NEXPOINT DIVERSIFIED REAL ESTATE TRUST Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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.



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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.



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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.

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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.



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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.



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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.

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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.



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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):


? 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.



? 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.



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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.



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