Nexpoint Diversified Real Estate Trust (NXDT) 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 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 us28% rewritten
4. 05adverse changes in zoning lawsNew
5. 06Most of our real estate investments are dependent upon our tenants successfully operating their businesses, and their failure to do so could adversely affect us50% rewritten
6. 07Multi-tenant properties expose us to additional risks
7. 08Tenant demand in our office portfolio may decline due to disruptions to the office sector, which could materially and adversely affect us79% rewritten
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 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 limited, may expose us to risks from a number of diverse issuers, industries and investment forms20% rewritten
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, tariffs or recession may adversely affect our financial condition and results of operations54% rewritten
15. 16Our 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
16. 17Investments in equity securities are subject to variation in their prices
17. 18We may use leverage in our investment program, resulting in a greater risk of loss
18. 19We 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
19. 20We may be subject to risks involved in investment activity through joint ventures
20. 21Our 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
21. 22We 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
22. 23Prepayment rates may adversely affect the value of loans in which we invest
23. 24The lack of liquidity in certain of our investments may adversely affect our business
24. 25Our 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
25. 26Any 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
26. 27We may not have control over certain of our loans and investments80% rewritten
27. 28rely on independent third-party management or servicing with respect to the management of an assetNew
28. 29Investments 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
29. 30We 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
30. 31We may not realize gains or income from our investments
31. 32Real estate valuation is inherently subjective and uncertain
32. 33Some 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
33. 34The Company’s real estate assets may be subject to impairment charges
34. 35The 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
35. 36Insurance on investments may not cover all losses

Risks Related to Our Industry

1. 37Compliance 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
2. 38If 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
3. 39Any 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 downgraded78% rewritten
4. 40The securitization process is subject to an evolving regulatory environment that may affect certain aspects of our current business
5. 41Rapid 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
6. 42We are a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements64% rewritten
7. 43Failure of our internal control over financial reporting could harm our business, financial condition and results of operationsNew
8. 44The majority of the hotels in the Hospitality segment 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 our hotels to consumers50% rewritten
9. 45The Company’s hotel properties may be adversely affected by various risks common to the hospitality and lodging industry26% rewritten
10. 46The 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 properties28% rewritten
11. 47Advances in technology and the growing use of online travel agencies may lead to increased costs and competition and lead to changes in consumer behavior24% rewritten
12. 48The Hospitality segment faces competition from other hotels and alternative lodging providers within the immediate vicinity of and in the broader geographic region where the Hospitality segment's hotels may be located43% rewritten
13. 49The hotel industry is subject to seasonal changes, which may cause fluctuations in room revenues, occupancy levels, room rates and operating expenses in particular hotels54% rewritten

Risks Related to Our Indebtedness and Financing Strategy

1. 50We 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. 51Any 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 strategy53% rewritten
3. 52Inability to access funding could have a material adverse effect on our results of operations, financial condition and business62% rewritten
4. 53the market price of our securitiesNew
5. 54We are subject to counterparty risk associated with our debt obligations
6. 55Any 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 debt53% rewritten

Risks Related to Our Corporate Structure

1. 56We 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. 57We depend upon key personnel of our Adviser and its affiliates
3. 58We 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. 59Our 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. 60We 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. 61Our 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. 62We may change our targeted investments and investment guidelines without shareholder consent
8. 63We 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. 64If we internalize our management functions, we may not achieve the perceived benefits of the internalization transaction
10. 65As 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. 66The Chapter 11 bankruptcy filing by Highland Capital Management, L.P. (“Highland”) may have materially adverse consequences on our business, financial condition and results of operations21% rewritten
12. 67Litigation against James Dondero and others may have materially adverse consequences on our business, financial condition and results of operations36% rewritten
13. 68We may compete with other entities affiliated with our Adviser and our Sponsor for investments
14. 69Our 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. 70Our 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. 71Certain 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 Our REIT Status and Other Tax Items

1. 72unless 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. 73In 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
3. 74Even 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
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 subordinated debt or preferred equity investments for REIT qualification purposes
6. 77The “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
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. 80Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends34% rewritten
10. 81The 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
11. 82Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities
12. 83Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment
13. 84We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them
14. 85The sale of certain properties could result in significant tax liabilities unless we are able to defer the taxable gain through 1031 Exchanges
15. 86The ability of our Board to revoke our REIT qualification without shareholder approval may cause adverse consequences to our shareholders
16. 87Legislative or other actions affecting REITs could have a negative effect on our shareholders or us
17. 88Recent changes in tax law may impact our shareholders or usNew
18. 89We and our subsidiaries and shareholders may be subject to state, local or foreign tax filing and payment obligations in various jurisdictions including those in which we or they transact business, own property or reside
19. 90Our ownership of interests in TRSs raises certain tax risks
20. 91deducted based on arm’s-length negotiations. Redetermined TRS service income generally represents amounts by 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

Risks Related to the Ownership of Our Common Shares

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 shares
3. 94general market and economic conditionsNew
4. 95The 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
5. 96We 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
6. 97Future 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
7. 98Sales 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
8. 99The 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. 100The market price and trading volume of the Series A Preferred Shares may fluctuate significantly and be volatile due to numerous circumstances beyond our control62% rewritten
2. 101our financial condition, cash flows, liquidity, results of operations, funds from operations and prospectsNew
3. 102There is no market for our Series B Preferred Shares and one may not develop
4. 103The 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
5. 104The Series A Preferred Shares and Series B Preferred Shares are not rated and may not be rated in the future

General Risks

1. 105Risk of Pandemics or Other Health Crises67% rewritten
2. 106Our business could be harmed if we are unable to effectively integrate artificial intelligence96% rewritten
3. 107Expanding use of social media presents additional risksNew
4. 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