# Nexpoint Diversified Real Estate Trust: Form 10-Q for the period ended Mar 31, 2023

- Company: [Nexpoint Diversified Real Estate Trust](/companies/nxdt.md) (CIK 1356115)
- Form: 10-Q
- Filed: 2023-05-12
- Accepted by EDGAR: May 12, 2023, 16:22 ET
- Period: 2023-03-31
- Accession: 0001356115-23-000007
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1356115/000135611523000007/nxdt-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1356115/000135611523000007/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $14.9m | us-gaap:Revenues |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $2.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $3.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $806.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$19.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.56 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.56 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 37,171,807 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $505.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $5.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-03-31 | $8.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-03-31 | $1.19bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $199.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $991.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 63,788 characters.

*The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our financial statements and accompanying notes included herein. 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.*

### Overview

As of March 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. Substantially all of our business is conducted through the OP. The OP GP is the sole general partner of the OP and is owned 100% by the Company. As of March 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 enabled the Company to proceed with full implementation 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.

As a diversified REIT, the Company’s primary investment objective is to provide both current income and capital appreciation. The Company seeks to achieve this objective through the Business Change. Target underlying property types primarily include, but are not limited to, single-family rentals, multifamily, self-storage, life science, office, industrial, hospitality, net lease and retail. The Company may, to a limited extent, hold, acquire or transact in certain non-real estate securities. 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 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.

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 to our shareholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. 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, 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. Our Sponsor and Mr. Dondero have informed us they believe the Bankruptcy Trust Lawsuit has no merit and Mr. 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 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 raised interest rates to combat inflation and restore price stability. 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. 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. 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.

### Components of Our Revenues and Expenses

### Revenues

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

*Interest income.* Interest income includes interest earned from our debt investments.

*Dividend income.* Dividend income includes dividends from our equity investments.

*Other income.* Other income includes ancillary income earned from tenants such as non-refundable fees, parking fees, and other miscellaneous fees charged to tenants and income items.

### Expenses

*Property operating expenses.* Property operating expenses include property maintenance costs, salary and employee benefit costs, utilities, casualty-related expenses and recoveries and other property operating costs of property owned directly or indirectly by us.

*Property management fees.* Property management fees include fees paid to NexVest, our property manager, for managing each property directly or indirectly owned by us (see Note 13 to our unaudited consolidated financial statements).

*Real estate taxes and insurance.* Real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property owned directly or indirectly by us. Insurance includes the cost of commercial, general liability, and other needed insurance for each property owned directly or indirectly by us.

*Advisory and administrative fees.* Advisory and administrative fees include the fees paid to our Adviser pursuant to the Advisory Agreement (see Note 13 to our unaudited consolidated financial statements).

*Property general and administrative expenses.* Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property owned directly or indirectly by us.

*Corporate general and administrative expenses.* 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. 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 -* 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.

*Depreciation and amortization.* Depreciation and amortization costs primarily include depreciation of our real properties and amortization of acquired in-place leases on property owned directly or indirectly by us.

### Other Income and Expense

*Interest Expense.* Interest expense primarily includes the cost of interest expense on debt, the amortization of deferred financing costs, if any, and the related impact of interest rate derivatives, if any, used to manage our interest rate risk.

*Equity in Earnings (Losses) of Unconsolidated Ventures*. Equity in earnings (losses) of unconsolidated ventures represents the change in our basis in equity method investments resulting from our share of the investments’ income and expenses. Profit and loss from equity method investments for which we’ve elected the fair value option are classified in divided income, change in unrealized gains and realized gains as applicable.

*Income Tax Expense.* Income tax expense is primarily derived from taxable gains from asset sales and other income earned from investments held in our TRSs.

*Unrealized Gain (Loss) on Investments*. Unrealized gains and losses represent changes in fair value for equity method investments, CLO equity investments, bonds, common stock, convertible notes, LLC interests, LP interests, rights and warrants, and senior loans for which the fair value option has been elected.

*Realized Gain (Loss) on Investments.* The Company recognizes the excess, or deficiency, of net proceeds received, less the carrying value of such investments, as realized gains or losses, respectively. 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.

### Real Estate Investments Statistics

As of March 31, 2023, the Company was invested in two retail properties and one office and hospitality property (excluding investments in undeveloped land), as listed below:

| Property Name | Rentable Square Footage\* (in thousands) | Property Type |  | Date Acquired | Average Effective Monthly Occupied Rent Per Square Foot \*(1) as of March 31, 2023 | % Occupied \*(2) as of March 31, 2023 |
| --- | ---: | --- | ---: | --- | ---: | ---: |
| White Rock Center | 82,793 | Retail |  | 6/13/2013 | $1.50 | 66.5% |
| 5916 W Loop 289 | 30,140 | Retail |  | 7/23/2013 | $0.40 | 100.0% |
| Cityplace Tower | 1,353,087 | Office & Hospitality | (3) | 8/15/2018 | $2.10 | 56.4% |
|  | 1,466,020 |  |  |  |  |  |

\* Information is unaudited.

(1) Average effective monthly occupied rent per square foot is equal to the average of the contractual rent for commenced leases as of March 31, 2023, minus any tenant concessions over the term of the lease, divided by the occupied square footage of commenced leases as of March 31, 2023.

(2) Percent occupied is calculated as the rentable square footage occupied as of March 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 March 31, 2023.

### Results of Operations for the Three Months Ended March 31, 2023 and December 31, 2022

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

|  | For the Three Months Ended March 31, 2023 | For the Three Months Ended December 31, 2022 |
| --- | ---: | ---: |
| Total revenues | $14,866 | $14,367 |
| Total expenses | (12,538) | (11,638) |
| Operating income | 2,328 | 2,729 |
| Interest expense | (3,462) | (3,218) |
| Equity in losses of unconsolidated ventures | (76) | (676) |
| Income tax expense | (806) | (2,459) |
| Change in unrealized losses | (18,640) | (13,793) |
| Realized loss | 1,135 | (5,169) |
| Net loss | (19,521) | (22,586) |
| Net income attributable to preferred shareholders | (1,155) | (1,155) |
| Net loss attributable to common shareholders | $(20,676) | $(23,741) |

The change in our net loss for the three months ended March 31, 2023 as compared to the net loss for the three 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.

### Revenues

*Rental income*. Rental income was $4.7 million for the three months ended March 31, 2023 compared to $5.5 million for the three months ended December 31, 2022, which was a decrease of $0.7 million. The decrease between the periods was primarily due to a decrease in lease cancellations and buy outs. Rental income primarily consists of lease revenue from our investment in Cityplace Tower.

*Interest and dividends*. Interest and dividends totaled $10.1 million for the three months ended March 31, 2023 compared to $8.9 million for the three months ended December 31, 2022, which was an increase of $1.2 million. The increase between periods was primarily due to an increase in CLO proceeds.

*Other income.* Other income was approximately $9.0 thousand for the three months ended March 31, 2023, compared to $14.0 thousand for the three months ended December 31, 2022, which was a decrease of $5.0 thousand. The decreases between periods was primarily due to a decrease in parking fees.

### Expenses

*Property operating expenses.* Property operating expenses were $1.5 million for the three months ended March 31, 2023 compared to $1.9 million for the three months ended December 31, 2022, which was a decrease of $0.4 million. The decrease between periods was primarily due to a decrease in repair and maintenance expenses. Property operating expenses consist primarily of expenses from our investment in Cityplace Tower.

*Property management fees.* Property management fees were $0.2 million for the three months ended March 31, 2023 compared to $0.1 million for the three months ended December 31, 2022, which was an increase of $41.0 thousand. The increase between periods was primarily due to an increase in property management fees at 5916 W Loop 289. 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 $1.4 million for the three months ended March 31, 2023 compared to $1.2 million for the three months ended December 31, 2022, which was an increase of $0.2 million. The increase between periods was primarily due to an increase in property taxes at Cityplace Tower. Real estate taxes and insurance expenses consist primarily of expenses from our investment in Cityplace Tower.

*Advisory and administrative fees.* For the three months ended March 31, 2023, the Company incurred Administrative Fees and Advisory Fees of $3.6 million, which excludes $0.4 million in fees that were deferred to comply with the Expense Cap compared to $2.6 million for the three months ended December 31, 2022, which excludes $1.1 million in fees that were deferred to comply with the Expense Cap which was an increase of $1.0 million. The increase in periods was primarily due to a decrease in fees that were required to be 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.

*Property general and administrative expenses.* Property general and administrative expenses were $0.7 million for the three months ended March 31, 2023 compared to $(0.6) million for the three months ended December 31, 2022, which was an increase of $1.3 million. The increase between the periods was primarily due to a write-off of a related party payable at 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 $1.5 million for the three months ended March 31, 2023 compared to $1.1 million for the three months ended December 31, 2022, which was an increase of $0.4 million. The increase/decrease between periods was primarily driven by audit fees of $0.5 million.

*Conversion expenses.* Conversion expenses were $0.2 million for the three months ended March 31, 2023 compared to $1.6 million for the three months ended December 31, 2022, which was a decrease of $1.4 million. The decrease between periods was primarily driven by a decrease in legal fees and audit related fees associated to the conversion of the predecessor.

*Depreciation and amortization.* Depreciation and amortization costs were $3.5 million for the three months ended March 31, 2023 compared to $3.6 million for the three months ended December 31, 2022, which was a decrease of $0.1 million. The decrease between periods was primarily due to a decrease in amortization of leases. Depreciation and amortization expenses consist primarily of expenses from our investment in Cityplace Tower. Due to the Business Change, the fair value of our real estate properties as of July 1, 2022 became the new cost basis for the Company. This change reset the depreciable basis of our properties as well as caused the recognition of new intangible lease assets.

### Other Income and Expense

*Interest expense.* Interest expense was $3.5 million for the three months ended March 31, 2023 compared to $3.2 million for the three months ended December 31, 2022, which was an increase of $0.3 million. The increase between periods was primarily due to an increase in interest expense at Cityplace Tower attributed to an increase in interest rates.

*Equity in losses of unconsolidated ventures*. Equity in losses of unconsolidated ventures was $0.1 million for the three months ended March 31, 2023 compared to $0.7 million for the three months ended December 31, 2022, which was an increase of $0.6 million. The increase between periods was primarily driven by amortization of the basis difference on the SAFStor Ventures of approximately $1.0 million for the three months ended December 31, 2022.

*Income tax expense*. The Company has recorded a current income tax expense of $0.9 million associated with the TRSs for the three months ended March 31, 2023, compared to $2.5 million for the three months ended December 31, 2022, which was a decrease of $1.7 million. The decrease 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 partially offset by the quarterly change in valuation allowance on a deferred tax asset of $0.1 million for a net expense of $0.8 million for the three months ended March 31, 2023, that is recorded on the Consolidated Statement of Operations.

*Change in unrealized losses*. Unrealized losses from our investments accounted for at fair value was $18.6 million for the three months ended March 31, 2023 compared to $13.8 million for the three months ended December 31, 2022, which was a decrease of $4.8 million. The decrease is largely driven by mark-to-market losses on SFR OP Units of $4.8 million, mark-to-market losses on NHT common stock of $4.7 million and losses on VB OP common units of $4.6 million.

*Realized gains (losses)*. Realized gains were $1.1 million for the three months ended March 31, 2023 compared to $(5.2) million for the three months ended December 31, 2022, which was an increase of $6.3 million. The increase was primarily driven by a realized loss of $6.8 million on the contribution of the SAFStor Ventures to the NSP OC.

### 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 expenses as well as gains or losses from the sale of operating real estate assets that are included in net income (loss) computed in accordance with GAAP, (4) corporate general and administrative expenses, (5) income tax expenses, (6) conversion expenses, (7) entity level general and administrative expenses incurred at the properties that are not reflective of the continuing operations of the properties, (8) non-operating property investment revenue, (9) realized and change in unrealized gains (losses) generated from non-real estate investments, and (10) 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 property. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale, which will usually change from period to period. Also, expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of the property owner. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. Non-operating property investment revenue and realized and 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, and gains and losses from the sale of operating real estate assets that are included in net income (loss) as determined under GAAP, certain property general and administrative expenses that are not reflective of the continuing operations of the properties, 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 are significant economic costs. 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 Three Months Ended March 31, 2023 and December 31, 2022

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

|  |  | For the Three Months Ended March 31 2023 | For the Three Months Ended December 31 2022 |
| --- | ---: | ---: | ---: |
| Net loss |  | $(19,521) | $(22,585) |
| Adjustments to reconcile net loss to NOI: |  |  |  |
| Advisory and administrative fees |  | 3,578 | 2,575 |
| Corporate general and administrative expenses |  | 1,496 | 1,142 |
| Conversion expense |  | 163 | 1,615 |
| Income tax expense |  | 806 | 2,459 |
| Depreciation and amortization |  | 3,524 | 3,614 |
| Interest expense |  | 3,462 | 3,218 |
| Property general and administrative expenses | (1) | — | (824) |
| Non-operating property investment revenue |  | (10,137) | (8,901) |
| Realized gains (losses) from non-real estate investments |  | (1,135) | 5,169 |
| Change in unrealized gains (losses) from non-real estate investments |  | 18,640 | 13,793 |
| Equity in income (losses) of unconsolidated equity method ventures |  | 76 | 676 |
| NOI |  | $952 | $1,951 |
| Less Non-Same Store |  |  |  |
| Revenues |  | $(4,382) | $(5,074) |
| Operating expenses |  | 3,644 | 3,368 |
| Same Store NOI |  | $214 | $245 |

(1) Includes an adjustment to net loss to exclude certain property general and administrative expenses that are not reflective of the continuing operations of the properties.

### Net Operating Income for Our Same Store and Non-Same Store Properties for the Three Months Ended March 31, 2023 and December 31, 2022

There are two properties in our same store pool for the three months ended March 31, 2023 and December 31, 2022 (our "Same Store" properties). Our Same Store properties exclude the following one property in our Portfolio as of March 31, 2023 and December 31, 2022, because it was not yet stabilized: Cityplace Tower. Non-Same Store properties include properties not yet stabilized

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

| Revenues Same Store | For the Three Months Ended March 31 2023 | For the Three Months Ended December 31 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Rental income | $347 | $393 | $(46) | (11.7)% |
| Same Store revenues | 347 | 393 | (46) | (11.7)% |
| Non-Same Store |  |  |  |  |
| Rental income | 4,373 | 5,074 | (701) | (13.8)% |
| Other income | 9 | 0 | 9 | —% |
| Non-Same Store revenues | 4,382 | 5,074 | (692) | (13.6)% |
| Total revenues | 4,729 | 5,467 | (737) | (13.5)% |
| **Operating expenses** |  |  |  |  |
| Same Store |  |  |  |  |
| Property operating expenses | 24 | 29 | (5) | (17.2)% |
| Real estate taxes and insurance | 82 | 84 | (2) | (2.4)% |
| Property management fees | 17 | 18 | (1) | (5.6)% |
| Property general and administrative expenses | 10 | 17 | (7) | (41.2)% |
| Same Store operating expenses | 133 | 148 | (15) | (10.1)% |
| Non-Same Store |  |  |  |  |
| Property operating expenses | 1,482 | 1,834 | (352) | (19.2)% |
| Real estate taxes and insurance | 1,275 | 1,109 | 166 | 15.0% |
| Property management fees | 153 | 174 | (21) | (12.1)% |
| Property general and administrative expenses | 733 | 251 | 482 | 192.0% |
| Non-Same Store operating expenses | 3,644 | 3,368 | 276 | 8.2% |
| Total operating expenses | 3,777 | 3,516 | 262 | 7.4% |
| **NOI** |  |  |  |  |
| Same Store | 214 | 245 | (31) | (12.7)% |
| Non-Same Store | 738 | 1,706 | (968) | N/M |
| **Total NOI** | $952 | $1,951 | $(999) | N/M |

See reconciliation of net loss to NOI above under “NOI and Same Store NOI for the Three Months Ended March 31, 2023 and December 31, 2022.”

### Same Store Results of Operations for the Three Months Ended March 31, 2023 and December 31, 2022

As of March 31, 2023, our Same Store properties were approximately 75.4% leased with a weighted average monthly effective occupied rent per square foot of $1.21. As of December 31, 2022, our Same Store properties were approximately 75.4% 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 three months ended March 31, 2023 as compared to the three months ended December 31, 2022.

### Revenues

*Rental Income*. Rental income was $0.3 million for the three months ended March 31, 2023, compared to $0.4 million for the three months ended December 31, 2022, which was a decrease of approximately $0.1 million. The majority of this decrease is related to a decrease in occupancy of 1.3% at Cityplace Tower.

### Expenses

*Property operating expenses*. Property operating expenses were $24.3 thousand for the three months ended March 31, 2023, compared to $28.8 thousand for the three months ended December 31, 2022, which was a decrease of approximately $4.5 thousand, or approximately 15.6%. The majority of the decrease is related to a decrease in repair and maintenance costs.

*Real estate taxes and insurance*. Real estate taxes and insurance costs were $82.0 thousand for the three months ended March 31, 2023, compared to $84.1 thousand for the three months ended December 31, 2022 which was a decrease of approximately $2.1 thousand, or approximately 2.5%. The majority of the decrease is related to a decrease in recoverable taxes.

*Property management fees*. Property management fees were $17.3 thousand for the three months ended March 31, 2023, compared to $17.9 thousand for the three months ended December 31, 2022 which was a decrease of approximately $0.6 thousand, or approximately 3.4%. The majority of the decrease is related to a decrease in gross receipts upon which property management fees are calculated.

*Property general and administrative expenses*. Property general and administrative expenses were $9.7 thousand for the three months ended March 31, 2023, compared to $17.4 thousand for the three months ended December 31, 2022 which was a decrease of $7.7 thousand, or approximately 44.3%. The majority of the decrease is related to a decrease in miscellaneous legal fees.

### FFO and AFFO

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. FFO is defined by NAREIT as net income (loss) computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization. We compute FFO attributable to common shareholders in accordance with NAREIT’s definition.

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 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 loss, the most directly comparable GAAP financial measure, for the three months ended March 31, 2023 and December 31, 2022 (in thousands, except per share amounts):

|  |  | For the Three Months Ended March 31, 2023 | For the Three Months Ended December 31, 2022 |
| --- | ---: | ---: | ---: |
| Net loss |  | $(19,521) | $(22,586) |
| Depreciation and amortization |  | 3,524 | 3,614 |
| Realized gains |  | (1,135) | 5,169 |
| **FFO** |  | (17,132) | (13,803) |
| Distributions to preferred shareholders |  | (1,155) | (1,155) |
| **FFO attributable to common shareholders** |  | (18,287) | (14,958) |
| **FFO per share - basic** |  | $(0.49) | $(0.40) |
| **FFO per share - diluted** |  | $(0.49) | $(0.40) |
|  |  |  | — |
| Amortization of deferred financing costs - long term debt |  | (474) | (92) |
| Change in unrealized losses |  | 18,640 | 13,793 |
| **AFFO attributable to common shareholders** |  | (121) | (1,257) |
| **AFFO per share - basic** |  | $0.00 | $(0.03) |
| **AFFO per share - diluted** |  | $0.00 | $(0.03) |
| **Weighted average common shares outstanding - basic** |  | $37,172 | $37,172 |
| **Weighted average common shares outstanding - diluted** |  | 37,172 | 37,172 |
| **Dividends declared per common share** |  | $0.15 | $0.15 |
| **FFO Coverage - diluted** | (1) | -3.28x | -2.68x |
| **AFFO Coverage - diluted** | (1) | -0.02x | -0.23x |
| **Net income (loss) coverage** |  | -3.5x | -4.05x |

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

#### The three months ended March 31, 2023 as compared to the three months ended December 31, 2022

FFO was $(17.1) million for the three months ended March 31, 2023 compared to $(13.8) million for the three months ended December 31, 2022, which was an decrease of approximately $3.3 million. The change in our FFO between the periods primarily relates to a decrease in unrealized losses of $4.3 million.

AFFO was $(121.0) thousand for the three months ended March 31, 2023 compared to $(1.3) million for the three months ended December 31, 2022, which was an increase of approximately $1.1 million. The change in our AFFO between the periods primarily relates to a decrease in income tax expense of $1.6 million.

### Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay for debt maturities, operating expenses and other expenditures including:

- capital expenditures to continue the ongoing development of Cityplace Tower;
- interest expense and scheduled principal payments on outstanding indebtedness (see “—Obligations and Commitments” below);
- recurring maintenance necessary to maintain our properties;
- distributions necessary to qualify for taxation as a REIT;
- income taxes for taxable income generated by TRS entities;
- acquisition of additional properties or investments;
- advisory and administrative fees payable to our Adviser;
- general and administrative expenses;
- reimbursements to our Adviser; and
- property management fees.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash balances. As of March 31, 2023, we had $10.9 million of cash available to meet our short-term liquidity requirements. As of March 31, 2023, we also had $36.5 million of restricted cash held in reserve by the lender on the Cityplace debt. These reserves include escrows for property taxes and insurance, reserves for tenant improvements as well as required excess collateral.

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. We expect to meet our long-term liquidity requirements through various sources of capital, which may include a revolving credit facility and future debt or equity issuances, existing working capital, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings, and property and non-real estate asset dispositions. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating performance and liquidity, market perceptions about us and restrictions on sales of properties under the Code. The success of our business strategy will depend, in part, on our ability to access these various capital sources.

In addition to our ongoing renovation of Cityplace, our other properties will require periodic capital expenditures and renovation to remain competitive. 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. 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. As a result, our ability to fund capital expenditures, acquisitions, or redevelopment through retained earnings long-term is limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations, and prospects could be materially and adversely affected.

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 March 31, 2023.

### Cash Flows

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

|  | For the Three Months Ended March 31 2023 | For the Three Months Ended December 31 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $505 | $3,858 |
| Net cash provided by (used in) investing activities | 8,234 | (1,244) |
| Net cash used in financing activities | (12,587) | (17,663) |
| Net decrease in cash, cash equivalents and restricted cash | (3,848) | (15,049) |
| Cash, cash equivalents and restricted cash, beginning of period | 48,649 | 63,698 |
| Cash, cash equivalents and restricted cash, end of period | $44,801 | $48,649 |

*Cash flows from operating activities.* During the three months ended March 31, 2023, net cash provided by operating activities was $0.5 million compared to net cash provided by operating activities of $3.9 million for the three months ended December 31, 2022. The change in cash flows from operating activities was primarily due to a decrease in mark-to-market assets. Operating cash flows were primarily driven by dividends received from our equity portfolio.

*Cash flows from investing activities.* During the three months ended March 31, 2023, net cash provided by investing activities was $8.2 million compared to net cash used in investing activities of $1.2 million for the three months ended December 31, 2022. The change in cash flows from investing activities was primarily due to an increase in proceeds from the sale of investments of $13.1 million. Cash flows from investing activities was primarily driven by proceeds from the sale of several equities for $8.1 million.

*Cash flows from financing activities.* During the three months ended March 31, 2023, net cash used in financing activities was $12.6 million compared to net cash used in financing activities of $17.7 million for the three months ended December 31, 2022. The change in cash flows from financing activities was primarily due to a decrease in prime brokerage borrowing repayments of $6.1 million. Cash flows from financing activities was primarily driven by prime brokerage borrowings of $6.4 million, offset by credit facility repayments of $3.0 million, prime brokerage repayments of $8.3 million and dividends paid to common shareholders of $5.6 million.

### Debt

### Mortgage Debt

As of March 31, 2023, our consolidated subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $144.1 million at a weighted average interest rate of 7.8%. See Note 7 to our unaudited consolidated financial statements for additional information.

We intend to invest in additional real estate investments as suitable opportunities arise and adequate sources of equity and debt financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, future borrowings and the proceeds from additional issuances of common shares or other securities or investment and property dispositions.

Although we expect to be subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common shares or other debt or equity securities, on terms that are acceptable to us or at all.

Furthermore, following the completion of our renovation and development programs and depending on the interest rate environment at the applicable time, we may seek to refinance our floating rate debt into longer-term fixed rate debt at lower leverage levels.

### Credit Facility

On January 8, 2021, the Company entered into the Credit Facility with Raymond James Bank, N.A. and drew the full balance. As of March 31, 2023, 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%. During the three months ended March 31, 2023, the Company paid down $3.0 million on the Credit Facility. As of March 31, 2023, the Credit Facility had an outstanding balance of $8.0 million. For additional information regarding our Credit Facility, see Note 6.

### Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of March 31, 2023 for the next five calendar years subsequent to March 31, 2023.

| Property Level Debt | Payments Due by Period (in thousands) Total |  | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Principal payments | $157,328 |  | $144,078 | $— | $13,250 | $— | $— | $— |  |
| Interest expense | 6,684 |  | 4,982 | 1,063 | 639 | — | — | — |  |
| Total | $164,012 |  | $149,060 | $1,063 | $13,889 | $— | $— | $— |  |
| **Prime Brokerage Borrowing** |  |  |  |  |  |  |  |  |  |
| Principal payments | $736 |  | $— | $— | $— | $— | $— | $736 | (1) |
| Interest expense | 195 |  | 39 | 39 | 39 | 39 | 39 | — | (1) |
| Total | $931 |  | $39 | $39 | $39 | $39 | $39 | $736 |  |
| **Preferred Shares** |  |  |  |  |  |  |  |  |  |
| Dividend payments | N/A | (2) | $3,465 | $4,620 | $4,620 | $4,620 | $4,620 | N/A | (2) |
| **Credit Facility** |  |  |  |  |  |  |  |  |  |
| Principal payments | $8,000 |  | $8,000 | $— | $— | $— | $— | $— |  |
| Interest expense | 435 |  | 435 | — | — | — | — | — |  |
| Total | $8,435 |  | $8,435 | $— | $— | $— | $— | $— |  |
| **Total contractual obligations and commitments** | $173,378 |  | $161,000 | $5,722 | $18,548 | $4,659 | $4,659 | $736 |  |

(1) Assumes no additional borrowings or repayments. The Prime Brokerage 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. 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. 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. The purpose of the deferral was to allow for continued discussions around refinancing the debt. Management recognizes that finding an alternative source of funding is necessary to repay the debt by the maturity date. Management believes that there is sufficient time before the maturity date and that the Company has sufficient access to capital to ensure the Company is able to meet its obligations as they become due.

#### Advisory Agreement

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 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 Notes 14 and 17 to our unaudited consolidated financial statements.

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. 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.

As of March 31, 2023, a total of $1.5 million in Fees to the Adviser have been 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.

### Income Taxes

We anticipate that we will continue to qualify to be taxed as a REIT for U.S. federal income tax purposes, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. However, we can give no assurance that we will maintain REIT qualification. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual “REIT taxable income”, as defined by the Code, to stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. 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 a current income tax expense of $0.9 million associated with the TRSs for the three months ended March 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 partially offset by removing the quarterly change in valuation allowance on a deferred tax asset of $0.1 million for a net expense of $0.8 million for the three months ended March 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. federal income tax on our taxable income at regular corporate income tax rates, and dividends paid to our shareholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income (loss) and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT. As of March 31, 2023, we believe we are in compliance with all applicable REIT requirements.

We evaluate the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50% probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Our management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. As of March 31, 2023 and to our knowledge, we have no examinations in progress and none are expected at this time.

We recognize our tax positions and evaluate them using a two-step process. First, we determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, we will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

We had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2023. We and our subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2021, 2020 and 2019 tax years remain open to examination by tax jurisdictions to which our subsidiaries and we are subject. When applicable, we recognize interest and/or penalties related to uncertain tax positions on our consolidated statements of operations and comprehensive income (loss).

### Dividends

We intend to make regular quarterly dividend payments to holders of our common shares. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common shares out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. 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 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 a dividend on our common shares of $0.15 per share which was paid on March 31, 2023 to shareholders of record on March 15, 2023. Our Board declared a dividend on our Series A Preferred Shares of $0.34375 per share which was paid on March 31, 2023 to shareholders of record on March 24, 2023. We expect that dividends on our common shares, when, if and as declared by our Board, will be declared on a quarterly basis.

### Off-Balance Sheet Arrangements

As of March 31, 2023, we had the following off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

#### Commitments

The Company is the guarantor on three secured loans to, and dividend payments with respect to Series D Preferred Stock of NSP, an affiliate of the Adviser, with the secured loans having an aggregate principal amount of approximately $662.1 million outstanding as of March 31, 2023. NSP is current on all debt and dividend payments and in compliance with all debt compliance provisions. See Note 13 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 March 31, 2023. The obligations include a customary environmental indemnity and a so-called "bad boy" guarantee, which is generally only applicable if and when the borrower directly, or indirectly through an agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper. NHT is current on all debt payments and in compliance with all debt compliance provisions.

### Critical Accounting Policies and Estimates

During the three months ended March 31, 2023, there have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 31, 2023.

### Inflation

The real estate market has not been directly affected by inflation in the past several years due to increases in rents nationwide. Our lease terms are generally for a period of one year or more and rental rates reset to market if renewed. The majority of our leases also contain protection provisions applicable to reimbursement billings for utilities.

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. 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 $0.9 million associated with the TRSs for the three months ended March 31, 2023, which is largely driven by income from the Company’s legacy CLO investments and investments in debt investments not secured by mortgages on real property. The tax expense is partially offset by the quarterly change in the valuation allowance on a deferred tax asset of $0.1 million for a net expense of $0.8 million for the three months ended March 31, 2023, that is recorded on the Consolidated Statement of Operations. 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.

## Controls and procedures

As filed, 1,670 characters.

### Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our President and Chief Financial Officer, evaluated, as of March 31, 2023, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2023, to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

### Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 186 characters.

There have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 31, 2023.

Filed May 12, 2023.
Source: SEC EDGAR, the filing index for accession 0001356115-23-000007. Last ingested by Listed: Oct 24, 2026, 15:11 ET. No prices; not investment advice.