NexPoint Real Estate Finance (NREF) risk factors, FY2025 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 us26% rewritten
4. 05adverse changes in zoning lawsNew
5. 06Residential loans are subject to increased risks of loss76% rewritten
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, tariffs, recession, major bank failures or sustained financial market illiquidity may adversely affect our financial condition and results of operations86% rewritten
8. 09Our 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
9. 10Our 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
10. 11We 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
11. 12Prepayment rates may adversely affect the value of our portfolio of assets
12. 13The lack of liquidity in certain of our target assets may adversely affect our business
13. 14Our 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
14. 15Any 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
15. 16We may not have control over certain of our loans and investments80% rewritten
16. 17rely on independent third-party management or servicing with respect to the management of an assetNew
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 time48% rewritten
19. 20Loans on properties in development or redevelopment involve a greater risk of loss than conventional mortgage loans28% rewritten
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 losses43% rewritten
26. 27Acts of violence or war or a prolonged economic slowdown may affect the real estate industry generally and our business, financial condition and results of operations45% rewritten

Risks Related to Our Industry

1. 28If 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
2. 29We 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
3. 30Liability relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments
4. 31We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses
5. 32Our 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
6. 33If 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
7. 34Any 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
8. 35Rapid 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 Act86% rewritten
9. 36may be exacerbated by the illiquid nature of any non-qualifying assets that we may own. We may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerationsNew
10. 37We may be subject to losses arising from current and future guarantees of debt and contingent obligations of our subsidiariesNew

Risks Related To Legal, Regulatory and Accounting Issues

1. 38We are a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements100% rewritten
2. 39Failure of our internal control over financial reporting could harm our business, financial condition and results of operations
3. 40Changes 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 against21% rewritten
4. 41Allowance for credit losses are particularly difficult to estimate in a turbulent economic environment

Risks Related to Our Indebtedness and Financing Strategy

1. 42We 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 needs26% rewritten
2. 43Any 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. 44Inability to access funding could have a material adverse effect on our results of operations, financial condition and business62% rewritten
4. 45the market price of our securitiesNew
5. 46We are subject to counterparty risk associated with our debt obligations
6. 47Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders53% rewritten
7. 48legal, tax and regulatory changes could occur and may adversely affect our ability to pursue our hedging strategies and/or increase the costs of implementing such strategiesNew
8. 49We are subject to counterparty risk associated with our hedging activities30% rewritten
9. 50We may enter into hedging transactions that could expose us to contingent liabilities in the future
10. 51We may fail to qualify for, or choose not to elect, hedge accounting treatment
11. 52Any 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. 53We 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. 54We depend upon key personnel of our Manager and its affiliates
3. 55We 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. 56Our 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. 57We 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. 58Our 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. 59We may change our targeted investments without stockholder consent49% rewritten
8. 60We 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. 61If we internalize our management functions, we may not achieve the perceived benefits of the internalization transaction
10. 62As 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. 63The Chapter 11 bankruptcy filing by Highland may have materially adverse consequences on our business, financial condition and results of operations20% rewritten
12. 64Litigation against James Dondero and others may have materially adverse consequences on our business, financial condition and results of operations33% rewritten
13. 65We may compete with other entities affiliated with our Manager and our Sponsor for investments
14. 66Our 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. 67Our 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. 68Our 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 losses46% rewritten
17. 69a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicatedNew
18. 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
19. 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 shares56% rewritten
20. 72a majority or more of all voting powerNew
21. 73a majority requirement for the calling of a stockholder-requested special meeting of stockholdersNew

Risks Related to Our REIT Status and Other Tax Items

1. 74unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REITNew
2. 75In 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
3. 76Even 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 you70% rewritten
4. 77The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT
5. 78There is a lack of clear authority governing the characterization of our mezzanine loans or preferred equity investments for REIT qualification purposes
6. 79The “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. 80Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments
8. 81If our OP failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT
9. 82Our ownership of interests in a TRS raises certain tax risks
10. 83Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends
11. 84The 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. 85Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities
13. 86Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment
14. 87We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them
15. 88The ability of our Board to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders
16. 89Legislative or other actions affecting REITs could have a negative effect on our stockholders or us
17. 90Recent changes in tax law may impact our stockholders or usNew
18. 91We 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. 92The concentration of our share ownership may limit your ability to influence corporate matters
2. 93Broad market fluctuations could negatively impact the market price of our common stock
3. 94general market and economic conditionsNew
4. 95The 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
5. 96We 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
6. 97Future 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
7. 98Sales 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
8. 99The rights of our common stockholders are limited by and subordinate to the rights of the holders of Series A Preferred Stock, Series B Preferred Stock and Series C 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, Series B Preferred Stock and Series C Preferred Stock

1. 100Holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock have extremely limited voting rights31% rewritten
2. 101The market price and trading volume of the Series A Preferred Stock may fluctuate significantly and be volatile due to numerous circumstances beyond our control62% rewritten
3. 102our financial condition, cash flows, liquidity, results of operations, funds from operations and prospectsNew
4. 103There is no market for our Series B Preferred Stock or Series C Preferred Stock and one may not develop
5. 104The Series A Preferred Stock, Series B Preferred Stock and Series C 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. 105The Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock have not been rated

General Risks

1. 106We 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. 107Our business could be harmed if we are unable to effectively integrate and use artificial intelligence
3. 108Risk of Pandemics or Other Health Crises71% rewritten