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Item 7. Management’s Discussion and Analysis

2024-03-14 compared with 2023-03-31 · 299 added, 109 removed, 245 unchanged (62% of the section changed)

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This discussion contains forward-looking statements that involve risks and uncertainties.

Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this quarterly report.

See “ Cautionary Statement Regarding Forward-Looking Statements ” in this report.

See “ Cautionary Statement Regarding Forward-Looking Statements ” in this Annual Report.

As of December 31, 2023, our Portfolio consisted primarily of debt and equity investments in the single-family rental, self-storage, office, hospitality, life science and multifamily sectors.

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As of December 31, 2023, there were 2,000 OP Units outstanding, of which 100% were owned by us.

On July 1, 2022, or the Deregistration Date, the SEC issued the Deregistration 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 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”).

On July 1, 2022, or 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 "Deregistration Order").

The issuance of the Deregistration Order enabled the Company to proceed with full implementation of its new business mandate to operate as a diversified REIT that focuses primarily on investing in various commercial real estate property types and across the capital structure, including but not limited to, equity, mortgage, debt, mezzanine debt and preferred equity (the "Business Change").

As a result of the Business Change, we have not provided a comparison of our financial statements to prior periods in which we were operating as a registered investment company because it would not be useful to our shareholders.

The discussion herein is principally limited to our financial condition and results of operations during the period from the Deregistration Date to December 31, 2022.

As a diversified REIT, the Company’s primary investment objective is to provide both current income and capital appreciation.

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We are externally managed by the Adviser through the Advisory Agreement, by and among the Company and the Adviser.

The Advisory Agreement was dated July 1, 2022, and amended on October 25, 2022, for an initial three-year

term that will expire on July 1, 2025 and successive one-year terms thereafter unless earlier terminated.

The Advisory Agreement was dated July 1, 2022, and amended on October 25, 2022 and April 11, 2023, for an initial three-year term that will expire on July 1, 2025 and successive one-year terms thereafter unless earlier terminated.

The Adviser is wholly owned by our Sponsor.

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We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.

Taxable income from certain non-REIT activities is managed through one or more TRS entities and are subject to applicable federal, state, and local income and margin taxes.

On October 15, 2021, the Bankruptcy Trust Lawsuit was filed by a litigation subtrust formed in connection with the Highland Bankruptcy against various persons and entities, including our Sponsor and James Dondero.

In addition, on February 8, 2023, the UBS Lawsuit was filed against Mr.

Dondero and a number of other persons and entities.

Taxable income from certain non-REIT activities is managed through one or more TRS entities and is subject to applicable federal, state, and local income and margin taxes.

The high rate environment and ongoing economic uncertainty, has limited credit availability to commercial real estate.

Less available and more expensive debt capital has had pronounced effects on the capital markets, making property acquisitions and other investments harder to finance.

Similar factors also impact the timing of and proceeds generated from asset sales and our ability to obtain debt capital.

On October 15, 2021, Marc S.

Kirschner, as litigation trustee of a litigation subtrust formed in connection with the bankruptcy proceedings of Highland, a former affiliate of our Sponsor, filed a lawsuit (the "Bankruptcy Trust Lawsuit") against various persons and entities, including our Sponsor and James Dondero.

In addition, on February 8, 2023, UBS Securities and its affiliate (collectively “UBS”) filed a lawsuit in the Supreme Court of the State of New York, County of New York against Mr.

Dondero and a number of entities currently or previously affiliated with Mr.

Dondero, seeking to collect on $1.3 billion in judgments UBS obtained against entities that were managed indirectly by Highland (the "UBS Lawsuit").

Neither the Bankruptcy Trust Lawsuit nor the UBS Lawsuit include claims related to our business or our assets.

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Dondero has informed us he believes the UBS Lawsuit has no merit;

we have been advised that the defendants named in each of the lawsuits intend to vigorously defend against the claims.

we have been advised that the defendants named in each of the

lawsuits intend to vigorously defend against the claims.

We do not expect the Bankruptcy Trust Lawsuit or the UBS Lawsuit will have a material effect on our business, results of operations or financial condition.

Macroeconomic trends, including increases in inflation and rising interest rates, may adversely impact our business, financial condition and results of operations.

Inflation in the United States has recently accelerated and is currently expected to continue at an elevated level in the near-term.

Rising inflation could have an adverse impact on our operating expenses and our floating rate mortgages and credit facilities, as these costs could increase at a rate higher than our rental and other revenue.

There is no guarantee we will be able to mitigate the impact of rising inflation.

The Federal Reserve has recently started raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise.

In addition, to the extent our exposure to increases in interest rates on any of our debt is not eliminated through interest rate swaps and interest rate protection agreements, such increases will result in higher debt service costs which will adversely affect our cash flows.

On February 22, 2023, as previously disclosed, the Board formed an independent special committee to oversee a review of the potential impact to the Company of the UBS Lawsuit and the Bankruptcy Trust Lawsuit.

The special committee retained Reichman Jorgensen Lehman Feldberg LLP (“Reichman Jorgensen”) as independent legal counsel to advise the special committee on the review.

Reichman Jorgensen reported to the special committee that they have found no evidence that the Company engaged in any conduct that would expose it to liability from the UBS Lawsuit or the Bankruptcy Trust Lawsuit.

On June 13, 2023, the special committee delivered these findings to the Board.

Following the review of the special committee, we reaffirm our expectation that neither the Bankruptcy Trust Lawsuit nor the UBS Lawsuit will have a material effect on our business, results of operations or financial condition.

Macroeconomic trends, including increases in or high inflation and rising or high interest rates, may adversely impact our business, financial condition and results of operations.

Rising inflation could have an adverse impact on our operating expenses, as these costs could increase at a rate higher than our rental and other revenue.

There is no guarantee we will be able to mitigate the impact of rising or high inflation.

In response to high inflation, the Federal Reserve raised interest rates to combat inflation and restore price stability.

In addition, to the extent our exposure to increases in or high interest rates on any of our debt is not eliminated through interest rate swaps and interest rate protection agreements, such increases or elevated rates will result in higher debt service costs which will adversely affect our cash flows.

We cannot make assurances that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings.

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Rental income .

Our rental income is primarily attributable to the rental revenue from our investment in Cityplace Tower, a 42-story, 1.35 million-square-foot, trophy office building acquired in 2018 as well as rental income from two retail properties (see Note 5 to our consolidated financial statements).

Our rental income is primarily attributable to the rental revenue from our investment in Cityplace Tower, a 42-story, 1.36 million-square-foot, trophy office building acquired in 2018 as well as rental income from two retail properties.

Our rental income also includes utility reimbursements, late fees, common area maintenance reimbursements, and other rental fees charged to tenants.

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Corporate general and administrative expenses include, but are not limited to, audit fees, legal fees, listing fees, board of trustee fees, investor relations costs and payments of reimbursements to our Adviser for operating expenses.

Corporate general and administrative expenses and the Advisory Fees and Administrative Fees paid to our Adviser will not exceed the Expense Cap for the 12 months subsequent to the Deregistration Date, calculated in accordance with the Advisory Agreement.

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.

Corporate general and administrative expenses and the Advisory Fees and Administrative Fees paid to our Adviser were limited to the Expense Cap for the 12 months ended June 30, 2023.

This limitation ended June 30, 2023, and did not limit the reimbursement by us of expenses related to securities offerings paid by our Adviser.

The Expense Cap also did 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 reimbursement for eligible out-of-pocket expenses paid on the Company's behalf.

Once waived, such expenses are considered permanently waived and become non-recoupable in the future.

Conversion expense .

In connection with the Deregistration Order, the Company has incurred legal fees and other fees in preparation for the Business Change.

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 incurred in preparation for or as a direct result of the conversion.

These conversion expenses are included in the consolidated statement of operations and comprehensive income (loss) as conversion expenses.

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The Company reverses cumulative, unrealized gains or losses previously reported in its Consolidated Statements of Operations on both the Successor and Predecessor basis with respect to the investment sold at the time of the sale.

Results of Operations for the Six Months Ended December 31, 2022

The six months ended December 31, 2022

Real Estate Investments Statistics

As of December 31, 2023, 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

(in thousands) Property Type Date

Acquired December 31,

2023 December 31,

White Rock Center 82,793 Retail 6/13/2013 $ 1.51 67.7 %

5916 W Loop 289 30,140 Retail 7/23/2013 $ — — % (4)

Cityplace Tower 1,365,711 Office & Hospitality (3) 8/15/2018 $ 2.14 51.3 %

(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, 2023, minus any tenant concessions over the term of the lease, divided by the occupied square footage of commenced leases as of December 31, 2023.

(2) Percent occupied is calculated as the rentable square footage occupied as of December 31, 2023, divided by the total rentable square footage, expressed as a percentage.

(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, 2023.

(4) The property's tenant vacated in the fourth quarter of 2023.

The Company is currently looking into leasing out the property.

Results of Operations for the Year Ended December 31, 2023 and Six Months Ended December 31, 2022

The discussion herein is principally limited to our financial condition and results of operations during the period from the Deregistration Date to December 31, 2022.

The following table sets forth a summary of our operating results for the six months ended December 31, 2022 (in thousands):

For the Six Months Ended December 31,

The discussion herein is principally limited to our financial condition and results of operations during the period from the Deregistration Date to December 31, 2022 and from January 1, 2023 to December 31, 2023.

The following table sets forth a summary of our operating results for the year ended December 31, 2023 and the six months ended December 31, 2022 (in thousands):

For the Year Ended December 31 For the Six Months Ended December 31,

Total revenues $63,284 $55,130

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Interest expense (15,902) (5,759)

Equity in losses of unconsolidated ventures (2,257)

Equity in income (losses) of unconsolidated ventures (306) (2,257)

Income tax expense (2,731) (9,975)

Change in unrealized losses (92,031)

Realized loss (2,323)

Net loss (81,573)

Net income attributable to preferred shareholders (2,310)

Net loss attributable to common shareholders $ (83,883)

The net loss for the six months ended December 31, 2022 primarily relates to mark-to-market losses on our investments accounted for at fair value partially offset by interest and dividends.

Change in unrealized gains (losses) (108,249) (92,031)

Realized gains (losses) (1,634) (2,323)

Net income (loss) (117,241) (81,573)

Net (income) loss attributable to preferred shareholders (4,619) (2,310)

Net income (loss) attributable to common shareholders $ (121,860) $ (83,883)

The net loss for the year ended December 31, 2023 and the six months ended December 31, 2022 primarily relates to mark-to-market losses on our investments accounted for at fair value partially offset by interest and dividends.

Rental income .

Rental income was $10.1 million for the six months ended December 31, 2022.

Rental income was $20.3 million for the year ended December 31, 2023, and $10.1 million for the six months ended December 31, 2022.

Rental income primarily consists of lease revenue from our investment in Cityplace Tower.

Interest and dividends .

Interest and dividends totaled $45.0 million for the six months ended December 31, 2022.

Interest and dividends consists primarily of dividends from CLO equity investments of $29.1 million, NREF OP distributions of $7.0 million and VineBrook Homes Operating Partnership, L.P.

("VB OP") distributions of $2.8 million.

Interest and dividends totaled $42.7 million for the year ended December 31, 2023, and $45.0 million for the six months ended December 31, 2022.

For the year ended December 31, 2023, interest and dividends consists primarily of dividends from CLO equity investments of $17.4 million, NexPoint Real Estate Finance Operating Partnership, L.P.

("NREF OP") distributions of $8.9 million and NREF dividends of $3.6 million.

For the six months ended December 31, 2022, interest and dividends consisted primarily of dividends from CLO equity investments of $29.1 million, NREF OP distributions of $7.0 million and VB OP distributions of $2.8 million.

Other income.

Other income was approximately $32,000 for the six months ended December 31, 2022.

Other income was approximately $0.3 million for the year ended December 31, 2023, and $32,000 for the six months ended December 31, 2022.

Property operating expenses.

Property operating expenses were $3.7 million for the six months ended December 31, 2022.

Property operating expenses were $7.5 million for the year ended December 31, 2023 and $3.7 million for the six months ended December 31, 2022.

Property operating expenses consist primarily of expenses from our investment in Cityplace Tower.

Property management fees.

Property management fees were $0.3 million for the six months ended December 31, 2022.

Property management fees were $0.7 million for the year ended December 31, 2023 and $0.3 million for the six months ended December 31, 2022.

Property management fees are primarily based on gross revenues derived primarily from our investment in Cityplace Tower.

Real estate taxes and insurance.

Real estate taxes and insurance costs were $2.7 million for the six months ended December 31, 2022.

Real estate taxes and insurance costs were $4.4 million for the year ended December 31, 2023 and $2.7 million for the six months ended December 31, 2022.

Real estate taxes and insurance expenses consist primarily of expenses from our investment in Cityplace Tower.

Advisory and administrative fees.

For the six months ended December 31, 2022, the Company incurred Administrative Fees and Advisory Fees of $5.5 million, inclusive of $1.8 million in expenses that were deferred to comply with the Expense Cap.

Should the Company’s Fees and expenses subject to the Expense Cap be less than the 1.5% limit for the twelve month period subsequent to the Deregistration Date, some or all of the deferred expenses could be recouped by the Adviser up to the Expense Cap.

For the year ended December 31, 2023, the Company incurred Administrative Fees and Advisory Fees of $11.7 million, inclusive of $2.0 million in fees that were waived to comply with the Expense Cap.

For the six months ended December 31, 2022, the Company incurred Administrative Fees and Advisory Fees of $5.5

million, inclusive of $1.8 million in expenses that were waived and cannot be recouped by the Adviser.

The Expense Cap expired on June 30, 2023.

Property general and administrative expenses.

Property general and administrative expenses were $0.3 million for the six months ended December 31, 2022.

Property general and administrative expenses were $4.3 million for the year ended December 31, 2023 and $0.3 million for the six months ended December 31, 2022.

Property general and administrative expenses consist primarily of expenses from our investment in Cityplace Tower.

Corporate general and administrative expenses.

Corporate general and administrative expenses were $3.1 million for the six months ended December 31, 2022.

Corporate general and administrative expenses were primarily driven by legal fees $0.8 million.

Corporate general and administrative expenses were $8.0 million for the year ended December 31, 2023 and $3.1 million for the six months ended December 31, 2022.

Conversion expenses.

Conversion expenses were $1.6 million for the six months ended December 31, 2022.

Conversion fees were primarily driven by legal fees related to the Deregistration Order of $0.9 million.

Conversion expenses were $1.2 million for the year ended December 31, 2023 and $1.6 million for the six months ended December 31, 2022.

Depreciation and amortization.

Depreciation and amortization costs were $7.2 million for the six months ended December 31, 2022.

Depreciation and amortization costs were $13.9 million for the year ended December 31, 2023 and $7.2 million for the six months ended December 31, 2022.

Depreciation and amortization expenses consist primarily of expenses from our investment in Cityplace Tower.

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Interest expense.

Interest expense was $5.8 million for the six months ended December 31, 2022.

Equity in losses of unconsolidated ventures .

Equity in losses of unconsolidated ventures was $2.3 million for the six months ended December 31, 2022 and was primarily driven by amortization of the basis difference on the SAFStor Ventures of approximately $2.2 million.

Interest expense was $15.9 million for the year ended December 31, 2023 and $5.8 million for the six months ended December 31, 2022.

Equity in income (losses) of unconsolidated ventures .

Equity in income of unconsolidated ventures was $0.3 million for the year ended December 31, 2023 Equity in losses of unconsolidated ventures was $2.3 million for the six months ended December 31, 2022.

Income tax expense .

The Company has recorded a current income tax expense of $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 $10.0 million for the six months ended December 31, 2022, that is recorded on the Consolidated Statement of Operations.

Change in unrealized losses .

Unrealized losses from our investments accounted for at fair value was $92.0 million for the six months ended December 31, 2022.

Losses were primarily driven by mark-to-market losses on NREF OP Units of $21.3 million, mark-to-market losses on NSP OC Common Units and equity of $23.6 million and losses on our CLO equity portfolio of $27.9 million.

The Company has recorded income tax expense (benefit) of $2.7 million associated with the TRSs for the year ended December 31, 2023 and $10.7 million associated with the TRSs for the six months ended December 31, 2022.

The tax expense for the year ended December 31, 2023 is partially offset by the annual change in valuation allowance on a deferred tax asset of $0.6 million and increased by a 2022 return-to-provision adjustment of $1.5 million for a net expense of $3.3 million for the year ended December 31, 2023, that is recorded on the Consolidated Statement of Operations.

The tax expense for the six months ended December 31, 2022 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 $10.0 million for the six months ended December 31, 2022, that is recorded on the Consolidated Statement of Operations.

Change in unrealized gains (losses) .

Unrealized gains (losses) from our investments accounted for at fair value was $(108.2) million for the year ended December 31, 2023 and $(92.0) million for the six months ended December 31, 2022.

The losses for the year ended December 31, 2023 were largely driven by mark-to-market losses on NexPoint Storage Partners, Inc.

("NSP") common equity of $35.5 million, VB OP Units of $27.5 million, NSP OC Common Units of $19.3 million offset by mark-to-market gains on and mark-to-market gains on our IQHQ, Inc.

Class A-1 shares of $3.4 million.

The losses for the six months ended December 31, 2022 were primarily driven by mark-to-market losses on NREF OP Units of $21.3 million, mark-to-market losses on NSP OC Common Units and equity of $23.6 million and losses on our CLO equity portfolio of $27.9 million.

Our CLO equity portfolio consists primarily of CLOs that are in the process of winding down operations and liquidating their remaining holdings.

The losses on the CLO equity portfolio are offset by dividends received of $29.1 million which are shown in interest and dividends on the consolidated statement of operations.

The losses on the CLO equity portfolio for the six months ended December 31, 2022 are offset by dividends received of $29.1 million which are shown in interest and dividends on the Consolidated Statement of Operations.

Realized gains (losses) .

Realized losses were $2.3 million for the six months ended December 31, 2022, driven primarily by a realized loss of $6.9 million on the contribution of the SAFStor Ventures to the NSP OC as discussed in Note 14 of the Company's consolidated financial statements.

This was partially offset by gains on maturities in our life settlement portfolio of $3.5 million.

Realized gains (losses) were $(1.6) million for the year ended December 31, 2023 and $(2.3) million for the six months ended December 31, 2022.

The losses for the year ended December 31, 2023 were primarily driven by realized losses on common stock of Elme Communities of $0.8 million, Whitestone REIT of $1.1 million, and realized losses on SFP of $1.3 million.

The loses for the six months ended December 31, 2022 were primarily driven by a realized loss of $6.9 million on the contribution of the SAFStor Ventures (as defined below) to the NSP OC.

This was primarily offset by gains on maturities in our life settlement portfolio of $3.5 million.

Non-GAAP Measurements

Net Operating Income and Same Store Net Operating Income

Net Operating Income ("NOI") is a non-GAAP financial measure of performance.

NOI is used by investors and our management to evaluate and compare the performance of our properties to other comparable properties, to determine trends in earnings and to compute the fair value of our properties as NOI is calculated by adjusting net income (loss) to add back (1) interest expense, (2) Advisory Fees and Administrative Fees, (3) the impact of depreciation and amortization, (4) corporate general and administrative expenses, (5) income tax expenses, (6) conversion expenses, (7) non-operating property investment revenue, (8) realized and change in unrealized gains (losses) generated from non-real estate investments, and (9) equity in income (losses) of unconsolidated equity method ventures.

The cost of funds is eliminated from net income (loss) because it is specific to our particular financing capabilities and constraints.

The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital, which may have changed or may change in the future.

Corporate general and administrative expenses, advisory fees and administrative fees, conversion expenses, and income tax expenses are eliminated because they do not reflect continuing operating costs of the property.

Depreciation and amortization expenses are eliminated because they may not accurately represent the actual change in value in our properties that result from use of the properties or changes in market conditions.

While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time.

Equity in income (losses) of unconsolidated equity method ventures are eliminated because they do not reflect continuing operating costs of the properties.

Non-operating property investment revenue and realized and change in unrealized gains (losses) from non-real estate investments are eliminated as they do not reflect continuing operating costs of the properties.

We believe that eliminating these items from net income (loss) is useful because the resulting measure captures the actual ongoing revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.

However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense, Advisory Fees and Administrative Fees, conversion expenses, income tax expenses, depreciation and amortization expense, non-operating property investment revenue and realized and change in unrealized gains and losses generated from non-real estate investments, and equity in income or losses of unconsolidated equity method ventures, all of which may be material values.

NOI may fail to capture significant trends in these components of net income, which further limits its usefulness.

NOI is a measure of the operating performance of our properties but does not measure our performance as a whole.

NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP.

This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI.

Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

We define “Same Store NOI” as NOI for our properties that are comparable between periods and that are stabilized.

Please see below for a discussion of properties included as Same Store (defined below).

We view Same Store NOI as an important measure of the operating performance of our properties because it allows us to compare operating results of properties owned for the entirety of the current and comparable periods and therefore eliminates variations caused by acquisitions or dispositions from the beginning of the compared period to the end of the current period.

NOI and Same Store NOI for the Year Ended December 31, 2023 and the Six Months Ended December 31, 2022

The following table, reconciles our NOI for the year ended December 31, 2023 and for the six months ended December 31, 2022 to net income (loss), the most directly comparable GAAP financial measure (in thousands):

For the Year Ended December 31 For the Six Months Ended December 31

Net loss $ (117,241) $ (81,573)

Adjustments to reconcile net loss to NOI:

Advisory and administrative fees 11,740 5,514

Corporate general and administrative expenses 7,981 3,080

Conversion expenses 1,203 1,615

Income tax expense 2,731 9,975

Depreciation and amortization 13,937 7,175

Interest expense 15,902 5,759

Property general and administrative expenses (1) — (824)

Non-operating property investment revenue ¹

(42,667) (45,061)

Realized gains (losses) from non-real estate investments 1,634 2,323

Change in unrealized (gains) losses from non-real estate investments 108,249 92,031

Equity in (income) losses of unconsolidated equity method ventures 306 2,257

NOI $ 3,775 $ 2,270

Less Non-Same Store

Revenues $ (19,147) $ (9,258)

Operating expenses 16,310 7,497

Same Store NOI $ 938 $ 509

(1) Non-operating property investment revenue is defined as revenue included in the consolidated financial statements, that are from non-operating properties such as dividend income and interest income.

Net Operating Income for Our Same Store and Non-Same Store Properties for the Year Ended December 31, 2023 and the Six Months Ended December 31, 2022

There are two properties, White Rock Center and 5916 W Loop 289, in our same store pool for the year ended December 31, 2023, and the six months ended December 31, 2022 (our "Same Store" properties).

Our Same Store properties exclude Cityplace Tower as of December 31, 2023 and December 31, 2022, because it was not yet stabilized, meaning construction or renovation was not completed.

Non-Same Store properties include properties not yet stabilized.

The following table reflects the revenues, property operating expenses and NOI for the year ended December 31, 2023 and six months ended December 31, 2022 for our Same Store and Non-Same Store properties (dollars in thousands):

For the Year Ended December 31 For the Six Months Ended December 31

Rental income $ 1,471 $ 811

Same Store revenues 1,471 811

Non-Same Store

Rental income 18,839 9,258

Other income 308 —

Non-Same Store revenues 19,147 9,258

Total revenues 20,618 10,070

Operating expenses

Property operating expenses 127 57

Real estate taxes and insurance 264 155

Property management fees 74 37

Property general and administrative expenses 68 53

Same Store operating expenses 533 302

Non-Same Store

Property operating expenses 7,361 3,561

Real estate taxes and insurance 4,113 2,541

Property management fees 653 322

Property general and administrative expenses 4,183 1,073

Non-Same Store operating expenses 16,310 7,497

Total operating expenses 16,843 7,799

Same Store 938 509

Non-Same Store 2,837 1,761

Total NOI $ 3,775 $ 2,270

See reconciliation of net income (loss) to NOI above under “NOI and Same Store NOI for the Year Ended December 31, 2023 and Six Months Ended December 31, 2022.”

Same Store Results of Operations for the Year Ended December 31, 2023 and the Six Months Ended December 31, 2022

As of December 31, 2023, our Same Store properties were approximately 49.6% leased with a weighted average monthly effective occupied rent per square foot of $1.11.

As of December 31, 2022, our Same Store properties were approximately 76.3% leased with a weighted average monthly effective rent per square foot of $1.21.

For our Same Store

properties, we recorded the following operating results for the year ended December 31, 2023 and for the six months ended December 31, 2022.

Rental Income .

Rental income was $1.5 million for the year ended December 31, 2023 and $0.8 million for the six months ended December 31, 2022.

Property operating expenses .

Property operating expenses were $0.1 million for the year ended December 31, 2023 and $0.1 million for the six months ended December 31, 2022.

Real estate taxes and insurance .

Real estate taxes and insurance costs were $0.3 million for the year ended December 31, 2023 and $0.2 million for the six months ended December 31, 2022.

Property management fees .

Property management fees were $0.1 million for the year ended December 31, 2023 and $36,693 for the six months ended December 31, 2022.

Property general and administrative expenses .

Property general and administrative expenses were $0.1 million for the year ended December 31, 2023 and $0.1 million for the six months ended December 31, 2022.

We believe that net income (loss), as defined by GAAP, is the most appropriate earnings measure.

We also believe that funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and adjusted funds from operations (“AFFO”) are important non-GAAP supplemental measures of operating performance for a REIT.

Since the historical cost accounting convention used for real estate assets requires depreciation except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time.

However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative.

Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income (loss), as defined by GAAP.

We compute FFO attributable to common shareholders as net income (loss), excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and realized gains (losses).

Our calculation of FFO differs slightly from NAREIT's definition of FFO because we exclude realized gains (losses).

We believe the exclusion of realized gains (losses) is appropriate because these realized gains (losses) are not related to our real estate properties.

AFFO makes certain adjustments to FFO in order to arrive at a more refined measure of the operating performance of our Portfolio.

There is no industry standard definition of AFFO and practice is divergent across the industry.

AFFO adjusts FFO to remove items such as equity based compensation expense and the amortization of deferred financing costs incurred in connection with obtaining long-term debt financing, and change in unrealized gains (losses).

We believe AFFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.

We believe that the use of FFO and AFFO, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful.

While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income (loss) as defined by GAAP and should not be considered as an alternative or substitute to those measures in evaluating our liquidity or operating performance.

FFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements.

Further, our computation of FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define AFFO differently than we do.

The following table reconciles our calculations of FFO and AFFO to net income (loss), the most directly comparable GAAP financial measure, for the year ended December 31, 2023 and six months ended December 31, 2022 (in thousands, except per share amounts):

For the Year Ended December 31, For the Six Months Ended December 31,

Net income (loss) $(117,241) $(81,573)

Depreciation and amortization 13,937 7,175

Realized gains (losses) 1,634 2,323

FFO (101,670) (72,075)

Distributions to preferred shareholders (4,619) (2,310)

FFO attributable to common shareholders (106,289) (74,385)

FFO per share - basic $ (2.85) $ (2.00)

FFO per share - diluted $ (2.85) $ (2.00)

Equity-based compensation expense 1,344 —

Amortization of deferred financing costs - long term debt (776) (67)

Change in unrealized losses 108,249 92,031

AFFO attributable to common shareholders 2,528 17,579

AFFO per share - basic $ 0.07 $ 0.47

AFFO per share - diluted $ 0.07 $ 0.47

Weighted average common shares outstanding - basic $ 37,334 $ 37,172

Weighted average common shares outstanding - diluted (1) 37,773 37,172

Dividends declared per common share $ 0.60 $ 0.30

FFO Coverage - diluted (2) -4.75x -6.67x

AFFO Coverage - diluted (2) 0.11x 1.58x

Net income (loss) coverage (2) -5.23x -7.31x

(1) The Company uses actual diluted weighted average common shares outstanding when in a dilutive position for FFO and AFFO.

(2) Indicates coverage ratio of FFO/AFFO/net income (loss) per common share (diluted) over dividends declared per common share during the period.

The year ended December 31, 2023 and the six months ended December 31, 2022

FFO was $(101.7) million for the year ended December 31, 2023 and $(72.1) million for the six months ended December 31, 2022.

AFFO was $2.5 million for the year ended December 31, 2023 and $17.8 million for the six months ended December 31, 2022.

Liquidity and Capital Resources

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• property management fees.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash balances.

We expect to meet our short-term liquidity requirements generally through our investment income, existing cash balance and, if necessary, future debt or equity issuances.

As of December 31, 2023 , we had $20.6 million of cash available to meet our short-term liquidity requirements.

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These reserves include escrows for property taxes and insurance, reserves for tenant improvements as well as required excess collateral.

As of December 31, 2023 , we also had $0.9 million of restricted cash held in reserve by the lender on the NexBank Revolver.

These reserves are to be used for future interest payments on the debt facility.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional properties, make additional accretive investments pursuant to our investment strategy, renovations and other capital expenditures to improve our properties and scheduled debt payments and distributions.

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We estimate an additional $190 million to $210 million of capital expenditures to complete the Cityplace renovation.

Also, acquisitions, redevelopments, or expansions of our properties will require significant capital outlays.

Also, acquisitions, redevelopments, or expansions of our properties will require

significant capital outlays.

Long-term, we may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains.

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We believe that our available cash, expected operating cash flows, and potential debt or equity financings will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period following December 31, 2023.

The following table presents selected data from our consolidated statements of cash flows for the six months ended December 31, 2022 (in thousands):

For the Six Months Ended December 31

Net cash provided by operating activities $31,431

Net cash used in investing activities (14,418)

Net cash used in financing activities (19,140)

The following table presents selected data from our consolidated statements of cash flows for the year ended December 31, 2023 and the six months ended December 31, 2022 (in thousands):

For the Year Ended December 31 For the Six Months Ended December 31

Net cash provided by (used in) operating activities $(24,266) $31,431

Net cash provided by (used in) investing activities 21,990 (14,418)

Net cash provided by (used in) used in financing activities 6,796 (19,140)

Net decrease in cash, cash equivalents and restricted cash 4,520 (2,127)

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Cash flows from operating activities.

During the six months ended December 31, 2022, net cash provided by operating activities was $31.4 million.

Operating cash flows were primarily driven by dividends received from our CLO equity portfolio.

During the year ended December 31, 2023, net cash provided by (used in) operating activities was $(24.3) million and $31.4 million for the six months ended December 31, 2022.

Cash flows from operating activities was primarily driven by an income tax payment of $10.7 million for the year ended December 31, 2023.

Operating cash flows were primarily driven by dividends received from our CLO equity portfolio for the six months ended December 31, 2022.

Cash flows from investing activities.

During the six months ended December 31, 2022, net cash used in investing activities was $14.4 million.

Cash flows from investing activities was primarily driven by acquisitions of new real estate investments of $26.5 million partially offset by proceeds from the redemption of our Caddo Sustainable Timberlands investment of $10.9 million in cash.

During the year ended December 31, 2023, net cash provided by (used in) investing activities was $22.0 million and $(14.4) million for the six months ended December 31, 2022.

Cash flows from investing activities was primarily driven by proceeds from the sale of several equities and senior loans for the year ended December 31, 2023.

Cash flows from financing activities.

During the six months ended December 31, 2022, net cash used in financing activities was $19.1 million.

Cash flows from financing activities was primarily driven by borrowings of $9.5 million, offset by credit facility repayments of $12.5 million, prime brokerage repayments of $14.4 million and dividends paid to common shareholders of $11.2 million.

During the year ended December 31, 2023, net cash provided by (used in) financing activities was $6.8 million and $(19.1) million for the six months ended December 31, 2022.

Cash flows from financing activities was primarily driven by notes payable borrowings of $39.0 million, offset by credit facility repayments of $10.0 million, and dividends paid to common shareholders of $16.9 million for the year ended December 31, 2023.

Mortgage Debt

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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.

On January 8, 2021, the Company entered into a $30.0 million credit facility ("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 one-month LIBOR plus 3.5% 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 $9.0 million on the Credit Facility during the year ended December 31, 2022.

During the six months ended December 31, 2022, the Company paid down $5.0 million on the Credit Facility.

On October 20, 2023, Raymond James Bank, N.A.

agreed to amend the terms of the Credit Facility, which, among other things, extended the maturity date to October 6, 2025 and increased the credit limit to $20 million.

On October 23, 2023, the Company drew $6.0 million of the available balance.

On November 20, 2023, the Company drew the remaining $13.0 million of the available balance.

As of December 31, 2023, the Credit Facility bore interest at the one-month SOFR plus 4.25%.

During the twelve months ended months ended December 31, 2023, the Company paid down $10.0 million on the Credit Facility.

As of December 31, 2023, the Credit Facility had an outstanding balance of $20.0 million.

For additional information regarding our Credit Facility, see Note 6.

Revolving Credit Facility

On May 22, 2023, the Company entered into the revolving credit facility with NexBank (the "NexBank Revolver"), with the option for the Company to receive additional disbursements thereunder up to a maximum amount of $50.0 million.

As of December 31, 2023, the NexBank Revolver bears interest at one-month SOFR plus 3.50% and matures on May 21, 2024, with the option to extend the maturity up to two times, each by six months.

In order to extend the debt, the Company must give at the latest, a 60 day notice to the lender, as well as fund the interest reserve account up to a six-month reserve.

As of December 31, 2023, the NexBank Revolver had an outstanding balance of $20.0 million.

As of December 31, 2023, the Company held $0.9 million in restricted cash in the interest reserve account.

Obligations and Commitments

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Preferred Shares

Dividend payments $ — $ 9,240 $ 9,240 $ 9,240 $ 9,240 $ 9,240 N/A (2)

Dividend payments N/A (2) $ 9,236 $ 9,236 $ 9,236 $ 9,236 $ 9,236 N/A (2)

Credit Facility

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(1) Assumes no additional borrowings or repayments.

The Prime Brokerage balance has no stated maturity date.

The Prime Brokerage (as defined below) balance has no stated maturity date.

(2) The Series A Preferred Shares are perpetual.

Credit Facility

The Credit Facility will mature on November 6, 2023 and is subject to monthly amortization payments through the maturity date.

The Credit Facility will mature on October 6, 2025 and is subject to monthly amortization payments through the maturity date.

We believe we will have adequate liquidity to pay these obligations when they come due.

Revolving Credit Facility

The NexBank Revolver will mature on May 21, 2024, with the option to extend the maturity up to two times, each by six months, and is subject to monthly interest payments through the maturity date, with the remaining principal being due on the maturity date.

We believe we will have adequate liquidity to pay these obligations when they come due.

Cityplace Debt

On November 8, 2022, we received lender consent to defer the maturity of the Cityplace debt to February 8, 2023.

On February 8, 2023, the lenders agreed to defer the maturity of the debt by three months to May 8, 2023 with the possibility to extend for an additional four months to September 8, 2023 provided certain metrics are met.

On May 8, 2023, we received lender consent to defer the maturity of the Cityplace debt to September 8, 2023.

Also on May 8, 2023, the parties to the loan agreement agreed to convert the index upon which the interest rate is based to one-

month SOFR effective as of the first interest period beginning on or after May 8, 2023.

On September 8, 2023, the lender agreed to defer the maturity of the Cityplace debt by six months to March 8, 2024.

The purpose of the deferral was to allow for continued discussions around refinancing the debt.

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As consideration for the Adviser’s services under the Advisory Agreement, we pay our Adviser the Fees, which includes the Advisory Fee equal to 1.00% of Managed Assets and the Administrative Fee equal to 0.20% of the Company’s Managed Assets.

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.

The Advisory Agreement provides that the Fees shall be paid in cash, unless the Adviser, in its sole discretion, elects to have all or a portion of the monthly installment of the Fees paid in common shares of the Company, subject to certain restrictions.

For additional information, see Note 13 to our consolidated financial statements.

The Advisory Agreement also provides that the Administrative Fee shall be paid in cash.

We also generally reimburse our Adviser for operating or offering expenses it incurs on our behalf or in connection with the services it performs for us.

Direct payment of operating expenses by us together with reimbursement of operating expenses to the Adviser, plus compensation expenses relating to equity awards granted under a long-term incentive plan and all other corporate general and administrative expenses of the Company, including the Fees payable under the Advisory Agreement, may not exceed the Expense Cap of 1.5% of Managed Assets, calculated as of the end of each quarter, for the twelve-month period following the Company’s receipt of the Deregistration Order.

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.

This limitation ended on June 30, 2023 and did 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, 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.

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.

Once waived, those expenses were considered permanently waived and became non-recoupable.

The Expense Cap expired on June 30, 2023.

As of December 31, 2023, a total of $3.1 million in Fees to the Adviser have been waived to comply with the Expense Cap.

For the year ended December 31, 2023, the Company expensed $11.7 million related to the Fees, net of the expense reimbursement.

Of this $11.7 million, $2.8 million is related to shares that were, or are expected to be issued in lieu of cash, and $7.9 million that was, or is expected to be paid in cash.

We anticipate that we will continue to qualify to be taxed as a REIT for U.S.

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Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes.

The Company has recorded an income tax expense of $2.0 million for the six months ended June 30, 2022, which is largely driven by income from the Company's legacy CLO investments.

The tax expense is partially offset by removing the valuation allowance on a deferred tax asset of $2.2 million and increased by a 2021 return-to-provision adjustment of $1.5 million, for a net expense of $10.0 million for the six months ended December 31, 2022, that is recorded on the Consolidated Statement of Operations.

The Company has recorded a current income tax expense of $2.7 million associated with the TRSs for the year ended December 31, 2023, which is largely driven by income from the Company’s legacy CLO investments and investments in debt instruments not secured by mortgages on real property.

The tax expense is decreased by the annual change in valuation allowance on a deferred tax asset of $0.6 million and partially offset by a return-to-provision adjustment of $1.5 million for a net expense of $2.7 million for the year ended December 31, 2023, that is recorded on the Consolidated Statement of Operations.

If we fail to qualify as a REIT in any taxable year, we could be subject to U.S.

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If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.

We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP.

We will make dividend payments based on our estimate of taxable earnings per common share, but not earnings calculated pursuant to GAAP.

Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair value adjustments, differences in premium amortization and discount accretion, investments held through our TRSs, book/tax differences on income derived from partnerships, and non-deductible general and administrative expenses.

Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share.

Our Board declared our tenth dividend of 2022 on our common shares of $0.15 per share which was paid on December 30, 2022 to shareholders of record on December 15, 2022.

Our Board declared our fourth quarterly dividend of 2022 on our Series A Preferred Shares of $0.34375 per share which was sent to the transfer agent prior to December 31, 2022 and paid on January 3, 2023 to shareholders of record on December 23, 2022.

Starting October 1, 2022, we expect that dividends on our common shares, when, if and as declared by our Board, will be declared on a quarterly basis.

Our Board declared a dividend on our common shares of $0.15 per share which was paid on December 29, 2023 to shareholders of record on November 17, 2023.

Our Board declared a dividend on our Series A Preferred Shares of $0.34375 per share which was sent to the transfer agent prior to December 31, 2023, and paid on January 2, 2024, to shareholders of record on December 22, 2023.

We expect that dividends on our common shares, when, if and as declared by our Board, will be declared on a quarterly basis.

The purpose of paying the elective stock dividend partially in shares and partially in cash is to conserve cash for additional investments at the Company.

The Company may revert to paying the dividend solely in cash at some point in the future when cash flow from operations supports such a cash dividend.

However, there can be no assurance that cash flow from operations will be able to support a cash dividend in the future.

Off-Balance Sheet Arrangements

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See Note 13 for additional information.

The Company is also the guarantor on two pools of loans of SAFStor, Inc.

("SAFStor"), an entity that NSP acquired 100% of the equity interest of on December 8, 2022.

The Company guarantees the loss recourse liability and obligation for any Recourse Liabilities (as defined below) arising out or in connection with certain bad acts.

The Company also guarantees the full payment of the debt, upon the occurrence of any Springing Recourse Events (as defined below).

As of December 31, 2023 the outstanding balance of the pools of guaranties is $270.9 million.

NSP is current on all debt and dividend payments and in compliance with all debt compliance provisions.

See Note 13 to our consolidated financial statements 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 as of December 31, 2023.

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NHT is current on all debt payments and in compliance with all debt compliance provisions.

The Company is a guarantor and an indemnitor on one of Cityplace’s loans with an aggregate principal amount of $142.3 million as of December 31, 2023.

The obligations include a completion guarantee, which is generally only applicable if and when the borrower, which is a subsidiary of the Company, directly, or indirectly through an agreement with an affiliate, joint venture partner or other third party, voluntarily terminates construction services prior to the completion of the project, files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper.

As of December 31, 2023, management does not anticipate any material deviations from schedule or budget related to construction projects current in process, and Cityplace is current on all debt payments and in compliance with all debt compliance provisions.

Critical Accounting Policies and Estimates

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As a result, the determination of fair value is uncertain because it involves subjective judgments and estimates that are unobservable.

For the year ended December 31, 2022, the unrealized loss related to the change in fair value of level 3 investments is $58.8 million.

See Notes 10 for additional disclosures regarding the valuation of level 3 fair valued investments.

For the year ended December 31, 2023, the unrealized loss related to the

change in fair value of level 3 investments is $110.6 million.

See Note 9 for additional disclosures regarding the valuation of level 3 fair valued investments.

Purchase Price Allocation

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Inflation may also affect the overall cost of debt, as the implied cost of capital increases.

The Federal Reserve has recently started raising interest rates to combat inflation and restore price stability and is expected to continue to raising interest rates in response to or in anticipation of continued inflation concerns.

The Federal Reserve has raised interest rates to combat inflation and restore price stability.

We intend to mitigate these risks through long-term fixed interest rate loans and interest rate hedges.

REIT Tax Election

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code.

To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our “REIT taxable income,” as defined by the Code, to our shareholders.

Taxable income from certain non-REIT activities are managed through one or more TRS entities and is subject to applicable federal, state, and local income and margin taxes.

The Company has recorded a current income tax expense of $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.

Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies

Not required.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis