilities, net		6,399
Due to affiliates		901
Total Liabilities		207,821

Shareholders' Equity:
Preferred shares, $0.001 par value: 4,800,000 shares authorized; 3,359,593 shares issued and outstanding		3
Common shares, $0.001 par value: unlimited shares authorized; 37,171,807 shares issued and outstanding		37
Additional paid-in capital		998,465
Accumulated earnings less dividends		48,552
Total Shareholders' Equity		1,047,057
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,254,878

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES (Predecessor Basis)

(in thousands, except per share amounts)

	December 31, 2021
Assets:
Investments, at fair value (a)	$	169,884
Affiliated investments, at fair value		872,101
Total investments, at fair value		1,041,985
Cash and cash equivalents		2,238
Restricted cash - securities sold short		440
Foreign tax reclaim receivable		1,250
Receivable for:
Due from custodian		192
Other assets		277
Company shares sold		209
Dividends and interest		913
Prepaid expenses and other assets		510
TOTAL ASSETS	$	1,048,014

Liabilities:
Notes payable	$	42,500
Due to custodian		110
Securities sold short, at value		430
Due to broker		9,188
Payable for:
Investment advisory fees		1,005
Interest expense and commitment fee		63
Accounting services fees		72
Accrued expenses and other liabilities		186
Total Liabilities		53,554

Mezzanine equity
Series A cumulative preferred shares, net of deferred financing costs		(83,252	)
Net assets applicable to common shares	$	911,208

Net assets consist of:
Paid-in capital in excess of par	$	913,920
Total accumulated loss		(2,712	)
Net assets applicable to common shares	$	911,208

Investments, at cost	$	279,216
Affiliated investments, at cost		828,659
Cash equivalents, at cost		2,157
Proceeds from securities sold short		765

Common Shares
Net assets	$	911,208
Shares outstanding (unlimited authorization)		37,080
Net asset value per share (net assets/shares outstanding)	$	24.57

(a) includes fair value of securities on loan of $1,248

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

(Unaudited)

	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	)

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS (Predecessor Basis)

(in thousands, except per share amounts)

(Unaudited)

	For the six months ended June 30,
	2022
Investment income:
Income:
Dividends from unaffiliated issuers	$	60,178
Dividends from affiliated issuers		15,025
Interest from unaffiliated issuers		991
Interest from affiliated issuers		3,002
Total income		79,196

Expenses:
Investment advisory		6,279
Tax fees		2,000
Legal fees		987
Interest expense and commitment fees		696
Conversion expense		471
Accounting services fees		334
Insurance		185
Reports to shareholders		136
Trustees fees		109
Audit and tax preparation fees		77
Transfer agent fees		72
Pricing fees		68
Registration fees		56
Other		322
Total operating expenses		11,792
Net investment income		67,404
Preferred dividend expenses		(2,310	)

Net realized and unrealized gain (loss) on investments
Realized gain on:
Investments from unaffiliated issuers		28,893
Investments from affiliated issuers		1,288
Securities sold short		253

Net change in unrealized gain on:
Investments from unaffiliated issuers		(38,237	)
Investments from affiliated issuers		70,830
Net realized and unrealized gain on investments		63,027
Total increase in net assets resulting from operations	$	128,121

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Predecessor Basis)

(in thousands, except per share amounts)

(Unaudited)

	For the three months ended September 30,			For the nine months ended September 30,
	2021			2021
Investment income:
Income:
Dividends from unaffiliated issuers	$	323		$	8,837
Dividends from affiliated issuers		4,299			12,287
Securities lending income		1			1
Interest from unaffiliated issuers		64			1,803
Interest from affiliated issuers		585			2,059
ROC Reclass		-			(11,850	)
Total income		5,272			13,137

Expenses:
Investment advisory		3,046			8,122
Legal fees		382			1,041
Interest expense and commitment fees		582			2,199
Conversion expense		260			971
Accounting services fees		147			404
Insurance		35			110
Reports to shareholders		108			289
Trustees fees		55			157
Audit and tax preparation fees		101			273
Transfer agent fees		27			109
Pricing fees		48			84
Registration fees		12			45
Other		185			381
Total operating expenses		4,988			14,185
Net investment income (loss)		284			(1,048	)
Preferred dividend expenses		(1,153	)		(3,392	)

Net realized and unrealized gain (loss) on investments
Realized loss on:
Investments from unaffiliated issuers		(18,684	)		(16,385	)

Net change in unrealized appreciation on:
Investments from unaffiliated issuers		34,196			103,636
Investments from affiliated issuers		33,746			80,948
Securities sold short		234			651
Net realized and unrealized gain on investments		49,492			168,850
Total increase in net assets resulting from operations	$	48,623		$	164,410

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

(Unaudited)

	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		3,359,593	$	3		37,171,807	$	37	$	998,557		$	114,271		$	1,112,868
Costs associated with Business Change		—		—		—		—		(92	)		—			(92	)
Net loss attributable to common shareholders		—		—		—		—		—			(60,142	)		(60,142	)
Net income attributable to preferred shareholders		—		—		—		—		—			1,155			1,155
Common stock dividends declared ($0.15 per share)		—		—		—		—		—			(5,577	)		(5,577	)
Preferred stock dividends declared ($0.34375 per share)		—		—		—		—		—			(1,155	)		(1,155	)
Balances, September 30, 2022		3,359,593	$	3		37,171,807	$	37	$	998,465		$	48,552		$	1,047,057

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (Predecessor Basis)

(in thousands)

(Unaudited)

	For the six months ended June 30,
	2022
Increase (decrease) in net assets operations:
Net investment income	$	67,404
Preferred dividend expenses		(2,310	)
Accumulated net realized gain (loss) on investments, securities sold short, written options, futures contracts, and foreign currency transactions		30,434
Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency		32,593
Net increase from operations		128,121

Distributions declared to common shareholders:
Distribution		(11,138	)
Total distributions declared to common shareholders:		(11,138	)
Increase in net assets from operations and distributions		116,983

Share transactions:
Value of distributions reinvested		1,425
Net increase from shares transactions		1,425
Total increase in net assets		118,408

Net assets
Beginning of period		911,208
End of period	$	1,029,616

Change in Common Shares
Issued for distribution reinvested		92
Net increase in common shares		92

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Predecessor Basis)

(in thousands)

(Unaudited)

	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)	$	284		$	(1,048	)
Preferred dividend expenses		(1,153	)		(3,392	)
Accumulated net realized loss on investments, securities sold short, written options, futures contracts, and foreign currency transactions		(18,684	)		(16,385	)
Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency		68,176			185,235
Net increase from operations		48,623			164,410

Distributions declared to common shareholders:
Distribution		(5,552	)		(16,642	)
Total distributions declared to common shareholders:		(5,552	)		(16,642	)
Increase in net assets from operations and distributions		43,071			147,768

Share transactions:
Value of distributions reinvested		602			1,504
Cost of shares redeemed		—			(152,320	)
Capital gains from the retirement of tendered shares		—			47,319
Net increase (decrease) from shares transactions		602			(103,497	)
Total increase in net assets		43,673			44,271

Net assets
Beginning of period		791,423			790,825
End of period	$	835,096		$	835,096

Change in Common Shares
Issued for distribution reinvested		39			117
Shares redeemed		-			(8,750	)
Net increase (decrease) in common shares		39			(8,633	)

See Notes to Consolidated Financial Statements

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(Unaudited)

	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

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NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(Unaudited)

Supplemental Disclosure of Cash Flow Information
Interest paid		$	(2,722	)

See Notes to Consolidated Financial Statements

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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

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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

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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 (“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 subsidiary (“TRS”). 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 September 30, 2022, there were 2,000 common units in the OP (“OP Units”) outstanding, of which 100.0% were owned by the Company.

On July 1, 2022 (the “Deregistration Date”), the SEC issued an order pursuant to Section 8(f) of the Investment Company Act of 1940 (the “1940 Act”) declaring that the Company has ceased to be an investment company under the 1940 Act (the “Deregistration Order”). The issuance of the Deregistration Order enables 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, for an initial three-year term (the “Advisory Agreement”), by and among the Company and the Adviser. The Adviser manages the day-to-day operations of the Company and provides investment management services. The Company expects it will only have accounting employees while the Advisory Agreement is in effect. 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’s 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. Summary of Significant Accounting Policies

Basis of Accounting

Prior to the Deregistration Date, the Company was accounted for as an investment company in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies, or the 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. generally accepted accounting principles (“GAAP”) required for companies that are not investment companies, or what we refer to as the Successor Basis. As a result of these changes, our consolidated financial statements as of and for the three months ended September 30, 2022, 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.

The accompanying unaudited consolidated financial statements are presented in accordance with GAAP. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent 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 according to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of September 30, 2022, and December 31, 2021 (Predecessor Basis) and results of operations for the three months ended September 30, 2022, the six 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 Consolidation

The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with FASB ASC 810, Consolidation. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, including the OP and its subsidiaries.

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Purchase Price Allocation

Upon 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 and liabilities in accordance with FASB ASC 805, Business Combinations. 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.

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 (“ASC 820”) (see Note 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.

Real estate assets, including land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Expenditures for improvements, renovations, and replacements are capitalized at cost. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table:

	Years
Land	Not depreciated
Buildings	30	-	40
Improvements	5	-	40
Furniture, fixtures, and equipment	5	-	10
Intangible lease assets and liabilities	Over lease term

Construction in progress includes the cost of renovation projects being performed at the various properties. Once a project is complete, the historical cost of the renovation is placed into service in one of the categories above depending on the type of renovation project and is depreciated over the estimated useful lives as described in the table above.

Impairment

Real 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, the Company 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. As of September 30, 2022, the Company has not recorded any impairment on its real estate assets.

Held for Sale

The Company periodically classifies real estate assets as held for sale when certain criteria are met in accordance with GAAP. At that time, the Company presents the net real estate assets and the net debt 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, there are no properties held for sale.

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Income Taxes

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”), effective for our taxable year ended December 31, 2021, 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 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. 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.

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 September 30, 2022, the Company believes it is in compliance with all applicable REIT requirements.

The Company evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “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-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 and to the knowledge of the Company, the Company has no examinations in progress and none are expected at this time.

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 September 30, 2022. The Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2021, 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 to uncertain tax positions on its consolidated statement of operations and comprehensive income (loss).

Deferred Tax Assets

As of September 30, 2022, significant components of the TRS’s net deferred tax assets (“DTA”) were as follows (in thousands):

	Deferred Tax Asset
Capital loss carryover from December 31, 2021	$	2,050
Capital loss carryover utilized in 2022		(2,050	)
Unrealized tax loss on investments		18,534
Total deferred tax assets		18,534
Valuation allowance		(15,246	)
Net deferred tax asset	$	3,288

The TRS is estimated to generate a net taxable capital gain of $15.7 million for the nine months ended September 30, 2022. The Company believes it is more likely than not that it will be able to harvest capital losses within 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. As such, the Company has recorded a valuation allowance of $15.2 million against the Company’s gross deferred tax assets to arrive at a net DTA of $3.3 million to reflect the expected tax benefit associated with the unrealized tax losses at the TRS.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of three 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.

Income Recognition

Rental Income – The Company has made several investments in direct real estate. The primary operations of these direct real estate investments consist of rental income earned from its 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.

Interest Income – Debt investments where the Company expects to collect the contractual interest and principal payments are considered to be performing. The Company recognizes income on performing debt investments in accordance with the terms of the investment on an accrual basis. Interest income also includes amortization of loan premiums or discounts and loan origination costs and prepayment penalties.

Dividend Income – Dividends and other corporate actions are recorded on the ex-dividend date, 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.

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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 Consolidated Statements of Operations on both the Successor and Predecessor basis with respect to the investment sold at the time of the sale.

Unrealized Gain (Loss) on Investments – Unrealized gains and losses represent changes in fair value for equity method investments, CLO equity investments, bonds, common stock, convertible notes, LLC interests, LP interests, rights and warrants, and senior loans for which the fair value option has been elected.

Expense Recognition

Interest expense, in accordance with the Company’s financing agreements, is recorded on the accrual basis. General and administrative expenses are expensed as incurred.

Recent Accounting Pronouncements

In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 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.

Investments

The Company holds investments in publicly traded companies and privately held entities primarily involved in the life science, multifamily, self-storage, single-family rental, mortgage lending, and hospitality industries. 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, we account for the investment under the equity method of accounting, as described below.

Investments accounted for under the equity method – 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). 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.

Investments that do not qualify for the equity method of accounting – For investees over which we determine that we do not have the ability to exercise significant influence or control, we account for each investment depending on whether it is an investment in a (i) publicly traded company, (ii) privately held entity that reports net asset value (“NAV”) per share, or (iii) privately held entity that does not report NAV per share, as described below.

Investments in publicly traded companies – Our investments in publicly traded companies are classified as investments with readily determinable fair values and are presented at fair value in our consolidated balance sheets, with changes in fair value classified in investment income 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.

Investments in privately held companies – Our investments in privately held entities without readily determinable fair values consist of (i) investments in privately held entities that report NAV per share and (ii) investments in privately held entities that do not report NAV per share. These investments are accounted for as follows:

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Investments in privately held entities that report NAV per share – Investments in privately held entities that report NAV per share, such as our privately held investments in limited partnerships, are presented at fair value using NAV 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.

Investments in privately held entities that do not report NAV per share – Investments in privately held entities that do not report NAV per share are accounted for using a measurement alternative using the fair value procedures described further in Note 9 - Fair Value of Derivatives and Financial Instruments.

Impairment evaluation of equity method investments – We monitor equity method investments 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 for indicators of impairment by monitoring the presence 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 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.

Distributions from equity method investments

We use the “nature of the distribution” approach to determine the classification within our consolidated statements of cash flows of cash distributions received from equity method investments, including our unconsolidated real estate joint ventures and equity method non-real estate investments. Under this approach, distributions are classified based on the nature of the underlying activity that generated the cash distributions. 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.

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3. Business Change

As discussed in Note 1 and Note 2, on the Deregistration Date, the SEC issued an order pursuant to Section 8(f) of the 1940 Act declaring that the Company has ceased to be an investment company under the 1940 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).

	June 30, 2022		Difference				July 1, 2022
	(Predecessor Basis)						(Successor Basis)
ASSETS
Operating Real Estate Investments
Land	$	—	$	21,208		(1)	$	21,208
Buildings and improvements		-		158,304		(1)		158,304
Intangible lease assets		-		10,979		(1)		10,979
Construction in progress		-		46,052		(1)		46,052
Furniture, fixtures, and equipment		-		349		(1)		349
Total Operating Real Estate Investments		-		236,892				236,892
Investments, at fair value		1,129,544		(324,927	)	(2)		804,617
Equity method investments		—		143,264		(3)		143,264
Life insurance policies, at fair value		—		56,440		(2)		56,440
Cash and cash equivalents		4,044		12,092		(1)		16,136
Restricted cash		—		34,640		(1)		34,640
Accounts receivable, net		—		4,849		(1)		4,849
Accrued interest and dividends		172		3,873		(1)		4,045
Prepaid and other assets		3,896		1,518		(1)		5,414
TOTAL ASSETS	$	1,137,656	$	168,641			$	1,306,297

Liabilities:
Mortgages payable, net	$	—	$	145,908		(1)	$	145,908
Notes payable, net		16,000		7,500		(1)		23,500
Prime brokerage borrowing		7,492		-				7,492
Accounts payable and other accrued liabilities		1,296		2,294		(1)		3,590
Accrued real estate taxes payable		-		2,323		(1)		2,323
Accrued interest payable		-		639		(1)		639
Security deposit liability		-		434		(1)		434
Prepaid rents		-		1,845		(1)		1,845
Intangible lease liabilities		-		6,770		(1)		6,770
Due to affiliates		-		928		(1)		928
Total Liabilities		24,788		168,641				193,429


Series A cumulative preferred shares, net of deferred financing costs		83,252		(83,252	)	(4)		—

Stockholders' Equity:
Preferred stock, $0.001 par value: 4,800,000 shares authorized; 3,359,593 shares issued and outstanding		3		-				3
Common stock, $0.001 par value: unlimited shares authorized; 37,171,807 shares issued and outstanding		37		-				37
Additional paid-in capital		915,305		83,252		(4)		998,557
Accumulated earnings less dividends		114,271		-				114,271
Total Stockholders' Equity		1,029,616		83,252				1,112,868
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	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.

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4. Investments in Real Estate Subsidiaries

The Company conducts its operations through the OP, which owns several 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.

As of September 30, 2022, the Company, through the OP, owned 4 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 December 31, 2021:

				Effective Ownership Percentage at
Property Name		Location	Year Acquired	September 30, 2022			December 31, 2021
White Rock Center		Dallas, Texas	2013		100	%		100	%
5916 W Loop 289		Lubbock, Texas	2013		100	%		100	%
Cityplace Tower		Dallas, Texas	2018		100	%		100	%
NexPoint Dominion Land, LLC	(1)	Plano, Texas	2022		100	%		0	%	(2)

(1)

NexPoint Dominion Land, LLC owns 100% of 21.5 acres of undeveloped land in Plano, Texas.

(2)

Property was acquired in 2022; therefore, no ownership as of December 31, 2021.

5. Real Estate Investments Statistics

As of September 30, 2022, the Company was invested in two retail properties and one office property (excluding investments in undeveloped land), as listed below:

					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		82,793	Retail	6/13/2013	$	1.46	$	1.46		72.9	%		78.4	%
5916 W Loop 289		30,140	Retail	7/23/2013		0.40		0.40		100.0	%		100.0	%
Cityplace Tower		1,353,087	Office	8/15/2018		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.

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6. Real Estate Investments

As of September 30, 2022, the major components of the Company’s investments in real estate held by SPEs the Company consolidates were as follows (in thousands):

Operating Properties	Land		Buildings and Improvements			Intangible Lease Assets			Intangible Lease Liabilities			Construction in Progress		Furniture, Fixtures, and Equipment			Totals
White Rock Center	$	1,315	$	10,314		$	1,921		$	(101	)	$	—	$	5		$	13,454
5916 W Loop 289		1,081		2,938			—			—			—		—			4,019
Cityplace Tower		18,812		148,443			9,058			(6,669	)		43,973		349			213,966
NexPoint Dominion Land, LLC		26,500		-			—			—			—		—			26,500
		47,708		161,695			10,979			(6,770	)		43,973		354			257,939
Accumulated depreciation and amortization		—		(2,016	)		(1,445	)		371			-		(168	)		(3,259	)
Total Operating Properties	$	47,708	$	159,679		$	9,534		$	(6,399	)	$	43,973	$	186		$	254,680

Depreciation expense was $2.2 million for the three months ended September 30, 2022. Amortization expense related to the Company’s intangible lease assets was $1.5 million and $0.4 million for the Company’s intangible lease liabilities for the three months ended September 30, 2022.

Acquisitions

On August 9, 2022, the Company 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):

Investment Vehicle

Location

Property Type

Date of

Acquisition

Purchase

Price

Debt

Effective

Ownership

(1)

NexPoint Dominion Land, LLC

Plano, Texas

Land

August 9, 2022

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.

Dispositions

On August 5, 2022, the Company’s investment in Caddo Sustainable Timberlands was redeemed for approximately $10.9 million.

7. Debt

Cityplace Debt

The Company has debt on its office real estate property. The debt is non-recourse to the Company and encumbers the property. The debt had an original maturity of September 7, 2022. The Company has deferred the maturity date with the lender to February 7, 2023. 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. The debt can be pre-paid in full on any date at par plus 0.25% if the Company gives 20 days prior written notice to the administrative agent. The below table contains summary information related to the real estate notes payable (dollars in thousands):

	Outstanding principal as of
	September 30, 2022			Interest Rate			Maturity Date (1)
Note A-1	$	103,216			4.94	%	2/7/2023
Note A-2		22,578			8.94	%	2/7/2023
Note B-1		12,993			4.94	%	2/7/2023
Note B-2		3,225			8.94	%	2/7/2023
Mezzanine Note 1		2,842			8.94	%	2/7/2023
Mezzanine Note 2		406			8.94	%	2/7/2023
Mortgages payable	$	145,260
Deferred financing costs, net		(347	)
Mortgages payable, net	$	144,913

(1)

Reflective of the lender consent dated November 8, 2022 that defers the maturity date to February 7, 2023.

Table of Contents

The weighted average interest rate of the Company’s debt related to its Cityplace investment was 5.7% as of September 30, 2022.

The loan agreements contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. As of September 30, 2022, the Company believes it is in compliance with all covenants.

Notes Payable

On August 9, 2022, the Company borrowed approximately $13.3 million from the seller, Gabriel Legacy, LLC to finance its acquisition of 21.5 acres of land in Plano, Texas held through NexPoint Dominion Land, LLC, a wholly owned subsidiary of the OP. The note bears interest at an annual rate equal to the WSJ Prime Rate and matures on August 8, 2025.

Credit Facility

On January 8, 2021, the Company entered into a $30.0 million credit agreement (the “Credit Facility”) with Raymond James Bank, N.A. and drew the full balance. The Credit Facility, as amended, bears interest at one-month LIBOR plus 3.5% and matures on March 6, 2023. The Company paid down $10.0 million on the Credit Facility during the year ended December 31, 2021. During the nine months ended September 30, 2022, the Company paid down $6.0 million on the Credit Facility. As of September 30, 2022, the Credit Facility had an outstanding balance of $14.0 million.

Deferred Financing Costs

The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related loans using the straight-line method, which approximates the effective interest method. Deferred financing costs, net of amortization, are recorded as a reduction from the related debt on the Company’s consolidated balance sheet. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to loss on extinguishment of debt and modification costs.

Prime Brokerage Borrowing

As of September 30, 2022, the Company maintains a prime brokerage account with Merrill Lynch Professional Clearing Corp (“BAML”) to hold securities owned by the TRS. The Company from time to time borrows against the value of these securities. As of September 30, 2022, Company had a margin balance of approximately $10.1 million outstanding with BAML bearing interest at the Overnight Bank Funding Rate plus 0.60%. Securities with a fair market value of approximately $20.8 million are pledged as collateral against this margin balance. This arrangement has no stated maturity date.

Schedule of Debt Maturities

The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next four calendar years subsequent to September 30, 2022 are as follows (in thousands):

		Real Estate Debt				Notes Payable				Total
2022		$	591

NEXPOINT DIVERSIFIED REAL ESTATE TRUST [NXDT] Filings

NEXPOINT DIVERSIFIED REAL ESTATE TRUST [NXDT-PA] Filings