UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-32921
NexPoint Diversified Real Estate Trust
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 80-0139099 |
| (State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 300 Crescent Court, Suite 700, Dallas, Texas (Address of Principal Executive Offices) | 75201 (Zip Code) |
(214) 276-6300
(Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Shares, par value $0.001 per share 5.50% Series A Cumulative Preferred Shares, par value $0.001 per share ($25.00 liquidation preference per share)
| NXDT NXDT-PA | New York Stock Exchange New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | |
| Non-Accelerated Filer | ☒ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 14, 2022, the registrant had 37,171,807 common shares, par value $0.001 per share, outstanding.
NEXPOINT DIVERSIFIED REAL ESTATE TRUST
Form 10-Q
Quarter Ended September 30, 2022
INDEX
| Page |
||
| ii |
||
| PART I—FINANCIAL INFORMATION |
||
| Item 1. |
||
| Consolidated Balance Sheet as of September 30, 2022 (unaudited) |
1 |
|
| Consolidated Statement of Assets and Liabilities as of December 31, 2021 (predecessor basis) |
2 |
|
| 3 |
||
| 4 |
||
| 5 |
||
| 6 |
||
| 7 |
||
| 8 |
||
| Consolidated Unaudited Statement of Cash Flows for the Three Months Ended September 30, 2022 |
9 |
|
| 11 |
||
| 12 |
||
| 13 |
||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
35 |
| Item 3. |
45 |
|
| Item 4. |
45 |
|
| PART II—OTHER INFORMATION |
||
| Item 1. |
46 |
|
| Item 1A. |
46 |
|
| Item 2. |
46 |
|
| Item 3. |
46 |
|
| Item 4. |
46 |
|
| Item 5. |
46 |
|
| Item 6. |
47 |
|
| 48 |
||
Cautionary Statement Regarding Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s current expectations, assumptions and beliefs. Forward-looking statements can often be identified by words such as “enable,” “proceed”, “focus,” “will,” “intend,” “expect” and similar expressions, and variations or negatives of these words. They are not guarantees of future results and forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. Actual results may vary materially from those contained in forward-looking statements based on a number of factors including, without limitation, (1) risks related to the real estate industry, including (a) changes in general economic and market conditions; (b) changes in the value of real estate properties; (c) risks related to local economic conditions, overbuilding and increased competition; (d) increases in property taxes and operating expenses; (e) changes in zoning laws; (f) casualty and condemnation losses; (g) variations in rental income, neighborhood values or the appeal of property to tenants; (h) the availability of financing; (i) changes in interest rates and leverage and (j) recessions or general economic downturn where properties are located and (2) risks related to non-diversification and other focused strategies, including that a significant amount of the our investments could be invested in the instruments of only a few companies or other issuers or that at any particular point in time one investment strategy could be more heavily weighted than the others. Readers should not place undue reliance on any forward-looking statements and are encouraged to review our filings with the Securities and Exchange Commission (the “SEC”) for a more complete discussion of risks and other factors that could affect any forward-looking statement. The statements made herein speak only as of the date of this report and except as required by law, we do not undertake any obligation to publicly update or revise any forward-looking statements.
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share and par value amounts)
(Unaudited)
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES (Predecessor Basis)
(in thousands, except per share amounts)
| December 31, 2021 | ||||
| Assets: | ||||
| Investments, at fair value (a) | $ | 169,884 | ||
| Affiliated investments, at fair value | 872,101 | |||
| Total investments, at fair value | 1,041,985 | |||
| Cash and cash equivalents | 2,238 | |||
| Restricted cash - securities sold short | 440 | |||
| Foreign tax reclaim receivable | 1,250 | |||
| Receivable for: | ||||
| Due from custodian | 192 | |||
| Other assets | 277 | |||
| Company shares sold | 209 | |||
| Dividends and interest | 913 | |||
| Prepaid expenses and other assets | 510 | |||
| TOTAL ASSETS | $ | 1,048,014 | ||
| Liabilities: | ||||
| Notes payable | $ | 42,500 | ||
| Due to custodian | 110 | |||
| Securities sold short, at value | 430 | |||
| Due to broker | 9,188 | |||
| Payable for: | ||||
| Investment advisory fees | 1,005 | |||
| Interest expense and commitment fee | 63 | |||
| Accounting services fees | 72 | |||
| Accrued expenses and other liabilities | 186 | |||
| Total Liabilities | 53,554 | |||
| Mezzanine equity | ||||
| Series A cumulative preferred shares, net of deferred financing costs | (83,252 | ) | ||
| Net assets applicable to common shares | $ | 911,208 | ||
| Net assets consist of: | ||||
| Paid-in capital in excess of par | $ | 913,920 | ||
| Total accumulated loss | (2,712 | ) | ||
| Net assets applicable to common shares | $ | 911,208 | ||
| Investments, at cost | $ | 279,216 | ||
| Affiliated investments, at cost | 828,659 | |||
| Cash equivalents, at cost | 2,157 | |||
| Proceeds from securities sold short | 765 | |||
| Common Shares | ||||
| Net assets | $ | 911,208 | ||
| Shares outstanding (unlimited authorization) | 37,080 | |||
| Net asset value per share (net assets/shares outstanding) | $ | 24.57 | ||
(a) includes fair value of securities on loan of $1,248
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
(Unaudited)
| For the three months ended September 30, |
||||
| 2022 |
||||
| Revenues |
||||
| Rental income |
$ | 4,603 | ||
| Interest and dividends |
36,142 | |||
| Other income |
18 | |||
| Total revenues |
40,763 | |||
| Expenses |
||||
| Property operating expenses |
1,756 | |||
| Property management fees |
166 | |||
| Real estate taxes and insurance |
1,502 | |||
| Advisory and administrative fees |
2,939 | |||
| Property general and administrative expenses |
858 | |||
| Corporate general and administrative expenses |
1,938 | |||
| Depreciation and amortization |
3,561 | |||
| Total expenses |
12,720 | |||
| Operating income |
28,043 | |||
| Interest expense |
(2,541 | ) |
||
| Equity in losses of unconsolidated ventures |
(1,581 | ) |
||
| Tax expense |
(7,516 | ) |
||
| Change in unrealized losses |
(78,238 | ) |
||
| Realized gains |
2,846 | |||
| Net loss |
(58,987 | ) |
||
| Net income attributable to preferred shareholders |
(1,155 | ) |
||
| Net loss attributable to common shareholders |
$ | (60,142 | ) |
|
| Weighted average common shares outstanding - basic |
37,172 | |||
| Weighted average common shares outstanding - diluted |
37,172 | |||
| Loss per share - basic |
$ | (1.62 | ) |
|
| Loss per share - diluted |
$ | (1.62 | ) |
|
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Predecessor Basis)
(in thousands, except per share amounts)
(Unaudited)
| For the six months ended June 30, |
||||
| 2022 |
||||
| Investment income: |
||||
| Income: |
||||
| Dividends from unaffiliated issuers |
$ | 60,178 | ||
| Dividends from affiliated issuers |
15,025 | |||
| Interest from unaffiliated issuers |
991 | |||
| Interest from affiliated issuers |
3,002 | |||
| Total income |
79,196 | |||
| Expenses: |
||||
| Investment advisory |
6,279 | |||
| Tax fees |
2,000 | |||
| Legal fees |
987 | |||
| Interest expense and commitment fees |
696 | |||
| Conversion expense |
471 | |||
| Accounting services fees |
334 | |||
| Insurance |
185 | |||
| Reports to shareholders |
136 | |||
| Trustees fees |
109 | |||
| Audit and tax preparation fees |
77 | |||
| Transfer agent fees |
72 | |||
| Pricing fees |
68 | |||
| Registration fees |
56 | |||
| Other |
322 | |||
| Total operating expenses |
11,792 | |||
| Net investment income |
67,404 | |||
| Preferred dividend expenses |
(2,310 | ) |
||
| Net realized and unrealized gain (loss) on investments |
||||
| Realized gain on: |
||||
| Investments from unaffiliated issuers |
28,893 | |||
| Investments from affiliated issuers |
1,288 | |||
| Securities sold short |
253 | |||
| Net change in unrealized gain on: |
||||
| Investments from unaffiliated issuers |
(38,237 | ) | ||
| Investments from affiliated issuers |
70,830 | |||
| Net realized and unrealized gain on investments |
63,027 | |||
| Total increase in net assets resulting from operations |
$ | 128,121 | ||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Predecessor Basis)
(in thousands, except per share amounts)
(Unaudited)
| For the three months ended September 30, |
For the nine months ended September 30, |
|||||||
| 2021 |
2021 |
|||||||
| Investment income: |
||||||||
| Income: |
||||||||
| Dividends from unaffiliated issuers |
$ | 323 | $ | 8,837 | ||||
| Dividends from affiliated issuers |
4,299 | 12,287 | ||||||
| Securities lending income |
1 | 1 | ||||||
| Interest from unaffiliated issuers |
64 | 1,803 | ||||||
| Interest from affiliated issuers |
585 | 2,059 | ||||||
| ROC Reclass |
- | (11,850 | ) |
|||||
| Total income |
5,272 | 13,137 | ||||||
| Expenses: |
||||||||
| Investment advisory |
3,046 | 8,122 | ||||||
| Legal fees |
382 | 1,041 | ||||||
| Interest expense and commitment fees |
582 | 2,199 | ||||||
| Conversion expense |
260 | 971 | ||||||
| Accounting services fees |
147 | 404 | ||||||
| Insurance |
35 | 110 | ||||||
| Reports to shareholders |
108 | 289 | ||||||
| Trustees fees |
55 | 157 | ||||||
| Audit and tax preparation fees |
101 | 273 | ||||||
| Transfer agent fees |
27 | 109 | ||||||
| Pricing fees |
48 | 84 | ||||||
| Registration fees |
12 | 45 | ||||||
| Other |
185 | 381 | ||||||
| Total operating expenses |
4,988 | 14,185 | ||||||
| Net investment income (loss) |
284 | (1,048 | ) |
|||||
| Preferred dividend expenses |
(1,153 | ) |
(3,392 | ) |
||||
| Net realized and unrealized gain (loss) on investments |
||||||||
| Realized loss on: |
||||||||
| Investments from unaffiliated issuers |
(18,684 | ) |
(16,385 | ) |
||||
| Net change in unrealized appreciation on: |
||||||||
| Investments from unaffiliated issuers |
34,196 | 103,636 | ||||||
| Investments from affiliated issuers |
33,746 | 80,948 | ||||||
| Securities sold short |
234 | 651 | ||||||
| Net realized and unrealized gain on investments |
49,492 | 168,850 | ||||||
| Total increase in net assets resulting from operations |
$ | 48,623 | $ | 164,410 | ||||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
| Preferred Shares | Common Shares | Additional | Accumulated Earnings (Loss) | |||||||||||||||||||||||||
| Three Months ended September 30, 2022 | Number of Shares | Par Value | Number of Shares | Par Value | Paid-in Capital | Less Dividends | Total | |||||||||||||||||||||
| Balances, June 30, 2022 | 3,359,593 | $ | 3 | 37,171,807 | $ | 37 | $ | 998,557 | $ | 114,271 | $ | 1,112,868 | ||||||||||||||||
| Costs associated with Business Change | — | — | — | — | (92 | ) | — | (92 | ) | |||||||||||||||||||
| Net loss attributable to common shareholders | — | — | — | — | — | (60,142 | ) | (60,142 | ) | |||||||||||||||||||
| Net income attributable to preferred shareholders | — | — | — | — | — | 1,155 | 1,155 | |||||||||||||||||||||
| Common stock dividends declared ($ per share) | — | — | — | — | — | (5,577 | ) | (5,577 | ) | |||||||||||||||||||
| Preferred stock dividends declared ($ per share) | — | — | — | — | — | (1,155 | ) | (1,155 | ) | |||||||||||||||||||
| Balances, September 30, 2022 | 3,359,593 | $ | 3 | 37,171,807 | $ | 37 | $ | 998,465 | $ | 48,552 | $ | 1,047,057 | ||||||||||||||||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (Predecessor Basis)
(in thousands)
(Unaudited)
| For the six months ended June 30, |
||||
| 2022 |
||||
| Increase (decrease) in net assets operations: |
||||
| Net investment income |
$ | 67,404 | ||
| Preferred dividend expenses |
(2,310 | ) |
||
| Accumulated net realized gain (loss) on investments, securities sold short, written options, futures contracts, and foreign currency transactions |
30,434 | |||
| Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency |
32,593 | |||
| Net increase from operations |
128,121 | |||
| Distributions declared to common shareholders: |
||||
| Distribution |
(11,138 | ) |
||
| Total distributions declared to common shareholders: |
(11,138 | ) |
||
| Increase in net assets from operations and distributions |
116,983 | |||
| Share transactions: |
||||
| Value of distributions reinvested |
1,425 | |||
| Net increase from shares transactions |
1,425 | |||
| Total increase in net assets |
118,408 | |||
| Net assets |
||||
| Beginning of period |
911,208 | |||
| End of period |
$ | 1,029,616 | ||
| Change in Common Shares |
||||
| Issued for distribution reinvested |
92 | |||
| Net increase in common shares |
92 | |||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Predecessor Basis)
(in thousands)
(Unaudited)
| For the three months ended September 30, | For the nine months ended September 30, | |||||||
| 2021 | 2021 | |||||||
| Increase in net assets operations: | ||||||||
| Net investment income (loss) | $ | 284 | $ | (1,048 | ) | |||
| Preferred dividend expenses | (1,153 | ) | (3,392 | ) | ||||
| Accumulated net realized loss on investments, securities sold short, written options, futures contracts, and foreign currency transactions | (18,684 | ) | (16,385 | ) | ||||
| Net change in unrealized appreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency | 68,176 | 185,235 | ||||||
| Net increase from operations | 48,623 | 164,410 | ||||||
| Distributions declared to common shareholders: | ||||||||
| Distribution | (5,552 | ) | (16,642 | ) | ||||
| Total distributions declared to common shareholders: | (5,552 | ) | (16,642 | ) | ||||
| Increase in net assets from operations and distributions | 43,071 | 147,768 | ||||||
| Share transactions: | ||||||||
| Value of distributions reinvested | 602 | 1,504 | ||||||
| Cost of shares redeemed | — | (152,320 | ) | |||||
| Capital gains from the retirement of tendered shares | — | 47,319 | ||||||
| Net increase (decrease) from shares transactions | 602 | (103,497 | ) | |||||
| Total increase in net assets | 43,673 | 44,271 | ||||||
| Net assets | ||||||||
| Beginning of period | 791,423 | 790,825 | ||||||
| End of period | $ | 835,096 | $ | 835,096 | ||||
| Change in Common Shares | ||||||||
| Issued for distribution reinvested | 39 | 117 | ||||||
| Shares redeemed | - | (8,750 | ) | |||||
| Net increase (decrease) in common shares | 39 | (8,633 | ) | |||||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
| For the three months ended September 30, |
||||
| 2022 |
||||
| Cash flows from operating activities |
||||
| Net loss |
$ | (58,987 | ) |
|
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||
| Depreciation and amortization |
3,643 | |||
| Amortization of intangible lease liabilities | (371 | ) | ||
| Amortization of deferred financing costs |
(25 | ) |
||
| Paid in kind interest |
(1,016 | ) |
||
| Realized (gain)/loss |
(2,846 | ) |
||
| Net change in unrealized (gain) loss on investments held at fair value |
78,238 | |||
| Equity in losses of unconsolidated ventures |
1,581 | |||
| Distributions of earnings from unconsolidated ventures |
1,692 | |||
| Changes in operating assets and liabilities, net of effects of acquisitions: |
||||
| Operating assets |
(3,795 | ) |
||
| Operating liabilities |
9,459 | |||
| Net cash provided by operating activities |
27,573 | |||
| Cash flows from investing activities |
||||
| Proceeds from asset redemptions |
10,872 | |||
| Distributions from CLO investments |
18,100 | |||
| Purchases of investments |
(9,925 | ) |
||
| Contributions to equity method investments |
(1,382 | ) |
||
| Additions to real estate investments |
(1,317 | ) |
||
| Acquisitions of real estate investments |
(26,500 | ) |
||
| Cash paid for life settlement premiums |
(3,022 | ) |
||
| Net cash used in investing activities |
(13,174 | ) |
||
| Cash flows from financing activities |
||||
| Proceeds received from notes payable |
13,250 | |||
| Mortgage payments |
(591 | ) |
||
| Prime brokerage borrowing |
2,567 | |||
| Credit facilities payments |
(9,500 | ) |
||
| Payment of costs associated with the Business Change |
(92 | ) |
||
| Deferred financing costs paid |
(379 | ) |
||
| Dividends paid to preferred shareholders |
(1,155 | ) |
||
| Dividends paid to common shareholders |
(5,577 | ) |
||
| Net cash used in financing activities |
(1,477 | ) |
||
| Net increase in cash, cash equivalents and restricted cash |
12,922 | |||
| Cash, cash equivalents and restricted cash, beginning of period (Note 3) |
50,776 | |||
| Cash, cash equivalents and restricted cash, end of period |
$ | 63,698 | ||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
| Supplemental Disclosure of Cash Flow Information |
||||
| Interest paid |
$ | (2,722 | ) |
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Predecessor Basis)
(in thousands) (Unaudited)
| For the six months ended June 30, |
||||
| 2022 |
||||
| Cash flows used in operating activities: |
||||
| Net increase in net assets resulting from operations |
$ | 128,121 | ||
| Adjustments to reconcile increase in net assets to net cash provided by operating activities: |
||||
| Purchases of investment securities from unaffiliated issuers |
(215,064 | ) |
||
| Purchases of investment securities from affiliated issuers |
(173,562 | ) |
||
| Proceeds from the disposition of investment securities from unaffiliated issuers |
355,103 | |||
| Proceeds from the disposition of investment securities from affiliated issuers |
8,910 | |||
| Purchases of securities sold short |
(177 | ) |
||
| Amortization/(accretion) of premiums |
(171 | ) |
||
| Net realized (gain)/loss on investments from unaffiliated issuers |
(28,893 | ) |
||
| Net realized (gain)/loss on investments from affiliated issuers |
(1,288 | ) |
||
| Net realized (gain)/loss on securities sold short |
(253 | ) |
||
| Net change in unrealized depreciation on unaffiliated investments |
38,237 | |||
| Net change in unrealized appreciation on investments in affiliated investments |
(70,830 | ) |
||
| Changes in operating assets and liabilities |
||||
| Dividends and interest receivable |
742 | |||
| Due from custodian |
193 | |||
| Prepaid expenses and other assets |
(1,584 | ) |
||
| Reclaim receivable |
1,250 | |||
| Foreign tax reclaim receivable |
(1,274 | ) |
||
| Due to broker |
(1,696 | ) |
||
| Payable for administrative fees |
(11 | ) |
||
| Payable for investment advisory fees |
49 | |||
| Due to custodian |
(110 | ) |
||
| Payable for interest expense and commitment fees |
82 | |||
| Accrued expenses and other liabilities |
(151 | ) |
||
| Net cash provided by operating activities |
37,623 | |||
| Cash flows used in financing activities: |
||||
| Payments on notes payable |
(26,500 | ) |
||
| Distributions paid in cash |
(9,714 | ) |
||
| Proceeds from shares sold |
(44 | ) |
||
| Net cash used in financing activities |
(36,258 | ) |
||
| Net increase in cash |
1,365 | |||
| Cash, cash equivalents, foreign currency and restricted cash: |
||||
| Beginning of period |
2,679 | |||
| End of period |
$ | 4,044 | ||
| Supplemental disclosure of cash flow information |
||||
| Reinvestment of distributions |
$ | 1,425 | ||
| Cash paid during the period for interest expense and commitment fees |
$ | 614 | ||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Predecessor Basis)
(in thousands)
(Unaudited)
| For the nine months ended September 30, |
||||
| 2021 |
||||
| Cash flows used in operating activities: |
||||
| Net increase in net assets resulting from operations |
$ | 164,410 | ||
| Adjustments to reconcile increase in net assets to net cash provided by operating activities: |
||||
| Purchases of investment securities from unaffiliated issuers |
(972,965 | ) |
||
| Purchases of investment securities from affiliated issuers |
(51,722 | ) |
||
| Proceeds from the disposition of investment securities from unaffiliated issues |
748,298 | |||
| Proceeds from the disposition of investment securities from affiliated issues |
307,254 | |||
| Amortization/(accretion) of premiums |
(224 | ) |
||
| Net realized (gain)/loss on unaffiliated issuers |
16,385 | |||
| Net change in unrealized depreciation on unaffiliated investments |
(104,287 | ) |
||
| Net change in unrealized depreciation on investments in affiliated investments |
(80,948 | ) |
||
| Changes in operating assets and liabilities |
||||
| Dividends and interest receivable |
514 | |||
| Due from broker |
(166 | ) |
||
| Fund shares sold |
(57 | ) |
||
| Prepaid expenses and other assets |
(827 | ) |
||
| Due to broker |
(1,958 | ) |
||
| Payable for admin fees |
(25 | ) |
||
| Payable for audit fees |
59 | |||
| Payable for investment advisory fees |
16 | |||
| Payable for interest expense and commitment fees |
67 | |||
| Accrued expenses and other liabilities |
36 | |||
| Net cash flow provided by operating activities |
23,860 | |||
| Cash flows used in financing activities: |
||||
| Proceeds from issuance of cumulative preferred shares |
83,990 | |||
| Payments on notes payable |
7,500 | |||
| Distributions paid in cash |
(15,140 | ) |
||
| Payments on shares redeemed |
(105,001 | ) |
||
| Net cash flow used in financing activities |
(28,651 | ) |
||
| Net decrease in cash |
(4,791 | ) |
||
| Cash, cash equivalents, foreign currency and restricted cash: |
||||
| Beginning of period |
9,004 | |||
| End of period |
$ | 4,213 | ||
| Supplemental disclosure of cash flow information |
||||
| Reinvestment of distributions |
$ | 1,504 | ||
| Cash paid during the period for interest expense and commitment fees |
$ | 2,129 | ||
See Notes to Consolidated Financial Statements
NEXPOINT DIVERSIFIED REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
NexPoint Diversified Real Estate Trust (the “Company”, “we”, “us” or “our”) was formed in Delaware and has elected to be taxed as a real estate investment trust (“REIT”). Substantially all of the Company’s business is conducted through NexPoint Diversified Real Estate Trust Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. The Company conducts its business (the “Portfolio”) through the OP and its wholly owned taxable REIT subsidiary (“TRS”). The Company’s wholly owned subsidiary, NexPoint Diversified Real Estate Trust OP GP, LLC (the “OP GP”), is the sole general partner of the OP. As of September 30, 2022, there were 2,000 common units in the OP (“OP Units”) outstanding, of which 100.0% were owned by the Company.
On July 1, 2022 (the “Deregistration Date”), the SEC issued an order pursuant to Section 8(f) of the Investment Company Act of 1940 (the “1940 Act”) declaring that the Company has ceased to be an investment company under the 1940 Act (the “Deregistration Order”). The issuance of the Deregistration Order enables the Company to proceed with full implementation of its new business mandate to operate as a diversified REIT that focuses primarily on investing in various commercial real estate property types and across the capital structure, including but not limited to equity, mortgage debt, mezzanine debt and preferred equity (the “Business Change”).
The Company is externally managed by NexPoint Real Estate Advisors X, L.P. (the “Adviser”), through an agreement dated July 1, 2022, amended on October 25, 2022, for an initial three-year term (the “Advisory Agreement”), by and among the Company and the Adviser. The Adviser manages the day-to-day operations of the Company and provides investment management services. The Company expects it will only have accounting employees while the Advisory Agreement is in effect. All of the Company’s investment decisions are made by the Adviser, subject to general oversight by the Adviser’s investment committee and the Company’s board of trustees (the “Board”). The Adviser is wholly owned by NexPoint Advisors, L.P. (the “Sponsor” or “NexPoint”).
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.
2. Summary of Significant Accounting Policies
Basis of Accounting
Prior to the Deregistration Date, the Company was accounted for as an investment company in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies, or the Predecessor Basis. Upon the Deregistration Order, the Company discontinued the use of the guidance in FASB ASC 946 and prospectively applied the guidance under U.S. generally accepted accounting principles (“GAAP”) required for companies that are not investment companies, or what we refer to as the Successor Basis. As a result of these changes, our consolidated financial statements as of and for the three months ended September 30, 2022, are accounted for using the Successor Basis and are presented separately from our consolidated financial statements on the Predecessor Basis, as of and for the periods prior to the Deregistration Date.
The accompanying unaudited consolidated financial statements are presented in accordance with GAAP. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.
In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of September 30, 2022, and December 31, 2021 (Predecessor Basis) and results of operations for the three months ended September 30, 2022, the six months ended June 30, 2022 (Predecessor Basis) and three and nine months ended September 30, 2021 (Predecessor Basis) have been included. Such adjustments are normal and recurring in nature. The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021, and notes thereto included in its Annual Report on Form N-CSR filed with the SEC on March 11, 2022, together with the amendment thereto filed with the SEC on April 4, 2022 (our “Annual Report”).
Principles of Consolidation
The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with FASB ASC 810, Consolidation. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, including the OP and its subsidiaries.
Purchase Price Allocation
Upon acquisition of a property considered to be an asset acquisition, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets and liabilities in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805. The fair value of the Company’s consolidated operating properties as of the Deregistration Date became the new basis in accordance with FASB ASC 946. Due to this change, the Company reallocated these fair values to the assets and liabilities of operating properties.
The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (“ASC 820”) (see Note 9), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets and liabilities represents the value associated with the in-place leases and above and below market leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents and tenants. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.
Real estate assets, including land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Expenditures for improvements, renovations, and replacements are capitalized at cost. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table:
| Years | |||||
| Land | Not depreciated | ||||
| Buildings | 30 | - | 40 | ||
| Improvements | 5 | - | 40 | ||
| Furniture, fixtures, and equipment | 5 | - | 10 | ||
| Intangible lease assets and liabilities | Over lease term | ||||
Construction in progress includes the cost of renovation projects being performed at the various properties. Once a project is complete, the historical cost of the renovation is placed into service in one of the categories above depending on the type of renovation project and is depreciated over the estimated useful lives as described in the table above.
Impairment
Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. The Company’s impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment. As of September 30, 2022, the Company has recorded any impairment on its real estate assets.
Held for Sale
The Company periodically classifies real estate assets as held for sale when certain criteria are met in accordance with GAAP. At that time, the Company presents the net real estate assets and the net debt associated with the real estate held for sale separately in its consolidated balance sheet, and the Company ceases recording depreciation and amortization expense related to that property. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell. As of September 30, 2022, there are no properties held for sale.
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), effective for our taxable year ended December 31, 2021, and expects to continue to qualify as a REIT. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its shareholders. As a REIT, the Company will be subject to federal income tax on its undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions it pays with respect to any calendar year are less than the sum of (1) 85% of its ordinary income, (2) 95% of its capital gain net income and (3) 100% of its undistributed income from prior years. The Company intends to operate in such a manner so as to qualify as a REIT, but no assurance can be given that the Company will operate in a manner so as to qualify as a REIT. 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 $10.8 million associated with the TRS for the three months ended September 30, 2022, which is largely driven by income from the Company’s legacy CLO investments. The tax expense is partially offset by removing the valuation allowance on a deferred tax asset of $3.3 million for a net expense of $7.5 million that is recorded on the Consolidated Statement of Operations.
If the Company fails to meet these requirements, it could be subject to federal income tax on all of the Company’s taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to shareholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless the Company is entitled to relief under specific statutory provisions. As of September 30, 2022, the Company believes it is in compliance with all applicable REIT requirements.
The Company evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Company’s 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. The Company’s 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 September 30, 2022 and to the knowledge of the Company, the Company has no examinations in progress and none are expected at this time.
The Company recognizes its tax positions and evaluates them using a two-step process. First, the Company determines 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, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.
The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of September 30, 2022. The Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2021, 2020 and tax years remain open to examination by tax jurisdictions to which the Company and its subsidiaries are subject. When applicable, the Company recognizes interest and/or penalties related to uncertain tax positions on its consolidated statement of operations and comprehensive income (loss).
Deferred Tax Assets
As of September 30, 2022, significant components of the TRS’s net deferred tax assets (“DTA”) were as follows (in thousands):
| Deferred Tax Asset | ||||
| Capital loss carryover from December 31, 2021 | $ | 2,050 | ||
| Capital loss carryover utilized in 2022 | (2,050 | ) | ||
| Unrealized tax loss on investments | 18,534 | |||
| Total deferred tax assets | 18,534 | |||
| Valuation allowance | (15,246 | ) | ||
| Net deferred tax asset | $ | 3,288 | ||
The TRS is estimated to generate a net taxable capital gain of $15.7 million for the nine months ended September 30, 2022. The Company believes it is more likely than not that it will be able to harvest capital losses within the TRS in either the fourth quarter of 2022, or within the three succeeding taxable years to be eligible for a capital loss carryback refund claim. As such, the Company has recorded a valuation allowance of $15.2 million against the Company’s gross deferred tax assets to arrive at a net DTA of $3.3 million to reflect the expected tax benefit associated with the unrealized tax losses at the TRS.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. Substantially all amounts on deposit with major financial institutions exceed insured limits. Restricted cash represents cash deposited in accounts related to security deposits, property taxes, insurance premiums and deductibles and other lender-required escrows. Amounts deposited in the reserve accounts associated with the loans can only be used as provided for in the respective loan agreements, and security deposits held pursuant to lease agreements are required to be segregated.
Income Recognition
Rental Income – The Company has made several investments in direct real estate. The primary operations of these direct real estate investments consist of rental income earned from its residents and tenants under lease agreements. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. The Company records an allowance to reflect revenue that may not be collectable. This is recorded through a provision for bad debts which is included in rental income in the accompanying consolidated statements of operations. Tenant and resident reimbursements and other income consist of charges billed to tenants for utilities, administrative, application and other fees and are recognized when earned.
Interest Income – Debt investments where the Company expects to collect the contractual interest and principal payments are considered to be performing. The Company recognizes income on performing debt investments in accordance with the terms of the investment on an accrual basis. Interest income also includes amortization of loan premiums or discounts and loan origination costs and prepayment penalties.
Dividend Income – Dividends and other corporate actions are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available and is verified.
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.
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.
Expense Recognition
Interest expense, in accordance with the Company’s financing agreements, is recorded on the accrual basis. General and administrative expenses are expensed as incurred.
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company will continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Investments
The Company holds investments in publicly traded companies and privately held entities primarily involved in the life science, multifamily, self-storage, single-family rental, mortgage lending, and hospitality industries. As a REIT, the Company generally limits its ownership of each individual entity’s voting stock to less than 10%. Each investment is evaluated to determine whether the Company has the ability to exercise significant influence, but not control, over an investee. Investments are evaluated in which Company ownership is equal to or greater than 20%, but less than or equal to 50%, of an investee’s voting stock with a presumption that the Company has this ability. For our investments in limited partnerships and functional equivalents that maintain specific ownership accounts, we presume that such ability exists when our ownership interest exceeds 3% to 5%. In addition to the Company’s ownership interest, the Company also considers whether it has a board seat or whether it participates in the policy-making process, among other criteria, to determine if we have an ability to exert significant influence, but not control, over an investee. If we determine that we have such ability, we account for the investment under the equity method of accounting, as described below.
Investments accounted for under the equity method – Under the equity method of accounting, the Company initially recognizes its investment at cost and subsequently adjusts the carrying amount of the investments for its share of earnings and losses reported by the investee, distributions received, and other-than-temporary impairments. The Company has elected the fair value option for several of its investments that would otherwise be accounted for under the equity method (See Note 8). Distributions from these investments are accounted for as Interest and Dividend income and mark-to-market gains and losses are included in Change in Unrealized Gains/(Losses) on the consolidated Statement of Operations. For more information about the Company’s investments accounted for under the equity method, refer to Note 8 – Investments in unconsolidated ventures.
Investments that do not qualify for the equity method of accounting – For investees over which we determine that we do not have the ability to exercise significant influence or control, we account for each investment depending on whether it is an investment in a (i) publicly traded company, (ii) privately held entity that reports net asset value (“NAV”) per share, or (iii) privately held entity that does not report NAV per share, as described below.
Investments in publicly traded companies – Our investments in publicly traded companies are classified as investments with readily determinable fair values and are presented at fair value in our consolidated balance sheets, with changes in fair value classified in investment income in our consolidated statement of operations. The fair values of our investments in publicly traded companies are determined based on sales prices or quotes available on securities exchanges.
Investments in privately held companies – Our investments in privately held entities without readily determinable fair values consist of (i) investments in privately held entities that report NAV per share and (ii) investments in privately held entities that do not report NAV per share. These investments are accounted for as follows:
Investments in privately held entities that report NAV per share – Investments in privately held entities that report NAV per share, such as our privately held investments in limited partnerships, are presented at fair value using NAV as a practical expedient, with changes in fair value recognized in net income. We use NAV per share reported by limited partnerships generally without adjustment, unless we are aware of information indicating that the NAV reported by a limited partnership does not accurately reflect the fair value of the investment at our reporting date.
Investments in privately held entities that do not report NAV per share – Investments in privately held entities that do not report NAV per share are accounted for using a measurement alternative using the fair value procedures described further in Note 9 - Fair Value of Derivatives and Financial Instruments.
Impairment evaluation of equity method investments – We monitor equity method investments and investments in privately held entities that do not report NAV per share throughout the year for new developments including operating results. These investments are evaluated on the basis of qualitative assessment for indicators of impairment by monitoring the presence of the following triggering events or impairment indicators:
| (i) | a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee |
| (ii) | a significant adverse change in the regulatory, economic, or technological environment of the investee; |
| (iii) | a significant adverse change in the general market condition, including rising interest rates |
| (iv) | significant concerns about the investee’s ability to continue as a going concern; and/or |
| (v) | a decision by investors to cease providing support or reduce their financial commitment to the investee. |
If such indicators are present, we are required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value.
Distributions from equity method investments
We use the “nature of the distribution” approach to determine the classification within our consolidated statements of cash flows of cash distributions received from equity method investments, including our unconsolidated real estate joint ventures and equity method non-real estate investments. Under this approach, distributions are classified based on the nature of the underlying activity that generated the cash distributions. If we lack the information necessary to apply this approach in the future, we will be required to apply the “cumulative earnings” approach as an accounting change on a retrospective basis. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized are classified as cash inflows from operating activities, and those in excess of that amount are classified as cash inflows from investing activities.
3. Business Change
As discussed in Note 1 and Note 2, on the Deregistration Date, the SEC issued an order pursuant to Section 8(f) of the 1940 Act declaring that the Company has ceased to be an investment company under the 1940 Act. The issuance of the Deregistration Order enabled the Company to proceed with full implementation of the Business Change. Upon the Deregistration Order, the Company discontinued the use of guidance in FASB ASC 946. To effectuate this change, the fair market values of the Company’s investments became the July 1, 2022 cost basis. The change also required the consolidation of several investments that were previously not required to be consolidated under FASB ASC 946. The table below illustrates the changes from the June 30, 2022 balance sheet using the Predecessor Basis and the July 1, 2022 opening balance sheet using the Successor Basis (dollars in thousands).
| June 30, 2022 | Difference | July 1, 2022 | ||||||||||
| (Predecessor Basis) | (Successor Basis) | |||||||||||
| ASSETS | ||||||||||||
| Operating Real Estate Investments | ||||||||||||
| Land | $ | — | $ | 21,208 | (1) | $ | 21,208 | |||||
| Buildings and improvements | - | 158,304 | (1) | 158,304 | ||||||||
| Intangible lease assets | - | 10,979 | (1) | 10,979 | ||||||||
| Construction in progress | - | 46,052 | (1) | 46,052 | ||||||||
| Furniture, fixtures, and equipment | - | 349 | (1) | 349 | ||||||||
| Total Operating Real Estate Investments | - | 236,892 | 236,892 | |||||||||
| Investments, at fair value | 1,129,544 | (324,927 | ) | (2) | 804,617 | |||||||
| Equity method investments | — | 143,264 | (3) | 143,264 | ||||||||
| Life insurance policies, at fair value | — | 56,440 | (2) | 56,440 | ||||||||
| Cash and cash equivalents | 4,044 | 12,092 | (1) | 16,136 | ||||||||
| Restricted cash | — | 34,640 | (1) | 34,640 | ||||||||
| Accounts receivable, net | — | 4,849 | (1) | 4,849 | ||||||||
| Accrued interest and dividends | 172 | 3,873 | (1) | 4,045 | ||||||||
| Prepaid and other assets | 3,896 | 1,518 | (1) | 5,414 | ||||||||
| TOTAL ASSETS | $ | 1,137,656 | $ | 168,641 | $ | 1,306,297 | ||||||
| Liabilities: | ||||||||||||
| Mortgages payable, net | $ | — | $ | 145,908 | (1) | $ | 145,908 | |||||
| Notes payable, net | 16,000 | 7,500 | (1) | 23,500 | ||||||||
| Prime brokerage borrowing | 7,492 | - | 7,492 | |||||||||
| Accounts payable and other accrued liabilities | 1,296 | 2,294 | (1) | 3,590 | ||||||||
| Accrued real estate taxes payable | - | 2,323 | (1) | 2,323 | ||||||||
| Accrued interest payable | - | 639 | (1) | 639 | ||||||||
| Security deposit liability | - | 434 | (1) | 434 | ||||||||
| Prepaid rents | - | 1,845 | (1) | 1,845 | ||||||||
| Intangible lease liabilities | - | 6,770 | (1) | 6,770 | ||||||||
| Due to affiliates | - | 928 | (1) | 928 | ||||||||
| Total Liabilities | 24,788 | 168,641 | 193,429 | |||||||||
| Series A cumulative preferred shares, net of deferred financing costs | 83,252 | (83,252 | ) | (4) | — | |||||||
| Stockholders' Equity: | ||||||||||||
| Preferred stock, $ par value: shares authorized; shares issued and outstanding | 3 | - | 3 | |||||||||
| Common stock, $ par value: shares authorized; shares issued and outstanding | 37 | - | 37 | |||||||||
| Additional paid-in capital | 915,305 | 83,252 | (4) | 998,557 | ||||||||
| Accumulated earnings less dividends | 114,271 | - | 114,271 | |||||||||
| Total Stockholders' Equity | 1,029,616 | 83,252 | 1,112,868 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,137,656 | $ | 168,641 | $ | 1,306,297 | ||||||
| (1) |
Change due to consolidation of subsidiaries that were previously accounted for at fair value. |
| (2) |
Change due to investments that were previously accounted for at fair value being consolidated or accounted for using the equity method. |
| (3) |
Change due to applying the equity method to investments that were previously carried at fair value. See Note 8 for more information on the Company's equity method investments. |
| (4) |
The mandatory redemption feature of the Series A Preferred Shares (defined below) expired on the Deregistration Date. As such, the Series A Preferred Shares are now accounted for as a component permanent equity. |
4. Investments in Real Estate Subsidiaries
The Company conducts its operations through the OP, which owns several direct real estate properties through single asset limited liability companies that are special purpose entities (“SPEs”). The Company consolidates the SPEs that it controls as well as any VIEs where it is the primary beneficiary. The Company controls and consolidates the OP as a VIE. In connection with its indirect equity investments in the properties acquired, the Company, through the OP and the TRS, directly or indirectly holds 100% of the membership interests in SPEs that directly own the properties. All of the properties the SPEs own are consolidated in the Company’s consolidated financial statements. The assets of each entity can only be used to settle obligations of that particular entity, and the creditors of each entity have no recourse to the assets of other entities or the Company.
As of September 30, 2022, the Company, through the OP, owned 4 properties through SPEs. The following table represents the Company’s ownership in each property by virtue of its 100% ownership of the SPEs that directly own the title to each property as of September 30, 2022 and December 31, 2021:
| Effective Ownership Percentage at |
|||||||||||||
| Property Name |
Location |
Year Acquired |
September 30, 2022 |
December 31, 2021 |
|||||||||
| White Rock Center |
Dallas, Texas |
2013 |
100 | % |
100 | % |
|||||||
| 5916 W Loop 289 |
Lubbock, Texas |
2013 |
100 | % |
100 | % |
|||||||
| Cityplace Tower |
Dallas, Texas |
2018 |
100 | % |
100 | % |
|||||||
| NexPoint Dominion Land, LLC |
(1) | Plano, Texas |
2022 |
100 | % |
0 | % |
(2) | |||||
| (1) |
NexPoint Dominion Land, LLC owns 100% of 21.5 acres of undeveloped land in Plano, Texas. |
| (2) |
Property was acquired in 2022; therefore, no ownership as of December 31, 2021. |
5. Real Estate Investments Statistics
As of September 30, 2022, the Company was invested in two retail properties and one office property (excluding investments in undeveloped land), as listed below:
| Average Effective Monthly Occupied Rent Per Square Foot (1) as of |
% Occupied (2) as of |
||||||||||||||||||||||
| Property Name |
Rentable Square Footage (in thousands) |
Property Type |
Date Acquired |
September 30, 2022 |
December 31, 2021 |
September 30, 2022 |
December 31, 2021 |
||||||||||||||||
| White Rock Center |
82,793 | Retail |
6/13/2013 |
$ | 1.46 | $ | 1.46 | 72.9 | % |
78.4 | % |
||||||||||||
| 5916 W Loop 289 |
30,140 | Retail |
7/23/2013 |
0.40 | 0.40 | 100.0 | % |
100.0 | % |
||||||||||||||
| Cityplace Tower |
1,353,087 | Office |
8/15/2018 |
2.10 | 2.18 | 32.9 | % |
41.8 | % |
||||||||||||||
| 1,466,020 | |||||||||||||||||||||||
| (1) |
Average effective monthly occupied rent per square foot is equal to the average of the contractual rent for commenced leases as of September 30, 2022 and December 31, 2021, respectively, minus any tenant concessions over the term of the lease, divided by the occupied square footage of commenced leases as of September 30, 2022 and December 31, 2021, respectively. |
| (2) |
Percent occupied is calculated as the rentable square footage occupied as of September 30, 2022 and December 31, 2021, divided by the total rentable square footage, expressed as a percentage. |
6. Real Estate Investments
As of September 30, 2022, the major components of the Company’s investments in real estate held by SPEs the Company consolidates were as follows (in thousands):
| Operating Properties |
Land |
Buildings and Improvements |
Intangible Lease Assets |
Intangible Lease Liabilities |
Construction in Progress |
Furniture, Fixtures, and Equipment |
Totals |
|||||||||||||||||||||
| White Rock Center |
$ | 1,315 | $ | 10,314 | $ | 1,921 | $ | (101 | ) |
$ | — | $ | 5 | $ | 13,454 | |||||||||||||
| 5916 W Loop 289 |
1,081 | 2,938 | — | — | — | — | 4,019 | |||||||||||||||||||||
| Cityplace Tower |
18,812 | 148,443 | 9,058 | (6,669 | ) |
43,973 | 349 | 213,966 | ||||||||||||||||||||
| NexPoint Dominion Land, LLC |
26,500 | - | — | — | — | — | 26,500 | |||||||||||||||||||||
| 47,708 | 161,695 | 10,979 | (6,770 | ) |
43,973 | 354 | 257,939 | |||||||||||||||||||||
| Accumulated depreciation and amortization |
— | (2,016 | ) |
(1,445 | ) |
371 | - | (168 | ) |
(3,259 | ) |
|||||||||||||||||
| Total Operating Properties |
$ | 47,708 | $ | 159,679 | $ | 9,534 | $ | (6,399 | ) |
$ | 43,973 | $ | 186 | $ | 254,680 | |||||||||||||
Depreciation expense was $2.2 million for the three months ended September 30, 2022. Amortization expense related to the Company’s intangible lease assets was $1.5 million and $0.4 million for the Company’s intangible lease liabilities for the three months ended September 30, 2022.
Acquisitions
On August 9, 2022, the Company purchased undeveloped land in Plano, Texas through a wholly owned SPE, as detailed in the table below (dollars in thousands). The details of the Company’s acquisitions held by SPEs the Company consolidates for the three months ended September 30, 2022 were as follows (dollars in thousands):
| Investment Vehicle |
Location |
Property Type |
Date of Acquisition |
Purchase Price |
Debt |
Effective Ownership (1) |
||||||||||||
| NexPoint Dominion Land, LLC |
Plano, Texas |
Land |
August 9, 2022 |
$ | 26,500 | $ | 13,250 | 100 | % |
|||||||||
| $ | 26,500 | $ | 13,250 | |||||||||||||||
| (1) |
Represents ownership of underlying property. The Company, through the OP, owns 100% of NexPoint Dominion Land, LLC as of September 30, 2022. |
Dispositions
On August 5, 2022, the Company’s investment in Caddo Sustainable Timberlands was redeemed for approximately $10.9 million.
7. Debt
Cityplace Debt
The Company has debt on its office real estate property. The debt is non-recourse to the Company and encumbers the property. The debt had an original maturity of September 7, 2022. The Company has deferred the maturity date with the lender to February 7, 2023. Management recognizes that finding an alternative source of funding is necessary to repay the debt by the maturity date. Management is evaluating multiple options to fund the repayment of the $145.3 million principal balance outstanding, including recasting the debt, securing additional equity or debt financing, selling a portion of the portfolio, or any combination thereof. 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. The debt can be pre-paid in full on any date at par plus 0.25% if the Company gives 20 days prior written notice to the administrative agent. The below table contains summary information related to the real estate notes payable (dollars in thousands):
| Outstanding principal as of |
|||||||||
| September 30, 2022 |
Interest Rate |
Maturity Date (1) |
|||||||
| Note A-1 |
$ | 103,216 | 4.94 | % |
|
||||
| Note A-2 |
22,578 | 8.94 | % |
|
|||||
| Note B-1 |
12,993 | 4.94 | % |
|
|||||
| Note B-2 |
3,225 | 8.94 | % |
|
|||||
| Mezzanine Note 1 |
2,842 | 8.94 | % |
|
|||||
| Mezzanine Note 2 |
406 | 8.94 | % |
|
|||||
| Mortgages payable |
$ | 145,260 | |||||||
| Deferred financing costs, net |
(347 | ) |
|||||||
| Mortgages payable, net |
$ | 144,913 | |||||||
| (1) |
Reflective of the lender consent dated November 8, 2022 that defers the maturity date to February 7, 2023. |
The weighted average interest rate of the Company’s debt related to its Cityplace investment was 5.7% as of September 30, 2022.
The loan agreements contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. As of September 30, 2022, the Company believes it is in compliance with all covenants.
Notes Payable
On August 9, 2022, the Company borrowed approximately $13.3 million from the seller, Gabriel Legacy, LLC to finance its acquisition of 21.5 acres of land in Plano, Texas held through NexPoint Dominion Land, LLC, a wholly owned subsidiary of the OP. The note bears interest at an annual rate equal to the WSJ Prime Rate and matures on August 8, 2025.
Credit Facility
On January 8, 2021, the Company entered into a $30.0 million credit agreement (the “Credit Facility”) with Raymond James Bank, N.A. and drew the full balance. The Credit Facility, as amended, bears interest at one-month LIBOR plus 3.5% and matures on March 6, 2023. The Company paid down $10.0 million on the Credit Facility during the year ended December 31, 2021. During the nine months ended September 30, 2022, the Company paid down $6.0 million on the Credit Facility. As of September 30, 2022, the Credit Facility had an outstanding balance of $14.0 million.
Deferred Financing Costs
The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related loans using the straight-line method, which approximates the effective interest method. Deferred financing costs, net of amortization, are recorded as a reduction from the related debt on the Company’s consolidated balance sheet. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to loss on extinguishment of debt and modification costs.
Prime Brokerage Borrowing
As of September 30, 2022, the Company maintains a prime brokerage account with Merrill Lynch Professional Clearing Corp (“BAML”) to hold securities owned by the TRS. The Company from time to time borrows against the value of these securities. As of September 30, 2022, Company had a margin balance of approximately $10.1 million outstanding with BAML bearing interest at the Overnight Bank Funding Rate plus 0.60%. Securities with a fair market value of approximately $20.8 million are pledged as collateral against this margin balance. This arrangement has no stated maturity date.
Schedule of Debt Maturities
The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next four calendar years subsequent to September 30, 2022 are as follows (in thousands):
| Real Estate Debt |
Notes Payable |
Total |
||||||||||
| 2022 |
$ | 591 | $ | 3,000 | $ | 3,591 | ||||||
| 2023 |
144,669 | 11,000 | 155,669 | |||||||||
| 2024 |
- | — | - | |||||||||
| 2025 |
- | 13,250 | 13,250 | |||||||||
| 2026 |
- | — | — | |||||||||
| Thereafter |
- | — | — | |||||||||
| Total |
$ | 145,260 | $ | 27,250 | $ | 172,510 | ||||||
8. Equity Method Investments
As discussed in Note 2, investments are evaluated in which Company ownership is equal to or greater than 20%, but less than or equal to 50%, of an investee’s voting stock with a presumption that the Company has the ability to exercise significant influence but not control, over an investee. For our investments in limited partnerships and functional equivalents that maintain specific ownership accounts, we presume that such ability exists when our ownership interest exceeds 3% to 5%. In addition to the Company’s ownership interest, the Company also considers whether it has a board seat or whether it participates in the policy-making process, among other criteria, to determine if we have an ability to exert significant influence, but not control, over an investee. If we determine that we have such ability but do not have control, we account for the investment under the equity method of accounting.
Below is a summary of the Company’s equity method investments as of September 30, 2022 (dollars in thousands):
| Investee Name |
Instrument |
Asset Type |
NXDT Percentage Ownership |
Investment Basis |
Share of Investee's Net Assets (7) |
Basis Difference |
||||||||||||||||
| Sandstone Pasadena Apartments, LLC |
LLC interest |
Multifamily |
50.0 | % |
$ | 13,229 | $ | — | $ | 13,229 | ||||||||||||
| SAFStor NREA JV-I, LLC |
LLC interest |
Self-storage |
81.3 | % |
(3) | 57,152 | 16,747 | 40,405 | ||||||||||||||
| SAFStor NREA JV-III, LLC |
LLC interest |
Self-storage |
73.6 | % |
(3) | 13,127 | 3,023 | 10,104 | ||||||||||||||
| AM Uptown Hotel, LLC |
LLC interest |
Hospitality |
60.0 | % |
(3) | 28,015 | 21,334 | 6,681 | ||||||||||||||
| SFR WLIF III, LLC |
LLC interest |
Single-family rental |
20.0 | % | 7,254 | 7,466 | (212 | ) | ||||||||||||||
| Las Vegas Land Owner, LLC |
LLC interest |
Land |
77.0 | % |
(4) | 12,312 | 12,312 | — | ||||||||||||||
| Perilune Aero Equity Holdings One, LLC |
LLC interest |
Aircraft |
16.4 | % |
10,284 | 8,751 | 1,533 | |||||||||||||||
| Claymore Holdings, LLC |
LLC interest |
N/A | 50.0 | % |
(6) | — | (1) | — | — | |||||||||||||
| Allenby, LLC |
LLC interest |
N/A | 50.0 | % |
(6) | — | (1) | — | — | |||||||||||||
| NexPoint Real Estate Finance Operating Partnership, L.P. |
LP interest |
Mortgage |
(5) | 23.0 | % |
104,397 | (1) | 104,397 | — | |||||||||||||
| VineBrook Homes Operating Partnership, L.P. |
LP interest |
Single-family rental |
10.6 | % |
(2) | 169,473 | (1) | 169,473 | — | |||||||||||||
| NexPoint Storage Partners, Inc. |
Common stock |
Self-storage |
53.0 | % |
(3) | 114,714 | (1) | 114,714 | — | |||||||||||||
| NexPoint SFR Operating Partnership, L.P. |
LP interest |
Single-family rental |
28.4 | % |
52,461 | (1) | 52,461 | — | ||||||||||||||
| NexPoint Hospitality Trust |
Common stock |
Hospitality |
46.2 | % |
27,074 | (1) | 27,074 | — | ||||||||||||||
| LLV Holdco, LLC |
LLC interest |
Land |
26.8 | % |
4,333 | (1) | 4,333 | — | ||||||||||||||
| $ | 613,825 | $ | 542,085 | $ | 71,740 | |||||||||||||||||
(1) The Company has elected the fair value option with respect to these investments. The basis in these investments is their September 30, 2022 fair market value.
(2) The Company owns less than 20% of the investee but has significant influence due to members of the management team serving on the board of the investee and as such, accounts for the investee using the equity method.
(3) The Company owns greater than 50% of the outstanding common equity but is not deemed by the Company to be the primary beneficiary of the investee and as such, accounts for the investee using the equity method.
(4) The Company owns 100% of Las Vegas Land Owner, LLC which owns 77% of the Tivoli North Property as described below. Through the TIC, the Company shares control and as such accounts for this investment using the equity method.
(5) NexPoint Real Estate Finance Operating Partnership, L.P. (“NREF OP”) focuses on originating, structuring and investing in first-lien mortgage loans, mezzanine loans, preferred equity, multifamily properties and common stock investments across multiple real estate asset classes, as well as multifamily commercial mortgage-backed securities securitizations.
(6) The Company has a 50% non-controlling interest in Claymore Holdings, LLC (“Claymore”) and Allenby, LLC, (“Allenby”). As such, the Company has determined it is not the primary beneficiary and does not consolidate these entities.
(7) Represents the Company’s percentage share of net assets of the investee per the investee’s books and records.
Sandstone
On May 29, 2015, the Company, via a wholly owned subsidiary, invested $12.0 million in Sandstone Pasadena Apartments, LLC (“Sandstone”), which beneficially owns a 696 unit multifamily property (the “Ashmore”) located in Pasadena, TX. This contribution by the Company gave it an initial ownership percentage of 83.3%. Sandstone and the Ashmore are managed by Knightvest 2015, LLC (the “Sandstone Manager”). The LLC agreement of Sandstone vests the Sandstone Manager with the exclusive right, power, authority and discretion in conducting the business of Sandstone, subject to certain exceptions. Since the Company is not the controlling member, it did not consolidate this Sandstone investment and therefore used the equity method to account for Sandstone. Per the Sandstone organizational documents, the Company was entitled to a return on unreturned equity of 10.0%, which compounded annually. There was a capital event in 2018 which led to a full return of the Company’s and the other member’s equity in Sandstone. This triggered a change in the distribution-sharing percentage, which is now effectively 50% for the Company. The Sandstone Manager determines the monthly distributions at their discretion. Since the Company fully realized its investment basis, all distributions from Sandstone are now recognized as realized gains. As of September 30, 2022, the Company still maintains 50.0% ownership of Sandstone.
SAFStor Ventures
The Company has invested in joint ventures (collectively, the “SAFStor Ventures”) with SAFStor NREA GP – I, LLC and SAFStor NREA GP – II, LLC (collectively, the “SAFStor GPs”). The SAFStor Ventures invest, through subsidiaries, in various self-storage real estate development projects primarily located on the east coast of the United States. The SAFStor GPs are the controlling and managing members of the SAFStor Ventures as they have exclusive management and oversight authority of the SAFStor Ventures, subject to certain exceptions. Since the Company is not the controlling member, it did not consolidate the SAFStor Ventures and therefore used the equity method to account for the investment. The Company is entitled to an annual compounding return on unreturned equity of 10.0% and pro rata distributions upon the occurrence of major capital events. See below for further detail on the SAFStor Ventures the Company owns as of September 30, 2022 (amount of storage units owned is unaudited, dollars in thousands):
| Joint venture |
Date entered |
Properties beneficially owned |
Storage units beneficially owned |
Basis |
NXDT Ownership |
|||||||||||||
| SAFStor NREA JV I, LLC |
10/3/2017 |
7 | 5,417 | $ | 57,152 | % |
||||||||||||
| SAFStor NREA JV III, LLC |
12/21/2018 |
1 | 851 | 13,127 | % |
|||||||||||||
| Total |
8 | 6,268 | $ | 70,279 | ||||||||||||||
Marriott Uptown
The Company, through a subsidiary, initially owned an 85% interest in AM Uptown Hotel, LLC, (“AM Uptown”) which beneficially owns a 255 key upper upscale hotel (the “Marriott Uptown”) located in Dallas, Texas. AM Uptown appointed Alamo Manhattan Properties, LLC (“Alamo Manhattan”) as the manager to manage and operate the Marriott Uptown. The management, control and direction of AM Uptown and its operations, business and affairs is vested exclusively in Alamo Manhattan, which has the right, power, and authority, acting solely by itself to carry out all the purposes of AM Uptown. The Company does not participate in the management, control, or direction of AM Uptown’s operations, business, or affairs. Since the Company is not the controlling member, it did not consolidate this AM Uptown investment and therefore used the equity method to account for AM Uptown. As of September 30, 2022, the Company maintains 60% ownership interest of AM Uptown due to previous capital events that triggered a change in the distribution-sharing percentage and ownership percentage.
Tivoli
On March 30, 2022, the Company invested in Las Vegas Land Owner, LLC (“Tivoli”), a joint venture that owns an 8.5 acre tract of land (the “Tivoli North Property”) upon which site Tivoli plans to develop a 300-unit multifamily apartment community directly adjacent to Tivoli Village, a high-end mixed-use center in Las Vegas, Clark County, Nevada. On August 8, 2022 the joint venture was restructured to a tenants-in-common arrangement (the “TIC”). Post restructure, the Company owns 100% of Tivoli, and Tivoli owns 77% of the underlying land investment. Members of the TIC must unanimously agree on certain major decisions regarding the underlying investment giving the Company shared control, and as such, the Company is not the controlling member and uses the equity method to account for Tivoli.
SFR WLIF III
The Company owns approximately a 20.0% interest in SFR WLIF III, LLC, an SPE designed to hold an investment in debt issued to VineBrook Homes Operating Partnership, L.P. (“VB OP”), an entity that manages single family rental properties, whose parent is advised by an affiliate of the Adviser. The loan to VB OP bears interest at 1-month LIBOR plus 155 basis points, matures on November 1, 2025, and has an outstanding principal balance of $241.2 million. SFR WLIF III, LLC is managed by an affiliate of the Adviser. As the Company has a non-controlling interest in this entity, it is accounted for as an equity method investment.
Claymore and Allenby
The Company owns minority interests in two LLCs created to hold litigation claims, Claymore and Allenby. The probability, timing, and potential amount of recovery, if any, are unknown as of September 30, 2022. Since the Company has non-controlling interests in these entities, they are accounted for as equity method investments.
Perilune
The Company is a 16.4% member of Perilune Aero Equity Holdings One, LLC (“Perilune”). Perilune is a pooled investment vehicle created to finance, acquire, lease and/or sell two aircraft through subordinated or other lending arrangements and/or direct or indirect equity investments. Perilune prepares financial statements on an annual basis. The Company is presumed to hold more than virtually no influence as its ownership percentage in Perilune is greater than 3-5% and as such accounts for it using the equity method.
NexPoint Real Estate Finance Operating Partnership, L.P.
In February 2020, the Company contributed assets to certain subsidiaries of the then-newly formed NREF OP, the operating partnership of a publicly traded mortgage REIT, in exchange for equity in those subsidiaries. The equity in the subsidiaries owned by the Company, including additional equity received upon receipt of liquidating distributions from other vehicles that contributed to NREF OP, was subsequently contributed to NexPoint Real Estate Opportunities, LLC (“NREO”) and redeemed for limited partnership units in NREF OP. NREF OP is the operating partnership for NexPoint Real Estate Finance, Inc., (NYSE: NREF) a public mortgage REIT managed by an affiliate of the Adviser. The Company, through NREO, owns approximately 23% of the common units of NREF OP, and as such, accounts for it using the equity method.
VineBrook Homes Operating Partnership, L.P.
On November 1, 2018, the Company through NREO contributed $70.7 million to VB OP in exchange for limited partnership units. VB OP is the operating partnership for VineBrook Homes Trust, Inc. (“VineBrook”), a private single-family rental REIT managed by an affiliate of the Adviser. The Company, through NREO, owns approximately 10.6% of the common units of VB OP as of September 30, 2022.
NexPoint Storage Partners, Inc.
In November 2020, the Company’s preferred stock investment in Jernigan Capital, Inc. was converted into common shares of NexPoint Storage Partners, Inc. (“NSP”) as part of a transaction where affiliates of the Adviser took Jernigan Capital, Inc. private. NSP is a privately owned self-storage REIT. As of September 30, 2022, the Company owns 53.0% of the outstanding common stock of NSP. The Company has determined that it is not the primary beneficiary of NSP due to the board seat and other rights granted to the owner of NSP’s preferred stock, and as such, accounts for this investment using the equity method.
NexPoint SFR Operating Partnership, L.P.
On June 8, 2022, the Company, directly or through one or more subsidiaries, contributed $25.0 million to the newly formed NexPoint SFR Operating Partnership, L.P. (“SFR OP”) in exchange for common units of the SFR OP (“SFR OP Units”). Additionally, on June 8, 2022, the Company, directly or through one or more subsidiaries, loaned $25.0 million to the SFR OP in exchange for $25.0 million of 7.50% convertible notes of the SFR OP (“SFR OP Convertible Notes”) that are interest only during the term and mature on June 30, 2027. The SFR OP is a subsidiary of NexPoint Homes Trust, Inc., a single-family rental REIT managed by an affiliate of the Adviser. Subsequent to June 8, 2022 and before September 30, 2022, the Company, directly or through one or more subsidiaries, contributed approximately an additional $27.5 million to the SFR OP in exchange for SFR OP Units. Additionally, subsequent to June 8, 2022 and before September 30, 2022, the Company, directly or through one or more subsidiaries, loaned an additional $5.0 million to the SFR OP in exchange for $5.0 million of SFR OP Convertible Notes. As of September 30, 2022, the Company, owns approximately 28.4% of the outstanding units of SFR OP and as such accounts for this investment using the equity method.
NexPoint Hospitality Trust
As of September 30, 2022, the Company owns 46.2% of the outstanding common stock of NexPoint Hospitality Trust. (“NHT”), a publicly traded hospitality REIT that owns 11 properties located throughout the United States. NHT is managed by an affiliate of the Adviser. NHT is listed on the TSX Venture Exchange under the ticker NHT.U.
LLV Holdco, LLC
As of September 30, 2022, the Company owns approximately 26.8% of the series A and B equity units of LLV Holdco, LLC (“LLV”). LLV specializes in managing real estate assets, which are ultimately sold to both residential and commercial developers. LLV owns approximately 300 gross acres of undeveloped land, of which 115 acres are developable near Lake Las Vegas in Henderson, Nevada.
Significant Equity Method Investments
The table below presents the unaudited summary balance sheets for the Company’s significant equity method investments as of September 30, 2022 (dollars in thousands). NREF and VineBrook do not prepare standalone financials for their operating partnerships as all operations and investments are owned through their operating partnerships and are consolidated by the corporate entities. As such, the financial information for NREF and VineBrook are presented below in lieu of their operating partnerships. NREF, VineBrook and NSP account for their real estate assets at historical cost rather than at fair market value.
| NREF |
VineBrook |
NSP |
||||||||||
| ASSETS |
||||||||||||
| Investments |
$ | 8,170,243 | $ | 2,500 | $ | — | ||||||
| Real estate assets |
59,940 | 3,463,082 | 763,318 | |||||||||
| Cash and cash equivalents |
22,100 | 92,566 | 72,167 | |||||||||
| Other assets |
23,661 | 193,309 | 150,746 | |||||||||
| TOTAL ASSETS |
$ | 8,275,944 | $ | 3,751,457 | $ | 986,231 | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||||||
| Liabilities: |
||||||||||||
| Debt |
$ | 7,758,491 | $ | 2,451,375 | $ | 907,278 | ||||||
| Other liabilities |
22,361 | 155,141 | 26,696 | |||||||||
| Total Liabilities |
7,780,852 | 2,606,516 | 933,974 | |||||||||
| Redeemable noncontrolling interests in the OP |
143,165 | 348,040 | — | |||||||||
| Total Shareholders' Equity |
351,927 | 796,901 | 52,257 | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
$ | 8,275,944 | $ | 3,751,457 | $ | 986,231 | ||||||
The table below presents the unaudited summary statement of operations for the three months ended September 30, 2022 for the Company’s significant equity method investments (dollars in thousands).
| NREF |
VineBrook |
NSP |
||||||||||
| Revenues |
||||||||||||
| Rental income |
$ | — | $ | 71,594 | $ | 52,697 | ||||||
| Net interest income |
5,779 | — | 4,169 | |||||||||
| Other income |
— | 2,044 | 2,904 | |||||||||
| Total revenues |
$ | 5,779 | $ | 73,638 | $ | 59,770 | ||||||
| Expenses |
||||||||||||
| Total expenses |
$ | 3,611 | $ | 88,119 | $ | 52,242 | ||||||
| Gain/(loss) on sales of real estate |
— | (224 | ) |
27,220 | ||||||||
| Other income/(expense) |
(10,841 | ) |
84 | (52,594 | ) |
|||||||
| Unrealized gain/(loss) on derivatives |
— | 29,356 | — | |||||||||
| Total comprehensive gain/(loss) |
$ | (8,673 | ) |
$ | 14,735 | $ | (17,846 | ) |
||||
9. Fair Value of Derivatives and Financial Instruments
Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy):
| ● |
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. |
| ● |
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. |
| ● |
Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. |
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date.
As of September 30, 2022, the Company’s fair valued investments consisted of senior loans, corporate bonds, collateralized loan obligations, convertible notes, common stocks, rights, warrants, life settlement contracts, LP interests and LLC interests. The fair value of the Company’s senior loans, bonds, and collateralized loan obligations are generally based on quotes received from brokers or independent pricing services. Senior loans, bonds, and collateralized loan obligations with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Senior loans, bonds, and collateralized loan obligations that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.
The fair value of the Company’s common stocks, rights, and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. At the end of each calendar quarter, the Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities.
The fair value of the Company’s common stocks, exchange-traded funds, other registered investment companies and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The Company’s real estate investments include equity interests in limited liability companies and equity issued by REITs that invest in commercial real estate. The fair value of real estate investments that are not actively traded on national exchanges are based on internal models developed by the Adviser. The significant inputs to the models include cash flow projections for the underlying properties, capitalization rates and appraisals performed by independent valuation firms. These inputs are not readily observable, and the Company has classified the investments as Level 3 assets. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option.
The fair value of the Company’s convertible notes are categorized as Level 3 assets in the fair value hierarchy. Convertible notes are valued using a discounted cash flow model using discount rates derived from observable market data applied to the internal rate of return implied by the expected contractual cash flows.
Upon initial acquisition, the Company’s life settlement contracts are recognized at the transaction price. For each subsequent reporting period, the investments are measured at fair value by a third-party valuation specialist using a life settlement pricing model and are categorized as Level 3 assets in the fair value hierarchy. Key assumptions utilized in determining fair value include but are not limited to: (i) life expectancy estimates provided by independent third-party underwriters based on actuarially developed mortality tables and industry life expectancy reports; (ii) future premium estimates; (iii) rates of return consistent with those sought by independent purchasers of life policies at the time of purchase; and (iv) offers and/or commitments from purchasers. In addition, the valuation agent will also consider recent sales as well as offers received for the life policies deemed likely to close in the near future in estimating fair value.
The assumptions used to value life policies are by nature, inherently uncertain and the effect of changes in estimates may be material. The fair value measurement used in estimating the present value calculations are derived from valuation techniques that include inputs that are not based on observable market data. Changes in the fair value of the life settlement contracts are reported as net unrealized gains or losses on the Consolidated Statement of Operations (Successor Basis). Upon the death of an insured or the sale of a life policy, the Company will recognize the difference between the proceeds received and the cost of the life policy as a realized gain or loss in the Company's Consolidated Statement of Operations (Successor basis).
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The table below summarizes the inputs used to value the Company’s assets carried at fair value on a recurring basis as of September 30, 2022.
| Fair Value |
||||||||||||||||||||
| Cost Basis |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
| Assets |
||||||||||||||||||||
| Bond |
$ | 17 | $ | — | $ | 15 | $ | — | $ | 15 | ||||||||||
| CLO |
34,962 | — | 563 | 5,092 | 5,655 | |||||||||||||||
| Common stock |
284,454 | 23,231 | — | 254,735 | 277,966 | |||||||||||||||
| Convertible notes |
53,958 | — | — | 53,958 | 53,958 | |||||||||||||||
| Life settlement |
64,267 | — | — | 66,150 | 66,150 | |||||||||||||||
| LLC interest |
3,982 | — | — | 4,333 | 4,333 | |||||||||||||||
| LP interest |
362,605 | 104,397 | — | 221,934 | 326,331 | |||||||||||||||
| Rights and warrants |
3,947 | — | 2,037 | 1,784 | 3,821 | |||||||||||||||
| Senior loan |
42,073 | — | 66 | 32,330 | 32,396 | |||||||||||||||
| $ | 850,265 | $ | 127,628 | $ | 2,681 | $ | 640,316 | $ | 770,625 | |||||||||||
The table below sets forth a summary of changes in the Company’s Level 3 assets (assets measured at fair value using significant unobservable inputs) for the three months ended September 30, 2022 (in thousands):
| July 1, 2022 |
Contributions/ Purchases |
Paid in- kind dividends |
Redemptions/ Conversions |
Realized gain/(loss) |
Unrealized gain/(loss) |
September 30, 2022 |
||||||||||||||||||||||
| Common stock |
$ | 257,346 | $ | 3,000 | $ | - | $ | - | $ | - | $ | (5,611 | ) |
$ | 254,735 | |||||||||||||
| Convertible notes |
51,858 | 2,100 | - | - | - | - | 53,958 | |||||||||||||||||||||
| Life settlement |
56,440 | 3,022 | - | - | 3,435 | 3,253 | 66,150 | |||||||||||||||||||||
| LP interest |
216,550 | 4,792 | - | - | - | 592 | 221,934 | |||||||||||||||||||||
| CLO |
52,500 | - | - | (18,100 | ) |
- | (29,308 | ) |
5,092 | |||||||||||||||||||
| LLC interest |
3,982 | - | - | - | - | 351 | 4,333 | |||||||||||||||||||||
| Rights and warrants |
1,784 | - | - | - | - | - | 1,784 | |||||||||||||||||||||
| Senior loan |
40,997 | - | 1,016 | - | (5 | ) |
(9,678 | ) |
32,330 | |||||||||||||||||||
| Total |
$ | 681,457 | $ | 12,914 | $ | 1,016 | $ | (18,100 | ) |
$ | 3,430 | $ | (40,401 | ) |
$ | 640,316 | ||||||||||||
The following is a summary of the significant unobservable inputs used in the fair valuation of assets categorized within Level 3 of the fair value hierarchy as of September 30, 2022.
| Category |
Valuation Technique |
Unobservable Inputs |
Input/Range Values |
Market Value |
|||||||||
| Common stock |
Multiples Analysis |
Unadjusted Price/MHz-PoP |
$0.09 |
- | $0.95 | ($0.515) | $ | 254,735 | |||||
| Multiple of EBITDA |
|
- | |||||||||||
| Discounted Cash Flow |
Discount Rate |
- | (10.34%) | ||||||||||
| Transaction Indication of Value |
Enterprise Value ($mm) |
$905 | |||||||||||
| Offer Price per Share |
110.0% | ||||||||||||
| Direct Capitalization Method |
Capitalization Rates |
7.625% | - | 9.25% | (8.61%) | ||||||||
| Net Asset Value |
N/A | $28 | |||||||||||
| NAV Approach |
Discount Rate |
10.0% | |||||||||||
| Black–Scholes Model |
Volatility |
87.9% | |||||||||||
| Convertible notes |
Transaction Indication of Value |
Cost Price |
N/A | 53,958 | |||||||||
| Life settlement |
Discounted Cash Flow |
Discount Rate |
14.0% | 66,150 | |||||||||
| LP interest |
Net Asset Value |
N/A | N/A | 221,934 | |||||||||
| Transaction Indication of Value |
Cost Price ($mm) |
$52 | |||||||||||
| LLC interest |
Discounted Cash Flow |
Discount Rate |
4.73% | - | 29.50% | (13.17%) | 4,333 | ||||||
| CLO |
NAV Approach |
Discount Rate |
70.0% | 5,092 | |||||||||
| Rights and warrants |
Liquidation Analysis |
N/A | 1,784 | ||||||||||
| Senior loan |
Discounted Cash Flow |
Discount Rate |
11.50% | - | 17.50% | (14.50%) | 32,330 | ||||||
| Transaction Indication of Value |
Net purchase price ($mm) |
636.0% | |||||||||||
| Total |
$ | 640,316 | |||||||||||
10. Life Settlement Portfolio
The Company owns 100% of the outstanding equity and debt of an Ireland domiciled private company with limited liability named Specialty Financial Products, Ltd.(“SFP”), a Designated Activity Company. SFP was formed for the purpose of, from time to time, and at the proposal of NexAnnuity Asset Management, L.P. (“NexAnnuity,” an affiliate of the Adviser), entering into approved transactions relating to the acquisition of U.S. life settlement policies funded by the issuance of debt securities (the “Structured Note”) purchased by the Company. SFP utilizes proceeds from maturing life settlement contracts to repay the Structured Note and to further invest in life settlement contracts. As the Company owns the outstanding equity of and Structured Note issued by SFP, the Company consolidates SFP in its entirety. SFP’s equity and the Structured Notes are eliminated during consolidation.
As of September 30, 2022, the Company’s life settlement portfolio consists of the following (dollars in thousands):
| Number of Policies | Face Value (Death Benefit) | Acquisition Cost | Premium Cost | Estimated Fair Value | |||||||||||||||||||||||||||||||||
| Total | Range | Total | Range | Total | Range | Total | Range | Total | |||||||||||||||||||||||||||||
| 28 | - | $ | - | $ | - | $ | - | $ | |||||||||||||||||||||||||||||
| Remaining Life Expectancy (in years) | Number | Face Value | Fair Value | ||||||||||||
| 0 | - | 1 | 2 | $ | 7,000 | $ | 5,950 | ||||||||
| 1 | - | 2 | 1 | 2,350 | 1,537 | ||||||||||
| 2 | - | 3 | 5 | 22,540 | 13,601 | ||||||||||
| 3 | - | 4 | 7 | 34,851 | 18,795 | ||||||||||
| 4 | - | 5 | 5 | 35,100 | 16,529 | ||||||||||
| Thereafter | 8 | 41,066 | 9,738 | ||||||||||||
| Total | 28 | $ | 142,907 | $ | 66,150 | ||||||||||
The premiums to be paid for each of the five succeeding fiscal years to keep the life settlement contracts in force as of September 30, 2022, assuming no maturities occur in that period, are as follows (dollars in thousands):
| Year |
Premiums |
|||
| 2022 |
$ | 724 | ||
| 2023 |
5,279 | |||
| 2024 |
5,769 | |||
| 2025 |
6,295 | |||
| 2026 |
7,011 | |||
| 2027 |
7,675 | |||
During the three months ended September 30, 2022, the Company purchased 3 policies with a combined face value of $28.0 million for $8.7 million, had 3 policies mature with an aggregate net death benefit of $11.0 million, and paid $3.0 million in premiums.
11. Shareholders’ Equity
Common Shares
During the six months ended June 30, 2022, the Company issued 107,453 common shares pursuant to its dividend reinvestment plan that was terminated on July 1, 2022. No shares were issued during the three months ended September 30, 2022.
As of September 30, 2022, the Company had 37,171,807 common shares, par value $0.001 per share, issued and outstanding.
During the three months ended September 30, 2022, the Company paid distributions on its common shares on August 1, 2022, August 31, 2022 and September 30, 2022, in each case in the amount of $0.05 per share.
Preferred Shares
On January 8, 2021, the Company issued 3,359,593 shares of its 5.50% Series A Cumulative Preferred Shares, liquidation preference $25.00 per share (the “Series A Preferred Shares”), with an aggregate liquidation preference of approximately $84.0 million. The Series A Preferred Shares were issued as part of the consideration for an exchange offer for a portion of the Company’s common shares. The Series A Preferred Shares are callable starting on December 15, 2023 at a price of $25 per share.
During the three months ended September 30, 2022, the Company paid distributions on its Series A Preferred Shares on September 30, 2022 in the amount of $0.34375 per share.
Egan-Jones Ratings Company assigned an investment grade corporate rating of BBB- to the Series A Preferred Shares and a rating of BBB to the Company. Dividends on the Series A Preferred Shares are cumulative from their original issue date at the annual rate of 5.50% of the $25 per share liquidation preference and are payable quarterly on March 31, September 30, October 31, and December 31 of each year, or in each case on the next succeeding business day.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of the Company’s common shares outstanding. The Company currently does not have any dilutive instruments outstanding.
The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share amounts):
| For the Three Months Ended September 30, |
||||
| 2022 |
||||
| Numerator for loss per share: |
||||
| Net loss attributable to common shareholders |
$ | (60,142 | ) |
|
| Denominator for loss per share: |
||||
| Weighted average common shares outstanding |
37,172 | |||
| Denominator for basic and diluted loss per share |
37,172 | |||
| Loss per weighted average common share: |
||||
| Basic |
$ | (1.62 | ) |
|
| Diluted |
$ | (1.62 | ) |
|
13. Related Party Transactions
Advisory and Administrative Fee
In connection with the Business Change and effective on the Deregistration Date, the Company terminated its investment advisory agreement and its administrative services agreement with NexPoint and entered into the Advisory Agreement with the Adviser, a subsidiary of NexPoint. The Company also terminated the investment advisory agreements between NexPoint and its wholly owned subsidiaries, NREO and NexPoint Real Estate Capital, LLC, effective on the Deregistration Date. Pursuant to the Advisory Agreement, subject to the overall supervision of our Board, the Adviser manages the day-to-day operations of the Company, and provides investment management services.
As of September 30, 2022, as consideration for the Adviser’s services under the Advisory Agreement, we pay our Adviser an annual fee (the “Advisory Fee”) of 1.00% of Managed Assets (as defined below) and an annual fee (the “Administrative Fee” and, together with the Advisory Fee, the “Fees”) of 0.20% of the Company’s Managed Assets, in each case paid monthly, in cash or our common shares as provided in the Advisory Agreement, subject to certain restrictions. See Note 15 for additional information.
Under the Advisory Agreement, “Managed Assets” means an amount equal to the total assets of the Company, including any form of leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing to purchase or develop real estate or other investments, borrowing through a credit facility, or the issuance of debt securities), (ii) the issuance of preferred shares or other preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the Company’s investment objectives and policies, and/or (iv) any other means. In the event the Company holds collateralized mortgage-backed securities (“CMBS”) where the Company holds the controlling tranche of the securitization and is required to consolidate under GAAP all assets and liabilities of a specific CMBS trust, the consolidated assets and liabilities of the consolidated trust will be netted to calculate the allowable amount to be included as Managed Assets. In addition, in the event the Company consolidates another person it does not wholly own as a result of owning a controlling interest in such person or otherwise, Managed Assets will be calculated without giving effect to such consolidation and instead such person’s assets, leverage, expenses, liabilities and obligations will, on a pro rata basis consistent with the Company’s percentage ownership, be considered those of the Company for purposes of calculation of Managed Assets. The Adviser computes Managed Assets as of the end of each fiscal quarter and then computes each installment of the Fees as promptly as possible after the end of the month with respect to which such installment is payable.
Reimbursement of Expenses; Expense Cap
The Company is required to pay directly or reimburse the Adviser for all of the documented “operating expenses” (all out-of-pocket expenses of the Adviser in performing services for us, including but not limited to the expenses incurred by the Adviser in connection with any provision by the Adviser of legal, accounting, financial, due diligence, investor relations or other services performed by the Adviser that outside professionals or outside consultants would otherwise perform and our pro rata share of rent, telephone, utilities, office furniture, equipment, machinery or other office, internal and overhead expenses of the Adviser required for our operations) and any and all expenses (other than underwriters’ discounts) paid or to be paid by us in connection with an offering of our securities, including, without limitation, our legal, accounting, printing, mailing and filing fees and other documented offering expenses (collectively, “Offering Expenses”), paid or incurred by the Adviser or its affiliates in connection with the services it provides to us pursuant to the Advisory Agreement. 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 1.5% of Managed Assets (the “Expense Cap”), for the twelve-month period following the Company’s receipt of the Deregistration Order, calculated as of the end of each quarter; 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.
The Advisory Agreement has an initial term of three years and is automatically renewed thereafter for successive additional one-year terms unless earlier terminated. We have the right to terminate the Advisory Agreement on 30 days’ written notice for cause (as defined in the Advisory Agreement). The Advisory Agreement can be terminated by us or the Adviser without cause with 180 days’ written notice to the other party. The Adviser may also terminate the agreement with 30 days’ written notice if we have materially breached the agreement and such breach has continued for 30 days. In addition, the Advisory Agreement shall terminate in the event of an assignment (as defined in Section 202(a)(1) of the Investment Advisers Act of 1940) of the Advisory Agreement (an “Advisers Act Assignment”). A termination fee will be payable to the Adviser by us upon termination of the Advisory Agreement for any reason, including non-renewal, other than a termination by us for cause or a termination due to an Advisers Act Assignment. The termination fee will be equal to three times the Fees earned by the Adviser during the twelve month period immediately preceding the most recently completed calendar quarter prior to the effective termination date; provided, however, if the Advisory Agreement is terminated prior to the one year anniversary of the date of the Advisory Agreement, the Fees earned during such period will be annualized for purposes of calculating the Fee.
For the three months ended September 30, 2022, the Company incurred Administrative Fees and Advisory Fees of $2.9 million, inclusive of $0.9 million in expenses that were 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.
Guaranties of NexPoint Storage Partners, Inc. Debt
On September 14, 2022, the Company entered into guaranties (the “BS Guaranties”) for the benefit of JPMorgan Chase Bank, National Association (“JPM”) and any additional or subsequent lenders from time to time (collectively, “BS Lender”) under the BS Loan Agreement (defined below), pursuant to which the Company guaranteed certain obligations of the borrowers (“BS Borrower”) under the Loan Agreement, dated September 14, 2022, by and among BS Borrower, JPM as administrative agent and BS Lender (the “BS Loan Agreement”). The Company, through its ownership in NSP, owns an indirect interest in BS Borrower and entered into the BS Guaranties as a condition of BS Lender lending to BS Borrower under the BS Loan Agreement. Pursuant to the BS Guaranties, the Company guaranteed certain carrying obligations, including interest payments, of BS Borrower and certain recourse obligations of BS Borrower pertaining to exculpation or indemnification of BS Lender. The BS Guaranties also provide that the Company may be required to repay principal amounts upon the occurrence of certain events, including certain action or inaction by BS Borrower, but does not provide for a full guarantee of repayment in all circumstances. The BS Loan Agreement provides for a single initial advance of the loan in the amount of $221.8 million to BS Borrower on the closing date, and provides BS Borrower the right to request additional advances in connection with subsequently acquired properties. Amounts outstanding under the BS Loan Agreement are due and payable on September 9, 2023 which date may, at the option of BS Borrower, be extended for two successive one-year terms upon the satisfaction of certain terms and conditions. Borrowings outstanding under the BS Loan Agreement are secured by mortgages on real property owned by one or more of the borrowers comprising BS Borrower and bear interest at the one-month SOFR, subject to a floor of 0.50%, plus an applicable spread of 4.0017% with respect to approximately $184.9 million of initial principal thereunder and 5.3750% with respect to approximately $36.9 million of initial principal thereunder.
Separately, on September 14, 2022, the Company entered into a Guaranty Agreement (Recourse Obligations), dated September 14, 2022 (the “CMBS Guaranty”) for the benefit of JPM and any additional or subsequent lenders from time to time (collectively, the “CMBS Lender”) under the Loan Agreement, dated September 14, 2022 (the “CMBS Loan Agreement”), by and among the borrowers thereunder (collectively, “CMBS Borrower”) and the CMBS Lender. The Company, through its ownership in NSP, owns an indirect interest in CMBS Borrower and entered into the CMBS Guaranty as a condition of CMBS Lender lending to CMBS Borrower under the CMBS Loan Agreement. Pursuant to the CMBS Guaranty, the Company guaranteed certain recourse obligations of CMBS Borrower pertaining to exculpation or indemnification of CMBS Lender. The CMBS Guaranty also provides that the Company may be required to repay principal amounts upon the occurrence of certain events, including certain action or inaction by CMBS Borrower, but does not provide for a full guarantee of repayment in all circumstances. The CMBS Loan Agreement provides for a loan of $356.5 million to CMBS Borrower. Amounts outstanding under the CMBS Loan Agreement are due and payable on September 9, 2024 which date may, at the option of CMBS Borrower, be extended for three successive one-year terms upon the satisfaction of certain terms and conditions. Borrowings outstanding under the CMBS Loan Agreement are secured by mortgages on real property owned by one or more of the borrowers comprising CMBS Borrower and bear interest at one-month SOFR plus a spread of 3.55%, which will increase by 0.1% upon a second extension of the loan maturity and by an additional 0.15% upon a third extension of the loan maturity.
Subsidiary Investment Management Agreement
SFP is a party to an agreement (the “SFP IMA”) with NexAnnuity pursuant to which NexAnnuity provides investment management services to SFP. Mr. Dondero serves as President of NexAnnuity, which is indirectly owned by a trust of which Mr. Dondero is the primary beneficiary.
In exchange for its services, the SFP IMA provides that NexAnnuity will receive a management fee (the “SFP Management Fee”) paid monthly in an amount equal to 1.00% of the average weekly value of an amount equal to the total assets of SFP, including any form of leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the investment objective, investment guidelines and policies under the SFP IMA, and/or (iv) any other means, plus any value added tax or any other applicable tax, if any, thereon. NexAnnuity may waive all or a portion of the SFP Management Fee.
Other Related Party Transactions
The Company has in the past, and may in the future, utilize the services of affiliated parties. The Company holds multiple operating accounts at NexBank,SSB, an affiliate of the Adviser through common beneficial ownership. The Company’s direct real estate investments are managed by NexVest Realty Advisors, LLC (“NexVest”) an affiliate of the Adviser. For the three and nine months ended September 30, 2022, the Company through its subsidiaries has paid $0.2 million and $0.6 million, respectively, in property management fees to NexVest. The property management agreement with NexVest for the property in Lubbock, Texas is dated January 1, 2014 and has a fixed fee of $750 per month. The property management agreement with NexVest for Cityplace Tower is dated August 15, 2018 and the management fee is calculated on 3% of gross revenues, with a minimum fee of $20,000. The property management agreement with NexVest for the White Rock Center is dated June 1, 2013 and the management fee is calculated on 4% of gross receipts.
The Company is the guarantor on two loans made to NHT, an affiliate of the Adviser, with an aggregate principal amount of 77.4 million as of September 30, 2022. NHT is current on all debt payments and in compliance with all debt compliance provisions.
On March 31, 2022, the Company, through a subsidiary, borrowed approximately $13.5 million from NREF, an entity advised by an affiliate of the Adviser, to finance its acquisition of a 77% interest in Tivoli North Property. The bridge note bore interest at an annual rate equal to the WSJ Prime Rate plus 1.5% and had a maturity date of October 1, 2022. The Company refinanced this bridge note with PNC Bank, N.A. on August 8, 2022. The new loan is for a principal amount of $13.5 million, matures on August 7, 2023, and bears interest at an annual rate of Daily Simple SOFR plus 3.5%. Proceeds from the note with PNC Bank were used to repay in full the financing provided by NREF on August 9, 2022. As discussed in Note 8, Tivoli is accounted for using the equity method and as such, the note with PNC Bank is not consolidated by the Company.
Related Party Investments
The Company, from time to time, may invest in entities managed by affiliates of the Adviser. For the three months ended and as of September 30, 2022, the Company has the following investments in entities managed or advised by, or directly or indirectly owned by entities managed or advised by, affiliates of the Adviser.
| Related Party |
Investment |
Fair Value/Carrying Value |
Change in Unrealized Gain/(Loss) |
Realized Gain/(Loss) |
Interest and Dividends |
Total Income |
||||||||||||||||
| SFR WLIF III, LLC |
LLC Units |
$ | 7,254 | $ | 131 | $ | - | $ | - | $ | 131 | |||||||||||
| NexPoint Residential Trust, Inc. |
Common Stock |
4,061 | (1,421 | ) |
- | 33 | (1,388 | ) |
||||||||||||||
| NexPoint Hospitality Trust |
Common Stock |
27,074 | 475 | - | - | 475 | ||||||||||||||||
| NexPoint Hospitality Trust |
Convertible Notes |
23,958 | - | - | 66 | 66 | ||||||||||||||||
| NexPoint Storage Partners, Inc. |
Common Stock |
114,714 | (6,565 | ) |
- | - | (6,565 | ) |
||||||||||||||
| NexPoint SFR Operating Partnership, L.P. |
Partnership Units |
52,461 | - | - | - | - | ||||||||||||||||
| NexPoint SFR Operating Partnership, L.P. |
Convertible Notes |
30,000 | - | - | 575 | 575 | ||||||||||||||||
| Claymore Holdings, LLC |
LLC Units |
- | - | - | - | - | ||||||||||||||||
| Allenby, LLC |
LLC Units |
- | - | - | - | - | ||||||||||||||||
| NexPoint Real Estate Finance Operating Partnership, L.P. |
Partnership Units |
104,397 | (36,866 | ) |
- | 3,485 | (33,381 | ) |
||||||||||||||
| VineBrook Homes Operating Partnership, L.P. |
Partnership Units |
169,473 | 592 | - | 1,427 | 2,019 | ||||||||||||||||
| Total |
$ | 533,392 | $ | (43,654 | ) |
$ | - | $ | 5,586 | $ | (38,068 | ) |
||||||||||
14. Commitments and Contingencies
Commitments
The Company is the guarantor on three secured loans made to NSP, an affiliate of the Adviser, with an aggregate principal amount of approximately $578.3 million outstanding as of September 30, 2022. NSP is current on all debt payments and in compliance with all debt compliance provisions. See Note 13 for additional information.
The Company is the guarantor on two loans made to NHT, an affiliate of the Adviser, with an aggregate principal amount of $77.4 million outstanding, as of September 30, 2022. NHT is current on all debt payments and in compliance with all debt compliance provisions.
Contingencies
In the normal course of business, the Company is subject to claims, lawsuits, and legal proceedings. While it is not possible to ascertain the ultimate outcome of all such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated balance sheets or consolidated statements of operations and comprehensive income (loss) of the Company. The Company is not involved in any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company or its properties or subsidiaries.
Environmental liabilities could have a material adverse effect on the Company’s business, assets, cash flows or results of operations. As of September 30, 2022, the Company was not aware of any environmental liabilities. There can be no assurance that material environmental liabilities do not exist.
Claymore is engaged in ongoing litigation that could result in a possible gain contingency to the Company. The probability, timing, and potential amount of recovery, if any, are unknown.
15. Subsequent Events
Dividends Declared
On October 24, 2022, the Board approved a quarterly dividend of $0.15 per common share, payable on December 30, 2022 to stockholders of record on December 15, 2022.
Amendment to Advisory Agreement
On October 25, 2022, the Advisory Agreement was amended to change the structure of the Advisory Fee such that a portion of the monthly installment of the Advisory Fee shall be paid in cash up to $1.0 million and the remainder of the monthly installment of the Advisory Fee, if any, shall be paid in common shares of the Company, subject to certain restrictions. The Advisory Agreement was also amended to provide that the Administrative Fee shall be paid in cash.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 and with our Annual Report, filed with the Securities and Exchange Commission (the “SEC”) on April 4, 2022. 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 September 30, 2022, 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 September 30, 2022, there were 2,000 OP Units outstanding, of which 100%, were owned by us.
On the Deregistration Date, the SEC issued the Deregistration Order. The issuance of the Deregistration Order enables the Company to proceed with full implementation of 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. The discussion herein is principally limited to our financial condition and results of operations during the period from the Deregistration Date to September 30, 2022.
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, for an initial three-year term. The Adviser is wholly owned by NexPoint Advisors, L.P.
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, and expect to continue to qualify as a REIT. 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 a TRS and is subject to applicable federal, state, and local income and margin taxes.
On October 15, 2021, a lawsuit was filed by a trust set up in connection with the Highland Capital Management, L.P. bankruptcy in the United States Bankruptcy Court for the Northern District of Texas. The lawsuit makes claims against a number of entities, including our Sponsor and James Dondero. The lawsuit does not include claims related to our business or our assets or operations. Our Sponsor and Mr. Dondero have informed us they believe the lawsuit has no merit and they intend to vigorously defend against the claims. We do not expect the 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 recently started raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the remainder of 2022. 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 (see Note 5 to our consolidated financial statements). Also included are utility reimbursements, late fees, common area maintenance reimbursements, and other rental fees charged to tenants.
Interest and dividends. Interest and dividends include interest earned from our debt investments and 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.
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.
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 consolidated financial statements).
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 consolidated financial statements).
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.
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.
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.
Tax Expense. Tax expense is primarily derived from taxable gains from asset sales and other income earned from investments held in our TRS.
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.
Results of Operations for the Three Months Ended September 30, 2022
The three months ended September 30, 2022
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. The discussion herein is principally limited to our financial condition and results of operations during the period from the Deregistration Date to September 30, 2022.
The following table sets forth a summary of our operating results for the three months ended September 30, 2022 (in thousands):
| For the Three Months Ended September 30, |
||||
| 2022 |
||||
| Total revenues |
$ | 40,763 | ||
| Total expenses |
(12,720 | ) |
||
| Operating income |
28,043 | |||
| Interest expense |
(2,541 | ) |
||
| Equity in losses of unconsolidated ventures |
(1,581 | ) |
||
| Tax expense |
(7,516 | ) |
||
| Change in unrealized losses |
(78,238 | ) |
||
| Realized gains |
2,846 | |||
| Net loss |
(58,987 | ) |
||
| Net income attributable to preferred shareholders |
(1,155 | ) |
||
| Net loss attributable to common shareholders |
$ | (60,142 | ) |
|
The net loss for the three months ended September 30, 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 $4.6 million for the three months ended September 30, 2022. Rental income primarily consists of lease revenue from our investment in Cityplace Tower.
Interest and dividends. Interest and dividends totaled $36.1 million for the three months ended September 30, 2022. Interest and dividends consists primarily of dividends from CLO equity investments of $29.1 million, NREF OP distributions of $3.5 million and VB OP distributions of $1.4 million.
Other income. Other income was approximately $18,000 for the three months ended September 30, 2022.
Expenses
Property operating expenses. Property operating expenses were $1.8 million for the three months ended September 30, 2022. Property operating expenses consist primarily of expenses from our investment in Cityplace Tower.
Real estate taxes and insurance. Real estate taxes and insurance costs were $1.5 million for the three months ended September 30, 2022. Real estate taxes and insurance 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 September 30, 2022. Property management fees are primarily based on gross revenues derived primarily from our investment in Cityplace Tower.
Advisory and administrative fees. For the three months ended September 30, 2022, the Company incurred Administrative Fees and Advisory Fees of $2.9 million, inclusive of $0.9 million in expenses that were 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.
Corporate general and administrative expenses. Corporate general and administrative expenses were $1.9 million for the three months ended September 30, 2022. Corporate general and administrative expenses were primarily driven by legal fees $0.6 million and valuation fees of $0.4 million.
Property general and administrative expenses. Property general and administrative expenses were $0.9 million for the three months ended September 30, 2022. Property general and administrative expenses consist primarily of expenses from our investment in Cityplace Tower.
Depreciation and amortization. Depreciation and amortization costs were $3.6 million for the three months ended September 30, 2022. 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 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. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the first year from the date of the Business Change.
Other Income and Expense
Interest expense. Interest expense was $2.5 million for the three months ended September 30, 2022.
Equity in losses of unconsolidated ventures. Equity in losses of unconsolidated ventures was $1.6 million for the three months ended September 30, 2022 and was primarily driven by amortization of the basis difference on the SAFStor Ventures of approximately $1.3 million.
Tax expense. The Company has recorded a current income tax expense of $10.8 million associated with the TRS for the three months ended September 30, 2022, which is largely driven by income from the Company’s legacy CLO investments. The tax expense is partially offset by removing the valuation allowance on a deferred tax asset of $3.3 million for a net expense of $7.5 million that is recorded on the Consolidated Statement of Operations.
Change in unrealized losses. Unrealized losses from our investments accounted for at fair value was $78.2 million for the three months ended September 30, 2022. Losses were primarily driven by mark-to-market losses on NREF OP units of $36.9 million and losses on our CLO equity portfolio of $27.2 million. Our CLO equity portfolio consists primarily of CLOs that are in the process of winding down operations and liquidating their remaining holdings. The losses on the CLO equity portfolio are offset by dividends received of $29.1 million which are shown in interest and dividends on the consolidated statement of operations.
Realized gains. Realized gains were $2.9 million for three months ended September 30, 2022, driven primarily by gains on life settlement maturities of $3.4 million partially offset by a legacy investment that was written off for a loss of $0.6 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 the TRS; |
| ● |
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 September 30, 2022, we had $29.2 million of cash available to meet our short-term liquidity requirements. As of September 30, 2022, we also had $34.5 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 $120 million to $130 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 September 30, 2022.
Cash Flows
The following table presents selected data from our consolidated statements of cash flows for the three months ended September 30, 2022 (in thousands):
| For the Three Months Ended September 30, |
||||
| 2022 |
||||
| Net cash provided by operating activities |
$ | 27,944 | ||
| Net cash used in investing activities |
(13,545 | ) |
||
| Net cash used in financing activities |
(1,477 | ) |
||
| Net increase in cash, cash equivalents and restricted cash |
12,922 | |||
| Cash, cash equivalents and restricted cash, beginning of period |
50,776 | |||
| Cash, cash equivalents and restricted cash, end of period |
$ | 63,698 | ||
Cash flows from operating activities. During the three months ended September 30, 2022, net cash provided by operating activities was $27.9 million. Operating cash flows were primarily driven by dividends received from our CLO equity portfolio.
Cash flows from investing activities. During the three months ended September 30, 2022, net cash used in investing activities was $13.6 million. Cash flows from investing activities was primarily driven by acquisitions of new real estate investments of $26.5 million partially offset by proceeds from the redemption of our Caddo Sustainable Timberlands investment of $10.9 million.
Cash flows from financing activities. During the three months ended September 30, 2022, net cash used in financing activities was $1.5 million. Cash flows from financing activities was primarily driven by borrowings of $13.3 million, offset by credit facility repayments of $9.5 million and dividends paid to common shareholders of $5.6 million.
Debt
Mortgage Debt
As of September 30, 2022, our consolidated subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $145.3 million at a weighted average interest rate of 5.7%. See Note 7 to our 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 $30.0 million Credit Facility with Raymond James Bank, N.A. and drew the full balance. The Credit Facility, as amended, bears interest at one-month LIBOR plus 3.5% and matures on March 6, 2023. The Company paid down $10.0 million on the Credit Facility during the year ended December 31, 2021. During the nine months ended September 30, 2022, the Company paid down $6.0 million on the Credit Facility. As of September 30, 2022, the Credit Facility had an outstanding balance of $14.0 million. For additional information regarding our Credit Facility, see Note 7.
Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of September 30, 2022 for the next four calendar years subsequent to September 30, 2022.
| Payments Due by Period (in thousands) |
||||||||||||||||||||||||||||
| Total |
2022 |
2023 |
2024 |
2025 |
2026 |
Thereafter |
||||||||||||||||||||||
| Property Level Debt |
||||||||||||||||||||||||||||
| Principal payments |
$ | 158,510 | $ | 591 | $ | 144,669 | $ | - | $ | 13,250 | $ | - | $ | - | ||||||||||||||
| Interest expense |
5,316 | 2,291 | 1,695 | 830 | 499 | - | - | |||||||||||||||||||||
| Total |
$ | 163,826 | $ | 2,882 | $ | 146,364 | $ | 830 | $ | 13,749 | $ | - | $ | - | ||||||||||||||
| Prime Brokerage Borrowing |
||||||||||||||||||||||||||||
| Principal payments |
$ | 10,059 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 10,059 | (1) | |||||||||||||
| Interest expense |
1,571 | 93 | 369 | 370 | 369 | 369 | - | (1) | ||||||||||||||||||||
| Total |
$ | 11,630 | $ | 93 | $ | 369 | $ | 370 | $ | 369 | $ | 369 | $ | 10,059 | ||||||||||||||
| Preferred Shares |
||||||||||||||||||||||||||||
| Dividend payments |
$ | - | $ | 1,155 | $ | 4,620 | $ | 4,620 | $ | 4,620 | $ | 4,620 | N/A | (2) | ||||||||||||||
| Credit Facility |
||||||||||||||||||||||||||||
| Principal payments |
$ | 14,000 | $ | 3,000 | $ | 11,000 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Interest expense |
333 | 213 | 120 | — | — | — | — | |||||||||||||||||||||
| Total |
$ | 14,333 | $ | 3,213 | $ | 11,120 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
| Total contractual obligations and commitments |
$ | 189,789 | $ | 7,343 | $ | 162,474 | $ | 5,821 | $ | 18,738 | $ | 4,989 | $ | 10,059 | ||||||||||||||
| (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 March 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 7, 2023. Management recognizes that finding an alternative source of funding is necessary to repay the debt by the maturity date. Management is evaluating multiple options to fund the repayment of the $145.3 million principal balance outstanding, including recasting the debt, securing additional equity or debt financing, selling a portion of the portfolio, or any combination thereof. 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 The first $1 million of the monthly installment of the Advisory Fee is paid in cash and the remainder of the monthly installment, if any, is paid in our common shares, subject to certain restrictions. The Administrative Fee is paid in cash. 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, for the twelve-month period following the Company’s receipt of the Deregistration Order, calculated as of the end of each quarter; 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.
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 $10.8 million associated with the TRS for the three months ended September 30, 2022, which is largely driven by income from the Company’s legacy CLO investments. The tax expense is partially offset by removing the valuation allowance on a deferred tax asset of $3.3 million for a net expense of $7.5 million 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 September 30, 2022, 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 September 30, 2022 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 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 share of common stock, 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, 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 our ninth monthly dividend of 2022 on our common shares of $0.05 per share which was paid on September 30, 2022 to shareholders of record on September 19, 2022. Our Board declared our third quarterly dividend of 2022 on our Series A Preferred Shares of $0.34375 per share which was paid on September 30, 2022 to shareholders of record on September 23, 2022. Starting October 1, 2022, 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 September 30, 2022, we had no 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.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes that would affect the reported amounts. These estimates are based on management’s historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required.
See Note 2, “Summary of Significant Accounting Policies”, for further discussion of our accounting estimates and policies.
Fair Value Measurements
Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy):
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Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. |
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Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. |
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Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. |
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date.
Valuation of Investments
As of September 30, 2022, the Company’s fair valued investments consisted of senior loans, corporate bonds, collateralized loan obligations, convertible notes, common stocks, rights, warrants, life settlement contracts, LP interests and LLC interests. The fair value of the Company’s senior loans, bonds, and collateralized loan obligations are generally based on quotes received from brokers or independent pricing services. Senior loans, bonds, and collateralized loan obligations with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Senior loans, bonds, and collateralized loan obligations that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.
The fair value of the Company’s common stocks, rights, and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. At the end of each calendar quarter, the Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities.
The fair value of the Company’s common stocks, exchange-traded funds, other registered investment companies and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The Company’s real estate investments include equity interests in limited liability companies and equity issued by REITs that invest in commercial real estate. The fair value of real estate investments that are not actively traded on national exchanges are based on internal models developed by the Adviser. The significant inputs to the models include cash flow projections for the underlying properties, capitalization rates and appraisals performed by independent valuation firms. These inputs are not readily observable, and the Company has classified the investments as Level 3 assets. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option.
The fair value of the Company’s convertible notes are categorized as Level 3 assets in the fair value hierarchy. Convertible notes are valued using a discounted cash flow model using discount rates derived from observable market data applied to the internal rate of return implied by the expected contractual cash flows.
Upon initial acquisition, the Company’s life settlement contracts are recognized at the transaction price. For each subsequent reporting period, the investments are measured at fair value by a third-party valuation specialist using a life settlement pricing model and are categorized as Level 3 assets in the fair value hierarchy. Key assumptions utilized in determining fair value include but are not limited to: (i) life expectancy estimates provided by independent third party underwriters based on actuarially developed mortality tables and industry life expectancy reports; (ii) future premium estimates; (iii) rates of return consistent with those sought by independent purchasers of life policies at the time of purchase; and (iv) offers and/or commitments from purchasers. In addition, the valuation agent will also consider recent sales as well as offers received for the life policies deemed likely to close in the near future in estimating fair value.
The assumptions used to value life policies are by nature, inherently uncertain and the effect of changes in estimates may be material. The fair value measurement used in estimating the present value calculations are derived from valuation techniques that include inputs that are not based on observable market data. Changes in the fair value of the life settlement contracts are reported as net unrealized gains or losses on the Consolidated Statement of Operations (Successor Basis). Upon the death of an insured or the sale of a life policy, the Company will recognize the difference between the proceeds received and the cost of the life policy as a realized gain or loss in the Company's Consolidated Statement of Operations (Successor basis).
Purchase Price Allocation
Upon acquisition of a property considered to be an asset acquisition, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets based on relative fair value in accordance with FASB ASC 805, Business Combinations. Acquisition costs related to asset acquisitions are capitalized in accordance with FASB ASC 805.
The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (see Note 9 to our consolidated financial statements), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.
Impairment
Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, we will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. The Company’s impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment.
Inflation
The real estate market has not been affected significantly 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 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. Currently, the Federal Reserve is 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 and expect to continue to qualify as a REIT. 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 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 $10.8 million associated with the TRS for the three months ended September 30, 2022, which is largely driven by income from the Company’s legacy CLO investments. The tax expense is partially offset by removing the valuation allowance on a deferred tax asset of $3.3 million for a net expense of $7.5 million 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies
Item 4. Controls and Procedures
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 September 30, 2022, 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 September 30, 2022, 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 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 September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.
Not required for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None for the three months ended September 30, 2022.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
EXHIBIT INDEX
| Exhibit Number |
Description |
|
| 3.1 |
||
| 3.2 |
||
| 3.3 |
||
| 10.1* |
||
| 10.2* |
||
| 10.3* |
||
| 10.4 |
||
| 10.5 |
||
| 31.1* |
||
| 31.2* |
||
| 32.1+ |
||
| 101.INS* |
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document) |
|
| 101.SCH* |
Inline XBRL Taxonomy Extension Schema |
|
| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase |
|
| 101.DEF* |
Inline XBRL Taxonomy Extension Definition Linkbase |
|
| 101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase |
|
| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase |
|
| 104* |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
+ Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEXPOINT DIVERSIFIED REAL ESTATE TRUST
| Signature |
Title |
Date |
||
| /s/ Jim Dondero |
President |
November 14, 2022 |
||
| Jim Dondero |
(Principal Executive Officer) |
|||
| /s/ Brian Mitts |
Chief Financial Officer, Executive VP-Finance, Treasurer and Assistant Secretary |
November 14, 2022 |
||
| Brian Mitts |
(Principal Financial Officer and Principal Accounting Officer) |
Exhibit 10.1
GUARANTY AGREEMENT (CARRY OBLIGATIONS)
THIS GUARANTY AGREEMENT (CARRY OBLIGATIONS) (this “Guaranty”) is executed as of September 14, 2022, by NEXPOINT DIVERSIFIED REAL ESTATE TRUST, a Delaware statutory trust, having an address at c/o NexPoint Real Estate Advisors, L.P., 300 Crescent Court, Suite 700, Dallas, Texas 75201 (“Guarantor”), for the benefit of JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, a banking association chartered under the laws of the United States of America, having an address at 383 Madison Avenue, New York, New York 10179, in its capacity as administrative agent (together with its successors and/or assigns, “Agent”), for the benefit of JPM in its capacity as the initial lender (together with any additional or subsequent lenders which may become party to the Loan Agreement (defined below) from time to time, collectively, “Lender”).
W I T N E S S E T H:
WHEREAS, pursuant to one or more promissory notes, dated as of the date hereof (as the same may hereafter be amended, restated, renewed, supplemented, replaced, extended or otherwise modified from time to time, the “Note”) among the entities listed on Schedule I attached hereto, each having its principal place of business at c/o NexPoint Real Estate Advisors, L.P., 300 Crescent Court, Suite 700, Dallas, Texas 75201 (each, an “Initial Property Owner Borrower” and collectively, the “Initial Property Owner Borrowers”, together with such other entities party to the Loan Agreement (as defined below) from time to time that execute a Joinder Agreement to the Loan Agreement, “Initial Property Owner Borrower”) and NSP RE BS LESSEE LLC, a Delaware limited liability company (“Operating Lessee”, and together with Property Owner Borrower, collectively, “Borrower”), Borrower has become indebted, and may from time to time be further indebted, to Lender with respect to a loan (“Loan”) which is secured by the Mortgage (as defined in the Loan Agreement), and is further evidenced by that certain Loan Agreement, of even date herewith among Borrower, Agent and Lender (as the same may hereinafter be amended, modified, restated, renewed or replaced the “Loan Agreement”) and further evidenced, secured or governed by the Loan Documents (as defined in the Loan Agreement);
WHEREAS, Lender is not willing to make the Loan, or otherwise extend credit and Agent is not willing to Administer the Loan, to Borrower unless Guarantor unconditionally guarantees payment and performance to Lender of the Guaranteed Obligations (as herein defined); and
WHEREAS, Guarantor is the owner of a direct or indirect interest in Borrower, and Guarantor will directly benefit from Lender’s making the Loan to Borrower.
NOW, THEREFORE, as an inducement to Lender to make the Loan to Borrower, and to extend such additional credit as Lender may from time to time agree to extend under the Loan Documents, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:
ARTICLE I
NATURE AND SCOPE OF GUARANTY
1.1 Guaranty of Obligation. Guarantor hereby irrevocably and unconditionally guarantees to Lender and its successors and assigns the payment and performance of the Guaranteed Obligations as and when the same shall be due and payable, whether by lapse of time, by acceleration of maturity or otherwise. Guarantor hereby irrevocably and unconditionally covenants and agrees that it is liable for the Guaranteed Obligations as a primary obligor. Guarantor shall only be liable for such Guaranteed Obligations to the extent same have accrued prior to the earliest of the following dates (the “Cut-Off Date”): (i) the date of the indefeasible repayment in full of the Debt; and (ii) so long as the Termination Conditions have been satisfied, (A) the date of a sale of all of the Properties pursuant to a foreclosure of the Mortgages or (B) the date on which a deed-in-lieu of foreclosure has been voluntarily accepted by Agent with respect to all of the Properties (it being agreed that Agent shall have no obligation to accept a deed-in-lieu of foreclosure).
1.2 Definitions. As used in this Guaranty, the following terms shall have the respective meanings set forth below:
(a) “Guaranteed Obligations” means, collectively, (i) Borrower’s obligation to pay interest payable at the applicable Interest Rate or the Default Rate, as applicable, under the Loan pursuant to the terms of the Loan Documents, (ii) Borrower’s obligation to pay Operating Expenses, Insurance Premiums, Taxes and Other Charges, (iii) Borrower’s obligation to pay Spread Maintenance Payment, (iv) Borrower’s obligation to make any deposits into the Operating Shortfall Reserve Account and (v) payment of Agent’s and Lenders’ cost of enforcement and collection of the Guaranteed Obligations.
(b) “Tail Period Carry Amount” means the amount determined by Agent in its sole but good faith discretion of the Guaranteed Obligations in respect of the period commencing on the Cut-Off Date and ending on the date that is six (6) months following the Cut-Off Date.
(c) “Termination Conditions” means (A) payment of the Spread Maintenance Payment under the Loan Agreement and (B) payment of the Tail Period Carry Amount.
1.3 Nature of Guaranty. This Guaranty is an irrevocable, absolute, continuing guaranty of payment and performance and not a guaranty of collection. This Guaranty may not be revoked by Guarantor and shall continue to be effective with respect to any Guaranteed Obligations arising or created after any attempted revocation by Guarantor and after (if Guarantor is a natural person) Guarantor’s death (in which event this Guaranty shall be binding upon Guarantor’s estate and, if the assets of such estate are distributed, Guarantor’s legal representatives and heirs). The fact that at any time or from time to time the Guaranteed Obligations may be increased or reduced shall not release or discharge the obligation of Guarantor to Lender with respect to the Guaranteed Obligations. This Guaranty may be enforced by Agent, on behalf of Lender and any subsequent holder of the Note and shall not be discharged by the assignment or negotiation of all or part of the Note. Upon indefeasible repayment in full of the Debt, Guarantor shall be automatically released from all of its liabilities and obligations with respect to the Guaranteed Obligations.
1.4 Guaranteed Obligations Not Reduced by Offset. The Guaranteed Obligations and the liabilities and obligations of Guarantor to Lender hereunder, shall not be reduced, discharged or released because or by reason of any existing or future offset, claim or defense of Borrower, or any other party, against Agent and/or Lender or against payment of the Guaranteed Obligations, whether such offset, claim or defense arises in connection with the Guaranteed Obligations (or the transactions creating the Guaranteed Obligations) or otherwise.
1.5 Payment By Guarantor. If all or any part of the Guaranteed Obligations shall not be punctually paid when due, whether at demand, maturity, acceleration or otherwise, Guarantor shall, immediately upon demand by Agent, on behalf of Lender, and without presentment, protest, notice of protest, notice of non-payment, notice of intention to accelerate the maturity, notice of acceleration of the maturity, or any other notice whatsoever, pay in lawful money of the United States of America, the amount due on the Guaranteed Obligations to Agent at Agent’s address as set forth herein. Such demand(s) may be made at any time coincident with or after the time for payment of all or part of the Guaranteed Obligations, and may be made from time to time with respect to the same or different items of Guaranteed Obligations. Such demand shall be deemed made, given and received in accordance with the notice provisions hereof.
1.6 No Duty To Pursue Others. It shall not be necessary for Agent or Lender (and Guarantor hereby waives any rights which Guarantor may have to require Agent or Lender), in order to enforce the obligations of Guarantor hereunder, first to (i) institute suit or exhaust its remedies against Borrower or others liable on the Loan or the Guaranteed Obligations or any other person, (ii) enforce Lender’s rights against any collateral which shall ever have been given to secure the Loan, (iii) enforce Agent’s or Lender’s rights against any other guarantors of the Guaranteed Obligations, (iv) join Borrower or any others liable on the Guaranteed Obligations in any action seeking to enforce this Guaranty, (v) exhaust any remedies available to Agent or Lender against any collateral which shall ever have been given to secure the Loan, or (vi) resort to any other means of obtaining payment of the Guaranteed Obligations. Neither Agent nor Lender shall be required to mitigate damages or take any other action to reduce, collect or enforce the Guaranteed Obligations.
1.7 Waivers. Guarantor agrees to the provisions of the Loan Documents, and hereby waives notice of, and any rights of consent to (i) any loans or advances made by Agent and/or Lender to Borrower, (ii) acceptance of this Guaranty, (iii) any amendment or extension of the Note, the Mortgage, the Loan Agreement or of any other Loan Documents, (iv) the execution and delivery by Borrower, Agent and Lender of any other loan or credit agreement or of Borrower’s execution and delivery of any promissory notes or other documents arising under the Loan Documents or in connection with the Property, (v) the occurrence of any breach by Borrower or an Event of Default, (vi) Lender’s transfer or disposition of the Guaranteed Obligations, or any part thereof, (vii) sale or foreclosure (or posting or advertising for sale or foreclosure) of any collateral for the Guaranteed Obligations, (viii) protest, proof of non-payment or default by Borrower, or (ix) any other action at any time taken or omitted by Agent or Lender, and, generally, all demands and notices of every kind in connection with this Guaranty, the Loan Documents, any documents or agreements evidencing, securing or relating to any of the Guaranteed Obligations and the obligations hereby guaranteed.
1.8 Payment of Expenses. In the event that Guarantor should breach or fail to timely perform any provisions of this Guaranty, Guarantor shall, immediately upon demand by Agent, pay Agent all out-of-pocket costs and expenses (including court costs and reasonable attorneys’ fees) actually incurred by Agent and/or Lender in the enforcement hereof or the preservation of Agent’s and Lender’s rights hereunder. The covenant contained in this Section shall survive the payment and performance of the Guaranteed Obligations.
1.9 Effect of Bankruptcy. In the event that, pursuant to any insolvency, bankruptcy, reorganization, receivership or other debtor relief law, or any judgment, order or decision thereunder, Agent and/or Lender must rescind or restore any payment, or any part thereof, received by Agent and/or Lender in satisfaction of the Guaranteed Obligations, as set forth herein, any prior release or discharge from the terms of this Guaranty given to Guarantor by Agent and/or Lender shall be without effect, and this Guaranty shall remain in full force and effect. It is the intention of Borrower and Guarantor that Guarantor’s obligations hereunder shall not be discharged except by Guarantor’s performance of such obligations and then only to the extent of such performance.
1.10 Waiver of Subrogation, Reimbursement and Contribution. Notwithstanding anything to the contrary contained in this Guaranty, Guarantor hereby unconditionally and irrevocably waives, releases and abrogates any and all rights it may now or hereafter have under any agreement, at law or in equity (including, without limitation, any law subrogating the Guarantor to the rights of Agent and/or Lender), to assert any claim against or seek contribution, indemnification or any other form of reimbursement from Borrower or any other party liable for payment of any or all of the Guaranteed Obligations for any payment made by Guarantor under or in connection with this Guaranty or otherwise.
1.11 Borrower. The term “Borrower” as used herein shall include any new or successor corporation, association, partnership (general or limited), limited liability company, joint venture, trust or other individual or organization formed as a result of any merger, reorganization, sale, transfer, devise, gift or bequest of Borrower or any interest in Borrower.
ARTICLE II
EVENTS AND CIRCUMSTANCES NOT REDUCING
OR DISCHARGING GUARANTOR’S OBLIGATIONS
Guarantor hereby consents and agrees to each of the following, and agrees that Guarantor’s obligations under this Guaranty shall not be released, diminished, impaired, reduced or adversely affected by any of the following, and waives any common law, equitable, statutory or other rights (including without limitation rights to notice) which Guarantor might otherwise have as a result of or in connection with any of the following:
2.1 Modifications. Any renewal, extension, increase, modification, alteration or rearrangement of all or any part of the Guaranteed Obligations, the Note, the Mortgage, the Loan Agreement, the other Loan Documents, or any other document, instrument, contract or understanding between Borrower, Agent and/or Lender, or any other parties, pertaining to the Guaranteed Obligations or any failure of Agent or Lender to notify Guarantor of any such action.
2.2 Adjustment. Any adjustment, indulgence, forbearance or compromise that might be granted or given by Lender to Borrower or Guarantor.
2.3 Condition of Borrower or Guarantor. The insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, dissolution or lack of power of Borrower, Guarantor or any other party at any time liable for the payment of all or part of the Guaranteed Obligations; or any dissolution of Borrower or Guarantor, or any sale, lease or transfer of any or all of the assets of Borrower or Guarantor, or any changes in the shareholders, partners or members of Borrower or Guarantor; or any reorganization of Borrower or Guarantor.
2.4 Invalidity of Guaranteed Obligations. The invalidity, illegality or unenforceability of all or any part of the Guaranteed Obligations, or any document or agreement executed in connection with the Guaranteed Obligations, for any reason whatsoever, including without limitation the fact that (i) the Guaranteed Obligations, or any part thereof, exceeds the amount permitted by law, (ii) the act of creating the Guaranteed Obligations or any part thereof is ultra vires, (iii) the officers or representatives executing the Note, the Mortgage, the Loan Agreement or the other Loan Documents or otherwise creating the Guaranteed Obligations acted in excess of their authority, (iv) the Guaranteed Obligations violate applicable usury laws, (v) Borrower has valid defenses, claims or offsets (whether at law, in equity or by agreement) which render the Guaranteed Obligations wholly or partially uncollectible from Borrower, (vi) the creation, performance or repayment of the Guaranteed Obligations (or the execution, delivery and performance of any document or instrument representing part of the Guaranteed Obligations or executed in connection with the Guaranteed Obligations, or given to secure the repayment of the Guaranteed Obligations) is illegal, uncollectible or unenforceable, or (vii) the Note, the Mortgage, the Loan Agreement or any of the other Loan Documents have been forged or otherwise are irregular or not genuine or authentic, it being agreed that Guarantor shall remain liable hereon regardless of whether Borrower or any other Person be found not liable on the Guaranteed Obligations or any part thereof for any reason.
2.5 Release of Obligors. Any full or partial release of the liability of Borrower on the Guaranteed Obligations, or any part thereof, or of any co-guarantors, or any other Person now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the Guaranteed Obligations, or any part thereof, it being recognized, acknowledged and agreed by Guarantor that Guarantor may be required to pay the Guaranteed Obligations in full without assistance or support of any other party, and Guarantor has not been induced to enter into this Guaranty on the basis of a contemplation, belief, understanding or agreement that other parties will be liable to pay or perform the Guaranteed Obligations, or that Agent and Lender will look to other parties to pay or perform the Guaranteed Obligations.
2.6 Other Collateral. The taking or accepting of any other security, collateral or guaranty, or other assurance of payment, for all or any part of the Guaranteed Obligations.
2.7 Release of Collateral. Any release, surrender, exchange, subordination, deterioration, waste, loss or impairment (including without limitation negligent, willful, unreasonable or unjustifiable impairment) of any collateral, property or security at any time existing in connection with, or assuring or securing payment of, all or any part of the Guaranteed Obligations.
2.8 Care and Diligence. The failure of Agent and/or Lender or any other party to exercise diligence or reasonable care in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of any collateral, property or security, including but not limited to any neglect, delay, omission, failure or refusal of Agent and/or Lender (i) to take or prosecute any action for the collection of any of the Guaranteed Obligations or (ii) to foreclose, or initiate any action to foreclose, or, once commenced, prosecute to completion any action to foreclose upon any security therefor, or (iii) to take or prosecute any action in connection with any instrument or agreement evidencing or securing all or any part of the Guaranteed Obligations.
2.9 Unenforceability. The fact that any collateral, security, security interest or lien contemplated or intended to be given, created or granted as security for the repayment of the Guaranteed Obligations, or any part thereof, shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other security interest or lien, it being recognized and agreed by Guarantor that Guarantor is not entering into this Guaranty in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the collateral for the Guaranteed Obligations.
2.10 Offset. The Note, the Loan Agreement, the Guaranteed Obligations and the liabilities and obligations of the Guarantor to Agent and/or Lender hereunder shall not be reduced, discharged or released because of or by reason of any existing or future right of offset, claim or defense of Borrower or Guarantor against Agent and/or Lender, or any other party, or against payment of the Guaranteed Obligations, whether such right of offset, claim or defense arises in connection with the Guaranteed Obligations (or the transactions creating the Guaranteed Obligations) or otherwise (except the defense of payment and performance thereof).
2.11 Merger. The reorganization, merger or consolidation of Borrower into or with any other Person.
2.12 Preference. Any payment by Borrower to Agent and/or Lender is held to constitute a preference under bankruptcy laws, or for any reason Agent or Lender is required to refund such payment or pay such amount to Borrower or someone else.
2.13 Other Actions Taken or Omitted. Any other action taken or omitted to be taken with respect to the Loan Documents, the Guaranteed Obligations, or the security and collateral therefor, whether or not such action or omission prejudices Guarantor or increases the likelihood that Guarantor will be required to pay the Guaranteed Obligations pursuant to the terms hereof, it is the unambiguous and unequivocal intention of Guarantor that Guarantor shall be obligated to pay the Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, which obligation shall be deemed satisfied only upon the full and final payment and satisfaction of the Guaranteed Obligations.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
To induce Agent and Lender to enter into the Loan Documents and extend credit to Borrower, Guarantor represents and warrants to Agent and Lender as follows:
3.1 Benefit. Guarantor is an Affiliate of Borrower, is the owner of a direct or indirect interest in Borrower, and has received, or will receive, direct or indirect benefit from the making of this Guaranty with respect to the Guaranteed Obligations.
3.2 Familiarity and Reliance. Guarantor is familiar with, and has independently reviewed books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be created as security for the payment of the Note or Guaranteed Obligations; however, Guarantor is not relying on such financial condition or the collateral as an inducement to enter into this Guaranty.
3.3 No Representation By Lender. Neither Agent nor Lender nor any other party has made any representation, warranty or statement to Guarantor in order to induce the Guarantor to execute this Guaranty.
3.4 Guarantor’s Financial Condition. As of the date hereof, and after giving effect to this Guaranty and the contingent obligation evidenced hereby, Guarantor is, and will be, solvent, and has and will have assets which, fairly valued, exceed its obligations, liabilities (including contingent liabilities, other than contingent liabilities in respect of non-recourse carveout guaranties and environmental indemnities that are inchoate in nature) and debts, and has and will have property and assets sufficient to satisfy and repay its obligations and liabilities.
3.5 Legality. The execution, delivery and performance by Guarantor of this Guaranty and the consummation of the transactions contemplated hereunder do not, and will not, contravene or conflict with any law, statute or regulation whatsoever to which Guarantor is subject or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or result in the breach of, any indenture, mortgage, deed of trust, charge, lien, or any contract, agreement or other instrument to which Guarantor is a party or which may be applicable to Guarantor. This Guaranty is a legal and binding obligation of Guarantor and is enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors’ rights.
3.6 Litigation. There are no actions, suits or proceedings at law or in equity by or before any Governmental Authority or other agency now pending or threatened in writing against or affecting Guarantor which, if adversely determined, could reasonably be expected to materially and adversely affect the condition (financial or otherwise) or business of such Guarantor (including the ability of such Guarantor to carry out the obligations contemplated by this Guaranty). There is no material fact presently known to Guarantor which has not been disclosed to Agent and Lenders which adversely affects, nor as far as Guarantor can foresee, is reasonably likely to adversely affect, the Property, the business, operations or condition (financial or otherwise) of Borrower or Guarantor in any material respect.
3.7 Survival. All representations and warranties made by Guarantor herein shall survive the execution hereof.
ARTICLE IV
SUBORDINATION OF CERTAIN INDEBTEDNESS
4.1 Subordination of All Guarantor Claims. As used herein, the term “Guarantor Claims” shall mean all debts and liabilities of Borrower to Guarantor, whether such debts and liabilities now exist or are hereafter incurred or arise, or whether the obligations of Borrower thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or liabilities be evidenced by note, contract, open account, or otherwise, and irrespective of the Person in whose favor such debts or liabilities may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by Guarantor. The Guarantor Claims shall include without limitation all rights and claims of Guarantor against Borrower (arising as a result of subrogation or otherwise) as a result of Guarantor’s payment of all or a portion of the Guaranteed Obligations. Upon the occurrence of an Event of Default or the occurrence of an event which would, with the giving of notice or the passage of time, or both, constitute an Event of Default, Guarantor shall not receive or collect, directly or indirectly, from Borrower or any other party any amount upon the Guarantor Claims.
4.2 Claims in Bankruptcy. In the event of receivership, bankruptcy, reorganization, arrangement, debtor’s relief, or other insolvency proceedings involving Guarantor as debtor, Agent shall have the right to prove its claim in any such proceeding so as to establish its rights hereunder and receive directly from the receiver, trustee or other court custodian dividends and payments which would otherwise be payable upon Guarantor Claims. Guarantor hereby assigns such dividends and payments to Agent for the benefit of Lender. Should Agent receive, for application against the Guaranteed Obligations, any such dividend or payment which is otherwise payable to Guarantor, and which, as between Borrower and Guarantor, shall constitute a credit against the Guarantor Claims, then upon payment to Agent in full of the Guaranteed Obligations, Guarantor shall become subrogated to the rights of Agent to the extent that such payments to Agent on the Guarantor Claims have contributed toward the liquidation of the Guaranteed Obligations, and such subrogation shall be with respect to that proportion of the Guaranteed Obligations which would have been unpaid if Agent had not received dividends or payments upon the Guarantor Claims.
4.3 Payments Held in Trust. In the event that, notwithstanding anything to the contrary in this Guaranty, Guarantor should receive any funds, payment, claim or distribution which is prohibited by this Guaranty, Guarantor agrees to hold in trust for Lender an amount equal to the amount of all funds, payments, claims or distributions so received, and agrees that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions so received except to pay them promptly to Lender, and Guarantor covenants promptly to pay the same to Lender.
4.4 Liens Subordinate. Guarantor agrees that any liens, security interests, judgment liens, charges or other encumbrances upon Borrower’s assets securing payment of the Guarantor Claims shall be and remain inferior and subordinate to any liens, security interests, judgment liens, charges or other encumbrances upon Borrower’s assets securing payment of the Guaranteed Obligations, regardless of whether such encumbrances in favor of Guarantor, Agent or Lender presently exist or are hereafter created or attach. Without the prior written consent of Agent, neither Guarantor nor any of its Affiliates shall (i) exercise or enforce any creditor’s right it may have against Borrower, (ii) create any Liens encumbering the Property, Borrower or any interest in either of the foregoing, other than Permitted Encumbrances, or (iii) foreclose, repossess, sequester or otherwise take steps or institute any action or proceedings (judicial or otherwise, including without limitation the commencement of, or joinder in, any liquidation, bankruptcy, rearrangement, debtor’s relief or insolvency proceeding) to enforce any liens, mortgage, deeds of trust, security interests, collateral rights, judgments or other encumbrances on assets of Borrower held by Guarantor.
ARTICLE V
COVENANTS
5.1 Definitions. As used in this Guaranty, the following terms shall have the respective meanings set forth below:
(a) “Net Worth” shall mean, as of a given date, (i) a Person’s total assets (exclusive of the Property) as of such date less (ii) such Person’s total liabilities as of such date determined in accordance with GAAP.
(b) “Liquid Asset” shall mean any of the following, but only to the extent owned individually, free of all security interests, liens, pledges, charges or any other encumbrance: (a) cash, (b) certificates of deposit (with a maturity of two (2) years or less) issued by, or savings account with, any bank or other financial institution reasonably acceptable to Lender or (c) marketable securities listed on a national or international exchange reasonably acceptable to Lender, marked to market; provided that Liquid Assets shall not include any asset that is a part of the Property or that is otherwise part of the collateral for the Loan.
5.2 Covenants. Until all of the Debt and the Guaranteed Obligations have been paid in full:
(a) Guarantor shall maintain a Net Worth of not less than $125,000,000.00; and
(b) Guarantor shall maintain Liquid Assets of not less than $20,000,000.00.
5.3 Financial Statements.
(a) within one hundred twenty (120) days after the end of each fiscal year of Guarantor, a complete copy of Guarantor’s annual financial statements prepared and reviewed by an independent certified public accountant acceptable to Agent, prepared in accordance with GAAP and (if applicable) the requirements of Regulation AB, including statements of income and expense and cash flow and a balance sheet for Guarantor, together with a certificate of an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) (A) setting forth in reasonable detail Guarantor’s Net Worth and Liquid Assets as of the end of such prior fiscal year and based on such annual financial statements, and (B) certifying that, to the best knowledge of the certifying individual, such annual financial statements are true, correct, accurate and complete in all material respects and fairly present the financial condition of Guarantor;
(b) within thirty (30) days after the end of each fiscal quarter of Guarantor, financial statements (including a balance sheet as of the end of such fiscal quarter and a statement of income and expense for such fiscal quarter) certified by an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) and in form and level of detail reasonably satisfactory to Agent, together with a certificate of an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) (A) setting forth in reasonable detail Guarantor’s Net Worth as of the end of such prior calendar quarter and based on the foregoing quarterly financial statements, and (B) certifying that, to the best knowledge of the certifying individual, such quarterly financial statements are true, correct, accurate and complete in all material respects and fairly present the financial condition of Guarantor in a manner consistent with GAAP and the requirements of Regulation AB (if applicable);
(c) within thirty (30) days after request by Agent, such other financial information with respect to Guarantor as Agent may reasonably request; provided, that Guarantor shall not be required to produce or create any new or additional reports or statements (other than certifications concerning Guarantor’s Net Worth and Liquid Assets) beyond that which is produced in the ordinary course in order to comply with any such request.
ARTICLE VI
MISCELLANEOUS
6.1 Waiver. No failure to exercise, and no delay in exercising, on the part of Agent and/or Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Agent and Lender hereunder shall be in addition to all other rights provided by law. No modification or waiver of any provision of this Guaranty, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand.
6.2 Notices. Any notice, demand, statement, request or consent made hereunder shall be in writing and shall be deemed to be received by the addressee on (a) the third day following the day such notice is deposited with the United States Postal Service first class certified mail, return receipt requested (b) expedited, prepaid delivery service, either commercial or United States Postal Service, with proof of attempted delivery and by telecopier (with answer back acknowledged), addressed to the address, as set forth below, of the party to whom such notice is to be given, or to such other address as either party shall in like manner designate in writing. The addresses of the parties hereto are as follows:
| Guarantor: |
NexPoint Diversified Real Estate Trust Dallas, Texas 75201 |
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| With a copy to: | Winston & Strawn LLP 2121 N. Pearl Street, Suite 900 Dallas, Texas 75201 Attention: Charles T. Haag Facsimile No.: chaag@winston.com |
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| Agent: | ||
| JPMorgan Chase Bank, National Association 383 Madison Avenue, 8th Floor New York, New York 10179 Attention: Simon B. Burce Facsimile No.: (212) 834-6029 |
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| with a copy to: | JPMorgan Chase Bank, National Association 4 Chase Metrotech Center, 4th Floor Brooklyn, New York 11245-0001 Attention: Nancy Alto Facsimile No.: (917) 546-2564 |
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| Cadwalader, Wickersham & Taft LLP 200 Liberty Street New York, New York 10281 Attention: Bonnie A. Neuman, Esq. Facsimile No.: (212) 504-6666 |
6.3 Governing Law. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST AGENT, LENDER OR GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY MAY AT AGENT’S OPTION BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE CITY OF NEW YORK, COUNTY OF NEW YORK, PURSUANT TO SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND GUARANTOR WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING.
GUARANTOR DOES HEREBY DESIGNATE AND APPOINT:
NATIONAL CORPORATE RESEARCH, LTD
850 NEW BURTON ROAD, SUITE 201
DOVER, COUNTY KENT, DELAWARE 19904
AS ITS AUTHORIZED AGENT TO ACCEPT AND ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT SAID ADDRESS AND WRITTEN NOTICE OF SAID SERVICE MAILED OR DELIVERED TO GUARANTOR IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON GUARANTOR IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE OF NEW YORK.
6.4 Invalid Provisions. If any provision of this Guaranty is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Guaranty, such provision shall be fully severable and this Guaranty shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Guaranty, and the remaining provisions of this Guaranty shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Guaranty, unless such continued effectiveness of this Guaranty, as modified, would be contrary to the basic understandings and intentions of the parties as expressed herein.
6.5 Amendments. This Guaranty may be amended only by an instrument in writing executed by the party or an authorized representative of the party against whom such amendment is sought to be enforced.
6.6 Parties Bound; Assignment; Joint and Several. This Guaranty shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives; provided, however, that Guarantor may not, without the prior written consent of Agent on behalf of Lender, assign any of its rights, powers, duties or obligations hereunder. If Guarantor consists of more than one person or party, the obligations and liabilities of each such person or party shall be joint and several.
6.7 Headings. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Guaranty.
6.8 Recitals. The recital and introductory paragraphs hereof are a part hereof, form a basis for this Guaranty and shall be considered prima facie evidence of the facts and documents referred to therein.
6.9 Counterparts. To facilitate execution, this Guaranty may be executed in as many counterparts as may be convenient or required. It shall not be necessary that the signature of, or on behalf of, each party, or that the signature of all persons required to bind any party, appear on each counterpart. All counterparts shall collectively constitute a single instrument. It shall not be necessary in making proof of this Guaranty to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, each of the parties hereto. Any signature page to any counterpart may be detached from such counterpart without impairing the legal effect of the signatures thereon and thereafter attached to another counterpart identical thereto except having attached to it additional signature pages.
6.10 Rights and Remedies. If Guarantor becomes liable for any indebtedness owing by Borrower to Agent and/or Lender, by endorsement or otherwise, other than under this Guaranty, such liability shall not be in any manner impaired or affected hereby and the rights of Agent and Lender hereunder shall be cumulative of any and all other rights that Agent and/or Lender may ever have against Guarantor. The exercise by Agent of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy.
6.11 Other Defined Terms. Any capitalized term utilized herein shall have the meaning as specified in the Loan Agreement, unless such term is otherwise specifically defined herein.
6.12 Entirety. THIS GUARANTY EMBODIES THE FINAL, ENTIRE AGREEMENT OF GUARANTOR AGENT AND LENDER WITH RESPECT TO GUARANTOR’S GUARANTY OF THE GUARANTEED OBLIGATIONS AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THIS GUARANTY IS INTENDED BY GUARANTOR, AGENT AND LENDER AS A FINAL AND COMPLETE EXPRESSION OF THE TERMS OF THE GUARANTY, AND NO COURSE OF DEALING BETWEEN GUARANTOR, AGENT AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE SHALL BE USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS GUARANTY AGREEMENT. THERE ARE NO ORAL AGREEMENTS BETWEEN GUARANTOR, AGENT AND LENDER.
6.13 Waiver of Right To Trial By Jury. GUARANTOR, AND BY THEIR ACCEPTANCE HEREOF, AGENT AND LENDER, HEREBY AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS GUARANTY, THE NOTE, THE LOAN AGREEMENT, THE MORTGAGE, OR THE OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH (OTHER THAN COMPULSORY OR MANDATORY COUNTERCLAIMS, IF SUCH COUNTERCLAIMS ARE COMPELLED UNDER LOCAL LAW OR RULE OF PROCEDURE). THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY AGENT AND GUARANTOR, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. EACH OF GUARANTOR, AGENT AND LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY GUARANTOR, AGENT AND LENDER, AS APPLICABLE.
6.14 Cooperation. Guarantor acknowledges that Lender and its successors and assigns may (i) sell this Guaranty, the Note and other Loan Documents to one or more investors as a whole loan, (ii) participate the Loan secured by this Guaranty to one or more investors, (iii) deposit this Guaranty, the Note and other Loan Documents with a trust, which trust may sell certificates to investors evidencing an ownership interest in the trust assets, or (iv) otherwise sell the Loan or interest therein to investors (the transactions referred to in clauses (i) through (iv) are hereinafter each referred to as “Secondary Market Transaction”). Guarantor shall reasonably cooperate with Lender in effecting any such Secondary Market Transaction and shall reasonably cooperate to implement all customary and reasonable requirements imposed by any Rating Agency or potential investor involved in any Secondary Market Transaction. Guarantor shall provide such information and documents relating to Guarantor as Lender may reasonably request in connection with such Secondary Market Transaction. In addition, Guarantor shall make available to Lender all information concerning its business and operations that Lender may reasonably request. Lender shall be permitted to share all such information with the investment banking firms (or other potential investors), Rating Agencies, accounting firms, law firms and other third-party advisory firms involved with the Loan and the Loan Documents or the applicable Secondary Market Transaction. It is understood that the information provided by Guarantor to Lender may ultimately be incorporated into the offering documents for the Secondary Market Transaction and thus various investors may also see some or all of the information. Lender and all of the aforesaid third-party advisors and professional firms shall be entitled to rely on the information supplied by, or on behalf of, Guarantor in the form as provided by Guarantor. Lender may publicize the existence of the Loan in connection with its marketing for a Secondary Market Transaction.
6.15 Reinstatement in Certain Circumstances. If at any time any payment of the principal of or interest under the Note or any other amount payable by Borrower under the Loan Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of Borrower or otherwise, the Guarantor’s obligations hereunder with respect to such payment shall be reinstated as though such payment has been due but not made at such time.
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EXECUTED as of the day and year first above written.
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NEXPOINT DIVERSIFIED REAL ESTATE TRUST, a Delaware statutory trust |
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/s/ Matt McGraner |
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Name: Matt McGraner |
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Title: Authorized Signatory |
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SCHEDULE I
PROPERTY OWNER BORROWER
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1. |
Van Nuys Owner LLC |
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Inglewood Owner LLC |
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Gables Storage Builders LLC |
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Phillips SW Storage, LLC |
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5. |
101 American Blvd. W., LLC |
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6. |
3216 Winnetka Ave. N., LLC |
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631 Transfer Rd., LLC |
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8. |
Hackensack Capital New Jersey LLC |
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9. |
Dover Capital NJ, LLC |
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10. |
1401 4th Ave NHP LLC |
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11. |
Brittmoore SS Investment, LLC |
Exhibit 10.2
GUARANTY AGREEMENT (RECOURSE OBLIGATIONS)
THIS GUARANTY AGREEMENT (RECOURSE OBLIGATIONS) (this “Guaranty”) is executed as of September 14, 2022, by NEXPOINT DIVERSIFIED REAL ESTATE TRUST, a Delaware statutory trust, having an address at c/o NexPoint Real Estate Advisors, L.P., 300 Crescent Court, Suite 700, Dallas, Texas 75201 (“Guarantor”), for the benefit of JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, a banking association chartered under the laws of the United States of America, having an address at 383 Madison Avenue, New York, New York 10179, in its capacity as administrative agent (together with its successors and/or assigns, “Agent”), for the benefit of JPM in its capacity as the initial lender (together with any additional or subsequent lenders which may become party to the Loan Agreement (defined below) from time to time, collectively, “Lender”).
W I T N E S S E T H:
WHEREAS, pursuant to one or more promissory notes, dated as of the date hereof (as the same may hereafter be amended, restated, renewed, supplemented, replaced, extended or otherwise modified from time to time, the “Note”) among the entities listed on Schedule I attached hereto, each having its principal place of business at c/o NexPoint Real Estate Advisors, L.P., 300 Crescent Court, Suite 700, Dallas, Texas 75201 (collectively, “Property Owner Borrower”) and NSP RE BS Lessee LLC, a Delaware limited liability company (“Operating Lessee”, and together with Property Owner Borrower, collectively, “Borrower”), Borrower has become indebted, and may from time to time be further indebted, to Lender with respect to a loan (“Loan”) which is secured by the Mortgage (as defined in the Loan Agreement), and is further evidenced by that certain Loan Agreement, of even date herewith among Borrower, Agent and Lender (as the same may hereinafter be amended, modified, restated, renewed or replaced the “Loan Agreement”) and further evidenced, secured or governed by the Loan Documents (as defined in the Loan Agreement);
WHEREAS, Lender is not willing to make the Loan, or otherwise extend credit and Agent is not willing to Administer the Loan, to Borrower unless Guarantor unconditionally guarantees payment and performance to Lender of the Guaranteed Obligations (as herein defined); and
WHEREAS, Guarantor is the owner of a direct or indirect interest in Borrower, and Guarantor will directly benefit from Lender’s making the Loan to Borrower.
NOW, THEREFORE, as an inducement to Lender to make the Loan to Borrower, and to extend such additional credit as Lender may from time to time agree to extend under the Loan Documents, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:
ARTICLE I
NATURE AND SCOPE OF GUARANTY
1.1 Guaranty of Obligation. Guarantor hereby irrevocably and unconditionally guarantees to Lender and its successors and assigns the payment and performance of the Guaranteed Obligations as and when the same shall be due and payable, whether by lapse of time, by acceleration of maturity or otherwise. Guarantor hereby irrevocably and unconditionally covenants and agrees that it is liable for the Guaranteed Obligations as a primary obligor.
1.2 Definition of Guaranteed Obligations. As used herein, the term “Guaranteed Obligations” means all obligations and liabilities of Borrower pursuant to Section 9.3 of the Loan Agreement; provided, however, that nothing contained herein shall require Guarantor to pay any Guaranteed Obligations that are actually paid by Guarantor pursuant to the Guaranty of Carry Obligations in accordance with the terms and conditions thereof.
1.3 Nature of Guaranty. This Guaranty is an irrevocable, absolute, continuing guaranty of payment and performance and not a guaranty of collection. This Guaranty may not be revoked by Guarantor and shall continue to be effective with respect to any Guaranteed Obligations arising or created after any attempted revocation by Guarantor and after (if Guarantor is a natural person) Guarantor’s death (in which event this Guaranty shall be binding upon Guarantor’s estate and, if the assets of such estate are distributed, Guarantor’s legal representatives and heirs). The fact that at any time or from time to time the Guaranteed Obligations may be increased or reduced shall not release or discharge the obligation of Guarantor to Lender with respect to the Guaranteed Obligations. This Guaranty may be enforced by Agent, on behalf of Lender and any subsequent holder of the Note and shall not be discharged by the assignment or negotiation of all or part of the Note. Upon indefeasible repayment in full of the Debt, Guarantor shall be automatically released from all of its liabilities and obligations with respect to the Guaranteed Obligations.
1.4 Guaranteed Obligations Not Reduced by Offset. The Guaranteed Obligations and the liabilities and obligations of Guarantor to Lender hereunder, shall not be reduced, discharged or released because or by reason of any existing or future offset, claim or defense of Borrower, or any other party, against Agent and/or Lender or against payment of the Guaranteed Obligations, whether such offset, claim or defense arises in connection with the Guaranteed Obligations (or the transactions creating the Guaranteed Obligations) or otherwise.
1.5 Payment By Guarantor. If all or any part of the Guaranteed Obligations shall not be punctually paid when due, whether at demand, maturity, acceleration or otherwise, Guarantor shall, immediately upon demand by Agent, on behalf of Lender, and without presentment, protest, notice of protest, notice of non-payment, notice of intention to accelerate the maturity, notice of acceleration of the maturity, or any other notice whatsoever, pay in lawful money of the United States of America, the amount due on the Guaranteed Obligations to Agent at Agent’s address as set forth herein. Such demand(s) may be made at any time coincident with or after the time for payment of all or part of the Guaranteed Obligations, and may be made from time to time with respect to the same or different items of Guaranteed Obligations. Such demand shall be deemed made, given and received in accordance with the notice provisions hereof.
1.6 No Duty To Pursue Others. It shall not be necessary for Agent or Lender (and Guarantor hereby waives any rights which Guarantor may have to require Agent or Lender), in order to enforce the obligations of Guarantor hereunder, first to (i) institute suit or exhaust its remedies against Borrower or others liable on the Loan or the Guaranteed Obligations or any other person, (ii) enforce Lender’s rights against any collateral which shall ever have been given to secure the Loan, (iii) enforce Agent’s or Lender’s rights against any other guarantors of the Guaranteed Obligations, (iv) join Borrower or any others liable on the Guaranteed Obligations in any action seeking to enforce this Guaranty, (v) exhaust any remedies available to Agent or Lender against any collateral which shall ever have been given to secure the Loan, or (vi) resort to any other means of obtaining payment of the Guaranteed Obligations. Neither Agent nor Lender shall be required to mitigate damages or take any other action to reduce, collect or enforce the Guaranteed Obligations.
1.7 Waivers. Guarantor agrees to the provisions of the Loan Documents, and hereby waives notice of, and any rights of consent to (i) any loans or advances made by Agent and/or Lender to Borrower, (ii) acceptance of this Guaranty, (iii) any amendment or extension of the Note, the Mortgage, the Loan Agreement or of any other Loan Documents, (iv) the execution and delivery by Borrower, Agent and Lender of any other loan or credit agreement or of Borrower’s execution and delivery of any promissory notes or other documents arising under the Loan Documents or in connection with the Property, (v) the occurrence of any breach by Borrower or an Event of Default, (vi) Lender’s transfer or disposition of the Guaranteed Obligations, or any part thereof, (vii) sale or foreclosure (or posting or advertising for sale or foreclosure) of any collateral for the Guaranteed Obligations, (viii) protest, proof of non-payment or default by Borrower, or (ix) any other action at any time taken or omitted by Agent or Lender, and, generally, all demands and notices of every kind in connection with this Guaranty, the Loan Documents, any documents or agreements evidencing, securing or relating to any of the Guaranteed Obligations and the obligations hereby guaranteed.
1.8 Payment of Expenses. In the event that Guarantor should breach or fail to timely perform any provisions of this Guaranty, Guarantor shall, immediately upon demand by Agent, pay Agent all out-of-pocket costs and expenses (including court costs and reasonable attorneys’ fees) actually incurred by Agent and/or Lender in the enforcement hereof or the preservation of Agent’s and Lender’s rights hereunder. The covenant contained in this Section shall survive the payment and performance of the Guaranteed Obligations.
1.9 Effect of Bankruptcy. In the event that, pursuant to any insolvency, bankruptcy, reorganization, receivership or other debtor relief law, or any judgment, order or decision thereunder, Agent and/or Lender must rescind or restore any payment, or any part thereof, received by Agent and/or Lender in satisfaction of the Guaranteed Obligations, as set forth herein, any prior release or discharge from the terms of this Guaranty given to Guarantor by Agent and/or Lender shall be without effect, and this Guaranty shall remain in full force and effect. It is the intention of Borrower and Guarantor that Guarantor’s obligations hereunder shall not be discharged except by Guarantor’s performance of such obligations and then only to the extent of such performance.
1.10 Waiver of Subrogation, Reimbursement and Contribution. Notwithstanding anything to the contrary contained in this Guaranty, Guarantor hereby unconditionally and irrevocably waives, releases and abrogates any and all rights it may now or hereafter have under any agreement, at law or in equity (including, without limitation, any law subrogating the Guarantor to the rights of Agent and/or Lender), to assert any claim against or seek contribution, indemnification or any other form of reimbursement from Borrower or any other party liable for payment of any or all of the Guaranteed Obligations for any payment made by Guarantor under or in connection with this Guaranty or otherwise.
1.11 Borrower. The term “Borrower” as used herein shall include any new or successor corporation, association, partnership (general or limited), limited liability company, joint venture, trust or other individual or organization formed as a result of any merger, reorganization, sale, transfer, devise, gift or bequest of Borrower or any interest in Borrower.
ARTICLE II
EVENTS AND CIRCUMSTANCES NOT REDUCING
OR DISCHARGING GUARANTOR’S OBLIGATIONS
Guarantor hereby consents and agrees to each of the following, and agrees that Guarantor’s obligations under this Guaranty shall not be released, diminished, impaired, reduced or adversely affected by any of the following, and waives any common law, equitable, statutory or other rights (including without limitation rights to notice) which Guarantor might otherwise have as a result of or in connection with any of the following:
2.1 Modifications. Any renewal, extension, increase, modification, alteration or rearrangement of all or any part of the Guaranteed Obligations, the Note, the Mortgage, the Loan Agreement, the other Loan Documents, or any other document, instrument, contract or understanding between Borrower, Agent and/or Lender, or any other parties, pertaining to the Guaranteed Obligations or any failure of Agent or Lender to notify Guarantor of any such action.
2.2 Adjustment. Any adjustment, indulgence, forbearance or compromise that might be granted or given by Lender to Borrower or Guarantor.
2.3 Condition of Borrower or Guarantor. The insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, dissolution or lack of power of Borrower, Guarantor or any other party at any time liable for the payment of all or part of the Guaranteed Obligations; or any dissolution of Borrower or Guarantor, or any sale, lease or transfer of any or all of the assets of Borrower or Guarantor, or any changes in the shareholders, partners or members of Borrower or Guarantor; or any reorganization of Borrower or Guarantor.
2.4 Invalidity of Guaranteed Obligations. The invalidity, illegality or unenforceability of all or any part of the Guaranteed Obligations, or any document or agreement executed in connection with the Guaranteed Obligations, for any reason whatsoever, including without limitation the fact that (i) the Guaranteed Obligations, or any part thereof, exceeds the amount permitted by law, (ii) the act of creating the Guaranteed Obligations or any part thereof is ultra vires, (iii) the officers or representatives executing the Note, the Mortgage, the Loan Agreement or the other Loan Documents or otherwise creating the Guaranteed Obligations acted in excess of their authority, (iv) the Guaranteed Obligations violate applicable usury laws, (v) Borrower has valid defenses, claims or offsets (whether at law, in equity or by agreement) which render the Guaranteed Obligations wholly or partially uncollectible from Borrower, (vi) the creation, performance or repayment of the Guaranteed Obligations (or the execution, delivery and performance of any document or instrument representing part of the Guaranteed Obligations or executed in connection with the Guaranteed Obligations, or given to secure the repayment of the Guaranteed Obligations) is illegal, uncollectible or unenforceable, or (vii) the Note, the Mortgage, the Loan Agreement or any of the other Loan Documents have been forged or otherwise are irregular or not genuine or authentic, it being agreed that Guarantor shall remain liable hereon regardless of whether Borrower or any other Person be found not liable on the Guaranteed Obligations or any part thereof for any reason.
2.5 Release of Obligors. Any full or partial release of the liability of Borrower on the Guaranteed Obligations, or any part thereof, or of any co-guarantors, or any other Person now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the Guaranteed Obligations, or any part thereof, it being recognized, acknowledged and agreed by Guarantor that Guarantor may be required to pay the Guaranteed Obligations in full without assistance or support of any other party, and Guarantor has not been induced to enter into this Guaranty on the basis of a contemplation, belief, understanding or agreement that other parties will be liable to pay or perform the Guaranteed Obligations, or that Agent and Lender will look to other parties to pay or perform the Guaranteed Obligations.
2.6 Other Collateral. The taking or accepting of any other security, collateral or guaranty, or other assurance of payment, for all or any part of the Guaranteed Obligations.
2.7 Release of Collateral. Any release, surrender, exchange, subordination, deterioration, waste, loss or impairment (including without limitation negligent, willful, unreasonable or unjustifiable impairment) of any collateral, property or security at any time existing in connection with, or assuring or securing payment of, all or any part of the Guaranteed Obligations.
2.8 Care and Diligence. The failure of Agent and/or Lender or any other party to exercise diligence or reasonable care in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of any collateral, property or security, including but not limited to any neglect, delay, omission, failure or refusal of Agent and/or Lender (i) to take or prosecute any action for the collection of any of the Guaranteed Obligations or (ii) to foreclose, or initiate any action to foreclose, or, once commenced, prosecute to completion any action to foreclose upon any security therefor, or (iii) to take or prosecute any action in connection with any instrument or agreement evidencing or securing all or any part of the Guaranteed Obligations.
2.9 Unenforceability. The fact that any collateral, security, security interest or lien contemplated or intended to be given, created or granted as security for the repayment of the Guaranteed Obligations, or any part thereof, shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other security interest or lien, it being recognized and agreed by Guarantor that Guarantor is not entering into this Guaranty in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the collateral for the Guaranteed Obligations.
2.10 Offset. The Note, the Loan Agreement, the Guaranteed Obligations and the liabilities and obligations of the Guarantor to Agent and/or Lender hereunder shall not be reduced, discharged or released because of or by reason of any existing or future right of offset, claim or defense of Borrower or Guarantor against Agent and/or Lender, or any other party, or against payment of the Guaranteed Obligations, whether such right of offset, claim or defense arises in connection with the Guaranteed Obligations (or the transactions creating the Guaranteed Obligations) or otherwise (except the defense of payment and performance thereof).
2.11 Merger. The reorganization, merger or consolidation of Borrower into or with any other Person.
2.12 Preference. Any payment by Borrower to Agent and/or Lender is held to constitute a preference under bankruptcy laws, or for any reason Agent or Lender is required to refund such payment or pay such amount to Borrower or someone else.
2.13 Other Actions Taken or Omitted. Any other action taken or omitted to be taken with respect to the Loan Documents, the Guaranteed Obligations, or the security and collateral therefor, whether or not such action or omission prejudices Guarantor or increases the likelihood that Guarantor will be required to pay the Guaranteed Obligations pursuant to the terms hereof, it is the unambiguous and unequivocal intention of Guarantor that Guarantor shall be obligated to pay the Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, which obligation shall be deemed satisfied only upon the full and final payment and satisfaction of the Guaranteed Obligations.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
To induce Agent and Lender to enter into the Loan Documents and extend credit to Borrower, Guarantor represents and warrants to Agent and Lender as follows:
3.1 Benefit. Guarantor is an Affiliate of Borrower, is the owner of a direct or indirect interest in Borrower, and has received, or will receive, direct or indirect benefit from the making of this Guaranty with respect to the Guaranteed Obligations.
3.2 Familiarity and Reliance. Guarantor is familiar with, and has independently reviewed books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be created as security for the payment of the Note or Guaranteed Obligations; however, Guarantor is not relying on such financial condition or the collateral as an inducement to enter into this Guaranty.
3.3 No Representation By Lender. Neither Agent nor Lender nor any other party has made any representation, warranty or statement to Guarantor in order to induce the Guarantor to execute this Guaranty.
3.4 Guarantor’s Financial Condition. As of the date hereof, and after giving effect to this Guaranty and the contingent obligation evidenced hereby, Guarantor is, and will be, solvent, and has and will have assets which, fairly valued, exceed its obligations, liabilities (including contingent liabilities), other than contingent liabilities in respect of non-recourse carveout guaranties and environmental indemnities that are inchoate in nature) and debts, and has and will have property and assets sufficient to satisfy and repay its obligations and liabilities.
3.5 Legality. The execution, delivery and performance by Guarantor of this Guaranty and the consummation of the transactions contemplated hereunder do not, and will not, contravene or conflict with any law, statute or regulation whatsoever to which Guarantor is subject or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or result in the breach of, any indenture, mortgage, deed of trust, charge, lien, or any contract, agreement or other instrument to which Guarantor is a party or which may be applicable to Guarantor. This Guaranty is a legal and binding obligation of Guarantor and is enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors’ rights.
3.6 Litigation. There are no actions, suits or proceedings at law or in equity by or before any Governmental Authority or other agency now pending or threatened in writing against or affecting Guarantor which, if adversely determined, could reasonably be expected to materially and adversely affect the condition (financial or otherwise) or business of such Guarantor (including the ability of such Guarantor to carry out the obligations contemplated by this Guaranty). There is no material fact presently known to Guarantor which has not been disclosed to Agent and Lenders which adversely affects, nor as far as Guarantor can foresee, is reasonably likely to adversely affect, the Property, the business, operations or condition (financial or otherwise) of Borrower or Guarantor in any material respect.
3.7 Survival. All representations and warranties made by Guarantor herein shall survive the execution hereof.
ARTICLE IV
SUBORDINATION OF CERTAIN INDEBTEDNESS
4.1 Subordination of All Guarantor Claims. As used herein, the term “Guarantor Claims” shall mean all debts and liabilities of Borrower to Guarantor, whether such debts and liabilities now exist or are hereafter incurred or arise, or whether the obligations of Borrower thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or liabilities be evidenced by note, contract, open account, or otherwise, and irrespective of the Person in whose favor such debts or liabilities may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by Guarantor. The Guarantor Claims shall include without limitation all rights and claims of Guarantor against Borrower (arising as a result of subrogation or otherwise) as a result of Guarantor’s payment of all or a portion of the Guaranteed Obligations. Upon the occurrence of an Event of Default or the occurrence of an event which would, with the giving of notice or the passage of time, or both, constitute an Event of Default, Guarantor shall not receive or collect, directly or indirectly, from Borrower or any other party any amount upon the Guarantor Claims.
4.2 Claims in Bankruptcy. In the event of receivership, bankruptcy, reorganization, arrangement, debtor’s relief, or other insolvency proceedings involving Guarantor as debtor, Agent shall have the right to prove its claim in any such proceeding so as to establish its rights hereunder and receive directly from the receiver, trustee or other court custodian dividends and payments which would otherwise be payable upon Guarantor Claims. Guarantor hereby assigns such dividends and payments to Agent for the benefit of Lender. Should Agent receive, for application against the Guaranteed Obligations, any such dividend or payment which is otherwise payable to Guarantor, and which, as between Borrower and Guarantor, shall constitute a credit against the Guarantor Claims, then upon payment to Agent in full of the Guaranteed Obligations, Guarantor shall become subrogated to the rights of Agent to the extent that such payments to Agent on the Guarantor Claims have contributed toward the liquidation of the Guaranteed Obligations, and such subrogation shall be with respect to that proportion of the Guaranteed Obligations which would have been unpaid if Agent had not received dividends or payments upon the Guarantor Claims.
4.3 Payments Held in Trust. In the event that, notwithstanding anything to the contrary in this Guaranty, Guarantor should receive any funds, payment, claim or distribution which is prohibited by this Guaranty, Guarantor agrees to hold in trust for Lender an amount equal to the amount of all funds, payments, claims or distributions so received, and agrees that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions so received except to pay them promptly to Lender, and Guarantor covenants promptly to pay the same to Lender.
4.4 Liens Subordinate. Guarantor agrees that any liens, security interests, judgment liens, charges or other encumbrances upon Borrower’s assets securing payment of the Guarantor Claims shall be and remain inferior and subordinate to any liens, security interests, judgment liens, charges or other encumbrances upon Borrower’s assets securing payment of the Guaranteed Obligations, regardless of whether such encumbrances in favor of Guarantor, Agent or Lender presently exist or are hereafter created or attach. Without the prior written consent of Agent, neither Guarantor nor any of its Affiliates shall (i) exercise or enforce any creditor’s right it may have against Borrower, (ii) create any Liens encumbering the Property, Borrower or any interest in either of the foregoing, other than Permitted Encumbrances, or (iii) foreclose, repossess, sequester or otherwise take steps or institute any action or proceedings (judicial or otherwise, including without limitation the commencement of, or joinder in, any liquidation, bankruptcy, rearrangement, debtor’s relief or insolvency proceeding) to enforce any liens, mortgage, deeds of trust, security interests, collateral rights, judgments or other encumbrances on assets of Borrower held by Guarantor.
ARTICLE V
COVENANTS
5.1 Definitions. As used in this Guaranty, the following terms shall have the respective meanings set forth below:
(a) “Net Worth” shall mean, as of a given date, (i) a Person’s total assets (exclusive of the Property) as of such date less (ii) such Person’s total liabilities as of such date, determined in accordance with GAAP.
(b) “Liquid Asset” shall mean any of the following, but only to the extent owned individually, free of all security interests, liens, pledges, charges or any other encumbrance: (a) cash, (b) certificates of deposit (with a maturity of two (2) years or less) issued by, or savings account with, any bank or other financial institution reasonably acceptable to Lender or (c) marketable securities listed on a national or international exchange reasonably acceptable to Lender, marked to market; provided that Liquid Assets shall not include any asset that is a part of the Property or that is otherwise part of the collateral for the Loan.
5.2 Covenants. Until all of the Debt and the Guaranteed Obligations have been paid in full:
(a) Guarantor shall maintain a Net Worth of not less than $125,000,000.00; and
(b) Guarantor shall maintain Liquid Assets of not less than $20,000,000.00.
5.3 Financial Statements.
(a) within one hundred twenty (120) days after the end of each fiscal year of Guarantor, a complete copy of Guarantor’s annual financial statements prepared and reviewed by an independent certified public accountant acceptable to Agent, prepared in accordance with GAAP and (if applicable) the requirements of Regulation AB, including statements of income and expense and cash flow and a balance sheet for Guarantor, together with a certificate of an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) (A) setting forth in reasonable detail Guarantor’s Net Worth and Liquid Assets as of the end of such prior fiscal year and based on such annual financial statements, and (B) certifying that, to the best knowledge of the certifying individual, such annual financial statements are true, correct, accurate and complete in all material respects and fairly present the financial condition of Guarantor;
(b) within thirty (30) days after the end of each fiscal quarter of Guarantor, financial statements (including a balance sheet as of the end of such fiscal quarter and a statement of income and expense for such fiscal quarter) certified by an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) and in form and level of detail reasonably satisfactory to Agent, together with a certificate of an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) (A) setting forth in reasonable detail Guarantor’s Net Worth as of the end of such prior calendar quarter and based on the foregoing quarterly financial statements, and (B) certifying that, to the best knowledge of the certifying individual, such quarterly financial statements are true, correct, accurate and complete in all material respects and fairly present the financial condition of Guarantor in a manner consistent with GAAP (or such other accounting basis acceptable to Lender) and the requirements of Regulation AB (if applicable);
(c) within thirty (30) days after request by Agent, such other financial information with respect to Guarantor as Agent may reasonably request; provided, that Guarantor shall not be required to produce or create any new or additional reports or statements (other than certifications concerning Guarantor’s Net Worth and Liquid Assets) beyond that which is produced in the ordinary course in order to comply with any such request.
ARTICLE VI
MISCELLANEOUS
6.1 Waiver. No failure to exercise, and no delay in exercising, on the part of Agent and/or Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Agent and Lender hereunder shall be in addition to all other rights provided by law. No modification or waiver of any provision of this Guaranty, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand.
6.2 Notices. Any notice, demand, statement, request or consent made hereunder shall be in writing and shall be deemed to be received by the addressee on (a) the third day following the day such notice is deposited with the United States Postal Service first class certified mail, return receipt requested (b) expedited, prepaid delivery service, either commercial or United States Postal Service, with proof of attempted delivery and by telecopier (with answer back acknowledged), addressed to the address, as set forth below, of the party to whom such notice is to be given, or to such other address as either party shall in like manner designate in writing. The addresses of the parties hereto are as follows:
| Guarantor: | NexPoint Diversified Real Estate Trust c/o NexPoint Real Estate Finance Operating Partnership, L.P. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attention: Matt McGraner Facsimile No.: mmcgraner@nexpointadviros.com |
|
| With a copy to: | Winston & Strawn LLP 2121 N. Pearl Street, Suite 900 Dallas, Texas 75201 Attention: Charles T. Haag Facsimile No.: chaag@winston.com |
|
| Agent: | ||
| JPMorgan Chase Bank, National Association 383 Madison Avenue, 8th Floor New York, New York 10179 Attention: Simon B. Burce Facsimile No.: (212) 834-6029 |
| with a copy to: | JPMorgan Chase Bank, National Association 4 Chase Metrotech Center, 4th Floor Brooklyn, New York 11245-0001 Attention: Nancy Alto Facsimile No.: (917) 546-2564 |
|
| and | ||
| Cadwalader, Wickersham & Taft LLP 200 Liberty Street New York, New York 10281 Attention: Bonnie A. Neuman, Esq. Facsimile No.: (212) 504-6666 |
6.3 Governing Law. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST AGENT, LENDER OR GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY MAY AT AGENT’S OPTION BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE CITY OF NEW YORK, COUNTY OF NEW YORK, PURSUANT TO SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND GUARANTOR WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. GUARANTOR DOES HEREBY DESIGNATE AND APPOINT:
NATIONAL CORPORATE RESEARCH, LTD
850 NEW BURTON ROAD, SUITE 201
DOVER, COUNTY KENT, DELAWARE 19904
AS ITS AUTHORIZED AGENT TO ACCEPT AND ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT SAID ADDRESS AND WRITTEN NOTICE OF SAID SERVICE MAILED OR DELIVERED TO GUARANTOR IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON GUARANTOR IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE OF NEW YORK.
6.4 Invalid Provisions. If any provision of this Guaranty is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Guaranty, such provision shall be fully severable and this Guaranty shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Guaranty, and the remaining provisions of this Guaranty shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Guaranty, unless such continued effectiveness of this Guaranty, as modified, would be contrary to the basic understandings and intentions of the parties as expressed herein.
6.5 Amendments. This Guaranty may be amended only by an instrument in writing executed by the party or an authorized representative of the party against whom such amendment is sought to be enforced.
6.6 Parties Bound; Assignment; Joint and Several. This Guaranty shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives; provided, however, that Guarantor may not, without the prior written consent of Agent on behalf of Lender, assign any of its rights, powers, duties or obligations hereunder. If Guarantor consists of more than one person or party, the obligations and liabilities of each such person or party shall be joint and several.
6.7 Headings. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Guaranty.
6.8 Recitals. The recital and introductory paragraphs hereof are a part hereof, form a basis for this Guaranty and shall be considered prima facie evidence of the facts and documents referred to therein.
6.9 Counterparts. To facilitate execution, this Guaranty may be executed in as many counterparts as may be convenient or required. It shall not be necessary that the signature of, or on behalf of, each party, or that the signature of all persons required to bind any party, appear on each counterpart. All counterparts shall collectively constitute a single instrument. It shall not be necessary in making proof of this Guaranty to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, each of the parties hereto. Any signature page to any counterpart may be detached from such counterpart without impairing the legal effect of the signatures thereon and thereafter attached to another counterpart identical thereto except having attached to it additional signature pages.
6.10 Rights and Remedies. If Guarantor becomes liable for any indebtedness owing by Borrower to Agent and/or Lender, by endorsement or otherwise, other than under this Guaranty, such liability shall not be in any manner impaired or affected hereby and the rights of Agent and Lender hereunder shall be cumulative of any and all other rights that Agent and/or Lender may ever have against Guarantor. The exercise by Agent of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy.
6.11 Other Defined Terms. Any capitalized term utilized herein shall have the meaning as specified in the Loan Agreement, unless such term is otherwise specifically defined herein.
6.12 Entirety. THIS GUARANTY EMBODIES THE FINAL, ENTIRE AGREEMENT OF GUARANTOR AGENT AND LENDER WITH RESPECT TO GUARANTOR’S GUARANTY OF THE GUARANTEED OBLIGATIONS AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THIS GUARANTY IS INTENDED BY GUARANTOR, AGENT AND LENDER AS A FINAL AND COMPLETE EXPRESSION OF THE TERMS OF THE GUARANTY, AND NO COURSE OF DEALING BETWEEN GUARANTOR, AGENT AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE SHALL BE USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS GUARANTY AGREEMENT. THERE ARE NO ORAL AGREEMENTS BETWEEN GUARANTOR, AGENT AND LENDER.
6.13 Waiver of Right To Trial By Jury. GUARANTOR, AND BY THEIR ACCEPTANCE HEREOF, AGENT AND LENDER, HEREBY AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS GUARANTY, THE NOTE, THE LOAN AGREEMENT, THE MORTGAGE, OR THE OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH (OTHER THAN COMPULSORY OR MANDATORY COUNTERCLAIMS, IF SUCH COUNTERCLAIMS ARE COMPELLED UNDER LOCAL LAW OR RULE OF PROCEDURE). THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY AGENT AND GUARANTOR, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. EACH OF GUARANTOR, AGENT AND LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY GUARANTOR, AGENT AND LENDER, AS APPLICABLE.
6.14 Cooperation. Guarantor acknowledges that Lender and its successors and assigns may (i) sell this Guaranty, the Note and other Loan Documents to one or more investors as a whole loan, (ii) participate the Loan secured by this Guaranty to one or more investors, (iii) deposit this Guaranty, the Note and other Loan Documents with a trust, which trust may sell certificates to investors evidencing an ownership interest in the trust assets, or (iv) otherwise sell the Loan or interest therein to investors (the transactions referred to in clauses (i) through (iv) are hereinafter each referred to as “Secondary Market Transaction”). Guarantor shall reasonably cooperate with Lender in effecting any such Secondary Market Transaction and shall reasonably cooperate to implement all customary and reasonable requirements imposed by any Rating Agency or potential investor involved in any Secondary Market Transaction. Guarantor shall provide such information and documents relating to Guarantor as Lender may reasonably request in connection with such Secondary Market Transaction. In addition, Guarantor shall make available to Lender all information concerning its business and operations that Lender may reasonably request. Lender shall be permitted to share all such information with the investment banking firms (or other potential investors), Rating Agencies, accounting firms, law firms and other third-party advisory firms involved with the Loan and the Loan Documents or the applicable Secondary Market Transaction. It is understood that the information provided by Guarantor to Lender may ultimately be incorporated into the offering documents for the Secondary Market Transaction and thus various investors may also see some or all of the information. Lender and all of the aforesaid third-party advisors and professional firms shall be entitled to rely on the information supplied by, or on behalf of, Guarantor in the form as provided by Guarantor. Lender may publicize the existence of the Loan in connection with its marketing for a Secondary Market Transaction.
6.15 Reinstatement in Certain Circumstances. If at any time any payment of the principal of or interest under the Note or any other amount payable by Borrower under the Loan Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of Borrower or otherwise, the Guarantor’s obligations hereunder with respect to such payment shall be reinstated as though such payment has been due but not made at such time.
6.16 Limitation of Liability. Notwithstanding anything to the contrary contained herein but subject to the terms and provisions of Section 1.9 and Section 6.15 of this Guaranty, Guarantor shall not be liable under this Guaranty to the extent (and only to the extent) that the event giving rise to the Guaranteed Obligations first occurred or arose after the date on which Agent, Lender or a third party who or which is not Borrower, Guarantor, an Affiliate of Borrower or Guarantor or a Person acting at the knowing direction of any of the foregoing acquires title to the Property as a result of the Agent’s exercise of remedies under the Loan Documents, through (1) foreclosure, or (2) deed in lieu thereof or otherwise (the date that any of the foregoing is consummated, the “Transfer Date”); provided further, however, that in no event shall Guarantor be released from any liability or obligation hereunder (a) that occurred, arose or accrued prior to the Transfer Date or (b) that has occurred, arisen or accrued on or after the Transfer Date to the extent that an act or action of a Borrower, Guarantor, an Affiliate of any of the foregoing or a Person acting on behalf thereof causes or authorizes the event giving rise to such liability or obligation to accrue.
6.17 Special State Provisions.
(a) With respect to the foregoing provisions contained in this Guaranty, the following shall apply with respect to any action or proceeding in the State of California:
(i) Modifications to Loan and Loan Documents. Guarantor agrees that Lender may do any of the following without affecting the enforceability of this Guaranty or the other Loan Documents: (A) take or release additional security for any obligation in connection with the Loan Documents; (B) discharge or release (by judicial or nonjudicial foreclosure, acceptance of a deed in lieu of foreclosure or otherwise) any Person or Persons liable under the Loan Documents; (C) accept or make compositions or other arrangements or file or refrain from filing a claim in any bankruptcy proceeding of Borrower, Operating Lessee or any other Loan Party, any guarantor of Borrower’s, Operating Lessee’s or other Loan Party’s obligations under the Loan Documents or any pledgor of collateral for any Person’s obligations to Lender; and (D) credit payments in such manner and order of priority to principal, interest or other obligations as Lender may determine in accordance with the terms of the Loan Documents.
(ii) Waivers.
(A) Guarantor agrees that Lender’s right to enforce this Guaranty is absolute and is not contingent upon the genuineness, validity or enforceability of any of the Loan Documents. Guarantor waives all benefits and defenses it may have under California Civil Code Section 2810 and agrees that Lender’s rights under this Guaranty shall be enforceable even if Borrower, Operating Lessee or any other Loan Party had no liability at the time of execution of the Loan Documents or later ceases to be liable.
(B) Guarantor waives all benefits and defenses it may have under California Civil Code Section 2809 and agrees that Lender’s rights under the Loan Documents will remain enforceable even if the amount secured by the Loan Documents is larger in amount and more burdensome than that for which Borrower, Operating Lessee or any other Loan Party is responsible. The enforceability of this Guaranty against Guarantor shall continue until all sums due under the Loan Documents have been paid in full and shall not be limited or affected in any way by any impairment or any diminution or loss of value of any security or collateral for Borrower’s, Operating Lessee’s and each other Loan Party’s obligations under the Loan Documents, from whatever cause, the failure of any security interest in any such security or collateral or any disability or other defense of Borrower, Operating Lessee or any other Loan Party, any guarantor of Borrower’s, Operating Lessee’s or any other Loan Party’s obligations under the Loan Documents, any other pledgor of collateral for any Person’s obligations to Lender or any other Person in connection with the Loan.
(C) Guarantor waives all benefits and defenses it may have under California Civil Code Sections 2845, 2849 and 2850 (subject to Section 1.10 of this Guaranty), including, without limitation, the right to require Lender to (i) proceed against Borrower, Operating Lessee or any other Loan Party, any guarantor of Borrower’s, Operating Lessee’s or any other Loan Party’s obligations under the Loan Documents, any other pledgor of collateral for any Person’s obligations to Lender or any other Person in connection with the Loan, (ii) proceed against or exhaust any other security or collateral Lender may hold, or (iii) pursue any other right or remedy for Borrower’s, Operating Lessee’s or any other Loan Party’s benefit, and agree that Lender may exercise its rights under this Guaranty or may foreclose against any of the Individual Properties without taking any action against Borrower, Operating Lessee, any other Loan Party, any guarantor of Borrower’s, Operating Lessee’s obligations under the Loan Documents, any pledgor of collateral for any Person’s obligations to Lender or any other Person in connection with the Loan, and without proceeding against or exhausting any security or collateral Lender holds.
(D) Guarantor waives any rights or benefits it may have by reason of California Code of Civil Procedure Section 580a, or other applicable law, which could limit the amount which Lender could recover in a foreclosure of any of the Individual Properties to the difference between the amount owing under the Loan Documents and the fair value of any such Individual Property or interests sold at a nonjudicial foreclosure sale or sales of any other real property held by Lender as security for the obligations under the Loan Documents.
(E) Guarantor, as a guarantor or surety, waives diligence and all demands, protests, presentments and notices of protest, dishonor, nonpayment and acceptance of the Loan Documents, in each case except as otherwise expressly required by the Loan Documents.
(F) Guarantor waives all rights and defenses that are or may become available to the guarantor or other surety by reason of California Civil Code Sections 2787 to 2855, inclusive, subject to Section 1.10 of this Guaranty.
(G) This Guaranty shall be effective as a waiver of, and Guarantor hereby expressly waives:
(1) any and all rights to which Guarantor may otherwise have been entitled under any suretyship laws in effect from time to time, including any right or privilege, whether existing under statute, at law or in equity, to require Lender to take prior recourse or proceedings against any collateral, security or Person whatsoever;
(2) any rights of sovereign immunity and any other similar and/or related rights; and
(3) any defenses (other than that (x) the Guaranteed Obligations are not due and owing or have been paid in full or (y) all sums payable under the Note or any of the other Loan Documents have been paid in full).
(H) Guarantor further waives: (a) any defense based upon any legal disability or other defense of Borrower, any other guarantor or other person, or by reason of the cessation or limitation of the liability of Borrower, Operating Lessee and the other Loan Parties from any cause other than that (x) the Guaranteed Obligations are not due and owing or have been paid in full or (y) all sums payable under the Note or any of the other Loan Documents have been paid in full; (b) any defense based upon any lack of authority of the officers, directors, partners or agents acting or purporting to act on behalf of Borrower, Operating Lessee and the other Loan Parties or any principal of Borrower, Operating Lessee and the other Loan Parties or any defect in the formation of Borrower, Operating Lessee and the other Loan Parties or any principal of Borrower, Operating Lessee and the other Loan Parties; (c) any defense based upon the application by Borrower, Operating Lessee and the other Loan Parties of the proceeds of the Loan for purposes other than the purposes represented by Borrower, Operating Lessee and the other Loan Parties to Lender or intended or understood by Lender or Guarantor; (d) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal; (c) any defense based upon Lender’s election, in any proceeding instituted under the Federal Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code or any successor statute; (f) any defense based upon any borrowing or any grant of a security interest under Section 364 of the Bankruptcy Code; and (g) the benefit of any statute of limitations affecting the liability of Guarantor hereunder or the enforcement hereof. Guarantor agrees that the payment of all sums payable under the Note or any of the other Loan Documents or any part thereof or other act which tolls any statute of limitations applicable to the Note or the other Loan Documents shall similarly operate to toll the statute of limitations applicable to Guarantor’s liability hereunder. Without limiting the generality of the foregoing or any other provision hereof, Guarantor expressly waives for the benefit of Lender to the extent permitted by law any and all rights and defenses which might otherwise be available to Guarantor under California Civil Code Sections 2899 and 3433 or any similar law of California or of any other state or of the United States.
(I) Guarantor hereby also waives and agrees not to assert or take advantage of any defense of Guarantor based upon Lender’s election of any remedy against Guarantor, Borrower, Operating Lessee and the other Loan Parties or any of them, including, without limitation, the defense to enforcement of this Guaranty (the “Gradsky” defense based upon Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968) or subsequent cases) which, absent this waiver, Guarantor would have by virtue of an election by Lender to conduct a non-judicial foreclosure sale of any Individual Property, it being understood by Guarantor that any such non-judicial foreclosure sale will destroy, by operation of California Code of Civil Procedure Section 580d, all rights of any party to a deficiency judgment against Borrower, and, as a consequence, will destroy all rights which Guarantor would otherwise have (including, without limitation, the right of subrogation, the right of reimbursement, and the right of contribution) to proceed against Borrower and to recover any such amount, and that Lender could be otherwise estopped from pursuing Guarantor for a deficiency judgment after a non-judicial foreclosure sale on the theory that a guarantor should be exonerated if a lender elects a remedy that eliminates the guarantor’s subrogation, reimbursement or contribution rights.
(J) Without limiting the generality of the foregoing or any other provision hereof, Guarantor expressly waives to the extent permitted by law any and all rights and defenses which might otherwise be available to Guarantor under California Civil Code Sections 2787 to 2855 inclusive and Chapter 2 of Title 14, 2899 and 3433 and under California Code of Civil Procedure Sections 580a, 580b, 580d and 726, or any of such sections.
(K) Guarantor hereby also waives any defense Guarantor has to performance hereunder, and any right Guarantor has to be exonerated, provided by Sections 2819, 2822 or 2825 of the California Civil Code, or otherwise, arising by reason of: any claim or defense based upon an election of remedies by Lender; the impairment or suspension of Lender’s rights or remedies against Guarantor; the alteration by Lender of the Guaranteed Obligations; any discharge of Guarantor’s obligations to Lender by operation of law as a result of Lender’s intervention or omission; or the acceptance by Lender of anything in partial satisfaction of the Guaranteed Obligations. Guarantor acknowledges and agrees that, as a result of the foregoing sentence, Guarantor is knowingly waiving in advance a complete or partial defense to this Guaranty arising under California Code of Civil Procedure Sections 580d or 580a and based upon Lender’s election to conduct a private non-judicial foreclosure sale. Notwithstanding anything to the contrary contained herein, Guarantor does not waive the defense that the Guaranteed Obligation are not due or owing or the Guaranteed Obligations have been fully and finally performed and indefeasibly paid in full.
(iii) Guarantor Informed of Borrower’s Condition. Guarantor acknowledges that it has had an opportunity to review the Loan Documents, the value of the security for each of the other entities comprising Borrower, Operating Lessee and each other Loan Party under the Loan Documents and the financial condition of each of the other entities comprising Borrower, Operating Lessee and each other Loan Party and the ability of such entity to satisfy its obligations to Lender. Guarantor agrees to keep itself fully informed of all aspects of the financial condition of Borrower, Operating Lessee and each other Loan Party and of the performance of Borrower, Operating Lessee and each other Loan Party to Lender and agrees that Lender has no duty to disclose to Guarantor any information pertaining to Borrower, Operating Lessee or any other Loan Party or any security for the obligations of the other entities comprising Borrower under the Loan Documents.
(iv) Waiver of Estoppel Defense. Upon and during the continuance of an Event of Default, Lender may elect to foreclose nonjudicially the Lien of any or all of the Mortgages and, if such right has arisen, to also exercise its rights under this Guaranty. Guarantor acknowledges that its right to seek reimbursement from Borrower for any amounts paid by it to Lender under this Guaranty will be eliminated if Lender elects to so foreclose the Lien of the Mortgages. Nevertheless, Guarantor waives any such right to reimbursement and agrees that a nonjudicial foreclosure by Lender of the Lien of the Mortgages will not affect the enforceability of the Loan Documents. In order to further effectuate such waiver, Guarantor hereby agrees that it waives all rights and defenses arising out of an election of remedies by Lender, even though that election of remedies, such as a nonjudicial foreclosure of the Lien of any or all of the Mortgages, has destroyed its rights of subrogation and reimbursement against Borrower by the operation of Section 580d of the Code of Civil Procedure or otherwise.
(v) Intentionally Omitted.
(vi) Confirmation of Waivers. In accordance with California Civil Code Section 2856(c), Guarantor, as guarantor, hereby makes the following waivers:
(A) Guarantor waives all rights and defenses that Guarantor may have because the Loan is secured by real property (other than any defense that (x) the Guaranteed Obligations are not due and owing or have been paid in full or (y) all sums payable under the Note and the other Loan Documents have been paid in full). This means, among other things:
a. Lender may collect from Guarantor without first foreclosing on any other real or personal property collateral pledged by the Borrower, Operating Lessee or any other Person (each an “Other Obligor” and collectively, the “Other Obligors”)
b. If Lender forecloses on any real property collateral pledged by any Other Obligor:
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The amount of the Loan may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. |
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Lender may collect from Guarantor even if Lender, by foreclosing on the real property collateral, has destroyed any right Guarantor may have to collect from any Other Obligor. |
(B) Except as specifically provided in Section 5.19(a)(vi)(A), this is an unconditional and irrevocable waiver of any rights and defenses Guarantor may have because Borrower’s debt is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedures.
(vii) Judicial Reference Agreement; Referee; Costs. In the event that any action, proceeding and/or hearing on any matter whatsoever, including all issues of fact or law arising out of, or in any way connected with, the Property, this Guaranty or any of the Loan Documents, or the enforcement of any remedy under any law, statute, or regulation (hereinafter, a “Controversy”), is to be tried in a court of Los Angeles County, California, and the jury trial waiver provisions set forth above are not permitted or otherwise applicable under then-prevailing law, then Guarantor agrees to the following provisions:
(A) Controversies Subject to Judicial Reference; Conduct of Reference.
(1) Each Controversy shall be determined by a consensual general judicial references (the “Reference”) pursuant to the provisions of California Code of Civil Procedures §§ 638 et. seq., as such statutes may be amended or modified from time to time.
(2) Upon a written request, or upon an appropriate motion by either Lender or Guarantor, any pending action relating to any Controversy and every Controversy shall be heard by a single Referee (as hereinafter defined) who shall then try all issues (including any and all questions of law and questions of fact relating thereto), and issue findings of fact and conclusions of law and report a statement of decision. The Referee’s statement of decision will constitute the conclusive determination of Controversy. Lender and Guarantor agree that the Referee shall have the power to issue all legal and equitable relief appropriate under the circumstances before him/her.
(3) Lender and Guarantor shall promptly and diligently cooperate with one another and the Referee, and shall perform such acts as may be necessary to obtain prompt and expeditious resolution of each Controversy in accordance with the terms of this Section.
(4) Either Lender or Guarantor may file the Referee’s findings, conclusions and statement with the clerk or judge of any appropriate court, file a motion to confirm the Referee’s report and have judgment entered thereon. If the report is deemed incomplete by such court, the Referee may be required to complete the report and resubmit it.
(5) Lender and Guarantor will each have such rights to assert such objections as are set forth in California Code of Civil Procedure §§ 638 et seq.
(6) All proceedings shall be closed to the public and confidential, and all records relating to the Reference shall be permanently sealed when the order thereon becomes final.
(B) Selection of Referee; Powers.
(1) Lender and Guarantor shall select a single neutral referee (the “Referee”), who shall be a retired judge or justice of the courts of the State of California, or a federal court judge, in each case, with at least ten years of judicial experience in civil matters. The Referee shall be appointed in accordance with California Code of Civil Procedure §§ 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts).
(2) If within ten (10) days after the request or motion for the Reference, Lender and Guarantor cannot agree upon a Referee, either Lender or Guarantor may request or move that the Referee be appointed by the Presiding Judge of the Los Angeles County Superior Court, or the Presiding Judge of the U.S. District Court for the Central District of California. The Referee shall determine all issues relating to the applicability, interpretation, legality and enforceability of this Section.
(C) Provisional Remedies; Self-Help and Foreclosure.
(1) No provision of this Section shall limit the right of either Lender or Guarantor, as the case may be, to (1) exercise such self-help remedies as might otherwise be available under applicable law, (2) initiate judicial or non-judicial foreclosure against any real or personal property collateral, (3) exercise any judicial or power of sale rights, or (4) obtain or oppose provisional or ancillary remedies, including without limitation, injunctive relief, writs of possession, the appointment of a receiver, and/or additional or supplementary remedies from a court of competent jurisdiction before, after or during the pendency of the Reference.
(2) The exercise of, or opposition to, any such remedy does not waive the right of Lender or Guarantor to the Reference pursuant to this Section.
(D) Costs and Fees.
(1) Promptly following the selection of the Referee, Lender and Guarantor shall each advance equal portions of the estimated fees and costs of the Referee.
(2) In the statement of decision issued by the Referee, the Referee shall award costs, including reasonable attorneys’ fees, to the prevailing party, if any, and may order the Referee’s fees to be paid or shared by Guarantor and/or Lender in such manner as the Referee deems just.
(b) With respect to the foregoing provisions contained in this Guaranty, the following shall apply to any action or proceedings in the State of Texas:
(1) Guarantor hereby expressly waives: (i) any right to revoke this Guaranty with respect to the Guaranteed Obligations; (ii) any right to require Lender to do any of the following before Guarantor is obligated to pay or perform the Guaranteed Obligations or before Lender may proceed against Guarantor: (A) sue or exhaust remedies against Borrower or any other Person liable for the Guaranteed Obligations or any portion thereof; (B) sue on an accrued right of action in respect of any of the Guaranteed Obligations or bring any other action, exercise any other right, or exhaust any other remedy; or (C) enforce rights against Borrower’s assets or the collateral pledged by Borrower to secure the Guaranteed Obligations; (iii) any right relating to the timing, manner or conduct of Lender’s enforcement of rights against Borrower’s assets or the collateral pledged by Borrower to secure the Guaranteed Obligations; (iv) if Guarantor and Borrower (or any other Person) have each pledged assets to secure the Guaranteed Obligations, any right to require Lender to proceed first against collateral pledged by Borrower (or any other Person) before proceeding against the collateral pledged by Guarantor; (v) other than as provided for in this Agreement or the Loan Documents, promptness, diligence, notice of any Event of Default, notice of nonpayment or nonperformance, notice of acceleration or intent to accelerate, demand for payment (although Lender may, but shall have no obligation to, make demand for payment), acceptance or notice of acceptance of this Guaranty, presentment, notice of protest, notice of dishonor, notice of the incurring by Borrower of additional indebtedness, notice of any suit or other action by Lender against Borrower or any other Person, any notice to any Person liable for the obligation which is the subject of the suit or action, and all other notices and demands with respect to the Guaranteed Obligations and this Guaranty; and (vi) each of the foregoing rights or defenses, regardless of whether they arise under (A) Rule 31 of the Texas Rules of Civil Procedure, (B) Section 17.001 of the Texas Civil Practice and Remedies Code, (C) Chapter 34 of the Texas Business and Commerce Code, or (D) any other statute or law, common law, in equity, under contract or otherwise, or under any amendments, recodifications, supplements or any successor statute or law of or to any such statute or law; and (vii) subject to Section 9.3 of the Loan Agreement, any and all rights under Sections 51.003, 51.004 and 51.005 of the Texas Property Code, and under any amendments, recodifications, supplements or any successor statute or law of or to any such statute or law.
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EXECUTED as of the day and year first above written.
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GUARANTOR: |
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NEXPOINT DIVERSIFIED REAL ESTATE TRUST, a Delaware statutory trust |
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/s/ Matt McGraner |
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Name: Matt McGraner |
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Title: Authorized Signatory |
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SCHEDULE I
PROPERTY OWNER BORROWER
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Van Nuys Owner LLC |
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Inglewood Owner LLC |
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Gables Storage Builders LLC |
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Phillips SW Storage, LLC |
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101 American Blvd. W., LLC |
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3216 Winnetka Ave. N., LLC |
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631 Transfer Rd., LLC |
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Hackensack Capital New Jersey LLC |
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Dover Capital NJ, LLC |
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1401 4th Ave NHP LLC |
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Brittmoore SS Investment, LLC |
Exhibit 10.3
GUARANTY AGREEMENT (RECOURSE OBLIGATIONS)
THIS GUARANTY AGREEMENT (RECOURSE OBLIGATIONS) (this “Guaranty”) is executed as of September 14, 2022, by NEXPOINT DIVERSIFIED REAL ESTATE TRUST, a Delaware statutory trust, having an address at c/o NexPoint Real Estate Advisors, L.P., 300 Crescent Court, Suite 700, Dallas, Texas 75201 (“Guarantor”), for the benefit of JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, a banking association chartered under the laws of the United States of America, having an address at 383 Madison Avenue, New York, New York 10179 (together with its successors and/or assigns, “Lender”).
W I T N E S S E T H:
WHEREAS, pursuant to the Note (as defined in the Loan Agreement (defined below)) among the entities listed on Schedule I attached hereto, each having its principal place of business at c/o NexPoint Real Estate Advisors, L.P., 300 Crescent Court, Suite 700, Dallas, Texas 75201 (collectively, “Property Owner Borrower”), and NSP RE SASB Lessee LLC, a Delaware limited liability company (“Operating Lessee”, and together with Property Owner Borrower, collectively, “Borrower”), Borrower has become indebted, and may from time to time be further indebted, to Lender with respect to a loan (“Loan”) which is secured by the Mortgage (as defined in the Loan Agreement), and is further evidenced by that certain Loan Agreement, of even date herewith among Borrower and Lender (as the same may hereinafter be amended, modified, restated, renewed or replaced the “Loan Agreement”) and further evidenced, secured or governed by the Loan Documents (as defined in the Loan Agreement);
WHEREAS, Lender is not willing to make the Loan, or otherwise extend credit, to Borrower unless Guarantor unconditionally guarantees payment and performance to Lender of the Guaranteed Obligations (as herein defined); and
WHEREAS, Guarantor is the owner of a direct or indirect interest in Borrower, and Guarantor will directly benefit from Lender’s making the Loan to Borrower.
NOW, THEREFORE, as an inducement to Lender to make the Loan to Borrower, and to extend such additional credit as Lender may from time to time agree to extend under the Loan Documents, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:
ARTICLE I
NATURE AND SCOPE OF GUARANTY
1.1 Guaranty of Obligation. Guarantor hereby irrevocably and unconditionally guarantees to Lender and its successors and assigns the payment and performance of the Guaranteed Obligations as and when the same shall be due and payable, whether by lapse of time, by acceleration of maturity or otherwise. Guarantor hereby irrevocably and unconditionally covenants and agrees that it is liable for the Guaranteed Obligations as a primary obligor.
1.2 Definition of Guaranteed Obligations. As used herein, the term “Guaranteed Obligations” means all obligations and liabilities of Borrower pursuant to Section 9.3 of the Loan Agreement.
1.3 Nature of Guaranty. This Guaranty is an irrevocable, absolute, continuing guaranty of payment and performance and not a guaranty of collection. This Guaranty may not be revoked by Guarantor and shall continue to be effective with respect to any Guaranteed Obligations arising or created after any attempted revocation by Guarantor and after (if Guarantor is a natural person) Guarantor’s death (in which event this Guaranty shall be binding upon Guarantor’s estate and, if the assets of such estate are distributed, Guarantor’s legal representatives and heirs). The fact that at any time or from time to time the Guaranteed Obligations may be increased or reduced shall not release or discharge the obligation of Guarantor to Lender with respect to the Guaranteed Obligations. This Guaranty may be enforced by Lender and any subsequent holder of the Note and shall not be discharged by the assignment or negotiation of all or part of the Note. Upon indefeasible repayment in full of the Debt, Guarantor shall be automatically released from all of its liabilities and obligations with respect to the Guaranteed Obligations.
1.4 Guaranteed Obligations Not Reduced by Offset. The Guaranteed Obligations and the liabilities and obligations of Guarantor to Lender hereunder, shall not be reduced, discharged or released because or by reason of any existing or future offset, claim or defense of Borrower, or any other party, against Lender or against payment of the Guaranteed Obligations, whether such offset, claim or defense arises in connection with the Guaranteed Obligations (or the transactions creating the Guaranteed Obligations) or otherwise.
1.5 Payment By Guarantor. If all or any part of the Guaranteed Obligations shall not be punctually paid when due, whether at demand, maturity, acceleration or otherwise, Guarantor shall, immediately upon demand by Lender and without presentment, protest, notice of protest, notice of non-payment, notice of intention to accelerate the maturity, notice of acceleration of the maturity, or any other notice whatsoever, pay in lawful money of the United States of America, the amount due on the Guaranteed Obligations to Lender at Lender’s address as set forth herein. Such demand(s) may be made at any time coincident with or after the time for payment of all or part of the Guaranteed Obligations, and may be made from time to time with respect to the same or different items of Guaranteed Obligations. Such demand shall be deemed made, given and received in accordance with the notice provisions hereof.
1.6 No Duty To Pursue Others. It shall not be necessary for Lender (and Guarantor hereby waives any rights which Guarantor may have to require Lender), in order to enforce the obligations of Guarantor hereunder, first to (i) institute suit or exhaust its remedies against Borrower or others liable on the Loan or the Guaranteed Obligations or any other person, (ii) enforce Lender’s rights against any collateral which shall ever have been given to secure the Loan, (iii) enforce Lender’s rights against any other guarantors of the Guaranteed Obligations, (iv) join Borrower or any others liable on the Guaranteed Obligations in any action seeking to enforce this Guaranty, (v) exhaust any remedies available to Lender against any collateral which shall ever have been given to secure the Loan, or (vi) resort to any other means of obtaining payment of the Guaranteed Obligations. Lender shall not be required to mitigate damages or take any other action to reduce, collect or enforce the Guaranteed Obligations.
1.7 Waivers. Guarantor agrees to the provisions of the Loan Documents, and hereby waives notice of, and any rights of consent to (i) any loans or advances made by Lender to Borrower, (ii) acceptance of this Guaranty, (iii) any amendment or extension of the Note, the Mortgage, the Loan Agreement or of any other Loan Documents, (iv) the execution and delivery by Borrower and Lender of any other loan or credit agreement or of Borrower’s execution and delivery of any promissory notes or other documents arising under the Loan Documents or in connection with the Property, (v) the occurrence of any breach by Borrower or an Event of Default, (vi) Lender’s transfer or disposition of the Guaranteed Obligations, or any part thereof, (vii) sale or foreclosure (or posting or advertising for sale or foreclosure) of any collateral for the Guaranteed Obligations, (viii) protest, proof of non-payment or default by Borrower, or (ix) any other action at any time taken or omitted by Lender, and, generally, all demands and notices of every kind in connection with this Guaranty, the Loan Documents, any documents or agreements evidencing, securing or relating to any of the Guaranteed Obligations and the obligations hereby guaranteed.
1.8 Payment of Expenses. In the event that Guarantor should breach or fail to timely perform any provisions of this Guaranty, Guarantor shall, immediately upon demand by Lender, pay Lender all out-of-pocket costs and expenses (including court costs and reasonable attorneys’ fees) actually incurred by Lender in the enforcement hereof or the preservation of Lender’s rights hereunder. The covenant contained in this Section shall survive the payment and performance of the Guaranteed Obligations.
1.9 Effect of Bankruptcy. In the event that, pursuant to any insolvency, bankruptcy, reorganization, receivership or other debtor relief law, or any judgment, order or decision thereunder, Lender must rescind or restore any payment, or any part thereof, received by Lender in satisfaction of the Guaranteed Obligations, as set forth herein, any prior release or discharge from the terms of this Guaranty given to Guarantor by Lender shall be without effect, and this Guaranty shall remain in full force and effect. It is the intention of Borrower and Guarantor that Guarantor’s obligations hereunder shall not be discharged except by Guarantor’s performance of such obligations and then only to the extent of such performance.
1.10 Waiver of Subrogation, Reimbursement and Contribution. Notwithstanding anything to the contrary contained in this Guaranty, Guarantor hereby unconditionally and irrevocably waives, releases and abrogates any and all rights it may now or hereafter have under any agreement, at law or in equity (including, without limitation, any law subrogating the Guarantor to the rights of Lender), to assert any claim against or seek contribution, indemnification or any other form of reimbursement from Borrower or any other party liable for payment of any or all of the Guaranteed Obligations for any payment made by Guarantor under or in connection with this Guaranty or otherwise.
1.11 Borrower. The term “Borrower” as used herein shall include any new or successor corporation, association, partnership (general or limited), limited liability company, joint venture, trust or other individual or organization formed as a result of any merger, reorganization, sale, transfer, devise, gift or bequest of Borrower or any interest in Borrower.
ARTICLE II
EVENTS AND CIRCUMSTANCES NOT REDUCING
OR DISCHARGING GUARANTOR’S OBLIGATIONS
Guarantor hereby consents and agrees to each of the following, and agrees that Guarantor’s obligations under this Guaranty shall not be released, diminished, impaired, reduced or adversely affected by any of the following, and waives any common law, equitable, statutory or other rights (including without limitation rights to notice) which Guarantor might otherwise have as a result of or in connection with any of the following:
2.1 Modifications. Any renewal, extension, increase, modification, alteration or rearrangement of all or any part of the Guaranteed Obligations, the Note, the Mortgage, the Loan Agreement, the other Loan Documents, or any other document, instrument, contract or understanding between Borrower and/or Lender, or any other parties, pertaining to the Guaranteed Obligations or any failure of Lender to notify Guarantor of any such action.
2.2 Adjustment. Any adjustment, indulgence, forbearance or compromise that might be granted or given by Lender to Borrower or Guarantor.
2.3 Condition of Borrower or Guarantor. The insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, dissolution or lack of power of Borrower, Guarantor or any other party at any time liable for the payment of all or part of the Guaranteed Obligations; or any dissolution of Borrower or Guarantor, or any sale, lease or transfer of any or all of the assets of Borrower or Guarantor, or any changes in the shareholders, partners or members of Borrower or Guarantor; or any reorganization of Borrower or Guarantor.
2.4 Invalidity of Guaranteed Obligations. The invalidity, illegality or unenforceability of all or any part of the Guaranteed Obligations, or any document or agreement executed in connection with the Guaranteed Obligations, for any reason whatsoever, including without limitation the fact that (i) the Guaranteed Obligations, or any part thereof, exceeds the amount permitted by law, (ii) the act of creating the Guaranteed Obligations or any part thereof is ultra vires, (iii) the officers or representatives executing the Note, the Mortgage, the Loan Agreement or the other Loan Documents or otherwise creating the Guaranteed Obligations acted in excess of their authority, (iv) the Guaranteed Obligations violate applicable usury laws, (v) Borrower has valid defenses, claims or offsets (whether at law, in equity or by agreement) which render the Guaranteed Obligations wholly or partially uncollectible from Borrower, (vi) the creation, performance or repayment of the Guaranteed Obligations (or the execution, delivery and performance of any document or instrument representing part of the Guaranteed Obligations or executed in connection with the Guaranteed Obligations, or given to secure the repayment of the Guaranteed Obligations) is illegal, uncollectible or unenforceable, or (vii) the Note, the Mortgage, the Loan Agreement or any of the other Loan Documents have been forged or otherwise are irregular or not genuine or authentic, it being agreed that Guarantor shall remain liable hereon regardless of whether Borrower or any other Person be found not liable on the Guaranteed Obligations or any part thereof for any reason.
2.5 Release of Obligors. Any full or partial release of the liability of Borrower on the Guaranteed Obligations, or any part thereof, or of any co-guarantors, or any other Person now or hereafter liable, whether directly or indirectly, jointly, severally, or jointly and severally, to pay, perform, guarantee or assure the payment of the Guaranteed Obligations, or any part thereof, it being recognized, acknowledged and agreed by Guarantor that Guarantor may be required to pay the Guaranteed Obligations in full without assistance or support of any other party, and Guarantor has not been induced to enter into this Guaranty on the basis of a contemplation, belief, understanding or agreement that other parties will be liable to pay or perform the Guaranteed Obligations, or that Lender will look to other parties to pay or perform the Guaranteed Obligations.
2.6 Other Collateral. The taking or accepting of any other security, collateral or guaranty, or other assurance of payment, for all or any part of the Guaranteed Obligations.
2.7 Release of Collateral. Any release, surrender, exchange, subordination, deterioration, waste, loss or impairment (including without limitation negligent, willful, unreasonable or unjustifiable impairment) of any collateral, property or security at any time existing in connection with, or assuring or securing payment of, all or any part of the Guaranteed Obligations.
2.8 Care and Diligence. The failure of Lender or any other party to exercise diligence or reasonable care in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of any collateral, property or security, including but not limited to any neglect, delay, omission, failure or refusal of Lender (i) to take or prosecute any action for the collection of any of the Guaranteed Obligations or (ii) to foreclose, or initiate any action to foreclose, or, once commenced, prosecute to completion any action to foreclose upon any security therefor, or (iii) to take or prosecute any action in connection with any instrument or agreement evidencing or securing all or any part of the Guaranteed Obligations.
2.9 Unenforceability. The fact that any collateral, security, security interest or lien contemplated or intended to be given, created or granted as security for the repayment of the Guaranteed Obligations, or any part thereof, shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other security interest or lien, it being recognized and agreed by Guarantor that Guarantor is not entering into this Guaranty in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the collateral for the Guaranteed Obligations.
2.10 Offset. The Note, the Loan Agreement, the Guaranteed Obligations and the liabilities and obligations of the Guarantor to Lender hereunder shall not be reduced, discharged or released because of or by reason of any existing or future right of offset, claim or defense of Borrower or Guarantor against Lender, or any other party, or against payment of the Guaranteed Obligations, whether such right of offset, claim or defense arises in connection with the Guaranteed Obligations (or the transactions creating the Guaranteed Obligations) or otherwise (except the defense of payment and performance thereof).
2.11 Merger. The reorganization, merger or consolidation of Borrower into or with any other Person.
2.12 Preference. Any payment by Borrower to Lender is held to constitute a preference under bankruptcy laws, or for any reason Lender is required to refund such payment or pay such amount to Borrower or someone else.
2.13 Other Actions Taken or Omitted. Any other action taken or omitted to be taken with respect to the Loan Documents, the Guaranteed Obligations, or the security and collateral therefor, whether or not such action or omission prejudices Guarantor or increases the likelihood that Guarantor will be required to pay the Guaranteed Obligations pursuant to the terms hereof, it is the unambiguous and unequivocal intention of Guarantor that Guarantor shall be obligated to pay the Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, which obligation shall be deemed satisfied only upon the full and final payment and satisfaction of the Guaranteed Obligations.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into the Loan Documents and extend credit to Borrower, Guarantor represents and warrants to Lender as follows:
3.1 Benefit. Guarantor is an Affiliate of Borrower, is the owner of a direct or indirect interest in Borrower, and has received, or will receive, direct or indirect benefit from the making of this Guaranty with respect to the Guaranteed Obligations.
3.2 Familiarity and Reliance. Guarantor is familiar with, and has independently reviewed books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be created as security for the payment of the Note or Guaranteed Obligations; however, Guarantor is not relying on such financial condition or the collateral as an inducement to enter into this Guaranty.
3.3 No Representation By Lender. Neither Lender nor any other party has made any representation, warranty or statement to Guarantor in order to induce the Guarantor to execute this Guaranty.
3.4 Guarantor’s Financial Condition. As of the date hereof, and after giving effect to this Guaranty and the contingent obligation evidenced hereby, Guarantor is, and will be, solvent, and has and will have assets which, fairly valued, exceed its obligations, liabilities (including contingent liabilities), other than contingent liabilities in respect of non-recourse carveout guaranties and environmental indemnities that are inchoate in nature) and debts, and has and will have property and assets sufficient to satisfy and repay its obligations and liabilities.
3.5 Legality. The execution, delivery and performance by Guarantor of this Guaranty and the consummation of the transactions contemplated hereunder do not, and will not, contravene or conflict with any law, statute or regulation whatsoever to which Guarantor is subject or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or result in the breach of, any indenture, mortgage, deed of trust, charge, lien, or any contract, agreement or other instrument to which Guarantor is a party or which may be applicable to Guarantor. This Guaranty is a legal and binding obligation of Guarantor and is enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors’ rights.
3.6 Litigation. There are no actions, suits or proceedings at law or in equity by or before any Governmental Authority or other agency now pending or threatened in writing against or affecting Guarantor which, if adversely determined, could reasonably be expected to materially and adversely affect the condition (financial or otherwise) or business of such Guarantor (including the ability of such Guarantor to carry out the obligations contemplated by this Guaranty). There is no material fact presently known to Guarantor which has not been disclosed to Lender which adversely affects, nor as far as Guarantor can foresee, is reasonably likely to adversely affect, the Property, the business, operations or condition (financial or otherwise) of Borrower or Guarantor in any material respect.
3.7 Survival. All representations and warranties made by Guarantor herein shall survive the execution hereof.
ARTICLE IV
SUBORDINATION OF CERTAIN INDEBTEDNESS
4.1 Subordination of All Guarantor Claims. As used herein, the term “Guarantor Claims” shall mean all debts and liabilities of Borrower to Guarantor, whether such debts and liabilities now exist or are hereafter incurred or arise, or whether the obligations of Borrower thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or liabilities be evidenced by note, contract, open account, or otherwise, and irrespective of the Person in whose favor such debts or liabilities may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by Guarantor. The Guarantor Claims shall include without limitation all rights and claims of Guarantor against Borrower (arising as a result of subrogation or otherwise) as a result of Guarantor’s payment of all or a portion of the Guaranteed Obligations. Upon the occurrence of an Event of Default or the occurrence of an event which would, with the giving of notice or the passage of time, or both, constitute an Event of Default, Guarantor shall not receive or collect, directly or indirectly, from Borrower or any other party any amount upon the Guarantor Claims.
4.2 Claims in Bankruptcy. In the event of receivership, bankruptcy, reorganization, arrangement, debtor’s relief, or other insolvency proceedings involving Guarantor as debtor, Lender shall have the right to prove its claim in any such proceeding so as to establish its rights hereunder and receive directly from the receiver, trustee or other court custodian dividends and payments which would otherwise be payable upon Guarantor Claims. Guarantor hereby assigns such dividends and payments to Lender. Should Lender receive, for application against the Guaranteed Obligations, any such dividend or payment which is otherwise payable to Guarantor, and which, as between Borrower and Guarantor, shall constitute a credit against the Guarantor Claims, then upon payment to Lender in full of the Guaranteed Obligations, Guarantor shall become subrogated to the rights of Lender to the extent that such payments to Lender on the Guarantor Claims have contributed toward the liquidation of the Guaranteed Obligations, and such subrogation shall be with respect to that proportion of the Guaranteed Obligations which would have been unpaid if Lender had not received dividends or payments upon the Guarantor Claims.
4.3 Payments Held in Trust. In the event that, notwithstanding anything to the contrary in this Guaranty, Guarantor should receive any funds, payment, claim or distribution which is prohibited by this Guaranty, Guarantor agrees to hold in trust for Lender an amount equal to the amount of all funds, payments, claims or distributions so received, and agrees that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions so received except to pay them promptly to Lender, and Guarantor covenants promptly to pay the same to Lender.
4.4 Liens Subordinate. Guarantor agrees that any liens, security interests, judgment liens, charges or other encumbrances upon Borrower’s assets securing payment of the Guarantor Claims shall be and remain inferior and subordinate to any liens, security interests, judgment liens, charges or other encumbrances upon Borrower’s assets securing payment of the Guaranteed Obligations, regardless of whether such encumbrances in favor of Guarantor or Lender presently exist or are hereafter created or attach. Without the prior written consent of Lender, neither Guarantor nor any of its Affiliates shall (i) exercise or enforce any creditor’s right it may have against Borrower, (ii) create any Liens encumbering the Property, Borrower or any interest in either of the foregoing, other than Permitted Encumbrances, or (iii) foreclose, repossess, sequester or otherwise take steps or institute any action or proceedings (judicial or otherwise, including without limitation the commencement of, or joinder in, any liquidation, bankruptcy, rearrangement, debtor’s relief or insolvency proceeding) to enforce any liens, mortgage, deeds of trust, security interests, collateral rights, judgments or other encumbrances on assets of Borrower held by Guarantor.
ARTICLE V
COVENANTS
5.1 Definitions. As used in this Guaranty, the following terms shall have the respective meanings set forth below:
(a) “Net Worth” shall mean, as of a given date, (i) a Person’s total assets (exclusive of the Property) as of such date less (ii) such Person’s total liabilities as of such date, determined in accordance with GAAP.
(b) “Liquid Asset” shall mean any of the following, but only to the extent owned individually, free of all security interests, liens, pledges, charges or any other encumbrance: (a) cash, (b) certificates of deposit (with a maturity of two (2) years or less) issued by, or savings account with, any bank or other financial institution reasonably acceptable to Lender or (c) marketable securities listed on a national or international exchange reasonably acceptable to Lender, marked to market; provided that Liquid Assets shall not include any asset that is a part of the Property or that is otherwise part of the collateral for the Loan.
5.2 Covenants. Until all of the Debt and the Guaranteed Obligations have been paid in full:
(a) Guarantor shall maintain a Net Worth of not less than $125,000,000.00 and
(b) Guarantor shall maintain Liquid Assets of not less than $20,000,000.00.
5.3 Financial Statements. Guarantor shall deliver to Lender:
(a) within one hundred twenty (120) days after the end of each fiscal year of Guarantor, a complete copy of Guarantor’s annual financial statements prepared and reviewed by an independent certified public accountant acceptable to Lender, prepared in accordance with GAAP and (if applicable) the requirements of Regulation AB, including statements of income and expense and cash flow and a balance sheet for Guarantor, together with a certificate of an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) (A) setting forth in reasonable detail Guarantor’s Net Worth and Liquid Assets as of the end of such prior fiscal year and based on such annual financial statements, and (B) certifying that, to the best knowledge of the certifying individual, such annual financial statements are true, correct, accurate and complete in all material respects and fairly present the financial condition of Guarantor;
(b) within thirty (30) days after the end of each fiscal quarter of Guarantor, financial statements (including a balance sheet as of the end of such fiscal quarter and a statement of income and expense for such fiscal quarter) certified by an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) and in form and level of detail reasonably satisfactory to Lender, together with a certificate of an authorized officer of Guarantor (solely in its capacity as an officer of Guarantor and without any personal liability whatsoever) (A) setting forth in reasonable detail Guarantor’s Net Worth as of the end of such prior calendar quarter and based on the foregoing quarterly financial statements, and (B) certifying that, to the best knowledge of the certifying individual, such quarterly financial statements are true, correct, accurate and complete in all material respects and fairly present the financial condition of Guarantor in a manner consistent with GAAP (or such other accounting basis acceptable to Lender) and the requirements of Regulation AB (if applicable);
(c) within thirty (30) days after request by Lender, such other financial information with respect to Guarantor as Lender may reasonably request; provided, that Guarantor shall not be required to produce or create any new or additional reports or statements (other than certifications concerning Guarantor’s Net Worth and Liquid Assets) beyond that which is produced in the ordinary course in order to comply with any such request.
ARTICLE VI
MISCELLANEOUS
6.1 Waiver. No failure to exercise, and no delay in exercising, on the part of Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Lender hereunder shall be in addition to all other rights provided by law. No modification or waiver of any provision of this Guaranty, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand.
6.2 Notices. Any notice, demand, statement, request or consent made hereunder shall be in writing and shall be deemed to be received by the addressee on (a) the third day following the day such notice is deposited with the United States Postal Service first class certified mail, return receipt requested (b) expedited, prepaid delivery service, either commercial or United States Postal Service, with proof of attempted delivery and by telecopier (with answer back acknowledged), addressed to the address, as set forth below, of the party to whom such notice is to be given, or to such other address as either party shall in like manner designate in writing. The addresses of the parties hereto are as follows:
| Guarantor: | NexPoint Diversified Real Estate Trust c/o NexPoint Real Estate Finance Operating Partnership, L.P. 300 Crescent Court, Suite 700 Dallas, Texas 75201 Attention: Matt McGraner Facsimile No.: mmcgraner@nexpoint.com |
|
| With a copy to: | Winston & Strawn LLP 2121 N. Pearl Street, Suite 900 Dallas, Texas 75201 Attention: Charles T. Haag Facsimile No.: chaag@winston.com |
|
| Lender: | ||
| JPMorgan Chase Bank, National Association 383 Madison Avenue, 8th Floor New York, New York 10179 Attention: Simon B. Burce Facsimile No.: (212) 834-6029 |
||
| with a copy to: | JPMorgan Chase Bank, National Association 4 Chase Metrotech Center, 4th Floor Brooklyn, New York 11245-0001 Attention: Nancy S. Alto Facsimile No.: (917) 546-2564 |
|
| and | ||
| Cadwalader, Wickersham & Taft LLP 200 Liberty Street New York, New York 10281 Attention: Bonnie A. Neuman, Esq. Facsimile No.: (212) 504-6666 |
6.3 Governing Law. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY MAY AT LENDER’S OPTION BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE CITY OF NEW YORK, COUNTY OF NEW YORK, PURSUANT TO SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND GUARANTOR WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. GUARANTOR DOES HEREBY DESIGNATE AND APPOINT:
NATIONAL CORPORATE RESEARCH, LTD
850 NEW BURTON ROAD, SUITE 201
DOVER, COUNTY KENT, DELAWARE 19904
AS ITS AUTHORIZED AGENT TO ACCEPT AND ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT SAID ADDRESS AND WRITTEN NOTICE OF SAID SERVICE MAILED OR DELIVERED TO GUARANTOR IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON GUARANTOR IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE OF NEW YORK.
6.4 Invalid Provisions. If any provision of this Guaranty is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Guaranty, such provision shall be fully severable and this Guaranty shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Guaranty, and the remaining provisions of this Guaranty shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Guaranty, unless such continued effectiveness of this Guaranty, as modified, would be contrary to the basic understandings and intentions of the parties as expressed herein.
6.5 Amendments. This Guaranty may be amended only by an instrument in writing executed by the party or an authorized representative of the party against whom such amendment is sought to be enforced.
6.6 Parties Bound; Assignment; Joint and Several. This Guaranty shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives; provided, however, that Guarantor may not, without the prior written consent of Lender, assign any of its rights, powers, duties or obligations hereunder. If Guarantor consists of more than one person or party, the obligations and liabilities of each such person or party shall be joint and several.
6.7 Headings. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Guaranty.
6.8 Recitals. The recital and introductory paragraphs hereof are a part hereof, form a basis for this Guaranty and shall be considered prima facie evidence of the facts and documents referred to therein.
6.9 Counterparts. To facilitate execution, this Guaranty may be executed in as many counterparts as may be convenient or required. It shall not be necessary that the signature of, or on behalf of, each party, or that the signature of all persons required to bind any party, appear on each counterpart. All counterparts shall collectively constitute a single instrument. It shall not be necessary in making proof of this Guaranty to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, each of the parties hereto. Any signature page to any counterpart may be detached from such counterpart without impairing the legal effect of the signatures thereon and thereafter attached to another counterpart identical thereto except having attached to it additional signature pages.
6.10 Rights and Remedies. If Guarantor becomes liable for any indebtedness owing by Borrower to Lender, by endorsement or otherwise, other than under this Guaranty, such liability shall not be in any manner impaired or affected hereby and the rights of Lender hereunder shall be cumulative of any and all other rights that Lender may ever have against Guarantor. The exercise by Lender of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy.
6.11 Other Defined Terms. Any capitalized term utilized herein shall have the meaning as specified in the Loan Agreement, unless such term is otherwise specifically defined herein.
6.12 Entirety. THIS GUARANTY EMBODIES THE FINAL, ENTIRE AGREEMENT OF GUARANTOR AND LENDER WITH RESPECT TO GUARANTOR’S GUARANTY OF THE GUARANTEED OBLIGATIONS AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF. THIS GUARANTY IS INTENDED BY GUARANTOR AND LENDER AS A FINAL AND COMPLETE EXPRESSION OF THE TERMS OF THE GUARANTY, AND NO COURSE OF DEALING BETWEEN GUARANTOR AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE PRACTICES, AND NO EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE SHALL BE USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS GUARANTY AGREEMENT. THERE ARE NO ORAL AGREEMENTS BETWEEN GUARANTOR AND LENDER.
6.13 Waiver of Right To Trial By Jury. GUARANTOR AND, BY ITS ACCEPTANCE HEREOF, LENDER, HEREBY AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS GUARANTY, THE NOTE, THE LOAN AGREEMENT, THE MORTGAGE, OR THE OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH (OTHER THAN COMPULSORY OR MANDATORY COUNTERCLAIMS, IF SUCH COUNTERCLAIMS ARE COMPELLED UNDER LOCAL LAW OR RULE OF PROCEDURE). THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY GUARANTOR AND LENDER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. EACH OF GUARANTOR AND LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY GUARANTOR AND LENDER, AS APPLICABLE.
6.14 Cooperation. Guarantor acknowledges that Lender and its successors and assigns may (i) sell this Guaranty, the Note and other Loan Documents to one or more investors as a whole loan, (ii) participate the Loan secured by this Guaranty to one or more investors, (iii) deposit this Guaranty, the Note and other Loan Documents with a trust, which trust may sell certificates to investors evidencing an ownership interest in the trust assets, or (iv) otherwise sell the Loan or interest therein to investors (the transactions referred to in clauses (i) through (iv) are hereinafter each referred to as “Secondary Market Transaction”). Guarantor shall reasonably cooperate with Lender in effecting any such Secondary Market Transaction and shall reasonably cooperate to implement all customary and reasonable requirements imposed by any Rating Agency or potential investor involved in any Secondary Market Transaction. Guarantor shall provide such information and documents relating to Guarantor as Lender may reasonably request in connection with such Secondary Market Transaction. In addition, Guarantor shall make available to Lender all information concerning its business and operations that Lender may reasonably request. Lender shall be permitted to share all such information with the investment banking firms (or other potential investors), Rating Agencies, accounting firms, law firms and other third-party advisory firms involved with the Loan and the Loan Documents or the applicable Secondary Market Transaction. It is understood that the information provided by Guarantor to Lender may ultimately be incorporated into the offering documents for the Secondary Market Transaction and thus various investors may also see some or all of the information. Lender and all of the aforesaid third-party advisors and professional firms shall be entitled to rely on the information supplied by, or on behalf of, Guarantor in the form as provided by Guarantor. Lender may publicize the existence of the Loan in connection with its marketing for a Secondary Market Transaction.
6.15 Reinstatement in Certain Circumstances. If at any time any payment of the principal of or interest under the Note or any other amount payable by Borrower under the Loan Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of Borrower or otherwise, the Guarantor’s obligations hereunder with respect to such payment shall be reinstated as though such payment has been due but not made at such time.
6.16 Limitation of Liability.
(a) Notwithstanding anything to the contrary contained herein but subject to the terms and provisions of Section 1.9 and Section 6.15 of this Guaranty, Guarantor shall not be liable under this Guaranty to the extent (and only to the extent) that the event giving rise to the Guaranteed Obligations first occurred or arose after the date on which Lender or a third party who or which is not Borrower, Guarantor, an Affiliate of Borrower or Guarantor or a Person acting at the knowing direction of any of the foregoing acquires title to the Property as a result of the Lender’s exercise of remedies under the Loan Documents, through (1) foreclosure, or (2) deed in lieu thereof or otherwise (the date that any of the foregoing is consummated, the “Mortgage Transfer Date”); provided further, however, that in no event shall Guarantor be released from any liability or obligation hereunder (a) that occurred, arose or accrued prior to the Mortgage Transfer Date or (b) that has occurred, arisen or accrued on or after the Mortgage Transfer Date to the extent that an act or action of a Borrower, Guarantor, an Affiliate of any of the foregoing or a Person acting on behalf thereof causes or authorizes the event giving rise to such liability or obligation to accrue.
6.17 Special State Provisions. With respect to the foregoing provisions contained in this Guaranty, the following shall apply with respect to the State of Connecticut:
(a) To induce Lender to enter into the commercial loan transaction evidenced by the Loan Agreement and other Loan Documents, Guarantor agrees that this is a “commercial transaction” as defined in Section 52-278(a) of the Connecticut General Statutes, as amended, and Guarantor waives any rights to notice and a hearing under Sections 52-278a to 52-278n of the Connecticut General Statutes, as amended, and authorizes Lender’s attorney to issue a writ for a prejudgment remedy, including, but not limited to, garnishment, attachment, foreign attachment and replevin, without securing a court order.
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EXECUTED as of the day and year first above written.
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GUARANTOR: |
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NEXPOINT DIVERSIFIED REAL ESTATE TRUST, a Delaware statutory trust |
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By: |
/s/ Matt McGraner |
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Name: Matt McGraner |
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Title: Authorized Signatory |
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SCHEDULE I
PROPERTY OWNER BORROWER
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1. |
Alameda Capital, LLC |
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2. |
453 Washington Avenue North Haven, LLC |
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3. |
Storage Partners of Miami I, LLC |
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4. |
PLG Jacksonville Storage, LLC |
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5. |
Miami City Self Storage Doral 77th Owner, LLC |
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6. |
Miami City Self Storage Pembroke Pines Blvd Owner, LLC |
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7. |
Lauderdale Storage Builders LLC |
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8. |
Edison Capital Jacksonville LLC |
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9. |
East Colonial Capital Orlando LLC |
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10. |
Sand Lake Road Capital Orlando LLC |
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11. |
Phillips Skyway Storage LLC |
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12. |
Phillips Ulmerton Storage LLC |
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13. |
Phillips Brandon Crossroads Storage LLC |
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14. |
Monroe Atlanta Owner, LLC |
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15. |
PVR Storage, LLC |
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16. |
Mequity Vinings, LLC |
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17. |
Northside Atlanta Owner, LLC |
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18. |
BT Storage Investments, LLC |
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19. |
Hurstbourne Storage, LLC |
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20. |
Severn Property LLC |
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21. |
10 Hampshire Property LLC |
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22. |
1835 Washington Self Storage LLC |
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23. |
10th & Seigle Ave., LLC |
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24. |
Mallard Creek Store #2, LLC |
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25. |
Five Points Storage Owner, LLC |
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26. |
Mequity 150th Street, LLC |
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27. |
LR-Bayshore 1, LLC |
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28. |
Bakery Square Self Storage, LLC |
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29. |
7807 Kingston Pike, LLC |
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jim Dondero, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of NexPoint Diversified Real Estate Trust; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2022
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/s/ Jim Dondero |
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Jim Dondero |
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President |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian Mitts, certify that:
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I have reviewed this Quarterly Report on Form 10-Q of NexPoint Diversified Real Estate Trust; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2022
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/s/ Brian Mitts |
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Brian Mitts |
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Chief Financial Officer, Executive VP- Finance, Treasurer and Assistant Secretary |
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(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of NexPoint Diversified Real Estate Trust (the “Company”) for the period ending September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Jim Dondero, President of the Company, and Brian Mitts, Chief Financial Officer, Executive VP-Finance, Treasurer and Assistant Secretary of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
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1. |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Dated: November 14, 2022 |
/s/ Jim Dondero |
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Jim Dondero President (Principal Executive Officer) |
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Dated: November 14, 2022 |
/s/ Brian Mitts |
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Brian Mitts Chief Financial Officer, Executive VP- Finance, Treasurer and Assistant Secretary (Principal Financial Officer) |