NEXPOINT DIVERSIFIED REAL ESTATE TRUST 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 71 Consolidated Balance Sheet as of December 31, 2022 74 Consolidated Statement of Assets and Liabilities as of December 31, 2021 (predecessor basis) 76 Consolidated Statement of Operations and Comprehensive Income (Loss) for the Six Months Ended December 3 1 , 2022 78 Consolidated Statement of Operations for the Six Months Ended June 30, 2022 (predecessor basis) 79 Consolidated Statement of Operations for the Year Ended December 31 , 2021 (predecessor basis) 80 Consolidated Statement of Shareholders’ Equity for the Six Months Ended December 31 , 2022 81 Consolidated Statement of Changes in Net Assets for the Six Months Ended June 30, 2022 (predecessor basis) 82 Consolidated Statement of Changes in Net Assets for the Year Ended December 3 1 , 2021 (predecessor basis) 83 Consolidated Statement of Cash Flows for the Six Months Ended D ecember 31 , 2022 84 Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2022 (predecessor basis) 86 Consolidated Statement of Cash Flows for the Year Ended December 31, 2021 (predecessor basis) 88 70 Table of Contents KPMG LLP Suite 1400 2323 Ross Avenue Dallas, TX 75201-2721 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors NexPoint Diversified Real Estate Trust: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of NexPoint Diversified Real Estate Trust and subsidiaries (the Company) as of December 31, 2022 (successor basis), the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for the six month period ended December 31, 2022 (successor basis). We have also audited the statements of operations, changes in net assets, and cash flows for the six month period ended June 30, 2022 (predecessor basis), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the six month periods ended December 31, 2022 (successor basis) and June 30, 2022 (predecessor basis), in conformity with U.S. generally accepted accounting principles. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company discontinued the application of investment company accounting guidance in Financial Accounting Standards Board Accounting Standard Codification Topic 946, Financial Services - Investment Companies as of July 1, 2022 due to its deregistration as an investment company, and prospectively applied other U.S. generally accepted accounting principles for companies which are not investment companies. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. 71 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Fair value measurement of level 3 investments As discussed in Notes 2 and 3 to the consolidated financial statements as a result of the Company’s deregistration as an investment company on July 1, 2022, certain of the Company’s investments were recorded at fair value using inputs that are classified within Level 3 of the fair value hierarchy. Establishing fair values for these level 3 investments is inherently subjective and dependent upon significant unobservable inputs and assumptions. We identified the evaluation of fair value measurements for certain level 3 investments as of July 1, 2022, as a critical audit matter. Evaluation of the Company’s valuation assumptions for these level 3 investments involved a high degree of auditor judgment. Specifically, subjective auditor judgment was required to evaluate the capitalization rates, discount rates, and market rent. Changes in these assumptions could have a significant impact on the fair value of the level 3 investments. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of an internal control related to the significant assumptions of the capitalization rates, discount rates, and market rent. We involved valuation professionals with specialized skills and knowledge who assisted in: • Evaluating the Company’s capitalization rates and discount rates, by comparing them against a range that was independently developed using publicly available market data for comparable entities. • Assessing the appropriateness of the market rent assumption by comparing it to independently researched transactions and current listings of comparable properties. /s/ KPMG LLP We have served as the Company’s auditor since 2022. Dallas, Texas March 31, 2023 72 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Trustees of NexPoint Diversified Real Estate Trust Opinion on the Financial Statements We have audited the accompanying consolidated statement of assets and liabilities of NexPoint Diversified Real Estate Trust (formerly NexPoint Strategic Opportunities Fund) (the “Fund”) as of December 31, 2021, the related consolidated statements of operations, changes in net assets and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2021, the results of its operations, changes in net assets and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2021, by correspondence with the custodian, agent banks, transfer agents, issuers, and brokers; when replies were not received from brokers, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Fund’s auditor since 2020. COHEN & COMPANY, LTD. Cleveland, Ohio March 10, 2022 C O H E N & C O M P A N Y , L T D . 800.229.1099 | 866.818.4538 fax | cohencpa.com Registered with the Public Company Accounting Oversight Board 73 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands, except share and par value amounts) December 31, 2022 ASSETS Consolidated Real Estate Investments Land $ 47,708 Buildings and improvements 174,469 Intangible lease assets 10,979 Construction in progress 39,731 Furniture, fixtures, and equipment 354 Total Gross Consolidated Real Estate Investments 273,241 Accumulated depreciation and amortization ( 7,158 ) Total Net Consolidated Real Estate Investments 266,083 Investments, at fair value ($ 576,419 with related parties) 754,910 Equity method investments ($ 7,272 with related parties) 70,656 Life insurance policies, at fair value 67,711 Cash and cash equivalents 13,360 Restricted cash 35,289 Accounts receivable, net 1,903 Prepaid and other assets 6,441 Accrued interest and dividends 4,302 Deferred tax asset, net 2,247 TOTAL ASSETS $ 1,222,902 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgages payable, net $ 144,414 Notes payable 24,250 Prime brokerage borrowing 2,624 Accounts payable and other accrued liabilities 13,865 Income tax payable 10,720 Accrued real estate taxes payable 254 Accrued interest payable 1,115 Security deposit liability 416 Prepaid rents 1,273 Intangible lease liabilities, net 6,027 Due to affiliates 112 Total Liabilities $ 205,070 Shareholders' Equity: 74 Table of Contents 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 999,845 Accumulated earnings less dividends 17,947 Total Shareholders' Equity 1,017,832 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,222,902 See Notes to Consolidated Financial Statements 75 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES (Predecessor Basis) (in thousands, except share and 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 76 Table of Contents 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 77 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) For the Six Months Ended December 31, 2022 Revenues Rental income $ 10,070 Interest income ($ 1,332 with related parties) 4,428 Dividend income ($ 10,881 with related parties) 40,600 Other income 32 Total revenues 55,130 Expenses Property operating expenses 3,682 Property management fees 296 Real estate taxes and insurance 2,695 Advisory and administrative fees 5,514 Property general and administrative expenses 302 Corporate general and administrative expenses 3,079 Conversion Expense 1,615 Depreciation and amortization 7,175 Total expenses 24,358 Operating income 30,772 Interest expense ( 5,759 ) Equity in losses of unconsolidated equity method ventures ( 2,257 ) Change in unrealized gain (losses) ( 92,031 ) Realized gains (losses) ( 2,323 ) Net loss before income taxes ( 71,598 ) Income tax expense ( 9,975 ) Net loss ( 81,573 ) Net income attributable to preferred shareholders ( 2,310 ) Net loss attributable to common shareholders $ ( 83,883 ) Weighted average common shares outstanding - basic 37,172 Weighted average common shares outstanding - diluted 37,172 Loss per share - basic $ ( 2.26 ) Loss per share - diluted $ ( 2.26 ) See Notes to Consolidated Financial Statements 78 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Predecessor Basis) (in thousands) 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 Income tax expense 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 Securities sold short 253 Net change in unrealized gain on: Investments from unaffiliated issuers ( 43,752 ) Investments from affiliated issuers 76,346 Net realized and unrealized gain on investments 61,740 Total increase in net assets resulting from operations $ 126,834 See Notes to Consolidated Financial Statements 79 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Predecessor Basis) (in thousands) For the Year Ended December 31, 2021 Investment income: Income: Dividends from unaffiliated issuers $ 74,727 Dividends from affiliated issuers 24,671 Securities lending income 6 Interest from unaffiliated issuers 4,747 Interest from affiliated issuers 2,835 ROC Reclass ( 11,850 ) Total income 95,136 Expenses: Investment advisory 11,094 Legal fees 2,206 Interest expense and commitment fees 2,435 Conversion expense 1,397 Accounting services fees 558 Insurance 145 Reports to shareholders 352 Trustees fees 275 Audit and tax preparation fees 124 Transfer agent fees 101 Pricing fees 279 Registration fees 75 Other 990 Total operating expenses 20,029 Net investment income (loss) 75,107 Preferred dividend expenses ( 4,555 ) Net realized and unrealized gain (loss) on investments Realized loss on: Investments from unaffiliated issuers ( 42,530 ) Investments from affiliated issuers 458 Securities sold short 351 Net change in unrealized appreciation on: Investments from unaffiliated issuers 40,480 Investments from affiliated issuers 175,495 Securities sold short 649 Net realized and unrealized gain on investments 174,903 Total increase in net assets resulting from operations $ 245,455 See Notes to Consolidated Financial Statements 80 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS ’ EQUITY (in thousands, except share and per share amounts) Preferred Shares Common Shares Additional Paid-in Capital Accumulated Earnings (Loss) Less Dividends Total Six Months Ended December 31, 2022 Number of Shares Par Value Number of Shares Par Value Balances, July 1, 2022 3,359,593 $ 3 37,171,807 $ 37 $ 999,845 $ 112,983 $ 1,112,868 Net loss attributable to common shareholders — — — — — ( 83,883 ) ( 83,883 ) Net income attributable to preferred shareholders — — — — — 2,310 2,310 Common share dividends declared ($ 0.30 per share) — — — — — ( 11,153 ) ( 11,153 ) Preferred share dividends declared ($ 0.68750 per share) — — — — — ( 2,310 ) ( 2,310 ) Balances, December 31, 2022 3,359,593 $ 3 37,171,807 $ 37 $ 999,845 $ 17,947 $ 1,017,832 See Notes to Consolidated Financial Statements 81 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (Predecessor Basis) (in thousands, except share amounts) 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 29,146 Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency 32,594 Net increase from operations 126,834 Distributions declared to common shareholders: Distribution ( 11,139 ) Total distributions declared to common shareholders: ( 11,139 ) Increase in net assets from operations and distributions 115,695 Share transactions: Value of distributions reinvested 1,425 Proceeds from sale of shares 1,288 Net increase from shares transactions 2,713 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 92,067 Net increase in common shares 92,067 See Notes to Consolidated Financial Statements 82 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Predecessor Basis) (in thousands, except share and par value amounts) For the Year Ended December 31, 2021 Increase in net assets operations: Net investment income $ 75,107 Preferred dividend expenses ( 4,555 ) Accumulated net realized loss on investments, securities sold short, written options, futures contracts, and foreign currency transactions ( 41,721 ) Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency 216,624 Net increase from operations 245,455 Distributions declared to common shareholders: Distribution ( 435 ) Return of capital ( 21,766 ) Total distributions declared to common shareholders: ( 22,201 ) Increase in net assets from operations and distributions 223,254 Share transactions: Value of distributions reinvested 2,131 Cost of shares redeemed ( 152,321 ) Capital gains from the retirement of tendered shares 47,319 Net decrease from shares transactions ( 102,871 ) Total increase in net assets 120,383 Net assets Beginning of year 790,825 End of year $ 911,208 Change in Common Shares Issued for distribution reinvested 162 Shares redeemed ( 8,750 ) Net decrease in common shares ( 8,588 ) See Notes to Consolidated Financial Statements 83 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) For the Six Months Ended December 31, 2022 Cash flows from operating activities Net loss $ ( 81,573 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 7,175 Amortization of intangible lease liabilities ( 743 ) Amortization of deferred financing costs 67 Paid-in-kind interest ($ 844 with related parties) ( 2,872 ) Realized (gain) loss 2,323 Net change in unrealized (gain) loss on investments held at fair value ($( 57,847 ) with related parties) 92,031 Equity in losses of unconsolidated ventures ($( 1,935 ) with related parties) 2,257 Distributions of earnings from unconsolidated ventures ($ 277 with related parties) 2,418 Cash paid for life settlement premiums ( 2,576 ) Changes in operating assets and liabilities Deferred tax asset ( 2,247 ) Income tax payable 10,720 Real estate taxes payable ( 2,069 ) Other operating assets 606 Other operating liabilities 5,914 Net cash provided by operating activities 31,431 Cash flows from investing activities Distributions from CLO investments 18,105 Proceeds from sale of investments 14,246 Purchases of investments ( 11,276 ) Contributions to equity method investments ( 1,382 ) Additions to consolidated real estate investments ( 5,966 ) Acquisitions of consolidated real estate investments ( 26,500 ) Purchases of life settlement policies ( 8,700 ) Proceeds from life settlement policy maturities 7,055 Net cash used in investing activities ( 14,418 ) Cash flows from financing activities Proceeds received from notes payable 13,250 Mortgage payments ( 1,181 ) Prime brokerage borrowing 9,543 Credit facilities payments ( 12,500 ) Prime brokerage payments ( 14,410 ) Deferred financing costs paid ( 379 ) Dividends paid to preferred shareholders ( 2,310 ) 84 Table of Contents Dividends paid to common shareholders ( 11,153 ) Net cash used in financing activities ( 19,140 ) Net decrease in cash, cash equivalents and restricted cash ( 2,127 ) Cash, cash equivalents and restricted cash, beginning of period (Note 3) 50,776 Cash, cash equivalents and restricted cash, end of period $ 48,649 Supplemental Disclosure of Cash Flow Information Interest paid $ 5,284 Income tax paid $ 1,501 Supplemental Disclosure of Noncash Activities Capitalized construction costs included in accounts payable and other accrued liabilities $ 3,883 Fair value assets acquired from the contribution of equity method investments* $ 62,510 *For more information about this transaction, refer to Note 9. Equity Method Investments—NexPoint Storage Partners Operating Company, LLC . See Notes to Consolidated Financial Statements 85 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Predecessor Basis) (in thousands) For the Six Months Ended June 30, 2022 Cash flows from operating activities: Net increase in net assets resulting from operations $ 126,834 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Purchases of investment securities from unaffiliated issuers ( 350,369 ) Purchases of investment securities from affiliated issuers ( 105,674 ) Proceeds from the disposition of investment securities from unaffiliated issuers 428,007 Proceeds from the disposition of investment securities from affiliated issuers 2,135 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 securities sold short ( 253 ) Net change in unrealized depreciation on unaffiliated investments 43,752 Net change in unrealized appreciation on investments in affiliated investments ( 76,346 ) Changes in operating assets and liabilities Dividends and interest receivable 741 Due from custodian 192 Prepaid expenses and other assets ( 1,583 ) Reclaim receivable 1,250 Foreign tax reclaim receivable ( 1,274 ) Due to broker ( 1,695 ) 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 ( 150 ) Net cash provided by operating activities 36,336 Cash flows from financing activities: Payments on notes payable ( 26,500 ) Distributions paid in cash ( 9,714 ) Proceeds from shares sold 1,288 Proceeds from dividend reinvestment ( 44 ) Net cash used in financing activities ( 34,970 ) Net increase in cash 1,366 Cash, cash equivalents and restricted cash: Beginning of period 2,678 End of period $ 4,044 86 Table of Contents 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 87 Table of Contents NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Predecessor Basis) (in thousands) For the Year Ended December 31, 2021 Cash flows from operating activities: Net increase in net assets resulting from operations $ 245,455 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Purchases of investment securities from unaffiliated issuers ( 690,913 ) Purchases of investment securities from affiliated issuers ( 438,578 ) Proceeds from the disposition of investment securities from unaffiliated issues 745,929 Proceeds from the disposition of investment securities from affiliated issues 305,977 Proceeds from return of capital of investment securities from affiliated issues 52,310 Purchases of securities sold short ( 414 ) Amortization/(accretion) of premiums ( 490 ) Net realized (gain)/loss on unaffiliated issuers 42,530 Net realized (gain)/loss on affiliated issuers ( 458 ) Net realized (gain)/loss on securities sold short ( 351 ) Net change in unrealized depreciation on unaffiliated investments ( 41,129 ) Net change in unrealized depreciation on investments in affiliated investments ( 175,495 ) Changes in operating assets and liabilities Dividends and interest receivable 202 Due from custodian ( 192 ) Prepaid expenses and other assets 743 Reclaim Receivable ( 1,250 ) Due to broker ( 5,687 ) Payable for admin fees 2 Payable for audit fees ( 391 ) Payable for investment advisory fees 103 Due to custodian 110 Payable for interest expense and commitment fees 60 Accrued expenses and other liabilities ( 7 ) Net cash flow provided by operating activities 38,066 Cash flows from financing activities: Proceeds from issuance of cumulative preferred shares 83,252 Payments on notes payable ( 2,500 ) Distributions paid in cash ( 20,070 ) Payments on shares redeemed ( 105,002 ) Proceeds from shares sold ( 72 ) Net cash flow used in financing activities ( 44,392 ) Net decrease in cash ( 6,326 ) Cash, cash equivalents, foreign currency and restricted cash: 88 Table of Contents Beginning of period 9,004 End of period $ 2,678 Supplemental disclosure of cash flow information Reinvestment of distributions $ 2,131 Cash paid during the period for interest expense and commitment fees $ 2,371 See Notes to Consolidated Financial Statements 89 Table of Contents 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 December 31, 2022, there were 2,000 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 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, (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 December 31, 2022. 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. 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 generally accepted accounting principles in the United States (“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 six months ended December 31, 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 fair value of the Company’s investments and consolidated operating properties as of the Deregistration Date became the new basis in accordance with FASB ASC 946. Due to this change, the Company reallocated these fair values to the assets and liabilities of operating properties. The accompanying consolidated financial statements are presented in accordance with GAAP which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the 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. 90 Table of Contents The accompanying consolidated financial statements have been prepared according to the rules and regulations of the SEC. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of December 31, 2022, and December 31, 2021 (Predecessor Basis) and results of operations for the six months ended December 31, 2022, the six months ended June 30, 2022 (Predecessor Basis) and twelve months ended December 31, 2021 (Predecessor Basis) have been included. Such adjustments are normal and recurring in nature. Principles of Consolidation Upon the application for the historical cost accounting basis, the Company accounts for 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 consolidated financial statements include the accounts of the Company and its subsidiaries, including the OP and its subsidiaries. The Company’s sole significant asset is its investment in the OP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the OP. 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. 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 10), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed. 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. 91 Table of Contents Fair Value Measurements Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB ASC 820, Fair Value Measurement and Disclosures establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy): • Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. • Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. • Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date. Valuation of Investments As of December 31, 2022, the Company’s fair valued investments consisted of senior loans, corporate bonds, collateralized loan obligations ("CLOs"), convertible notes, common stocks, rights, warrants, life settlement contracts, LP interests and LLC interests. The fair value of the Company’s senior loans, bonds, and CLOs are generally based on quotes received from brokers or independent pricing services. Senior loans, bonds, and CLOs with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Senior loans, bonds, and CLOs that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The Company has elected for certain of the equity method investments to be measured using fair value. The fair value of the Company’s common stocks, rights, and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. At the end of each calendar quarter, the Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. The fair value of the Company’s common stocks, exchange-traded funds, other registered investment companies and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the 92 Table of Contents brokers and pricing services to derive the values are not readily observable. The Company’s real estate investments include equity interests in limited liability companies and equity issued by REITs that invest in commercial real estate. The fair value of real estate investments that are not actively traded on national exchanges are based on internal models developed by the Adviser. The significant inputs to the models include cash flow projections for the underlying properties, capitalization rates and appraisals performed by independent valuation firms. These inputs are not readily observable, and the Company has classified the investments as Level 3 assets. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option. The fair value of the Company’s convertible notes are categorized as Level 3 assets in the fair value hierarchy. Convertible notes are valued using a discounted cash flow model using discount rates derived from observable market data applied to the internal rate of return implied by the expected contractual cash flows. Upon initial acquisition, the Company’s life settlement contracts are recognized at the transaction price. For each subsequent reporting period, the investments are measured at fair value by a third-party valuation specialist using a life settlement pricing model and are categorized as Level 3 assets in the fair value hierarchy. Key assumptions utilized in determining fair value include but are not limited to: (i) life expectancy estimates provided by independent third party underwriters based on actuarially developed mortality tables and industry life expectancy reports; (ii) future premium estimates; (iii) rates of return consistent with those sought by independent purchasers of life policies at the time of purchase; and (iv) offers and/or commitments from purchasers. In addition, the valuation agent will also consider recent sales as well as offers received for the life policies deemed likely to close in the near future in estimating fair value. The assumptions used to value life policies are by nature, inherently uncertain and the effect of changes in estimates may be material. The fair value measurement used in estimating the present value calculations are derived from valuation techniques that include inputs that are not based on observable market data. Changes in the fair value of the life settlement contracts are reported as net unrealized gains or losses on the Consolidated Statement of Operations (Successor Basis). Upon the death of an insured or the sale of a life policy, the Company will recognize the difference between the proceeds received and the cost of the life policy as a realized gain or loss in the Company's Consolidated Statement of Operations (Successor basis). Impairment Real estate assets and equity method investments 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. The Company recognizes its share of the investee's comprehensive income or loss for equity method investments. If the investee is loss-making, the Company recognizes its share of the losses until its equity interest is reduced to zero. As of December 31, 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 real estate liabilities associated with the real estate held for sale separately in its consolidated balance sheet, and the Company ceases recording depreciation and amortization expense related to that property. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell. As of December 31, 2022, there are no properties held for sale. 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. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute annually at least 93 Table of Contents 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. 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 December 31, 2022, the Company believes it is in compliance with all applicable REIT requirements. The Company has recorded a current income tax expense of $ 2.0 million for the six months ended June 30, 2022 and $ 10.7 million associated with the TRSs for the six months ended December 31, 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 $ 2.2 million and increased by a 2021 return-to-provision adjustment of $ 1.5 million for a net expense of $ 12.0 million for the twelve months ended December 31, 2022, that is recorded on the Consolidated Statement of Operations. 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 December 31, 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 December 31, 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). The Company has not recorded any uncertain tax positions for the six months ended June 30, 2022 or six months ended December 31, 2022. 94 Table of Contents Deferred Tax Assets As of December 31, 2022, significant components of the net deferred tax assets (“DTA”) of the Company's TRSs were as follows (in thousands): Deferred Tax Asset Capital loss carryover from December 31, 2021 $ 2,050 Capital loss carryover utilized in 2022 ( 1,924 ) Net operating loss carryover from December 31, 2021 590 Net operating loss carryover utilized in 2022 ( 119 ) Unrealized tax loss on investments 16,677 Total deferred tax assets $ 17,274 Valuation allowance ( 15,027 ) Net deferred tax asset $ 2,247 The Company may not offset tax assets or liabilities from one TRS with those of another TRS. NHF TRS, LLC, one of the Company's TRSs, is estimated to generate a net taxable capital gain of $ 16.4 million for the six months ended December 31, 2022. The Company believes it is more likely than not that it will be able to harvest capital losses within this TRS during the three succeeding taxable years to be eligible for a capital loss carryback refund claim and has therefore not applied a valuation allowance to the extent of the expected future refund claim. As such, the Company has recorded a valuation allowance of $ 15.0 million against the Company’s gross deferred tax assets to arrive at a net DTA of $3.4 million to reflect the expected tax benefit associated with the unrealized tax losses at this TRS. NREO TRS, LLC ("NREO TRS"), one of the Company's TRSs, has an estimated net operating loss balance of $ 2.2 million as of December 31, 2022 that does not have an expiration date as well as an estimated $ 0.6 million capital loss balance as of December 31, 2022, that will expire if not utilized within the succeeding five taxable years. The Company believes that it will be able to fully utilize the tax assets from NREO TRS and has not therefore applied a valuation allowance to the $ 0.6 million DTA generated by this TRS. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments purchased with an original maturity of six 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 tenants under lease agreements. Rental income is recognized on the straight-line method over the related terms of the leases. 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 which is included in rental income in the accompanying consolidated statements of operations. In July 2018, the FASB issued Accounting Standards Update (“ASU") 2018-11, Leases – Targeted Improvements (“ASU 2018-11”), which provides entities with relief from the costs of implementing certain aspects of ASU 2016-02. ASU 2018-11 provides a practical expedient that allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where the Company is the lessor. The Company implemented the provisions of ASU 2018-11 and 2016-02, collectively Topic 842 Leases, effective July 1, 2022. The Company presents leases in the Consolidated Statements of Operations and began presenting all rentals and reimbursements from tenants as a single line item within rental income. 95 Table of Contents 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 except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available and is verified. 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 statement 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. Property operating expenses - Property operating expenses include property maintenance costs, salary and employee benefit costs, utilities, casualty-related expenses and recoveries and other property operating costs. Property management fees - Property management fees include fees paid to NexVest, our property manager, for managing each property directly or indirectly owned by us (see Note 14 to our consolidated financial statements). Real estate taxes and insurance - Real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property. Insurance includes the cost of commercial, general liability, and other needed insurance for each property Advisory and administrative fees - Advisory and administrative fees include the fees paid to our Adviser pursuant to the Advisory Agreement (see Note 14 to our consolidated financial statements). Property general and administrative expense - Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property. Corporate general and administrative expenses - Corporate general and administrative expenses include, but are not limited to, audit fees, legal fees, listing fees, board of director fees, equity-based compensation expense, investor relations costs and payments of reimbursements to our Adviser for operating expenses. Corporate general and administrative expenses and the advisory and administrative fees paid to our Adviser will not exceed 1.5% of Managed Assets (as defined below) per calendar year (or part thereof that the Advisory Agreement is in effect), calculated in accordance with the Advisory Agreement, or the Expense Cap (as defined below). The Expense Cap does not limit the reimbursement by us of expenses related to securities offerings paid by our Adviser. The Expense Cap also does not apply to legal, accounting, financial, due diligence, and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation, or other events outside our ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets. Additionally, in the sole discretion of the Adviser, the Adviser may elect to waive certain advisory and administrative fees otherwise due. If advisory and administrative fees are waived in a period, the waived fees for that period are considered to be waived permanently and the Adviser may not be reimbursed in the future. Conversion expense - Conversion expenses include the costs of the Business Change in conjunction with the Deregistration Order, which primarily include legal fees and other fees in preparation of the conversion. Depreciation and amortization - Depreciation and amortization costs primarily include depreciation of our properties and amortization of leases or expenses. 96 Table of Contents Recent Accounting Pronouncements In March 2020, the FASB issued ASU 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. Each investment is evaluated to determine whether the Company has the ability to exercise significant influence, but not control, over an investee. Investments are evaluated in which Company ownership is equal to or greater than 20%, but less than or equal to 50%, of an investee’s voting stock with a presumption that the Company has this ability. For our investments in limited partnerships and functional equivalents that maintain specific ownership accounts, we presume that such ability exists when our ownership interest exceeds 3% to 5%. In addition to the Company’s ownership interest, the Company also considers whether it has a board seat or whether it participates in the policy-making process, among other criteria, to determine if we have an ability to exert significant influence, but not control, over an investee. If we determine that we have such ability, but we do not control, we account for the investment under the equity method of accounting, as described below. Investments that qualify for the equity method of accounting – Under the equity method of accounting, the Company initially recognizes its investment at cost and subsequently adjusts the carrying amount of the investments for its share of earnings and losses reported by the investee, distributions received, and other-than-temporary impairments. The Company has elected the fair value option for several of its investments that would otherwise be accounted for under the equity method (See Note 10). 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 – Equity Method Investments. The Company has elected for certain of the equity method investments to be measured using fair value. 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 change in unrealized gain (loss) in our consolidated statement of operations. The fair values of our investments in publicly traded companies are determined based on sales prices or quotes available on securities exchanges. 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: Investments in privately held entities that report NAV per share – Investments in privately held entities that elect the fair value option that report NAV per share, such as our privately held investments in limited partnerships, are presented at fair value using NAV, 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 valuation technique described further in Note 10 - Fair Value of Derivatives and Financial Instruments. 97 Table of Contents Impairment evaluation of equity method investments – We monitor equity method investments not reported at fair value for indicators that a decrease in the value of the investment has occurred that is other than temporary. If such indicators are present, we are required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value. 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. 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. 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 Investment Company Act declaring that the Company has ceased to be an investment company under the Investment Company Act. The issuance of the Deregistration Order enables 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 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). 98 Table of Contents June 30, 2022 Difference July 1, 2022 (Predecessor Basis) (Successor Basis) ASSETS: Consolidated 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 Consolidated 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 2,644 (1) 2,816 Prepaid and other assets 3,896 2,479 (1) 6,375 TOTAL ASSETS $ 1,137,656 $ 168,373 $ 1,306,029 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 2,026 (1) 3,322 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 24,788 168,373 193,161 Series A cumulative preferred shares, net of deferred financing costs 83,252 ( 83,252 ) (4) — Stockholders' 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; 37,171,807 shares issued and outstanding 37 — 37 Additional paid-in capital 916,596 83,249 (4) 999,845 Accumulated earnings less dividends 112,983 — 112,983 Total Stockholders' Equity 1,029,616 83,252 1,112,868 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,137,656 $ 168,373 $ 1,306,029 (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 9 for more information on the Company's equity method investments. 99 Table of Contents (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. 4. Investments in Real Estate Subsidiaries The Company conducts its operations through the OP, which owns several 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. 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 December 31, 2022, the Company, through the OP, owned four 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 December 31, 2022: Effective Ownership Percentage at Property Name Location Year Acquired December 31, 2022 White Rock Center Dallas, Texas 2013 100 % 5916 W Loop 289 Lubbock, Texas 2013 100 % Cityplace Tower Dallas, Texas 2018 100 % NexPoint Dominion Land, LLC (1) Plano, Texas 2022 100 % (1) NexPoint Dominion Land, LLC owns 100 % of 21.5 acres of undeveloped land in Plano, Texas. 5. Real Estate Investments Statistics As of December 31, 2022, the Company was invested in two retail properties and one office and hospitality 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 December 31, 2022 December 31, 2022 White Rock Center 82,793 Retail 6/13/2013 $ 1.50 66.5 % 5916 W Loop 289 30,140 Retail 7/23/2013 $ 0.40 100.0 % Cityplace Tower 1,353,087 Office & Hospitality (3) 8/15/2018 $ 2.10 32.9 % 1,466,020 * Information is unaudited. (1) Average effective monthly occupied rent per square foot is equal to the average of the contractual rent for commenced leases as of December 31, 2022, minus any tenant concessions over the term of the lease, divided by the occupied square footage of commenced leases as of December 31, 2022. (2) Percent occupied is calculated as the rentable square footage occupied as of December 31, 2022, divided by the total rentable square footage, expressed as a percentage. 100 Table of Contents (3) Cityplace is currently under development and the Company is converting part of the property into a hotel, which was still under construction as of December 31, 2022. 6. Consolidated Real Estate Investments As of December 31, 2022, the major components of the Company’s investments in real estate held by SPEs the Company consolidates, which are included in "Consolidated Real Estate Investments" on the Consolidated balance sheet, were as follows (in thousands): 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 2,939 — — — — 4,020 Cityplace Tower 18,812 161,216 9,058 ( 6,669 ) 39,731 349 222,497 NexPoint Dominion Land, LLC 26,500 — — — — — 26,500 47,708 174,469 10,979 ( 6,770 ) 39,731 354 266,471 Accumulated depreciation and amortization — ( 4,114 ) ( 2,863 ) 743 — ( 181 ) ( 6,415 ) Total Operating Properties $ 47,708 $ 170,355 $ 8,116 $ ( 6,027 ) $ 39,731 $ 173 $ 260,056 Depreciation expense was $ 4.3 million for the six months ended December 31, 2022. Amortization expense related to the Company’s intangible lease assets was $ 2.9 million and $ 0.7 million for the Company’s intangible lease liabilities for the six months ended December 31, 2022. The net amount amortized as an increase to rental revenue for capitalized above and below-market lease intangibles was $ 0.6 million for the six months ended December 31, 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 six months ended December 31, 2022 were as follows (dollars in thousands): Investment Property Location Property Type Date of Acquisition Purchase Price Debt Effective Ownership NexPoint Dominion Land, LLC Plano, Texas Land August 9, 2022 $ 26,500 $ 13,250 100 % 7. Debt Cityplace Debt The Company has debt on its office and hospitality real estate property. The debt is limited recourse to the Company and encumbers the property. The debt had an original maturity of September 8, 2022, and the Company has deferred the maturity date with the lender to May 8, 2023, with the possibility to extend for an additional four months to September 8, 2023 provided certain metrics are met. The purpose of the deferral was to allow for continued discussions around refinancing the debt. Management recognizes that finding an alternative source of funding is necessary to repay the debt by the maturity date. Management is evaluating multiple options to fund the repayment of the $ 144.7 million principal balance outstanding as of December 31, 2022, including refinancing 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 101 Table of Contents become due. Due to the short term nature of the debt, the fair value of the debt is approximately the outstanding balance. The below table contains summary information related to the mortgages payable (dollars in thousands): Outstanding principal as of December 31, 2022 Interest Rate Maturity Date (1) Note A-1 $ 102,795 6.47 % 5/8/2023 Note A-2 22,486 10.47 % 5/8/2023 Note B-1 12,940 6.47 % 5/8/2023 Note B-2 3,212 10.47 % 5/8/2023 Mezzanine Note 1 2,831 10.47 % 5/8/2023 Mezzanine Note 2 404 10.47 % 5/8/2023 Mortgages payable 144,668 Deferred financing costs, net ( 254 ) Mortgages payable, net $ 144,414 (1) If certain extension conditions are met based on the terms in the loan agreement, the maturity date will be extended to September 8, 2023. The weighted average interest rate of the Company’s debt related to its Cityplace investment was 7.3 % as of December 31, 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 December 31, 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. Due to the short term nature of the note, the fair value of the note is approximately the outstanding balance. 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 facility (the "Credit Facility") with Raymond James Bank, N.A. and drew the full balance. As of December 31, 2022, the Credit Facility, as amended, bore interest at the one-month London Inter-Bank Offered Rate ("LIBOR") plus 3.50 % and matures on November 6, 2023. On March 6, 2023, the interest rate on the Credit Facility increased to one-month LIBOR plus 4.25 %. The Company paid down $ 10.0 million on the Credit Facility during the year ended December 31, 2021. During the twelve months ended December 31, 2022, the Company paid down $ 9.0 million on the Credit Facility. As of December 31, 2022, the Credit Facility had an outstanding balance of $ 11.0 million. Due to the short term nature of the debt, the fair value of the debt is approximately the outstanding balance. Management believes that the Company has sufficient access to capital to ensure the Company is able to meet its obligations as they become due. 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. 102 Table of Contents Prime Brokerage Borrowing As of October 4, 2022, the Company paid down all outstanding borrowings through its prime brokerage account with Merrill Lynch Professional Clearing Corp. Effective July 2, 2022, the Company entered a prime brokerage account with Jefferies to hold securities owned by the Company. The Company from time to time borrows against the value of these securities. As of December 31, 2022, the Company had a margin balance of approximately $ 2.6 million outstanding with Jefferies bearing interest at the Overnight Bank Funding Rate plus 0.50 %. Securities with a fair value of approximately $ 19.6 million are pledged as collateral against this margin balance. This arrangement has no stated maturity date. Due to the floating interest rate nature of the debt, the fair value of the debt is approximately the outstanding balance. Schedule of Debt Maturities The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years subsequent to December 31, 2022 are as follows (in thousands): Mortgages Payable Notes Payable Total 2023 $ 144,668 $ 11,000 $ 155,668 2024 — — — 2025 — 13,250 13,250 2026 — — — 2027 — — — Thereafter — — — Total $ 144,668 $ 24,250 $ 168,918 8. Variable Interest Entities Consolidated VIEs At each reporting period, the Company reassesses whether it remains the primary beneficiary for VIEs consolidated under the VIE model. As of December 31, 2022, the Company has accounted for the following investments as unconsolidated VIEs: 103 Table of Contents Entities Instrument Asset Type Percentage Ownership as of December 31, 2022 Relationship as of December 31, 2022 Unconsolidated Entities: NexPoint Real Estate Finance Operating Partnership, L.P. LP interest Mortgage 16.1 % VIE VineBrook Homes Operating Partnership, L.P. LP interest Single-family rental 11.1 % VIE NexPoint Storage Partners Operating Company, LLC LLC interest Self-storage 30.5 % VIE NexPoint Storage Partners, Inc. Common stock Self-storage 53.1 % VIE Perilune Aero Equity Holdings One, LLC LLC interest Aircraft 16.4 % VIE SFR WLIF III, LLC LLC interest Single-family rental 20.0 % VIE IQHQ Holdings, LP LP interest Life science 1.2 % VIE 9. Equity Method Investments As discussed in Note 2, 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 the ability to exercise significant influence but not control, over an investee. For our investments in limited partnerships and functional equivalents that maintain specific ownership accounts, we presume that such ability exists when our ownership interest exceeds 3% to 5%. In addition to the Company’s ownership interest, the Company also considers whether it has a board seat or whether it participates in the policy-making process, among other criteria, to determine if we have an ability to exert significant influence, but not control, over an investee. If we determine that we have such ability but do not have control, we account for the investment under the equity method of accounting. 104 Table of Contents Below is a summary of the Company’s equity method investments as of December 31, 2022 (dollars in thousands): Investee Name Instrument Asset Type NXDT Percentage Ownership Investment Basis Share of Investee's Net Assets (1) Basis Difference (2) Share of Earnings (Loss) Sandstone Pasadena Apartments, LLC LLC interest Multifamily 50.0 % $ 13,013 $ — $ 13,013 $ ( 217 ) AM Uptown Hotel, LLC LLC interest Hospitality 60.0 % (3) 27,136 21,334 5,802 ( 227 ) SFR WLIF III, LLC LLC interest Single-family rental 20.0 % 7,272 7,466 ( 194 ) 280 Las Vegas Land Owner, LLC LLC interest Land 77.0 % (4) 12,312 12,312 — — Perilune Aero Equity Holdings One, LLC LLC interest Aircraft 16.4 % 10,923 8,751 2,172 665 Claymore Holdings, LLC LLC interest N/A 50.0 % (5) — (6) — — — Allenby, LLC LLC interest N/A 50.0 % (5) — (6) — — — $ 70,656 $ 49,863 $ 20,793 $ 501 Below is a summary of the Company's investments that qualify for equity method accounting but the Company has elected to account for using the fair value option. Amounts are included in "investments, at fair value" on the consolidated balance sheet. Investee Name Instrument Asset Type NXDT Percentage Ownership Investment Basis NexPoint Real Estate Finance Operating Partnership, L.P. LP interest Mortgage 16.1 % (7) 77,370 (6) NexPoint Real Estate Finance, Inc. Common stock Mortgage 12.3 % (7) 33,369 (6) VineBrook Homes Operating Partnership, L.P. LP interest Single-family rental 11.1 % (7) 169,661 (6) NexPoint Storage Partners, Inc. Common stock Self-storage 53.1 % (3) 103,695 (6) NexPoint Storage Partners Operating Company, LLC LLC interest Self-storage 30.5 % $ 56,505 (6) NexPoint SFR Operating Partnership, L.P. LP interest Single-family rental 31.0 % $ 53,480 (6) NexPoint Hospitality Trust Common stock Hospitality 45.4 % $ 27,685 (6) LLV Holdco, LLC LLC interest Land 26.8 % 4,331 (6) $ 526,096 (1) Represents the Company’s percentage share of net assets of the investee per the investee’s books and records. (2) Represents the difference between the basis at which the investments in unconsolidated ventures are carried by the Company and the Company's proportionate share of the equity method investee's net assets. To the extent that the Company’s cost basis is different from the basis reflected at the joint venture level, the basis difference 105 Table of Contents is generally amortized over the lives of the related assets and liabilities, and such amortization is included in the Company’s share of equity in earnings of the joint venture. (3) The Company owns greater than 50% of the outstanding common equity but is not deemed by the Company to be the primary beneficiary (for a VIE) or have a controlling financial interest of the investee and as such, accounts for the investee using the equity method. (4) The Company owns 100 % of Las Vegas Land Owner, LLC which owns 77 % of a joint venture that owns an 8.5 acre tract of land (the "Tivoli North Property") as described below. Through the TIC (as defined below), the Company shares control and as such accounts for this investment using the equity method. (5) The Company has a 50 % non-controlling interest in Claymore Holdings, LLC (“Claymore”) and Allenby, LLC, (“Allenby”). The Company has determined it is not the primary beneficiary and does not consolidate these entities. (6) The Company has elected the fair value option with respect to these investments. The basis in these investments is their December 31, 2022 fair value. (7) The Company owns less than 20% of the investee but has significant influence due to members of the management team serving on the board of the investee or its parent and as such, accounts for the investee using the equity method. Sandstone On May 29, 2015, the Company, via a wholly owned subsidiary, invested $ 12 million in Sandstone Pasadena Apartments, LLC ("Sandstone"), which beneficially owns a 696 -unit multifamily property (the “Ashmore”) located in Pasadena, TX. This contribution by the Company gave it an initial ownership percentage of 83.3 %. Sandstone and the Ashmore are managed by Knightvest 2015, LLC (the “Sandstone Manager”). The LLC agreement of Sandstone vests the Sandstone Manager with the exclusive right, power, authority and discretion in conducting the business of Sandstone, subject to certain exceptions. Since the Company does not have a controlling financial interest, it does not consolidate Sandstone and therefore uses the equity method of accounting. Per the Sandstone organizational documents, the Company was entitled to a return on unreturned equity of 10 %, which compounded annually. There was a capital event in 2018 which led to a full return of the Company’s and the other member’s equity in Sandstone. This triggered a change in the distribution-sharing percentage, which is now effectively 50 % for the Company. The Sandstone Manager determines the monthly distributions at their discretion. As of December 31, 2022, the Company still maintains 50 % ownership of Sandstone. Marriott Uptown On June 8, 2018, the Company, through a subsidiary, initially invested amounts in exchange for which it received an approximately 85 % interest in AM Uptown Hotel, LLC, (“AM Uptown”) which beneficially owns a 255 -key upscale hotel (the “Marriott Uptown”) located in Dallas, Texas. AM Uptown appointed Alamo Manhattan Properties, LLC (“Alamo Manhattan”) as the manager to manage and operate the Marriott Uptown. The management, control and direction of AM Uptown and its operations, business and affairs is vested exclusively in Alamo Manhattan, which has the right, power, and authority, acting solely by itself to carry out all the purposes of AM Uptown. The Company does not participate in the management, control, or direction of AM Uptown’s operations, business, or affairs and has no kickout rights over Alamo Manhattan. Since the Company does not have a controlling financial interest, it does not consolidate AM Uptown and therefore uses the equity method of accounting. As of December 31, 2022, the Company maintains 60 % ownership interest of AM Uptown due to previous capital events that triggered a change in the distribution-sharing percentage and ownership percentage. SFR WLIF III On July 11, 2019, the Company initially invested amounts in exchange for which it received an approximately 20 % interest in SFR WLIF III, LLC, an SPE designed to hold an investment in debt issued to VineBrook Homes Operating Partnership, L.P. (the "VB OP"), an entity that manages single family rental properties, whose parent is advised by an affiliate of the Adviser. The loan to the VB OP bears interest at 1-month LIBOR plus 155 basis points, matures on December 1, 2025, and has an outstanding principal balance of $ 241.2 million. SFR WLIF III, LLC is managed, directly or indirectly, by an affiliate of the Adviser. As the Company does not have a controlling financial interest in this entity, it is accounted for as an equity method investment. 106 Table of Contents Tivoli On March 30, 2022, the Company invested in Las Vegas Land Owner, LLC ("Tivoli"), a joint venture that owns the Tivoli North Property, comprised of an 8.5 -acre tract of land, upon which site Tivoli plans to develop a 300 -unit multifamily apartment community directly adjacent to Tivoli Village, a high-end mixed-use center in Las Vegas, Clark County, Nevada. On August 8, 2022 the joint venture was restructured to a tenants-in-common arrangement (the "TIC"). Post restructure, the Company owns 100 % of Tivoli, and Tivoli owns 77 % of the underlying land investment. Members of the TIC must unanimously agree on certain major decisions regarding the underlying investment giving the Company shared control, and as such, the Company accounts for the TIC investment using the equity method. Perilune The Company is a 16.4 % member of Perilune Aero Equity Holdings One, LLC ("Perilune"). Perilune is a pooled investment vehicle created to finance, acquire, lease and/or sell two aircraft through subordinated or other lending arrangements and/or direct or indirect equity investments. Due to the timing of the receipt of financial statements from Perilune, the Company applies up to a 90 day lag reporting for this investment. In instances where the timing of the receipt of financial statements exceeds the 90 day window, earnings for the period are estimated. Since Perilune is a partnership-like LLC, and the Company holds more than an insignificant ownership percentage but not a controlling financial interest, the investment is accounted for using the equity method. Claymore and Allenby The Company owns noncontrolling interests in two LLCs, Claymore and Allenby, created to hold litigation claims. The probability, timing, and potential amount of recovery, if any, are unknown as of December 31, 2022. Since the Company does not have controlling financial interests in these entities, they are accounted for as equity method investments. NexPoint Real Estate Finance Operating Partnership, L.P. In February 2020, the Company contributed assets to certain subsidiaries of the then-newly formed NexPoint Real Estate Finance Operating Partnership, L.P. (the "NREF OP"), the operating partnership of a publicly traded mortgage REIT, in exchange for equity in those subsidiaries. The equity in the subsidiaries owned by the Company, including additional equity received upon receipt of liquidating distributions from other vehicles that contributed to the NREF OP, was subsequently contributed to the Company's wholly owned subsidiary NexPoint Real Estate Opportunities, LLC ("NREO") and redeemed for limited partnership units in the NREF OP. The NREF OP is the operating partnership of NexPoint Real Estate Finance, Inc. ("NREF"), a public mortgage REIT managed by an affiliate of the Adviser. The Company, through NREO, owns approximately 16.1 % of the common units of limited partnership of the NREF OP ("NREF OP Units"), and is not considered the primary beneficiary. The Company owns less than 20% of the investee but has significant influence due to members of the management team serving on the board of NREF and as such, the investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. NexPoint Real Estate Finance, Inc. On December 23, 2022, the Company, through NREO, redeemed 2,100,000 NREF OP Units for 2,100,000 shares of common stock of NREF. The Company, through NREO owns approximately 12.3 %, of NREF’s common stock. The Company owns less than 20% of the investee and does not have a controlling financial interest but has significant influence due to members of the management team serving on the board of the investee, and as such, the investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. VineBrook Homes Operating Partnership, L.P. On November 1, 2018, the Company through NREO contributed $ 70.7 million to the VB OP in exchange for limited partnership units. The VB OP is the operating partnership of VineBrook Homes Trust ("VineBrook"), a private single-family rental REIT managed by an affiliate of the Adviser. The Company, through NREO, owns approximately 11.1 % of the common units of VB OP as of December 31, 2022 and is not considered the primary beneficiary. The Company owns less than 20% of the investee but has significant influence due to members of the management team serving on the board of 107 Table of Contents VineBrook and as such, the investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. NexPoint Storage Partners, Inc. In November 2020, the Company’s preferred stock investment in Jernigan Capital, Inc. was converted into common shares of NexPoint Storage Partners, Inc. ("NSP") as part of a transaction where affiliates of the Adviser took Jernigan Capital, Inc. private. NSP is a privately owned self-storage REIT. As of December 31, 2022, the Company owns 53.1 % of the outstanding common stock of NSP. The Company has determined that it is not the primary beneficiary of NSP. The investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. NexPoint Storage Partners Operating Company, LLC. On December 8, 2022, the Company, through NREO, contributed all of its interests in the joint ventures (the "SAFStor Ventures") with SAFStor NREA GP – I, LLC, SAFStor NREA GP – II, LLC and NREA GP – III, LLC to NexPoint Storage Partners Operating Company, LLC (the "NSP OC") in exchange for 47,064 newly created Class B Units of the NSP OC. The NSP OC is the operating company of NSP. As of December 31, 2022, the Company owns approximately 30.5 % of the outstanding combined classes of common units of the NSP OC (the “NSP OC Common Units") and is not the primary beneficiary, and as such, the investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. NexPoint SFR Operating Partnership, L.P. On June 8, 2022, the Company, directly or through one or more subsidiaries, contributed $ 25.0 million to the newly formed NexPoint SFR Operating Partnership, L.P. (the "SFR OP") in exchange for common units of the SFR OP (the “SFR OP Units"). Additionally, on June 8, 2022, the Company, directly or through one or more subsidiaries, loaned $ 25.0 million to the SFR OP in exchange for $ 25.0 million of 7.50 % convertible notes of the SFR OP (the “SFR OP Convertible Notes") that are interest only during the term and mature on June 30, 2027. The SFR OP is a subsidiary of NexPoint Homes Trust, Inc., a single-family rental REIT managed by an affiliate of the Adviser. Subsequent to June 8, 2022 and before December 31, 2022, the Company, directly or through one or more subsidiaries, contributed approximately an additional $ 27.5 million to the SFR OP in exchange for SFR OP Units. Subsequent to June 8, 2022 and through December 31, 2022, the Company, directly or through one or more subsidiaries, contributed approximately an additional $ 1.0 million to the SFR OP in exchange for SFR OP Units through distribution reinvestments. Additionally, subsequent to June 8, 2022 and before December 31, 2022, the Company, directly or through one or more subsidiaries, loaned an additional $ 5.0 million to the SFR OP in exchange for $ 5.0 million of SFR OP Convertible Notes. As of December 31, 2022, the Company, owns approximately 31.0% of the outstanding units of SFR OP and does not have a controlling financial interest. The investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. NexPoint Hospitality Trust As of December 31, 2022, the Company owns 45.4 % of the outstanding common stock of NexPoint Hospitality Trust ("NHT")and does not have a controlling financial interest. The investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. NHT is a publicly traded hospitality REIT that owns 11 properties located throughout the United States. NHT is managed by an affiliate of the Adviser. NHT is listed on the TSX Venture Exchange under the ticker NHT.U. LLV Holdco, LLC As of December 31, 2022, the Company owns approximately 26.8 % of the series A and B equity units of LLV Holdco, LLC (“LLV”) and does not have a controlling financial interest. The investment qualifies to be accounted for using the equity method. However, management has elected to account for the investment using the fair value option. Additionally, the Company owns 12,127,369 par of LLV's senior revolving loan maturing December 31, 2023 and paying interest at a fixed rate of 5 % per annum. LLV specializes in managing real estate assets, which are ultimately sold to both residential and commercial developers. LLV owns approximately 300 gross acres of undeveloped land, of which 115 acres are developable near Lake Las Vegas in Henderson, Nevada. 108 Table of Contents Significant Equity Method Investments The table below presents the unaudited summary balance sheets for the Company’s significant equity method investments as of December 31, 2022 (dollars in thousands). NREF, NSP and VineBrook do not prepare standalone financials for their operating companies as all operations and investments are owned through their operating companies and are consolidated by the corporate entities. As such, only the financial information for NREF, NSP and VineBrook are presented below. NREF VineBrook NSP ASSETS Investments $ 7,886,370 $ 2,500 $ — Real estate assets 245,222 3,568,567 1,310,059 Cash and cash equivalents 17,671 114,749 14,665 Other assets 3,011 150,921 174,952 TOTAL ASSETS $ 8,152,274 $ 3,836,737 $ 1,499,676 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Debt $ 1,345,101 $ 2,601,229 $ 902,659 Other liabilities 6,264,026 131,993 391,356 Total Liabilities $ 7,609,127 $ 2,733,222 $ 1,294,015 Redeemable noncontrolling interests in the operating company 97,567 475,281 205,114 Noncontrolling interests in consolidated VIEs $ — $ 6,906 $ 4,035 Total Shareholders' Equity 445,580 621,328 ( 3,488 ) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,152,274 $ 3,836,737 $ 1,499,676 The table below presents the unaudited summary statement of operations for the year ended December 31, 2022 for the Company’s significant equity method investments (dollars in thousands). NREF VineBrook NSP Revenues Rental income $ 11,116 $ 262,433 $ 74,639 Net interest income 37,733 — 6,125 Other income — 6,898 4,119 Total revenues $ 48,849 $ 269,331 $ 84,883 Expenses Total expenses 20,044 319,835 85,340 Gain (loss) on sales of real estate $ — $ ( 519 ) $ ( 1,406 ) Other income (expense) ( 14,591 ) 1,361 ( 77,408 ) Unrealized gain (loss) on derivatives — 52,833 — Total comprehensive income (loss) $ 14,214 $ 3,171 $ ( 79,271 ) 109 Table of Contents 10. Fair Value of Derivatives and Financial Instruments Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy): • Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. • Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. • Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date. As of December 31, 2022, the Company’s fair valued investments consisted of senior loans, corporate bonds, CLOs, convertible notes, common stocks, rights, warrants, life settlement contracts, LP interests and LLC interests. The fair value of the Company’s senior loans, bonds, and CLOs are generally based on quotes received from brokers or independent pricing services. Senior loans, bonds, and CLOs with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Senior loans, bonds, and CLOs that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The fair value of the Company’s common stocks, rights, and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. At the end of each calendar quarter, the Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. The fair value of the Company’s common stocks, exchange-traded funds, other registered investment companies and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The Company’s real estate investments include equity interests in limited liability companies and equity issued by REITs that invest in commercial real estate. The fair value of real estate investments that are not actively traded on national exchanges are based on internal models developed 110 Table of Contents by the Adviser. The significant inputs to the models include cash flow projections for the underlying properties, capitalization rates and appraisals performed by independent valuation firms. These inputs are not readily observable, and the Company has classified the investments as Level 3 assets. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option. The fair value of the Company’s convertible notes are categorized as Level 3 assets in the fair value hierarchy. Convertible notes are valued using a discounted cash flow model using discount rates derived from observable market data applied to the internal rate of return implied by the expected contractual cash flows. Upon initial acquisition, the Company’s life settlement contracts are recognized at the transaction price. For each subsequent reporting period, the investments are measured at fair value by a third-party valuation specialist using a life settlement pricing model and are categorized as Level 3 assets in the fair value hierarchy. Key assumptions utilized in determining fair value include but are not limited to: (i) life expectancy estimates provided by independent third-party underwriters based on actuarially developed mortality tables and industry life expectancy reports; (ii) future premium estimates; (iii) rates of return consistent with those sought by independent purchasers of life policies at the time of purchase; and (iv) offers and/or commitments from purchasers. In addition, the valuation agent will also consider recent sales as well as offers received for the life policies deemed likely to close in the near future in estimating fair value. The assumptions used to value life policies are by nature, inherently uncertain and the effect of changes in estimates may be material. The fair value measurement used in estimating the present value calculations are derived from valuation techniques that include inputs that are not based on observable market data. Changes in the fair value of the life settlement contracts are reported as net unrealized gains or losses on the consolidated statement of operations (Successor Basis). Upon the death of an insured or the sale of a life policy, the Company will recognize the difference between the proceeds received and the cost of the life policy as a realized gain or loss in the Company's consolidated statement of operations (Successor Basis). Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available fair market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The table below summarizes the inputs used to value the Company’s assets carried at fair value on a recurring basis as of December 31, 2022 (in thousands): Fair Value Cost Basis Level 1 Level 2 Level 3 Total Assets Bond $ 17 $ — $ 20 $ — $ 20 CLO 34,958 — 563 6,412 6,975 Common stock 325,275 53,872 — 234,667 288,539 Convertible notes 54,802 — — 50,828 50,828 Life settlement 64,267 — — 67,711 67,711 LLC interest 66,492 — — 60,836 60,836 LP interest 321,026 — 77,370 223,141 300,511 Rights and warrants 3,947 — 3,794 — 3,794 Senior loan 43,399 — 66 43,341 43,407 $ 914,183 $ 53,872 $ 81,813 $ 686,936 $ 822,621 111 Table of Contents The table below sets forth a summary of changes in the Company’s Level 3 assets (assets measured at fair value using significant unobservable inputs) for the six months ended December 31, 2022 (in thousands): July 1, 2022 Contributions/ Purchases Paid in- kind dividends Redemptions/ Conversions Return of capital Realized gain/(loss) Unrealized gain/(loss) December 31, 2022 Common Equity $ 257,346 $ 3,363 $ — $ — $ ( 443 ) $ — $ ( 25,599 ) $ 234,667 Convertible Notes 51,858 2,784 160 — — — ( 3,974 ) 50,828 Life settlement 56,440 11,276 — ( 7,055 ) — 3,489 3,561 67,711 LP Interests 227,309 5,780 — ( 10,872 ) — 113 811 223,141 CLO 52,500 — — — ( 18,105 ) — ( 27,983 ) 6,412 LLC Interests 3,982 62,510 — — — — ( 5,656 ) 60,836 Senior Loans 40,997 443 2,048 ( 27 ) — ( 126 ) 6 43,341 Total $ 690,432 $ 86,156 $ 2,208 $ ( 17,954 ) $ ( 18,548 ) $ 3,476 $ ( 58,834 ) $ 686,936 112 Table of Contents The following is a summary of the significant unobservable inputs used in the fair valuation of assets categorized within Level 3 of the fair value hierarchy as of December 31, 2022. Category Valuation Technique Significant Unobservable Inputs Input Value(s) (Arithmetic Mean) Fair Value CLO Discounted Net Asset Value Discount 70 % $ 6,412 Common Stock Market Approach Unadjusted Price/MHz-PoP $ 0.09 % - $ 0.95 % ( 0.515 %) $ 234,667 NAV / sh multiple $ 1.10 x - $ 1.45 x $( 1.28 )x Discounted Cash Flow Discount Rate 8.63 % - 14.5 % ( 9.98 )% Market Rent (per sqft) $ 16 - $ 58 $( 23.38 ) RevPAR $ 75 - $ 189 $ 110.4 Capitalization Rates 5.38 % - 9.25 % ( 8.4 )% Recent Transaction Implied Enterprise Value from Transaction Price ($mm) $ 841 N/A $ 25.31 - $ 28 $( 26.66 ) Convertible Notes Discounted Cash Flow Discount Rate 8 % 50,828 Life Settlement Discounted Cash Flow Discount Rate 14 % 67,711 Life Expectancy (Months) 12 - 196 74 Months LLC Interest Discounted Cash Flow Discount Rate 8.75 % - 30 % ( 19.38 )% 60,836 Market Rent (per sqft) $ 16 - $ 58 $( 23.38 ) Capitalization Rate 5.38 % LP Interest Discounted Cash Flow Discount Rate 6.4 % - 9.1 % ( 7.75 )% 223,141 Capitalization Rate 3.5 % - 6.8 % ( 5.15 )% Recent Transaction Cost Price per Share $ 25 Senior Loan Discounted Cash Flow Discount Rate 11.5 % - 20 % ( 15.75 )% $ 43,341 Total $ 686,936 113 Table of Contents 11. Life Settlement Portfolio The Company owns 100 % of the outstanding equity and debt of Specialty Financial Products, Ltd. ("SFP"), an Ireland domiciled private company with limited liability and a Designated Activity Company. SFP was formed for the purpose of and at the proposal of NexAnnuity Asset Management, L.P. ("NexAnnuity"), an affiliate of the Adviser, entering into acquisitions of U.S. life settlement policies approved by NexAnnuity and funded by the issuance of debt securities, or the Structured Note purchased by the Company. SFP utilizes proceeds from maturing life settlement contracts to repay the Structured Note and to further invest in life settlement contracts. As the Company owns the outstanding equity of and Structured Note issued by SFP, the Company consolidates SFP in its entirety. The Company did not elect the fair value option for SFP as of December 31, 2022. SFP’s equity and the Structured Note are eliminated during consolidation and the financial assets held by SFP are measured at fair value. As of December 31, 2022, the Company’s life settlement portfolio consists of the following (dollars in thousands): Number of Policies Face Value (Death Benefit) Acquisition Cost Premium Cost Estimated Fair Value Total Range Total Range Total Range Total Range Total 28 $ 1,500 -$ 15,000 $ 142,952 $ 350 - $ 3,895 $ 48,132 $ 0 - $ 580 $ 4,589 $0 $ 117 - $ 6,095 $ 67,711 Remaining Life Expectancy (in years) Number Face Value Fair Value 0 - 1 2 $ 7,000 $ 5,950 1 - 2 2 7,350 4,774 2 - 3 5 19,061 11,393 3 - 4 8 51,351 27,648 4 - 5 3 17,100 7,978 Thereafter 8 41,090 9,968 Total 28 $ 142,952 $ 67,711 The premiums to be paid for each of the five succeeding calendar years to keep the life settlement contracts in force as of December 31, 2022, assuming no maturities occur in that period, are as follows (dollars in thousands): Year Premiums 2023 5,279 2024 5,769 2025 6,295 2026 7,011 2027 7,675 During the six months ended December 31, 2022, the Company purchased 3 policies with a combined face value of $ 28.0 million for $ 8.7 million, had 1 policy mature with an aggregate net death benefit of $ 7.0 million, and paid $ 2.6 million in premiums to keep the life settlement contracts in force. 12. Shareholders ’ Equity Common Shares During the six months ended June 30, 2022, the Company issued 92,067 common shares pursuant to its dividend reinvestment plan that was terminated on July 1, 2022. No shares were issued during the six months ended December 31, 2022. 114 Table of Contents As of December 31, 2022, the Company had 37,171,807 common shares, par value $ 0.001 per share, issued and outstanding. During the six months ended December 31, 2022, the Company paid distributions on its common shares on August 1, August 31, September 30 and December 30, 2022. For July, August and September, these distributions were paid in the amount of $ 0.05 per share. Beginning in October, the distribution was updated to $ 0.15 per share and payable quarterly. Preferred Shares On January 8, 2021, the Company issued 3,359,593 5.50 % Series A Cumulative Preferred Shares, par value $ 0.001 per share, liquidation preference $ 25.00 per share ("Series A Preferred Shares") with an aggregate liquidation preference of approximately $ 84.0 million. The Series A Preferred Shares were issued as part of the consideration for an exchange offer for a portion of the Company’s common shares. The Series A Preferred Shares are callable beginning on December 15, 2023 at a price of $ 25 per share. The Company has the option to exercise the callable function of the preferred shares at the Company's discretion. As a result, these are included in permanent equity. During the six months ended December 31, 2022, the Company declared distributions on its Series A Preferred Shares on September 1, 2022 and December 6, 2022, in the amount of $ 0.34375 per share, respectively. The Company sent funding to the transfer agent prior to September 30, 2022 and December 31, 2022, which were then paid to shareholders on September 30, 2022 and January 3, 2023. Dividends on the Series A Preferred Shares are cumulative from their original issue date at the annual rate of 5.5 % of the $ 25 per share liquidation preference and are payable quarterly on March 31, June 30, September 30, and December 31 of each year, or in each case on the next succeeding business day. 13. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of the Company’s common shares outstanding. The Company currently does not have any dilutive instruments outstanding. The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share and share amounts): For the Six Months ended December 31, 2022 Numerator for loss per share: Net income (loss) attributable to common shareholders $ ( 83,883 ) Denominator for loss per share: Weighted average common shares outstanding 37,171,807 Denominator for basic and diluted loss per share 37,171,807 Loss per weighted average common share: Basic $ ( 2.26 ) Diluted $ ( 2.26 ) 14. Related Party Transactions Advisory and Administration Services Fee Prior to the Deregistration Date, the Company was party to an investment advisory agreement (the "Former Advisory Agreement") with an affiliate of the Adviser (the "Former Adviser") pursuant to which the Former Adviser 115 Table of Contents provided investment advisory services to the Company and certain of its subsidiaries. The Company's contractual fee under the Former Advisory Agreement was an annual fee, payable monthly, in an amount equal to 1.00 % an amount (the "Former Managed Assets”) equal to the total assets of the Company, including any form of investment leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the Company’s investment objectives and policies, and/or (iv) any other means. The Former Adviser was permitted to waive a portion of its fees. Prior to the Deregistration Date, the Company was also party to an administration services agreement (the “Administration Services Agreement”) pursuant to which the Former Adviser previously performed administrative functions for us in connection with our operation as a closed-end investment company. For its services, the Former Adviser received an annual fee, payable monthly, in an amount equal to 0.20 % of the average weekly value of the Former Managed Assets. For the six months ended June 30, 2022, the Company incurred fees under the Former Advisory Agreement and Former Administrative Services Agreement of $ 6.3 million prior to the Deregistration Date. In connection with the Business Change and effective on the Deregistration Date, the Company terminated its investment advisory agreement and its administrative services agreement with NexPoint and entered into the Advisory Agreement with the Adviser, a subsidiary of NexPoint. The Company also terminated the investment advisory agreements between NexPoint and its wholly owned subsidiaries, NREO and NexPoint Real Estate Capital, LLC, effective on the Deregistration Date. Pursuant to the Advisory Agreement, subject to the overall supervision of our Board, the Adviser manages the day-to-day operations of the Company, and provides investment management services. As of December 31, 2022, as consideration for the Adviser’s services under the Advisory Agreement, we pay our Adviser an annual fee (the "Advisory Fee") of 1.00 % of Managed Assets and an annual fee (the "Administrative Fee" and, together with the Advisory Fee, the "Fees") of 0.20 % of the Company’s Managed Assets (defined below). The Advisory Agreement provides that the first portion of the monthly installment of the Advisory Fee shall be paid in cash up to $ 1.0 million and the remainder of the monthly installment of the Advisory Fee, if any, shall be paid in common shares of the Company, subject to certain restrictions related to maintaining the Company’s status as a REIT and compliance with federal securities laws and rules promulgated by the New York Stock Exchange. In addition, in no event will the common shares issued to the Adviser under the Advisory Agreement exceed five percent of the number of common shares or five percent of the voting power of the Company outstanding prior to the first such issuance. The number of common shares payable to the Adviser under the Advisory Agreement as a portion of the Advisory Fee shall equal (i) the total dollar amount of the monthly installment of the Advisory Fee payable minus the $ 1.0 million cash portion of the monthly installment of the Advisory Fee divided by (ii) the volume-weighted average price per share for the 10 trading days prior to the end of the month for which the Fees will be paid. The Fees shall be payable independent of the performance of the Company or its investments. The Advisory Agreement also provides that the Administrative Fee shall be paid in cash. Under the Advisory Agreement, “Managed Assets” means an amount equal to the total assets of the Company, including any form of leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing to purchase or develop real estate or other investments, borrowing through a credit facility, or the issuance of debt securities), (ii) the issuance of preferred shares or other preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the Company’s investment objectives and policies, and/or (iv) any other means. In the event the Company holds collateralized mortgage-backed securities ("CMBS") where the Company holds the controlling tranche of the securitization and is required to consolidate under GAAP all assets and liabilities of a specific CMBS trust, the consolidated assets and liabilities of the consolidated trust will be netted to calculate the allowable amount to be included as Managed Assets. In addition, in the event the Company consolidates another entity it does not wholly own as a result of owning a controlling interest in such entity or otherwise, Managed Assets will be calculated without giving effect to such consolidation and instead such entity’s assets, leverage, expenses, liabilities and obligations will, on a pro rata basis consistent with the Company’s percentage ownership, be considered those of the Company for purposes of calculation of Managed Assets. The Adviser computes Managed Assets as of the end of each fiscal quarter and then computes each installment of the Fees as promptly as possible after the end of the month with respect to which such installment is payable. 116 Table of Contents Reimbursement of Expenses; Expense Cap The Company is required to pay directly or reimburse the Adviser for all of the documented “operating expenses” (all out-of-pocket expenses of the Adviser in performing services for us, including but not limited to the expenses incurred by the Adviser in connection with any provision by the Adviser of legal, accounting, financial, due diligence, investor relations or other services performed by the Adviser that outside professionals or outside consultants would otherwise perform and our pro rata share of rent, telephone, utilities, office furniture, equipment, machinery or other office, internal and overhead expenses of the Adviser required for our operations) and any and all expenses (other than underwriters' discounts) paid or to be paid by us in connection with an offering of our securities, including, without limitation, our legal, accounting, printing, mailing and filing fees and other documented offering expenses (collectively, "Offering Expenses"), paid or incurred by the Adviser or its affiliates in connection with the services it provides to us pursuant to the Advisory Agreement. Direct payment of operating expenses by us together with reimbursement of operating expenses to the Adviser, plus compensation expenses relating to equity awards granted under a long-term incentive plan and all other corporate general and administrative expenses of the Company, including the Fees payable under the Advisory Agreement, may not exceed 1.5 % (the "Expense Cap") of Managed Assets, calculated as of the end of each quarter, for the twelve-month period following the Company’s receipt of the Deregistration Order; provided, however, that this limitation will not apply to Offering Expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions or other events outside the ordinary course of our business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments; provided, further, in the event the Company consolidates another entity that it does not wholly own as a result of owning a controlling interest in such entity or otherwise, expenses will be calculated without giving effect to such consolidation and instead such entity’s expenses will, on a pro rata basis consistent with the Company’s percentage ownership, be considered those of the Company for purposes of calculation of expenses. On occasion, the Adviser may waive additional fees to the extent assets are invested in certain affiliated investments. The Adviser may, at its discretion and at any time, waive its right to reimbursement for eligible out-of-pocket expenses paid on the Company’s behalf. Once waived, these expenses are considered permanently waived and become non-recoupable in the future. The Advisory Agreement has an initial term of three years that will expire on July 1, 2025, and successive additional one-year terms thereafter unless earlier terminated. We have the right to terminate the Advisory Agreement on 30 days’ written notice upon the occurrence of a cause event (as defined in the Advisory Agreement). The Advisory Agreement can be terminated by us or the Adviser without cause upon the expiration of the then-current term with at least 180 days’ written notice to the other party prior to the expiration of s term. The Adviser may also terminate the agreement with 30 days’ written notice if we have materially breached the agreement and such breach has continued for 30 days before we are given such notice. In addition, the Advisory Agreement will automatically terminate in the event of Advisers Act Assignment (as defined in the Advisory Agreement) unless we provide written consent. A termination fee will be payable to the Adviser by us upon termination of the Advisory Agreement for any reason, including non-renewal, other than a termination by us upon the occurrence of a cause event or due to an Advisers Act Assignment. The termination fee will be equal to three times the Fees earned by the Adviser during the twelve month period immediately preceding the most recently completed calendar quarter prior to the effective termination date; provided, however, if the Advisory Agreement is terminated prior to the one year anniversary of the date of the Advisory Agreement, the Fees earned during such period will be annualized for purposes of calculating the Fees. For the six months ended December 31, 2022, the Company incurred Administrative Fees and Advisory Fees of $ 5.5 million, inclusive of $ 1.1 million in expenses that were deferred to comply with the Expense Cap. Should the Fees and expenses and any other items subject to the Expense Cap be less than the 1.5 % limit for the twelve-month period subsequent to the Deregistration Date, some or all of the deferred expenses could be recouped by the Adviser up to the Expense Cap. Guaranties of NexPoint Storage Partners, Inc. Debt On September 14, 2022, the Company entered into guaranties (the “BS Guaranties”) for the benefit of JPMorgan Chase Bank, National Association (“JPM”) and any additional or subsequent lenders from time to time (collectively, “BS Lender”) under a loan agreement (the "BS Loan Agreement"), pursuant to which the Company guaranteed certain obligations of the borrowers (“BS Borrower”) under the BS Loan Agreement. The Company, through its ownership in NSP, owns an indirect interest in BS Borrower and entered into the BS Guaranties as a condition of BS Lender lending to BS Borrower under the BS Loan Agreement. Pursuant to the BS Guaranties, the Company guaranteed certain carrying obligations, including interest payments, of BS Borrower and certain recourse obligations of BS Borrower pertaining to exculpation or indemnification of BS Lender. The BS Guaranties also provide that the Company may be required to repay 117 Table of Contents principal amounts upon the occurrence of certain events, including certain action or inaction by BS Borrower, but does not provide for a full guarantee of repayment in all circumstances. The BS Loan Agreement provides for a single initial advance of the loan in the amount of $ 221.8 million to BS Borrower on the closing date, and provides BS Borrower the right to request additional advances in connection with subsequently acquired properties. Amounts outstanding under the BS Loan Agreement are due and payable on September 9, 2023 which date may, at the option of BS Borrower, be extended for two successive one-year terms upon the satisfaction of certain terms and conditions. Borrowings outstanding under the BS Loan Agreement are secured by mortgages on real property owned by one or more of the borrowers comprising BS Borrower and bear interest at the one-month secured overnight financing rate ("SOFR"), subject to a floor of 0.5 %, plus an applicable spread of approximately 4.0 % with respect to approximately $ 184.9 million of initial principal thereunder and approximately 5.4 % with respect to approximately $ 36.9 million of initial principal thereunder. In connection with the foregoing, the Company entered into a Sponsor Guaranty Agreement in favor of Extra Space Storage LP ("Extra Space") pursuant to which the Company and certain affiliates of the Adviser (the "Co-Guarantors") guaranteed obligations of NSP with respect to NSP’s newly created Series D Preferred Stock and two promissory notes in an aggregate principal amount of approximately $ 64.2 million issued to Extra Space. The guaranties by the Company and the Co-Guarantors are capped at $ 97.6 million, which cap amount will be reduced as the guaranteed obligations of NSP are paid. Each of the Company and the Co-Guarantors generally guaranteed the foregoing obligations of NSP up to the cap amount on a pro rata basis with respect to its percentage ownership of NSP’s common stock. The maximum liability of the Company under the guaranties is approximately $ 83.8 million. The Company has not recorded a contingent liability due to NSP being current on all debt and preferred dividend payments and in compliance with all debt compliance provisions of the Sponsor Guaranty Agreement. Separately, on September 14, 2022, the Company entered into a Guaranty Agreement (Recourse Obligations), dated September 14, 2022 (the “CMBS Guaranty”) for the benefit of JPM and any additional or subsequent lenders from time to time (collectively, the “CMBS Lender”) under a loan agreement (the "CMBS Loan Agreement"), by and among the borrowers thereunder (collectively, “CMBS Borrower”) and the CMBS Lender. The Company, through its ownership in NSP, owns an indirect interest in CMBS Borrower and entered into the CMBS Guaranty as a condition of CMBS Lender lending to CMBS Borrower under the CMBS Loan Agreement. Pursuant to the CMBS Guaranty, the Company guaranteed certain recourse obligations of CMBS Borrower pertaining to exculpation or indemnification of CMBS Lender. The CMBS Guaranty also provides that the Company may be required to repay principal amounts upon the occurrence of certain events, including certain action or inaction by CMBS Borrower, but does not provide for a full guarantee of repayment in all circumstances. The CMBS Loan Agreement provides for a loan of $ 356.5 million to CMBS Borrower. Amounts outstanding under the CMBS Loan Agreement are due and payable on September 9, 2024 which date may, at the option of CMBS Borrower, be extended for three successive one-year terms upon the satisfaction of certain terms and conditions. Borrowings outstanding under the CMBS Loan Agreement are secured by mortgages on real property owned by one or more of the borrowers comprising CMBS Borrower and bear interest at one-month SOFR plus a spread of approximately 3.6 %, which will increase by 0.1 % upon a second extension of the loan maturity and by an additional approximately 0.15 % upon a third extension of the loan maturity. Subsidiary Investment Management Agreement SFP is a party to a management agreement (the "SFP IMA") with NexAnnuity pursuant to which NexAnnuity provides investment management services to SFP. Mr. Dondero serves as President of NexAnnuity, which is indirectly owned by a trust of which Mr. Dondero is the primary beneficiary. In exchange for its services, the SFP IMA provides that NexAnnuity will receive a management fee (the "SFP Management Fee paid monthly in an amount equal to 1.0 % of the average weekly value of an amount equal to the total assets of SFP, including any form of leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the investment objective, investment guidelines and policies under the SFP IMA, and/or (iv) any other means, plus any value added tax or any other applicable tax, if any, thereon. NexAnnuity may waive all or a portion of the SFP Management Fee. 118 Table of Contents Other Related Party Transactions The Company has in the past, and may in the future, utilize the services of affiliated parties. The Company holds multiple operating accounts at NexBank an affiliate of the Adviser through common beneficial ownership. The Company’s operating properties, other than undeveloped land, are managed by NexVest Realty Advisors, LLC ("NexVest"), an affiliate of the Adviser. For the six and twelve months ended December 31, 2022, the Company through its subsidiaries has paid approximately $ 0.3 million and $ 0.7 million, respectively, in property management fees to NexVest. The property management agreement with NexVest for the retail property in Lubbock, Texas is dated January 1, 2014 and has a fixed fee of $ 750 per month. The property management agreement with NexVest for Cityplace Tower is dated August 15, 2018, and the management fee is calculated on 3 % of gross revenues, with a minimum fee of $ 20,000 per month. The property management agreement with NexVest for the White Rock Center is dated June 1, 2013, and the management fee is calculated on 4 % of gross receipts, payable monthly. The Company is a limited guarantor and an indemnitor on one of NHT's loans with an aggregate principal amount of $ 77.4 million as of December 31, 2022. The obligations include a customary environmental indemnity and a so-called "bad boy" guarantee, which is generally only applicable if and when the borrower directly, or indirectly through an agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper. The Company has not recorded a contingent liability as NHT is current on all debt payments and in compliance with all debt compliance provisions. On March 31, 2022, the Company, through an unconsolidated subsidiary, borrowed approximately $ 13.5 million from NREF, an entity advised by an affiliate of the Adviser, to finance its acquisition of a 77.0 % interest in Tivoli North Property. The bridge note bore interest at an annual rate equal to the WSJ Prime Rate plus 1.5 % and had a maturity date of October 1, 2022. The Company refinanced this bridge note with PNC Bank, N.A ("PNC Bank") on August 8, 2022. The new loan had a principal amount of $ 13.5 million, matures on August 7, 2023, and bears interest at an annual rate of daily simple SOFR plus 3.5 %. Proceeds from the note with PNC Bank were used to repay in full the financing provided by NREF on August 9, 2022. On December 8, 2022, the Company, through NREO, entered into a Contribution Agreement pursuant to which NREO contributed all of its interests in the SAFStor Ventures with SAFStor NREA GP – I, LLC, SAFStor NREA GP – II, LLC and NREA GP – III, LLC to NSP OC in exchange for approximately 47,064 newly created Class B Units of the NSP OC, representing 14.8 % of NSP OC Common Units immediately after NREO’s acquisition of Class B Units. The NSP OC is the operating company of NSP, of which the Company owns approximately 86,369 shares, or 53.1 %, of the outstanding common stock as of December 31, 2022. In connection with the foregoing, the NSP OC acquired all of the other interests in the SAFStor Ventures from affiliates of the Adviser following which they were wholly owned by a subsidiary of the NSP OC. The SAFStor Ventures are invested, through subsidiaries, in various self-storage real estate development projects primarily located on the East Coast of the United States. As of December 31, 2022, the Company owns approximately 47,064 units, or 30.5 %, of the outstanding NSP OC Common Units. On December 23, 2022, the Company, through NREO, redeemed 2,100,000 NREF OP Units for 2,100,000 shares of common stock of NREF. The NREF OP is the operating partnership of NREF, a publicly traded mortgage REIT managed by an affiliate of the Adviser. 119 Table of Contents Related Party Investments The Company, from time to time, may invest in entities managed by affiliates of the Adviser. For the six months ended and as of December 31, 2022, the Company has the following investments in entities managed or advised by, or directly or indirectly owned by entities managed or advised by, affiliates of the Adviser (in thousands). Related Party Investment Fair Value Change in Unrealized Gain/(Loss) Realized Gain/(Loss) Interest and Dividends Total Income SFR WLIF III, LLC LLC Units $ 7,272 $ 315 $ — $ — $ 315 NexPoint Residential Trust, Inc. Common Stock 3,825 ( 1,657 ) — 70 ( 1,587 ) NexPoint Hospitality Trust Common Stock 27,685 1,086 — — 1,086 NexPoint Hospitality Trust Convertible Notes 21,479 ( 3,323 ) — 152 ( 3,171 ) NexPoint Storage Partners, Inc. Common Stock 103,695 ( 17,584 ) — — ( 17,584 ) NexPoint Storage Partners Operating Company, LLC LLC Units 56,505 ( 6,004 ) — — ( 6,004 ) NexPoint SFR Operating Partnership, L.P. Partnership Units 53,480 31 — 988 1,019 NexPoint SFR Operating Partnership, L.P. Convertible Notes 29,350 ( 650 ) — 1,181 531 Claymore Holdings, LLC LLC Units — — — — — Allenby, LLC LLC Units — — — — — NexPoint Real Estate Finance Operating Partnership, L.P. Partnership Units 77,370 ( 21,327 ) — 6,969 ( 14,358 ) NexPoint Real Estate Finance, Inc. Common Stock 33,369 ( 9,198 ) — — — ( 9,198 ) VineBrook Homes Operating Partnership, L.P. Partnership Units 169,661 780 — 2,853 — 3,633 Total $ 583,691 $ ( 57,531 ) $ — $ 12,213 $ ( 45,318 ) 120 Table of Contents 15. Commitments and Contingencies Commitments On December 8, 2022 and in connection with a restructuring of NSP, the Company, together with the certain affiliates of the Adviser (the "Co-Guarantors"), as guarantors, entered into a Sponsor Guaranty Agreement in favor of Extra Space Storage LP ("Extra Space") pursuant to which the Company and the Co-Guarantors guaranteed obligations of NSP with respect to NSP’s newly created Series D Preferred Stock and two promissory notes in an aggregate principal amount of approximately $ 64.2 million issued to Extra Space. The guaranties by the Company and the Co-Guarantors are capped at $ 97.6 million, which cap amount will be reduced as the guaranteed obligations of NSP are paid. Each of the Company and the Co-Guarantors generally guaranteed the foregoing obligations of NSP up to the cap amount on a pro rata basis with respect to its percentage ownership of NSP’s common stock. The maximum liability of the Company under the guaranties is approximately $ 83.8 million. As of December 31, 2022, the Company owns approximately 53.1 % of the total outstanding shares of common stock of NSP. NSP is current on all debt and dividend payments and in compliance with all debt compliance provisions. See Note 14 for additional information. The Company is a limited guarantor and an indemnitor on one of NHT's loans with an aggregate principal amount of $ 77.4 million outstanding, as of December 31, 2022. The obligations include a customary environmental indemnity and a so-called "bad boy" guarantee, which is generally only applicable if and when the borrower directly, or indirectly through an agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper. The Company has not recorded a contingent liability as NHT is current on all debt payments and in compliance with all debt compliance provisions. Contingencies In the normal course of business, the Company is subject to claims, lawsuits, and legal proceedings. While it is not possible to ascertain the ultimate outcome of all such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated balance sheets or consolidated statements of operations and comprehensive income (loss) of the Company. The Company is not involved in any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company or its properties or subsidiaries. Environmental liabilities could have a material adverse effect on the Company’s business, assets, cash flows or results of operations. As of December 31, 2022, the Company was not aware of any environmental liabilities. There can be no assurance that material environmental liabilities do not exist. Claymore and Allenby are engaged in ongoing litigation that could result in a possible gain contingency to the Company. The probability, timing, and potential amount of recovery, if any, are unknown. 16. Operating Leases Lessor Accounting We generate the majority of our revenue by leasing our operating properties to customers under operating lease agreements. The manner in which we recognize these transactions in our financial statements is described in the Income Recognition section of Footnote 1 to these consolidated financial statements. The following table summarizes the future minimum lease payments to the Company as the lessor under the operating lease obligations at December 31, 2022 (in thousands). These amounts do not reflect future rental revenues from renewal or replacement of existing leases. Reimbursements of operating expenses and variable rent increases are excluded from the table below. 121 Table of Contents Year: Operating Leases 2023 $ 10,334 2024 $ 6,310 2025 $ 6,002 2026 $ 4,687 2027 $ 3,872 Thereafter $ 3,320 Total $ 34,525 The following table lists the tenants where the rental revenue from the tenants during the period presented represented 10% or more of total rental income in the Company’s consolidated statements of operations (in thousands): Six Months Ended December 31, 2022 Tenant Rental Income Hudson Advisors, LLC $ 1,424 17. Subsequent Events Dividends Declared On February 22, 2023, the Board approved a quarterly dividend of $ 0.15 per common share, payable on March 31, 2023 to shareholders of record on March 15, 2023. Also on February 22, 2023, the Board approved a quarterly dividend of $ 0.34375 per Series A Preferred Share, payable on March 31, 2023 to shareholders of record on March 24, 2023. Adoption of Long Term Incentive Plan On January 30, 2023, we held a special meeting of shareholders, at which our shareholders approved our 2023 Long Term Incentive Plan (the “2023 LTIP”). The 2023 LTIP authorizes the Compensation Committee of the Board to provide equity-based compensation in the form of option rights, share appreciation rights, restricted shares, restricted shares units, performance shares, performance units, cash incentive awards, profits interest units and other awards based on or related to the Company’s shares. Cityplace Debt Extension On February 8, 2023, the lenders agreed to defer the maturity of the Cityplace debt by three months to May 8, 2023, with the possibility to extend for an additional four months to September 8, 2023 provided certain metrics are met. The purpose of the deferral was to allow for continued discussions around refinancing the debt. 122 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.