Nexpoint Diversified Real Estate Trust (NXDT) 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 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
2. 03Because we primarily invest in the real estate industry, our investments expose us to risks similar to and associated with real estate investments generally
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. 05Most of our real estate investments are dependent upon our tenants successfully operating their businesses, and their failure to do so could adversely affect us
5. 06Multi-tenant properties expose us to additional risks
6. 07Competition that traditional retail tenants face from e-commerce retail sales, or the integration of brick-and-mortar stores with e-commerce retail operators, could adversely affect our business
7. 08Tenant demand in our office portfolio may decline due to disruptions to the office sector, which could materially and adversely affect us
8. 09Certain provisions of the Company's leases may be unenforceable
9. 10Many of our operating costs and expenses associated with our investments are or may be fixed and will not decline if revenues decline
10. 11We are subject to certain risks associated with investing in real estate, including potential liabilities under environmental laws and risks of loss from weather conditions, man-made or natural disasters, climate change and terrorism
11. 12Investments in securities of other companies or issuers, including debt and equity instruments such as bonds, preferred or common shares, or convertible instruments, could cause us to incur losses or other expenses which could adversely affect our financial position, results of operations, and cash flows
12. 13Our investments in non-real estate businesses, though expected to be limited, may expose us to risks from a number of diverse issuers, industries and investment forms
13. 14Fluctuations 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
14. 15Macroeconomic trends including inflation, high interest rates or recession may adversely affect our financial condition and results of operations
15. 16affect the availability and terms of future borrowings, renewals or refinancings. Such future constraints could increase our borrowing costs, which would make it more difficult or expensive to obtain additional financing or refinance existing obligations and commitments, which could slow or deter future growth
16. 17Our 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
17. 18Investments in equity securities are subject to variation in their prices
18. 19We may use leverage in our investment program, resulting in a greater risk of loss
19. 20We may invest in preferred equity securities which contain provisions that may result in a decline in the value of such preferred security in certain situations
20. 21We may invest in or write options on securities, which may result in our bearing the risk of loss should the underlying security change in value during the life of the option
21. 22We may engage in the short sale of securities, which involves the risk of significant loss in the event the price of the borrowed securities appreciates before the short position closes out
22. 23If other short positions of the same security are closed out at the same time, a “short squeeze” can occur where demand exceeds the supply for the security sold short. A short squeeze makes it more likely that we will need to replace the borrowed security at an unfavorable price
23. 24We may be subject to risks involved in investment activity through joint ventures
24. 25Our investments may be concentrated in terms of type of interest, geography, asset types, industry and sponsors and may continue to be so in the future
25. 26We operate in a competitive market for investment opportunities and competition may limit our ability to acquire desirable properties, loans and investments in commercial real estate and could also affect the yields of these assets
26. 27Prepayment rates may adversely affect the value of loans in which we invest
27. 28The lack of liquidity in certain of our investments may adversely affect our business
28. 29Our success depends on the availability of attractive loans and investments and our Adviser’s ability to identify, structure, consummate, leverage, manage and realize returns on our loans and investments
29. 30Any distressed loans or investments we make, or loans or investments that later become distressed, may subject us to losses and other risks relating to bankruptcy proceedings
30. 31We may not have control over certain of our loans and investments
31. 32Investments 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
32. 33We may invest in senior loans, a significant portion of which may be below investment grade, which the borrower may fail to repay or which may decline in value due to changes in interest rates
33. 34We may not realize gains or income from our investments
34. 35Real estate valuation is inherently subjective and uncertain
35. 36Some 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
36. 37The Company’s real estate assets may be subject to impairment charges
37. 38The due diligence process that our Adviser undertakes in regard to investment opportunities may not reveal all facts that may be relevant in connection with an investment and if our Adviser incorrectly evaluates the risks of our loans and investments, we may experience losses
38. 39Insurance on investments may not cover all losses
39. 40Terrorist 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
40. 41The majority of the hotels owned by NHT are operated pursuant to franchise agreements with nationally recognized hotel brands and changes in the market perception of such brands may impact the desirability of NHT’s hotels to consumers
41. 42As part of its hotel business, NHT and its franchise partners are required to collect and maintain certain information about hotel employees and customers, which subjects us to risks associated with cybersecurity breaches and compliance with privacy regulations
42. 43Increasing real estate taxes, utilities, insurance costs and other capital expenditures may negatively impact NHT’s operating results
43. 44Litigation risk could affect NHT’s business
44. 45Litigation risk specific to real property may affect NHT’s business
45. 46There may be limitations on NHT’s ability to sell its properties, including if NHT acquires or finances properties with lock-out provisions, which may prohibit NHT from selling a property or may require NHT to maintain specified debt levels for a period of years on some properties

Risks Related to Our Industry

1. 47We may need to foreclose on certain loans and/or exercise our “foreclosure option” under the terms of investments we may acquire, which could result in losses that harm our results of operations and financial condition
2. 48Liability relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments
3. 49We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses
4. 50Compliance with various laws and regulations, including accessibility, building and health and safety laws and regulations, may be costly, may adversely affect our operations or expose us to liability
5. 51Our ability to generate returns for our shareholders 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. 52If 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. 53Any 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. 54We may invest in derivative instruments, which would subject us to increased risk of loss
9. 55The securitization process is subject to an evolving regulatory environment that may affect certain aspects of our current business
10. 56Rapid 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
11. 57We are a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements
12. 58The Company’s hotel properties may be adversely affected by various risks common to the hospitality and lodging industry
13. 59The hotel industry is cyclical and changes in economic conditions, consumer behavior and the travel and tourism industries may impact the demand for the Company’s hotel properties
14. 60Advances in technology and the growing use of online travel agencies may lead to increased costs and competition and lead to changes in consumer behavior
15. 61The NHT segment faces competition from other hotels and alternative lodging providers within the immediate vicinity of and in the broader geographic region where NHT’s hotels may be located
16. 62The hotel industry is subject to seasonal changes, which may cause fluctuations in room revenues, occupancy levels, room rates and operating expenses in particular hotels

Risks Related to Our Indebtedness and Financing Strategy

1. 63We 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. 64Any credit facilities (including term loans and revolving facilities), debt securities, repurchase agreements, warehouse facilities, securitizations or other debt arrangements may impose restrictive covenants, which may restrict our flexibility to determine our operating policies and investment strategy
3. 65Inability to access funding could have a material adverse effect on our results of operations, financial condition and business
4. 66We are subject to counterparty risk associated with our debt obligations
5. 67Derivatives and hedging activity could adversely affect cash flow
6. 68Any credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities, securitizations or other debt arrangements 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. 69We have limited operating history as a REIT and may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our shareholders
2. 70We depend upon key personnel of our Adviser and its affiliates
3. 71We are dependent upon our Adviser 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. 72Our Adviser 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. 73We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Adviser and members of our Adviser’s management team or by our Sponsor or its affiliates
6. 74Our Adviser maintains a contractual as opposed to a fiduciary relationship with us. Our Adviser’s liability is limited under the Advisory Agreement, and we have agreed to indemnify our Adviser against certain liabilities
7. 75We may change our targeted investments without shareholder consent
8. 76We will pay substantial fees and expenses to our Adviser and its affiliates, which payments increase the risk that you will not earn a profit on your investment
9. 77If we internalize our management functions, we may not achieve the perceived benefits of the internalization transaction
10. 78As a result of our arrangements with our Sponsor and our Adviser, there may be times when our Sponsor and our Adviser or their affiliated persons have interests that differ from those of our shareholders, giving rise to a conflict of interest
11. 79The 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. 80Litigation against James Dondero and others may have materially adverse consequences on our business, financial condition and results of operations
13. 81We may compete with other entities affiliated with our Adviser and our Sponsor for investments
14. 82Our Adviser, its affiliates and their respective affiliates, officers and employees face competing demands relating to their time, and this may cause our operating results to suffer
15. 83Our declaration of trust permits our Board to issue shares with terms that may subordinate the rights of our shareholders or discourage a third party from acquiring us in a manner that could otherwise result in a premium price to our shareholders
16. 84Certain provisions of our declaration of trust 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 shareholders with the opportunity to realize a premium over the then-prevailing market price of such shares

Risks Related to the NHT Merger

1. 85Non-completion of the NHT Merger may have an adverse effect on our business and results of operations
2. 86Lawsuits challenging the NHT Merger may be filed against NHT and the Company, and an adverse judgment in any such lawsuit or any future similar lawsuits may prevent the NHT Merger from becoming effective or from becoming effective within the expected timeframe
3. 87Following the consummation of the NHT Merger, the Company may be unable to integrate the operations of the Company and NHT successfully and realize the anticipated synergies and other benefits of the NHT Merger or do so within the anticipated time frame

Risks Related to Our REIT Status and Other Tax Items

1. 88In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions to our shareholders. 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. 89Even 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. 90The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT
4. 91There is a lack of clear authority governing the characterization of our subordinated debt or preferred equity investments for REIT qualification purposes
5. 92The “taxable mortgage pool” rules may increase the taxes that we or our shareholders may incur and may limit the manner in which we effect future securitizations
6. 93Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments
7. 94If our OP failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT
8. 95Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends
9. 96The share ownership restrictions of the Code for REITs and the 9.8% share ownership limits in our declaration of trust may inhibit market activity in our shares and restrict our business combination opportunities
10. 97Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities
11. 98Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment
12. 99We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them
13. 100The sale of certain properties could result in significant tax liabilities unless we are able to defer the taxable gain through 1031 Exchanges
14. 101The ability of our Board to revoke our REIT qualification without shareholder approval may cause adverse consequences to our shareholders
15. 102Legislative or other actions affecting REITs could have a negative effect on our shareholders or us
16. 103We and our subsidiaries and shareholders 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
17. 104Our ownership of interests in TRSs raises certain tax risks
18. 105by which the gross income of a TRS attributable to its services for or on behalf of us (other than to a tenant of ours) would be increased based on arm’s length negotiations
19. 106Our ownership of NHT prior to the NHT Merger raises certain tax risks under Canadian law
20. 107Our ownership of NHT prior to the NHT Merger raises certain U.S. tax risks
21. 108Changes 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

Risks Related to the Ownership of Our Common Shares

1. 109The concentration of our share ownership may limit your ability to influence corporate matters
2. 110Broad market fluctuations could negatively impact the market price of our common shares
3. 111The form, timing and/or amount of dividend distributions on our common shares in future periods may vary and be impacted by economic and other considerations
4. 112We may be unable to make distributions on our common shares at expected levels, which could result in a decrease in the market price of our common shares
5. 113Future issuances of debt securities and equity securities may negatively affect the market price of our common shares and, in the case of equity securities, may be dilutive to owners of our common shares and could reduce the overall value of an investment in our common shares
6. 114Sales of substantial amounts of common shares or the perception that such sales could occur may adversely affect the prevailing market price for our common shares
7. 115The rights of our common shareholders are limited by and subordinate to the rights of the holders of Series A Preferred Shares and Series B Preferred Shares and these rights may have a negative effect on the value of our common shares

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

1. 116The market price and trading volume of the Series A Preferred Shares may fluctuate significantly and be volatile due to numerous circumstances beyond our control
2. 117There is no market for our Series B Preferred Shares and one may not develop
3. 118The Series A Preferred Shares and Series B Preferred Shares are subordinate to our existing and future debt, and such interests could be diluted by the issuance of additional shares of preferred shares and by other transactions
4. 119The Series A Preferred Shares and Series B Preferred Shares are not rated and may not be rated in the future

General Risks

1. 120We 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 distributions
2. 121Risk of Pandemics or Other Health Crises
3. 122Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting
4. 123The direct and indirect impacts of climate change may adversely affect our business
5. 124Our business could be harmed if we are unable to effectively integrate artificial intelligence
6. 125All of the hotels owned by NHT are operated pursuant to franchise agreements with nationally recognized hotel brands and changes in the market perception of such brands may impact the desirability of NHT’s hotels to consumers
7. 126reputations of NHT’s franchise partners could also be adversely affected from these types of security breaches or regulatory violations, which could impair revenues or the ability to attract and retain qualified hotel personnel
8. 127Fixed Costs and Capital Expenditures
9. 128Litigation at the Property Level
10. 129If the SIFT Rules were to apply to NHT, they could adversely affect the marketability of investments in NHT, and the amount of cash available for distribution and the after-tax return to investors in NHT (including the Company)