NexPoint Real Estate Finance (NREF) risk factors, FY2024 10-K

Other

1. 01The following is a summary of some of the risks and uncertainties that could materially adversely affect our business, financial condition and results of operations. You should read this summary together with the more detailed description of each risk factor contained below

Risks Related to Our Business

1. 02Our loans and investments expose us to risks similar to and associated with debt-oriented real estate investments generally
2. 03Our real estate investments are subject to risks particular to real property. These risks may result in a reduction or elimination of or return from an investment secured by a particular property
3. 04Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us
4. 05Residential loans are subject to increased risks of loss
5. 06estate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover our cost basis in the loan, and any costs or delays involved in the foreclosure or liquidation process may increase losses
6. 07Fluctuations in interest rates and credit spreads could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments
7. 08Macroeconomic trends including inflation, high interest rates, recession, major bank failures or sustained financial market illiquidity may adversely affect our financial condition and results of operations
8. 09management, third-party contractors and vendors, insurance, transportation and taxes, and our residents may also be adversely impacted by higher cost of living expenses, including food, energy and transportation, which may increase our rate of tenant defaults and harm our operating results
9. 10Our loans and investments may be subject to fluctuations in interest rates that may not be adequately protected, or protected at all, by our hedging strategies
10. 11Our loans and investments are concentrated in terms of type of interest, geography, asset types and sponsors and may continue to be so in the future
11. 12We operate in a competitive market for lending and investment opportunities and competition may limit our ability to originate or acquire desirable loans and investments in our target assets and could also affect the yields of these assets
12. 13Prepayment rates may adversely affect the value of our portfolio of assets
13. 14The lack of liquidity in certain of our target assets may adversely affect our business
14. 15Our success depends on the availability of attractive loans and investments and our Manager’s ability to identify, structure, consummate, leverage, manage, realize and redeploy returns on our loans and investments
15. 16Any distressed loans or investments we make, or loans and investments that later become distressed, may subject us to losses and other risks relating to bankruptcy proceedings
16. 17We may not have control over certain of our loans and investments
17. 18CMBS B-Pieces, CMBS I/O Strips, mezzanine loans, preferred equity and other investments that are subordinated or otherwise junior in an issuer’s capital structure and that involve privately negotiated structures expose us to greater risk of loss
18. 19Our investments in CMBS pose additional risks, including the risk that we will not be able to recover some or all of our investment and the risk that we will not be able to hedge or transfer our CMBS B-Piece or CMBS I/O Strip investments for a significant period of time
19. 20Loans on properties in transition involve a greater risk of loss than conventional mortgage loans
20. 21We may not realize gains or income from our investments
21. 22Real estate valuation is inherently subjective and uncertain
22. 23Some of our portfolio investments may be recorded at fair value not readily available and, as a result, there will be uncertainty as to the value of these investments
23. 24We may experience a decline in the fair value of our assets
24. 25The due diligence process that our Manager undertakes in regard to investment opportunities may not reveal all facts that may be relevant in connection with an investment and if our Manager incorrectly evaluates the risks of our loans and investments, we may experience losses
25. 26Insurance on loans and real estate securities collateral may not cover all losses
26. 27Terrorist attacks, other acts of violence or war or a prolonged economic slowdown may affect the real estate industry generally and our business, financial condition and results of operations
27. 28condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Losses resulting from these types of events may not be fully insurable

Risks Related to Our Industry

1. 29The securitization market is subject to an evolving regulatory environment that may affect certain aspects of these activities
2. 30If we were required to register with the U.S. Commodity Futures Trading Commission (the “CFTC”) as a Commodity Pool Operator, it could materially adversely affect our business, financial condition and results of operations
3. 31We may need to foreclose on certain of the loans and/or exercise our “foreclosure option” under the terms of our investments we originate or acquire, which could result in losses that harm our results of operations and financial condition
4. 32Liability relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments
5. 33We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses
6. 34Our ability to generate returns for our stockholders through our investment, finance and operating strategies is subject to then-existing market conditions, and we may make significant changes to these strategies in response to changing market conditions
7. 35If we fail to develop, enhance and implement strategies to adapt to changing conditions in the real estate industry and capital markets, our financial condition and results of operations may be materially and adversely affected
8. 36Any credit ratings assigned to our loans and investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded
9. 37Some of our investments and investment opportunities may be in synthetic form
10. 38We may invest in derivative instruments, which would subject us to increased risk of loss
11. 39Rapid changes in the values of our real estate investments may make it more difficult for us to maintain our qualification as a REIT or exclusion from regulation under the Investment Company Act

Risks Related To Legal, Regulatory and Accounting Issues

1. 40We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements
2. 41We are an “emerging growth company,” as defined in the JOBS Act and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies
3. 42Failure of our internal control over financial reporting could harm our business, financial condition and results of operations
4. 43Changes in accounting rules and other policy or regulatory changes could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against
5. 44Allowance for credit losses are particularly difficult to estimate in a turbulent economic environment

Risks Related to Our Indebtedness and Financing Strategy

1. 45We have a substantial amount of indebtedness which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs
2. 46Any credit facilities (including term loans and revolving facilities), debt securities, repurchase agreements, warehouse facilities and securitizations may impose restrictive covenants, which may restrict our flexibility to determine our operating policies and investment strategy
3. 47Inability to access funding could have a material adverse effect on our results of operations, financial condition and business
4. 48We are subject to counterparty risk associated with our debt obligations
5. 49Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders
6. 50We are subject to counterparty risk associated with our hedging activities
7. 51We may enter into hedging transactions that could expose us to contingent liabilities in the future
8. 52We may fail to qualify for, or choose not to elect, hedge accounting treatment
9. 53Any credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities and securitizations that we may use to finance our assets may require us to provide additional collateral or pay down debt

Risks Related to Our Corporate Structure

1. 54We may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our stockholders
2. 55We depend upon key personnel of our Manager and its affiliates
3. 56We are dependent upon our Manager and its affiliates to conduct our day-to-day operations; thus, adverse changes in their financial health or our relationship with them could cause our operations to suffer
4. 57Our Manager manages our portfolio pursuant to very broad investment guidelines and is not required to seek the approval of our Board for each investment, financing, asset allocation or hedging decision made by it, which may result in our making riskier investments and which could materially and adversely affect us
5. 58We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Manager, members of our Manager’s management team or by our Sponsor or its affiliates
6. 59Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Our Manager’s liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities
7. 60We may change our targeted investments without stockholder consent
8. 61We will pay substantial fees and expenses to our Manager and its affiliates, which payments increase the risk that you will not earn a profit on your investment
9. 62If we internalize our management functions, we may not achieve the perceived benefits of the internalization transaction
10. 63As a result of our arrangements with our Sponsor and our Manager, there may be times when our Sponsor and our Manager or their affiliated persons have interests that differ from those of our stockholders, giving rise to a conflict of interest
11. 64The Chapter 11 bankruptcy filing by Highland Capital Management, L.P. (“Highland”) may have materially adverse consequences on our business, financial condition and results of operations
12. 65Litigation against James Dondero and others may have materially adverse consequences on our business, financial condition and results of operations
13. 66We may compete with other entities affiliated with our Manager and our Sponsor for investments
14. 67Our Manager, our Sponsor and their respective affiliates, officers and employees face competing demands relating to their time, and this may cause our operating results to suffer
15. 68Our charter permits our Board to issue stock with terms that may subordinate the rights of our stockholders or discourage a third party from acquiring us in a manner that could otherwise result in a premium price to our stockholders
16. 69Our rights and the rights of our stockholders to recover claims against our directors and officers are limited by Maryland law and our organizational documents, which could reduce your and our recovery against them if they cause us to incur losses
17. 70We have entered into indemnification agreements with each of our directors and executive officers that provide for indemnification to the maximum extent permitted by Maryland law
18. 71Certain provisions of the MGCL may have the effect of inhibiting a third party from acquiring us or of impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares

Risks Related to Our REIT Status and Other Tax Items

1. 72In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions to our stockholders. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our securities
2. 73Even if we qualify as a REIT for U.S. federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to you
3. 74activities and/or to dispose of assets at inopportune times, which could adversely affect our financial condition, results of operations, cash flow and value of our securities
4. 75The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT
5. 76There is a lack of clear authority governing the characterization of our mezzanine loans or preferred equity investments for REIT qualification purposes
6. 77The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur and may limit the manner in which we effect future securitizations
7. 78Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments
8. 79If our OP failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT
9. 80Our ownership of interests in a TRS raises certain tax risks
10. 81Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends
11. 82The share ownership restrictions of the Code for REITs and the 6.2% share ownership limits in our charter may inhibit market activity in shares of our stock and restrict our business combination opportunities
12. 83Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities
13. 84Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment
14. 85We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them
15. 86The ability of our Board to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders
16. 87Legislative or other actions affecting REITs could have a negative effect on our stockholders or us
17. 88We and our subsidiaries and stockholders may be subject to state, local or foreign tax filing and payment obligations taxation in various jurisdictions including those in which we or they transact business, own property or reside

Risks Related to the Ownership of Our Common Stock

1. 89The concentration of our share ownership may limit your ability to influence corporate matters
2. 90Broad market fluctuations could negatively impact the market price of our common stock
3. 91The form, timing and/or amount of dividend distributions on our common stock in future periods may vary and be impacted by economic and other considerations
4. 92We may be unable to make distributions on our common stock at expected levels, which could result in a decrease in the market price of our common stock
5. 93Future issuances of debt securities and equity securities may negatively affect the market price of shares of our common stock and, in the case of equity securities, may be dilutive to owners of our common stock and could reduce the overall value of an investment in our common stock
6. 94Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock
7. 95The rights of our common stockholders are limited by and subordinate to the rights of the holders of Series A Preferred Stock and Series B Preferred Stock and these rights may have a negative effect on the value of shares of our common stock

Risks Related to the Ownership of the Series A Preferred Stock and Series B Preferred Stock

1. 96Holders of Series A Preferred Stock have extremely limited voting rights
2. 97Holders of Series B Preferred Stock have extremely limited voting rights
3. 98The market price and trading volume of the Series A Preferred Stock may fluctuate significantly and be volatile due to numerous circumstances beyond our control
4. 99There is no market for our Series B Preferred Stock and one may not develop
5. 100The Series A Preferred Stock and Series B Preferred Stock are subordinate to our existing and future debt, and such interests could be diluted by the issuance of additional shares of preferred stock and by other transactions
6. 101The Series A Preferred Stock and Series B Preferred Stock have not been rated

General Risks

1. 102We are highly dependent on information technology and security breaches or systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our securities and our ability to pay dividends
2. 103Our business could be harmed if we are unable to effectively integrate and use artificial intelligence
3. 104Risk of Pandemics or Other Health Crises