UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-23129
NEXPOINT REAL ESTATE STRATEGIES FUND
(Exact name of registrant as specified in charter)
200 Crescent Court
Suite 700
Dallas, Texas 75201
(Address of principal executive offices)(Zip code)
NexPoint Advisors, L.P.
200 Crescent Court
Suite 700
Dallas, Texas 75201
(Name and Address of Agent for Service)
Registrant’s telephone number, including area code: (877) 665-1287
Date of fiscal year end: December 31
Date of reporting period: December 31, 2016
Item 1. Reports to Stockholders.
A copy of the Annual Report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), is attached herewith.
2
NexPoint Real Estate Strategies Fund
Annual Report
December 31, 2016
NexPoint Real Estate Strategies Fund
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Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
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We recognize and respect your privacy expectations, whether you are a visitor to our web site, a potential shareholder, a current shareholder or even a former shareholder.
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• | Account history, including information about the transactions and balances in your accounts with us or our affiliates. |
Disclosure of Information. We may share the information we collect with our affiliates. We may also disclose this information as otherwise permitted by law. We do not sell your personal information to third parties for their independent use.
Confidentiality and Security of Information. We restrict access to nonpublic personal information about you to our employees and agents who need to know such information to provide products or services to you. We maintain physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information, although you should be aware that data protection cannot be guaranteed.
PORTFOLIO MANAGER COMMENTARY (unaudited)
Year ending December 31, 2016 | NexPoint Real Estate Strategies Fund |
Dear Shareholders,
We are pleased to present NexPoint Real Estate Strategies Fund’s (NRES) inaugural annual report for the 2016 calendar yearend. There has been an enormous amount of time, energy, and effort put forth in constructing a strategy that we believe provides investors unique access to the real estate sector while strategically allocating capital in a thoughtful, forward-thinking manner throughout the entire real estate cycle. We aim to achieve four primary objectives: to provide (i) current income, (ii) long-term total return, (iii) lower correlation to the equity markets, and (iv) minimize drawdowns during market downturns while maximizing risk-adjusted returns. Our investment philosophy employs a “hands on” approach whereby each step of the investment process is performed in-house by an investment team that is active in the capital markets, real estate markets and private market. As a result, we believe we can identify and effectively exploit the arbitrage between public and private real estate values. Not only do we believe that our style and approach provide greater control, transparency, and efficiencies, but we firmly believe it is the superior method in running an actively managed, real estate-focused interval fund.
REITs posted excellent returns through the first half of the year, but reversed materially in the latter half as interest rate anxieties and decelerating fundamentals rippled through the sector. For the year, the MSCI US REIT Index returned 8.62%, lagging the S&P 500, which returned 11.95%. NexPoint Real Estate Strategies Class Z shares returned 4.17% since its July 1, 2016 inception date while the MCSI US REIT Index, the Fund’s primary benchmark, returned -4.37%. The Fund was also able to generate approximately three and half times higher risk adjusted returns than the MSCI US REIT Index. Looking ahead, even with interest rates on the rise and the multiple years of positive performance that REITs have experienced, we believe that an improving economy will act as a catalyst to help drive performance in 2017.
Since the Fund’s inception this past July, there has been significant opportunities in the public real estate market for several key reasons. First, increased volatility, the byproduct of interest rate sensitivity and (for some property types) decelerating fundamentals, has jostled the real estate market creating attractive valuations. In addition, the secular shift to index investment vehicles has essentially repriced the entire sector. Finally, in August of 2016, real estate broke away from the financial sector becoming the 11th sector of the S&P. Due to these factors, we were able to exploit idiosyncratic dislocations and allocate capital to undervalued, mispriced securities. We have also made concentrated debt investments in proprietary real estate deals that we believe are more insulated from systematic risk. We believe these themes will continue to exist in 2017, thereby creating similar opportunities for active managers to outperform. We will continue to seek to take advantage of market dislocations and be tactical in our investment decisions by shifting the portfolio’s asset-mix based upon where we believe we are in the real estate cycle.
We want to thank you for your support and we will continue to work diligently to create value for our shareholders.
Sincerely,
Jim Dondero
Portfolio Manager
NexPoint Real Estate Strategies Fund
Matt McGraner
Portfolio Manager
NexPoint Real Estate Strategies Fund
Annual Report | 1 |
PORTFOLIO MANAGER COMMENTARY (unaudited)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Total Returns | ||||||||||||||||||||||||
Class A | Class C | Class Z | ||||||||||||||||||||||
Without Sales Charge |
With Sales Charge |
Without Sales Charge |
With Sales Charge |
Without Sales Charge |
With Sales Charge |
|||||||||||||||||||
Year Ended December 31, 2016 |
n/a | n/a | n/a | n/a | n/a | n/a | ||||||||||||||||||
Five Year |
n/a | n/a | n/a | n/a | n/a | n/a | ||||||||||||||||||
Since Inception: |
4.12 | % | -1.87 | % | 3.78 | % | 2.78 | % | 4.17 | % | n/a | |||||||||||||
(July 21, 2016) for Class A and C |
||||||||||||||||||||||||
(July 01, 2016) for Class Z |
Returns shown in the chart and table do not reflect taxes that a shareholder would pay on Fund distributions or on the sale of the Fund shares.
“Without Sales Charge” returns do not include sales charges or contingent deferred sales charges (“CDSC”). “With Sales Charge” returns reflect the maximum sales charge of 5.75% on Class A Shares. The CDSC on Class C Shares is 1.00% within 18 months after purchase; there is no CDSC on Class C Shares thereafter. The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s share when redeemed may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For performance data current to the most recent month-end, please visit our website at www.nexpointres.com. The gross annualized expense ratios of the Fund are: Class A: 10.78%, Class C: 11.53%, and Class Z: 11.26%. NexPoint Advisors, L.P. (the “Investment Adviser” has contractually agreed to limit the total annual operating expenses (including organizational and offering expenses, but excluding distribution fees, interest, dividend expenses on short sales, brokerage commissions and other transaction costs, acquired fund fees and expenses, taxes, litigation expenses and extraordinary expenses), to the extent that they exceed 1.75% per annum of the Fund’s average Daily Gross Assets (as defined in Note 5). Total net annualized operating expenses for each class after reimbursement are Class A 2.08%, Class C 2.83%, Class Z 1.83%. Performance results reflect any contractual waivers and/or reimbursements of fund expenses by the Investment Adviser. Absent this limitation, performance results would have been lower.
See Notes to Performance on page 1 for more information.
Stock and bond prices may fall or fail to rise over time for several reasons, including general financial market conditions, factors related to a specific issuer or industry and, with respect to bond prices, changing market perceptions of the risk of default and changes in government intervention. These factors may also lead to increased volatility and reduced liquidity in the bond markets. The Fund may invest in foreign securities which may cause more volatility and less liquidity due to currency changes, political instability and accounting differences.
Mutual fund investing involves risk including the possible loss of principal.
2 | Annual Report |
NexPoint Real Estate Strategies Fund |
Objective
NexPoint Real Estate Strategies Fund seeks long-term total return with an emphasis on current income.
Net Assets as of December 31, 2016
$7.3 million
Portfolio Data as of December 31, 2016
The information below provides a snapshot of NexPoint Real Estate Strategies Fund at the end of the reporting period. NexPoint Real Estate Strategies Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
Top 10 Holdings as of 12/31/2016 (%)(1)(3) | ||||
RCP Keystone Hotel LLC 9.00%, 11/15/19 (U.S. Senior Loans) |
26.8 | |||
NRESF REIT SUB LLC (Common Stocks) |
14.8 | |||
NexPoint Residential Trust, Inc. (Common Stocks) |
4.7 | |||
RAIT Financial Trust (Common Stocks) |
4.5 | |||
Independence Realty Trust, Inc. (Common Stocks) |
4.5 | |||
CoreCivic, Inc. 4.63%, 05/01/23 (Corporate Bonds & Notes) |
4.1 | |||
RAIT Financial Trust (Preferred Stocks) |
4.0 | |||
GEO Group, Inc. (The) 5.13%, 04/01/23 (Corporate Bonds & Notes) |
4.0 | |||
Life Storage, Inc. (Common Stocks) |
3.9 | |||
RAIT Financial Trust (Preferred Stocks) |
3.9 |
(1) | Industries and holdings are calculated as a percentage of total net assets. |
(2) | Includes the Fund’s cash equivalent investments in the amount of $1,758,690. |
(3) | Excludes the Fund’s cash equivalent investments. |
(4) | Includes NRESF REIT Sub, LLC, as the entity holds private debt. |
Annual Report | 3 |
December 31, 2016 | NexPoint Real Estate Strategies Fund |
A guide to understanding each Fund’s financial statements
Investment Portfolio | The Investment Portfolio details all of the Fund’s holdings and their value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification. | |
Statement of Assets and Liabilities | This statement details the Fund’s assets, liabilities, net assets and common share price as of the last day of the reporting period. Net assets are calculated by subtracting all the Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and non-investment assets. The net asset value per common share is calculated by dividing net assets by the number of common shares outstanding as of the last day of the reporting period. | |
Statement of Operations | This statement reports income earned by the Fund and the expenses accrued by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund’s net increase or decrease in net assets from operations applicable to common shareholders. | |
Statements of Changes in Net Assets | These statements detail how the Fund’s net assets were affected by its operating results, distributions to common shareholders and shareholder transactions from common shares (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting period. The Statements of Changes in Net Assets also detail changes in the number of common shares outstanding. | |
Statement of Cash Flows | This statement reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency during the period. | |
Financial Highlights | The Financial Highlights demonstrate how the Fund’s net asset value per common share was affected by the Fund’s operating results. The Financial Highlights also disclose the Fund’s performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets). | |
Notes to Financial Statements | These notes disclose the organizational background of the Fund, its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies. |
4 | Annual Report |
As of December 31, 2016 | NexPoint Real Estate Strategies Fund |
See accompanying Notes to Financial Statements. | 5 |
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 2016 | NexPoint Real Estate Strategies Fund |
($) | ||||
Assets |
||||
Investments from unaffiliated issuers, at value (cost $5,545,710) |
5,593,266 | |||
Affiliated issuers, at value (cost $1,313,538) (Note 8) |
1,421,197 | |||
|
|
|||
Total Investments, at value (cost $6,859,248) |
7,014,463 | |||
Cash equivalents |
1,758,690 | |||
Cash |
15,113 | |||
Receivable for: |
||||
Dividends and interest |
59,098 | |||
Receivable from Investment Adviser (Note 5) |
77,976 | |||
Offering cost |
145,781 | |||
Prepaid expenses and other assets |
756 | |||
|
|
|||
Total assets |
9,071,877 | |||
|
|
|||
Liabilities |
||||
Notes payable (Note 5) |
1,500,000 | |||
Payable for: |
||||
Investments purchased |
49,646 | |||
Transfer agent fees |
1,563 | |||
Accrued expenses and other liabilities |
240,078 | |||
|
|
|||
Total liabilities |
1,791,287 | |||
|
|
|||
Commitments and Contingencies (Note 6) |
||||
Net Assets |
7,280,590 | |||
|
|
|||
Net Assets Consist of: |
||||
Paid-in capital |
7,078,683 | |||
Accumulated net investment income |
5,273 | |||
Accumulated net realized gain from investments and foreign currency transactions |
41,419 | |||
Net unrealized appreciation on investments |
155,215 | |||
|
|
|||
Net Assets |
7,280,590 | |||
|
|
6 | See accompanying Notes to Financial Statements. |
STATEMENT OF ASSETS AND LIABILITIES (continued)
As of December 31, 2016 | NexPoint Real Estate Strategies Fund |
($) | ||||
Class A: |
||||
Net assets |
1,041.42 | |||
Shares outstanding (unlimited authorization) |
50.495 | |||
|
|
|||
Net asset value per share(a)(b) |
20.62 | |||
|
|
|||
Maximum offering price per share(c) |
21.88 | |||
|
|
|||
Class C: |
||||
Net assets |
1,037.72 | |||
Shares outstanding (unlimited authorization) |
50.429 | |||
|
|
|||
Net asset value and offering price per share(a) |
20.58 | |||
|
|
|||
Class Z: |
||||
Net assets |
7,278,511 | |||
Shares outstanding (unlimited authorization) |
353,785 | |||
|
|
|||
Net asset value, offering and redemption price per share |
20.57 | |||
|
|
(a) | Redemption price per share is equal to net asset value per share less any applicable contingent deferred sales charge (“CDSC”). |
(b) | Purchases of $500,000 or more are subject to a 1.00% CDSC if redeemed within eighteen months of purchase. |
(c) | The sales charge is 5.75%. On sales of $500,000 or more, there is no sales charge and therefore the offering will be lower. |
See accompanying Notes to Financial Statements. | 7 |
For the Period Ended December 31, 2016(a) | NexPoint Real Estate Strategies Fund |
($) | ||||
Investment Income |
||||
Income: |
||||
Dividends from unaffiliated issuers |
38,603 | |||
Dividends from affiliated issuers (Note 8) |
6,560 | |||
Interest from unaffiliated issuers |
57,080 | |||
|
|
|||
Total Income |
102,243 | |||
|
|
|||
Expenses: |
||||
Investment advisory (Note 5) |
29,718 | |||
Distribution and shareholder service fees: (Note 5) |
||||
Class A |
1 | |||
Class C |
5 | |||
Transfer agent fees |
3,136 | |||
Trustees fees (Note 5) |
425 | |||
Accounting services fees |
4,735 | |||
Audit fees |
37,513 | |||
Legal fees |
13,448 | |||
Reports to shareholders |
20,000 | |||
Organization costs |
71,551 | |||
Amortized offering costs |
145,781 | |||
Other |
3,971 | |||
|
|
|||
Total operating expenses before waiver and reimbursement (Note 5) |
330,284 | |||
Less: Expenses waived or borne by the adviser and administrator |
(286,453 | ) | ||
|
|
|||
Net operating expenses |
43,831 | |||
|
|
|||
Net investment income |
58,412 | |||
|
|
|||
Net Realized and Unrealized Gain (Loss) on Investments |
||||
Realized gain (loss) on: |
||||
Investments from unaffiliated issuers |
62,158 | |||
Foreign currency related transactions |
(133 | ) | ||
Change in unrealized appreciation on: |
||||
Investments |
155,215 | |||
|
|
|||
Net realized and unrealized gain (loss) on investments |
217,240 | |||
|
|
|||
Total increase in net assets resulting from operations |
275,652 | |||
|
|
(a) | The Fund and Class Z commenced operations on July 1, 2016, Class A and C commenced operations on July 21, 2016. |
8 | See accompanying Notes to Financial Statements. |
STATEMENT OF CHANGES IN NET ASSETS
NexPoint Real Estate Strategies Fund |
Period Ended December 31, 2016(a) ($) |
||||
Increase (Decrease) in Net Assets |
||||
Operations: |
||||
Net investment income |
58,412 | |||
Net realized gain on investments and foreign currency transactions |
62,025 | |||
Net change in unrealized appreciation on investments |
155,215 | |||
|
|
|||
Net increase from operations |
275,652 | |||
|
|
|||
Distributions to shareholders from: |
||||
Net investment income |
||||
Class A |
(10 | ) | ||
Class C |
(9 | ) | ||
Class Z |
(73,727 | ) | ||
|
|
|||
Total distributions |
(73,746 | ) | ||
|
|
|||
Increase in net assets from operations and distributions |
201,906 | |||
|
|
|||
Share transactions: |
||||
Proceeds from sale of shares |
||||
Class A |
1,000 | |||
Class C |
1,000 | |||
Class Z |
7,002,938 | |||
Value of distributions reinvested |
||||
Class A |
10 | |||
Class C |
9 | |||
Class Z |
73,727 | |||
|
|
|||
Net increase from shares transactions |
7,078,684 | |||
|
|
|||
Total increase in net assets |
7,280,590 | |||
Net Assets |
||||
Beginning of period |
— | |||
|
|
|||
End of period |
7,280,590 | |||
|
|
|||
Accumulated net investment income |
5,273 | |||
|
|
(a) | The Fund and Class Z commenced operations on July 1, 2016, Class A and C commenced operations on July 21, 2016. |
See accompanying Notes to Financial Statements. | 9 |
STATEMENT OF CHANGES IN NET ASSETS (concluded)
NexPoint Real Estate Strategies Fund |
CAPITAL STOCK ACTIVITY - SHARES
Period Ended December 31, 2016(a) |
||||
Class A: |
||||
Shares sold |
50 | |||
Issued for distribution reinvested |
.495 | |||
|
|
|||
Net increase in fund shares |
50.495 | |||
|
|
|||
Class C: |
||||
Shares sold |
50 | |||
Issued for distribution reinvested |
.429 | |||
|
|
|||
Net increase in fund shares |
50.429 | |||
|
|
|||
Class Z: |
||||
Shares sold |
350,160 | |||
Issued for distribution reinvested |
3,625 | |||
|
|
|||
Net increase in fund shares |
353,785 | |||
|
|
(a) | Class Z commenced operations on July 1, 2016, Class A and C commenced operations on July 21, 2016. |
10 | See accompanying Notes to Financial Statements. |
NexPoint Real Estate Strategies Fund |
($) | ||||
Cash Flow Provided by Operating Activities |
||||
Net increase in net assets resulting from operations |
275,652 | |||
Adjustments to Reconcile Net Investment Income to Net Cash Provided by Operating Activities Operating Activities: |
||||
Purchases of investment securities from unaffiliated issuers |
(6,145,411 | ) | ||
Purchases of investment securities from affiliated issuers |
(1,313,538 | ) | ||
Proceeds from disposition of investment securities from unaffiliated issuers |
665,460 | |||
Purchases of short-term portfolio investments, net |
(1,758,690 | ) | ||
Net accretion of discount |
(3,468 | ) | ||
Net realized gain on investments from unaffiliated issuers |
(62,158 | ) | ||
Net change in unrealized appreciation on investments |
(155,215 | ) | ||
Increase in receivable for dividends and interest |
(59,098 | ) | ||
Increase in receivable from Investment Adviser |
(77,976 | ) | ||
Increase in offering cost |
(145,781 | ) | ||
Increase in prepaid expenses and other assets |
(756 | ) | ||
Increase in payable for investments purchased |
49,646 | |||
Increase in payable for transfer agent fees |
1,563 | |||
Increase in payable for accrued expenses and other liabilities |
240,078 | |||
|
|
|||
Net cash flow provided by operating activities |
(8,489,692 | ) | ||
Cash flows received from financing activities: |
||||
Proceeds from notes |
1,500,000 | |||
Proceeds from shares sold |
7,004,938 | |||
|
|
|||
Net cash flow provided by financing activities |
8,504,938 | |||
Effect of exchange rate changes on cash |
(133 | ) | ||
|
|
|||
Net increase in cash |
15,113 | |||
Cash: |
||||
Beginning of period |
— | |||
|
|
|||
End of period |
15,113 | |||
|
|
|||
Supplemental disclosure of cash flow information: |
||||
Reinvestment of dividends |
73,746 | |||
|
|
See accompanying Notes to Financial Statements. | 11 |
NexPoint Real Estate Strategies Fund, Class A |
Selected data for a share outstanding throughout each period is as follows:
For the Period Ended December 31, 2016(a) |
||||
Net Asset Value, Beginning of Period |
$ | 20.00 | ||
Income from Investment Operations: |
||||
Net investment income(b) |
0.14 | |||
Net realized and unrealized gain |
0.68 | |||
|
|
|||
Total from investment operations |
0.82 | |||
Less Distributions Declared to Shareholders: |
||||
From net investment income |
(0.20 | ) | ||
|
|
|||
Total distributions declared to shareholders |
(0.20 | ) | ||
Net Asset Value, End of Period(c) |
$ | 20.62 | ||
Total Return(c)(d)(e) |
4.12 | % | ||
Ratios to Average Net Assets(f)/Supplemental Data: |
||||
Net assets, end of period (in 000’s) |
$ | 1 | ||
Gross operating expenses(g) |
10.78 | % | ||
Net investment income |
1.56 | % | ||
Portfolio turnover rate(e) |
14 | % |
(a) | Class commenced operations on July 21, 2016. |
(b) | Net investment income per share is based on average shares outstanding during the period. |
(c) | The Net Asset Value per share and total return have been calculated based on net assets which include adjustments made in accordance with U.S. Generally Accepted Accounting Principles required at period end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share or total return experienced by the shareholder at period end. |
(d) | Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. |
(e) | Not annualized. |
(f) | All ratios for the period have been annualized, unless otherwise indicated. |
(g) | Supplemental expense ratios are shown below: |
For the Period Ended December 31, 2016 |
||||
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses) |
2.08 | % | ||
Interest expense and commitment fees |
— | |||
Dividends and fees on securities sold short |
— |
12 | See accompanying Notes to Financial Statements. |
FINANCIAL HIGHLIGHTS (continued)
NexPoint Real Estate Strategies Fund, Class C |
Selected data for a share outstanding throughout each period is as follows:
For the Period Ended December 31, 2016(a) |
||||
Net Asset Value, Beginning of Period |
$ | 20.00 | ||
Income from Investment Operations: |
||||
Net investment income(b) |
0.04 | |||
Net realized and unrealized gain |
0.71 | |||
|
|
|||
Total from investment operations |
0.75 | |||
Less Distributions Declared to Shareholders: |
||||
From net investment income |
(0.17 | ) | ||
|
|
|||
Total distributions declared to shareholders |
(0.17 | ) | ||
Net Asset Value, End of Period(c) |
$ | 20.58 | ||
Total Return(c)(d)(e) |
3.78 | % | ||
Ratios to Average Net Assets(f)/Supplemental Data: |
||||
Net assets, end of period (in 000’s) |
$ | 1 | ||
Gross operating expenses(g) |
11.53 | % | ||
Net investment income |
0.45 | % | ||
Portfolio turnover rate(e) |
14 | % |
(a) | Class commenced operations on July 21, 2016. |
(b) | Net investment income per share is based on average shares outstanding during the period. |
(c) | The Net Asset Value per share and total return have been calculated based on net assets which include adjustments made in accordance with U.S. Generally Accepted Accounting Principles required at period end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share or total return experienced by the shareholder at period end. |
(d) | Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. |
(e) | Not annualized. |
(f) | All ratios for the period have been annualized, unless otherwise indicated. |
(g) | Supplemental expense ratios are shown below: |
For the Period Ended December 31, 2016 |
||||
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses) |
2.83 | % | ||
Interest expense and commitment fees |
— | |||
Dividends and fees on securities sold short |
— |
See accompanying Notes to Financial Statements. | 13 |
FINANCIAL HIGHLIGHTS (concluded)
NexPoint Real Estate Strategies Fund, Class Z |
Selected data for a share outstanding throughout each period is as follows:
For the Period Ended December 31, 2016(a) |
||||
Net Asset Value, Beginning of Period |
$ | 19.95 | ||
Income from Investment Operations: |
||||
Net investment income(b) |
0.24 | |||
Net realized and unrealized gain |
0.59 | |||
|
|
|||
Total from investment operations |
0.83 | |||
Less Distributions Declared to Shareholders: |
||||
From net investment income |
(0.21 | ) | ||
|
|
|||
Total distributions declared to shareholders |
(0.21 | ) | ||
Net Asset Value, End of Period(c) |
$ | 20.57 | ||
Total Return(c)(d)(e) |
4.17 | % | ||
Ratios to Average Net Assets(f)/Supplemental Data: |
||||
Net assets, end of period (in 000’s) |
$ | 7,279 | ||
Gross operating expenses(g) |
11.26 | % | ||
Net investment income |
2.45 | % | ||
Portfolio turnover rate(e) |
14 | % |
(a) | Class commenced operations on July 1, 2016. |
(b) | Net investment income per share is based on average shares outstanding during the period. |
(c) | The Net Asset Value per share and total return have been calculated based on net assets which include adjustments made in accordance with U.S. Generally Accepted Accounting Principles required at period end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share or total return experienced by the shareholder at period end. |
(d) | Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. |
(e) | Not annualized. |
(f) | All ratios for the period have been annualized, unless otherwise indicated. |
(g) | Supplemental expense ratios are shown below: |
For the Period Ended December 31, 2016 |
||||
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses) |
1.83 | % | ||
Interest expense and commitment fees |
— | |||
Dividends and fees on securities sold short |
— |
14 | See accompanying Notes to Financial Statements. |
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Annual Report | 15 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
16 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund’s assets as of December 31, 2016 is as follows:
Total value at |
Level 1 Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Unobservable Inputs |
|||||||||||||
Assets |
||||||||||||||||
U.S. Senior Loans |
||||||||||||||||
Real Estate |
$ | 1,950,000 | $ | — | $ | — | $ | 1,950,000 | ||||||||
Corporate Bonds & Notes(1) |
586,500 | — | 586,500 | — | ||||||||||||
Common Stocks |
||||||||||||||||
Real Estate |
3,418,924 | 2,341,763 | — | 1,077,161 | ||||||||||||
Preferred Stocks(1) |
1,059,039 | 1,059,039 | — | — | ||||||||||||
Cash Equivalents |
1,758,690 | 1,758,690 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 8,773,153 | $ | 5,159,492 | $ | 586,500 | $ | 3,027,161 | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
The table below sets forth a summary of changes in the Fund’s assets measured at fair value using significant unobservable inputs (Level 3) for the period ended December 31, 2016.
Balance as of July 1, 2015* |
Transfers into Level 3 |
Transfers out of Level 3 |
Net Amortization (Accretion) of Premium/ (Discount) |
Net Realized Gain (Losses) |
Net Unrealized Gains/ (Losses) |
Net Purchases |
Net (Sales) |
Balance as of |
Change in securities still |
|||||||||||||||||||||||||||||||
U.S. Senior Loans |
||||||||||||||||||||||||||||||||||||||||
Real Estate |
$ | — | $ | — | $ | — | $ | 686 | $ | — | $ | 18,814 | $ | 1,930,500 | $ | — | $ | 1,950,000 | $ | 18,814 | ||||||||||||||||||||
Common Stocks |
||||||||||||||||||||||||||||||||||||||||
Real Estate |
— | — | — | — | — | 64,411 | 1,012,750 | — | 1,077,161 | 64,411 | ||||||||||||||||||||||||||||||
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|
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Total |
$ | — | $ | — | $ | — | $ | 686 | $ | — | $ | 83,225 | $ | 2,943,250 | $ | — | $ | 3,027,161 | $ | 83,225 | ||||||||||||||||||||
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|
* | Commencement of Operations. |
Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments.
For the period ended December 31, 2016, there were no transfers between Levels.
The Fund uses end of period market value in the determination of the amount associated with any transfers between levels.
The following is a summary of significant unobservable inputs used in the fair valuation of assets and liabilities categorized within Level 3 of the fair value hierarchy:
Category | Market Value at |
Valuation Technique | Unobservable Inputs | Input Value(s) | ||||||||
U.S. Senior Loans |
$ | 1,950,000 | Cost Price | N/A | N/A | |||||||
Common Stock |
1,077,161 | Net Asset Value | N/A | N/A | ||||||||
|
|
|||||||||||
Total |
$ | 3,027,161 |
Annual Report | 17 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
18 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Annual Report | 19 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
20 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Annual Report | 21 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Note 8. Affiliated Issuers
Under Section 2 (a) (3) of the Investment Company Act of 1940, as amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Fund as of December 31, 2016:
Shares | Market Value | |||||||||||||||||||||||||||
Issuer | July 1, 2016* |
December 31, 2016 |
July 1, 2016* |
December 31, 2016 |
Affiliated Income |
Purchases | Sales | |||||||||||||||||||||
Other Affiliate |
||||||||||||||||||||||||||||
NexPoint Residential Trust, Inc., REIT (Common Stocks) |
— | 15,400 | $ | $ | 344,036 | $ | 6,560 | $ | 300,788 | $ | — | |||||||||||||||||
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|
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Majority Owned, Not Consolidated |
||||||||||||||||||||||||||||
NRESF REIT SUB, LLC (Common Stocks) |
— | 1,012,750 | — | 1,077,161 | — | 1,012,750 | — | |||||||||||||||||||||
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|
|
|
|
|
|
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|
|
|
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|
|||||||||||||||
Total |
— | 1,028,150 | $ | — | $ | 1,421,197 | $ | 6,560 | $ | 1,313,538 | $ | — | ||||||||||||||||
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* | Commenced Operations. |
22 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (concluded)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Annual Report | 23 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of NexPoint Real Estate Strategies Fund:
We have audited the accompanying statement of assets and liabilities, including the investment portfolio, of NexPoint Real Estate Strategies Fund, as of December 31, 2016, and the related statements of operations, changes in net assets, and cash flows and the financial highlights for the period from July 1, 2016 (commencement of operations), to December 31, 2016. These financial statements and financial highlights are the responsibility of management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with custodians and brokers, or by other appropriate auditing procedures when replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of NexPoint Real Estate Strategies Fund as of December 31, 2016, the results of its operations, its changes in net assets, its cash flows, and the financial highlights for the period described in the first paragraph above, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 27, 2017
24 | Annual Report |
ADDITIONAL INFORMATION (unaudited)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Annual Report | 25 |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
26 | Annual Report |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Trustees and Officers
The Board is responsible for the overall management of the Fund, including supervision of the duties performed by the Investment Adviser. The names and birth dates of the Trustees and officers of the Fund, the year each was first elected or appointed to office, their principal business occupations during the last five years, the number of funds overseen by each Trustee and other directorships they hold are shown below. The business address for each Trustee and officer of the Fund is c/o NexPoint Advisors, L.P., 200 Crescent Court, Suite 700, Dallas, TX 75201.
Name and Date of Birth |
Position(s) held with the Trust |
Term of Office and Length of Time Served(1) |
Principal During the |
Number
of Portfolios in Highland Fund Complex Overseen by the Trustee(2) |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Attributes, Skills for | ||||||
Independent Trustees | ||||||||||||
Timothy K. Hui (6/13/1948) |
Trustee | Indefinite Term; Trustee since inception in 2006 |
Dean of Educational Resources since July 2012 and from July 2006 to January 2008, Vice President from February 2008 to June 2012, and Assistant Provost for Graduate Education from July 2004 to June 2006 at Cairn University. | 23 | None | Significant experience on this board of directors/trustees; administrative and managerial experience; legal training and practice. | ||||||
Bryan A. Ward (2/4/1955) |
Trustee | Indefinite Term; Trustee since inception in 2006 |
Private Investor, BW Consulting, LLC since 2014; Senior Manager, Accenture, LLP (a consulting firm) from 2002 until retirement in 2014. | 23 | Director of Equity Metrix, LLC | Significant experience on this and/or other boards of directors/trustees; significant managerial and executive experience; significant experience as a management consultant. |
Annual Report | 27 |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Trustees and Officers
Name and Date of Birth |
Position(s) held with the Trust |
Term of Office and Length of Time Served(1) |
Principal During the |
Number
of Portfolios in Highland Fund Complex Overseen by the Trustee(2) |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Attributes, Skills for | ||||||
Independent Trustees | ||||||||||||
Dr. Bob Froehlich (4/28/1953) |
Trustee | Indefinite Term; Trustee since December 2013 | Executive Vice President and Chief Investment Strategist, The Hartford Mutual Funds from 2009 until retirement in 2012; Vice Chairman of Deutsche Asset Management from 2002 to 2009. | 23 | Trustee of ARC Realty Finance Trust, Inc. (from January 2013 to May 2016); Director of KC Concessions, Inc.; Trustee of Realty Capital Income Funds Trust; Director of American Realty Capital Healthcare Trust II (from January 2013 to June 2016); Director, American Realty Capital Daily Net Asset Value Trust, Inc. (from November 2012 to July 2016); Director of American Sports Enterprise, Inc.; Director of Davidson Investment Advisors (from July 2009 to July 2016); Chairman and owner, Kane County Cougars Baseball Club; Advisory Board of Directors, Internet Connectivity Group, Inc. (from January 2014 to April 2016); Director of AXAR Acquisition Corp. (formerly AR Capital Acquisition Corp.); Director of The Midwest League of Professional Baseball Clubs, Inc.; Director of Kane County Cougars Foundation, Inc.’ Director of Galen Robotics, Inc. | Significant experience in the financial industry; significant managerial and executive experience; significant experience on other boards of directors, including as a member of several audit committees. |
28 | Annual Report |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Trustees and Officers
Name and Date of Birth |
Position(s) held with the Trust |
Term of Office and Length of Time Served(1) |
Principal During the |
Number
of Portfolios in Highland Fund Complex Overseen by the Trustee(2) |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Attributes, Skills for | ||||||
Independent Trustees | ||||||||||||
John Honis3 (6/16/1958) |
Trustee | Indefinite Term; Trustee since July 2013 | President of Rand Advisors, LLC since August 2013; Partner of Highland Capital Management, L.P. (“HCM”) from February 2007 until his resignation in November 2014. | 23 | Manager of Turtle Bay Resort, LLC | Significant experience in the financial industry; significant managerial and executive experience, including experience as president, chief executive officer or chief restructuring officer of five telecommunication firms; experience on other boards of directors. |
Annual Report | 29 |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Trustees and Officers
Name and Date of Birth |
Position(s) held with the Trust |
Term of Office and Length of Time Served(1) |
Principal During the |
Number
of Portfolios in Highland Fund Complex Overseen by the Trustee(2) |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Attributes, Skills for | ||||||
Interested Trustees | ||||||||||||
Ethan Powell4 (6/20/1975) |
Trustee; Chairman of the Board | Indefinite Term; Trustee since December 2013; Chairman of the Board since December 2013; Executive Vice President and Principal Executive Officer from June 2012 until December 2015 | President and Founder of Impact Shares LLC (a registered investment advisor dedicated to building a platform to create better socially responsible investment solutions) since December 2015; Trustee/Director of the Highland Fund Complex from June 2012 until July 2013 and since December 2013; Chief Product Strategist of Highland Capital Management Fund Advisors, L.P. (“HCMFA”) from 2012 until December 2015; Senior Retail Fund Analyst of HCM from 2007 until December 2015 and HCMFA from its inception until December 2015; Secretary of NexPoint Credit Strategies Fund (“NHF”) from November 2010 until June 2012; President and Principal Executive Officer of NHF from June 2012 until May 2015; Secretary of NHF from May 2015 until December 2015; Executive Vice President and Principal Executive Officer of Highland Funds I and Highland Funds II from June 2012 until December 2015; and Secretary of Highland Funds I and Highland Funds II from November 2010 to May 2015. | 23 | Trustee of Impact Shares Funds I Trust | Significant experience in the financial industry; significant executive experience including past service as an officer of funds in the Highland Fund Complex; significant administrative and managerial experience. |
30 | Annual Report |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Trustees and Officers
Name and Date of Birth |
Position(s) with the Trust |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years | |||
Officers | ||||||
James Dondero (6/29/1962) |
President and Principal Executive Officer | Indefinite Term; President since March 2016 | President of Highland Capital Management, L.P., which he co-founded in 1993; Portfolio Manager of NHF, Portfolio Manager of Highland Energy MLP Fund, Highland Global Allocation Fund, Highland Small-Cap Equity Fund and Highland Premier Growth Equity Fund (all series of HFII); Portfolio Manager of Highland Opportunistic Credit Fund (series of Highland Funds I (“HFI”); and a Portfolio Manager of NexPoint Capital since 2014; President and Portfolio Manager of NexPoint Discount Yield Fund, NexPoint Energy and Materials Opportunities Fund, NexPoint Healthcare Opportunities Fund, NexPoint Latin American Opportunities Fund, NexPoint Merger Arbitrage Fund and NexPoint Distressed Strategies Fund since 2016. | |||
Brian Mitts (8/26/1970) |
Vice President, Principal Accounting Officer and Principal Financial Officer | Indefinite term; Vice President and Chief Financial Officer since January 2016; Treasurer from January 2016 to March 2016 | Chief Financial Officer, Executive Vice President and Treasurer of NexPoint Residential Trust, Inc. since 2014; Principal Financial Officer and Principal Accounting Officer of NHF since November 2010; Executive Vice President, Principal Financial Officer and Principal Accounting Officer of NHF since May 2015; Treasurer of NHF from November 2010 until May 2015; Chief Financial Officer of NexPoint Capital, Inc. from August 2014 until May 2015; Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer of NexPoint Capital, Inc. since May 2015; Principal Financial Officer and Principal Accounting Officer of NexPoint Real Estate Strategies Fund since March 2016; Chief Financial Officer and Financial and Operations Principal of HCFD since November 2013; Chief Operations Officer of HCMFA since 2012; Secretary of NexPoint Advisors, L.P. from August 2012 until May 2015; Executive Vice President of NexPoint Advisors, L.P. since May 2015; Senior Retail Fund Analyst of HCM since 2007 and HCMFA since its inception; Secretary, Principal Financial Officer and Principal Accounting Officer of Highland Funds I and Highland Funds II since May 2015; Principal Financial Officer and Principal Accounting Officer of Highland Funds I since November 2010 and of Highland Funds II since February 2011; Treasurer of Highland Funds I from November 2010 until May 2015 and of Highland Funds II from February 2011 until May 2015 and Financial and Operations Principal of NexBank Securities, Inc. since 2014. | |||
Frank Waterhouse (4/14/1971) |
Treasurer | Indefinite Term; Treasurer since March 2016 | Assistant Treasurer of Acis Capital Management, L.P. from December 2011 until February 2012; Treasurer of Acis Capital Management, L.P. since February 2012; Assistant Treasurer of HCM from November 2011 until April 2012; Treasurer of HCM since April 2012; Assistant Treasurer of HCMFA from December 2011 until October 2012; Treasurer of HCMFA since October 2012; Treasurer of NexPoint Advisors, L.P. since March 2012 and Treasurer of NexPoint Capital, Inc., NHF, Highland Funds I, Highland Funds II, and NexPoint Real Estate Advisors, L.P. since May 2015 and Treasurer of NexPoint Real Estate Strategies Fund since March 2016. |
Annual Report | 31 |
ADDITIONAL INFORMATION (unaudited) (concluded)
December 31, 2016 | NexPoint Real Estate Strategies Fund |
Trustees and Officers
Name and Date of Birth |
Position(s) with the Trust |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years | |||
Officers | ||||||
Dustin Norris (1/6/1984) |
Secretary | Indefinite Term; Secretary since March 2016 | Chief Product Strategist at HCMFA since September 2015, Director of Product Strategy at HCMFA from May 2014 to September 2015; Secretary of NHF since December 2015; Assistant Treasurer of Highland Funds I and Highland Funds II since November 2012; Assistant Treasurer of NHF from November 2012 to December 2015; Secretary of NexPoint Capital, Inc. since 2014; Secretary of NexPoint Real Estate Strategies Fund since March 2016; Senior Accounting Manager at HCMFA from August 2012 to May 2014; and Fund Accountant at HCM from June 2010 to August 2012. |
1 | On an annual basis, as a matter of Board policy, the Governance Committee reviews each Trustee’s performance and determines whether to extend each such Trustee’s service for another year. Effective June 2013, the Board adopted a retirement policy wherein the Governance Committee shall not recommend the continued service as a Trustee of a Board member who is older than 80 years of age at the time the Governance Committee reports its findings to the Board. |
2 | The “Highland Fund Complex” consists of NHF, each series of Highland Funds I, each series of Highland Funds II, NexPoint Capital, Inc., a closed-end management investment company that has elected to be treated as a business development company under the 1940 Act, NexPoint Merger Arbitrage Fund, NexPoint Latin American Opportunities Fund, NexPoint Real Estate Strategies Fund, NexPoint Opportunistic Credit Fund, NexPoint Energy and Materials Opportunities Fund, NexPoint Discount Yield Fund and NexPoint Healthcare Opportunities Fund. |
3 | Since May 1, 2015, Mr. Honis has been treated as an Independent Trustee of the Trust. Prior to that date, Mr. Honis was treated as an Interested Trustee because he was a partner of an investment adviser affiliated with the Adviser until his resignation in November 2014. As of August 31, 2016, Mr. Honis was entitled to receive aggregate severance and/or deferred compensation payments of approximately $1.5 million from another affiliate of the Adviser. Mr. Honis also serves as a director of a portfolio company affiliated with the Adviser. During the Trust’s last two fiscal years, Mr. Honis’ aggregate compensation from this portfolio company for his services as a director was approximately $50,000. |
In addition, Mr. Honis serves as a trustee of a trust that owns substantially all of the economic interest in an investment adviser affiliated with the Adviser. Mr. Honis indirectly receives an asset-based fee in respect of such interest, which is projected to range from $100,000-$150,000 annually. In light of these relationships between Mr. Honis and affiliates of the Adviser, it is possible that the SEC might in the future determine Mr. Honis to be an interested person of the Trust. |
4 | Effective December 4, 2015, Mr. Powell resigned from his position with the Adviser. Mr. Powell currently receives hourly fees from the Adviser to perform consulting services for the Adviser relating to matters on which he worked during his tenure at the Adviser. Although the Trust believes that Mr. Powell is technically no longer an interested person of the Trust, in light of his previous employment and his ongoing provision of consulting services to the Adviser and affiliates of the Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an interested person of the Trust. Therefore, the Trust treats Mr. Powell as an Interested Trustee of the Trust for all purposes other than compensation (Mr. Powell will be compensated at the same rate as the Independent Trustees) from December 16, 2015 until at least December 4, 2017 (the second anniversary of his resignation). |
32 | Annual Report |
IMPORTANT INFORMATION ABOUT THIS REPORT
Annual Report | 33 |
NexPoint Real Estate Strategies Fund
c/o DST Systems, Inc.
P.O. Box 219630
Kansas City, MO 64121-9630
NexPoint Real Estate Strategies Fund | Annual Report, December 31, 2016 |
www.nexpointadvisors.com | NRES-AR-1216 |
Item 2. Code of Ethics.
(a) | NexPoint Real Estate Strategies Fund (the “Registrant”), as of the end of the period covered by this report, has adopted a code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party. |
(b) | Not applicable. |
(c) | There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party, and that relates to any element of the code of ethics description. |
(d) | The Registrant has not granted any waiver, including any implicit waiver, from a provision of the code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this Item’s instructions. |
(e) | Not applicable. |
(f) | The Registrant’s code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions is filed herewith as Exhibit (a)(1). |
Item 3. Audit Committee Financial Expert.
As of the end of the period covered by the report, the Registrant’s Board of Trustees (the “Board”) has determined that Bryan A. Ward, a member of the Audit & Qualified Legal Compliance Committee of the Board (the “Audit Committee”), is an audit committee financial expert as defined by the U.S. Securities and Exchange Commission (the “SEC”) in Item 3 of Form N-CSR. Mr. Ward is “independent” as defined by the SEC for purposes of this Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Audit Fees
(a) | The aggregate fees billed since inception on July 1, 2016 for professional services rendered by the principal accountant for the audit of the Registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements are $50,000 for the fiscal year ended December 31, 2016. |
Audit-Related Fees
(b) | The aggregate fees billed since inception on July 1, 2016 for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the Registrant’s financial statements and are not reported under paragraph (a) of this Item are $0 for the fiscal year ended December 31, 2016. The nature of the services related to agreed-upon procedures, performed on the Registrant’s semi-annual financial statements. |
3
Tax Fees
(c) | The aggregate fees billed since inception on July 1, 2016 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $5,000 for the fiscal year ended December 31, 2016. The nature of the services related to assistance on the Registrant’s tax returns and excise tax calculations. |
All Other Fees
(d) | The aggregate fees billed since inception on July 1, 2016 for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for the fiscal year ended December 31, 2016. |
(e)(1) | Disclose the Audit Committee’s pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X: |
The Audit Committee shall:
(a) have direct responsibility for the appointment, compensation, retention and oversight of the Registrant’s independent auditors and, in connection therewith, to review and evaluate matters potentially affecting the independence and capabilities of the auditors; and
(b) review and pre-approve (including associated fees) all audit and other services to be provided by the independent auditors to the Registrant and all non-audit services to be provided by the independent auditors to the Registrant’s investment adviser or any entity controlling, controlled by or under common control with the investment adviser (an “Adviser Affiliate”) that provides ongoing services to the Registrant, if the engagement relates directly to the operations and financial reporting of the Registrant; and
(c) establish, to the extent permitted by law and deemed appropriate by the Audit Committee, detailed pre-approval policies and procedures for such services; and
(d) review and consider whether the independent auditors’ provision of any non-audit services to the Registrant, the Registrant’s investment adviser or an Adviser Affiliate not pre-approved by the Audit Committee are compatible with maintaining the independence of the independent auditors.
(e)(2) | The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: |
(b) 100%
(c) 100%
(d) N/A
(f) | The percentage of hours expended on the principal accountant’s engagement to audit the Registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was less than fifty percent. |
4
(g) | The aggregate non-audit fees billed by the Registrant’s principal accountant for services rendered to the Registrant, and rendered to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and an Adviser Affiliate that provides ongoing services to the Registrant since inception on July 1, 2016 was $0 for the fiscal year ended December 31, 2016. |
(h) | The Registrant’s Audit Committee has considered whether the provision of non-audit services that were rendered to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and an Adviser Affiliate that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence. |
Item 5. Audit Committee of Listed Registrants.
The Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. It is composed of the following Trustees, each of whom is not an “interested person” as defined in the 1940 Act:
Dr. Bob Froehlich
Timothy K. Hui
Bryan A. Ward
Item 6. Investments.
(a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the Annual Report to shareholders filed under Item 1 of this form. |
(b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
NEXPOINT ADVISORS, L.P.
PROXY VOTING POLICY
Purpose and Scope
The purpose of these voting policies and procedures (the “Policy”) is to set forth the principles and procedures by which HCMLP (the “Company”) votes or gives consents with respect to the securities owned by Clients for which the Company exercises voting authority and discretion.1 For avoidance of doubt, this includes any proxy and any shareholder vote or consent, including a vote or consent for a private company or other issuer that does not involve a proxy. These policies and procedures have been designed to help ensure that votes are cast in the best interests of Clients in accordance with the Company’s fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940 (the “Advisers Act”).
1 | In any case where a Client has instructed the Company to vote in a particular manner on the Client’s behalf, those instructions will govern in lieu of parameters set forth in the Policy. |
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This Policy applies to securities held in all Client accounts (including Retail Funds and other pooled investment vehicles) as to which the Company has explicit or implicit voting authority. Implicit voting authority exists where the Company’s voting authority is implied by a general delegation of investment authority without reservation of proxy voting authority to the Client.
If the Company has delegated voting authority to an investment sub-adviser with respect to any Retail Fund, such sub-adviser will be responsible for voting all proxies for such Retail Funds in accordance with the sub-adviser’s proxy voting policies. The Compliance Department, to provide oversight over the proxy voting by sub-advisers and to ensure that votes are executed in the best interests of the Retail Funds, shall (i) review the proxy voting policies and procedures of each Retail Fund sub-adviser to confirm that they comply with Rule 206(4)-6, both upon engagement of the sub-adviser and upon any material change to the sub-adviser’s proxy voting policies and procedures, and (ii) require each such sub-adviser to provide quarterly certifications that all proxies were voted pursuant to the sub-adviser’s policies and procedures or to describe any inconsistent votes.
General Principles
The Company and its affiliates engage in a broad range of activities, including investment activities for their own accounts and for the accounts of various Clients and providing investment advisory and other services to Clients. In the ordinary course of conducting the Company’s activities, the interests of a Client may conflict with the interests of the Company, other Clients and/or the Company’s affiliates and their clients. Any conflicts of interest relating to the voting of proxies, regardless of whether actual or perceived, will be addressed in accordance with these policies and procedures. The guiding principle by which the Company votes all proxies is to vote in the best interests of each Client by maximizing the economic value of the relevant Client’s holdings, taking into account the relevant Client’s investment horizon, the contractual obligations under the relevant advisory agreements or comparable documents and all other relevant facts and circumstances at the time of the vote. The Company does not permit voting decisions to be influenced in any manner that is contrary to, or dilutive of, this guiding principle.
Voting Procedures
Third-Party Proxy Advisors
The Company may engage a third-party proxy advisor (“Proxy Advisor”) to provide proxy voting recommendations with respect to Client proxies. Proxy Advisor voting recommendation guidelines are generally designed to increase investors’ potential financial gain. When considering whether to retain or continue retaining any particular Proxy Advisor, the Compliance Department will ascertain, among other things, whether the Proxy Advisor has the capacity and competency to adequately analyze proxy issues. In this regard, the Compliance Department will consider, among other things: the adequacy and quality of the Proxy Advisor’s staffing and personnel; the robustness of its policies and procedures regarding its ability to (a) ensure that its proxy voting recommendations are based on current and accurate information and (b) identify and address any conflicts of interest and any other considerations that the Compliance Department determines would be appropriate in considering the nature and quality of the services provided by the Proxy Advisor. To identify and address any conflicts that may arise on the part of the Proxy Advisor, the Compliance Department will ensure that the Proxy Advisor notifies the Compliance Department of any relevant business changes or changes to its policies and procedures regarding conflicts.
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Third-Party Proxy Voting Services
The Company may utilize a third-party proxy voting service (“Proxy Voting Service”) to monitor holdings in Client accounts for purposes of determining whether there are upcoming shareholder meetings or similar corporate actions and to execute Client proxies on behalf of the Company pursuant to the Company’s instructions, which shall be given in a manner consistent with this Policy. The Compliance Department will oversee each Proxy Voting Service to ensure that proxies have been voted in a manner consistent with the Company’s instructions.
Monitoring
Subject to the procedures regarding Nonstandard Proxy Notices described below, the Compliance Department of the Company shall have responsibility for monitoring Client accounts for proxy notices. Except as detailed below, if proxy notices are received by other employees of the Company, such employees must promptly forward all proxy or other voting materials to the Compliance Department.
Portfolio Manager Review and Instruction
From time to time, the settlement group of the Company may receive nonstandard proxy notices, regarding matters including, but not limited to, proposals regarding corporate actions or amendments (“Nonstandard Proxy Notices”) with respect to securities held by Clients. Upon receipt of a Nonstandard Proxy Notice, a member of the settlement group (the “Settlement Designee”) shall send an email notification containing all relevant information to the Portfolio Manager(s) with responsibility for the security and [ .com]. Generally, the relevant Portfolio Manager(s) shall deliver voting instructions for Nonstandard Proxy Notices by replying to the email notice sent to the Portfolio Manager(s) and [ .com] by the Settlement Designee or by sending voting instructions to [ .com] and [ .com]. Any conflicts for Nonstandard Proxy Notices should also be disclosed to the Compliance Department. In the event a Portfolio Manager orally conveys voting instructions to the Settlement Designee or any other member of the Company’s settlement group, that Settlement Designee or member of the Company’s settlement group shall respond to the original notice email sent to [ .com] detailing the Portfolio Manager(s) voting instructions.
With regard to standard proxy notices, on a weekly basis, the Compliance Department will send a notice of upcoming proxy votes related to securities held by Clients and the corresponding voting recommendations of the Proxy Advisor to the relevant Portfolio Manager(s). Upon receipt of a proxy notice from the Compliance Department, the Portfolio Manager(s) will review and evaluate the upcoming votes and recommendations. The Portfolio Managers may rely on any information and/or research available to him or her and may, in his or her discretion, meet with members of an issuer’s management to discuss matters of importance to the relevant Clients and their economic interests. Should the Portfolio Manager determine that deviating from the Proxy Advisor’s recommendation is in a Client’s best interest, the Portfolio Manager shall communicate his or her voting instructions to the Compliance Department.
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In the event that more than one Portfolio Manager is responsible for making a particular voting decision and such Portfolio Managers are unable to arrive at an agreement as to how to vote with respect to a particular proposal, they should consult with the applicable Chief Compliance Officer (the “CCO”) for guidance.
Voting
Upon receipt of the relevant Portfolio Managers’ voting instructions, if any, the Compliance Department will communicate the instructions to the Proxy Voting Service to execute the proxy votes.
Non-Votes
It is the general policy of the Company to vote or give consent on all matters presented to security holders in any vote, and these policies and procedures have been designated with that in mind. However, the Company reserves the right to abstain on any particular vote if, in the judgment of the CCO, or the relevant Portfolio Manager, the effect on the relevant Client’s economic interests or the value of the portfolio holding is insignificant in relation to the Client’s portfolio, if the costs associated with voting in any particular instance outweigh the benefits to the relevant Clients or if the circumstances make such an abstention or withholding otherwise advisable and in the best interests of the relevant Clients not to vote. Such determination may apply in respect of all Client holdings of the securities or only certain specified Clients, as the Company deems appropriate under the circumstances. As examples, a Portfolio Manager may determine: (a) not to recall securities on loan if, in his or her judgment, the matters being voted upon are not material events affecting the securities and the negative consequences to Clients of disrupting the securities lending program would outweigh the benefits of voting in the particular instance or (b) not to vote proxies relating to certain foreign securities if, in his or her judgment, the expense and administrative inconvenience outweighs the benefits to Clients of voting the securities.
Conflicts of Interest
The Company’s Compliance Department is responsible for monitoring voting decisions for any conflicts of interest, regardless of whether they are actual or perceived. All voting decisions contrary to the recommendation of a Proxy Advisor require a mandatory conflicts of interest review by the Compliance Department, which will include a consideration of whether the Company or any Portfolio Manager or other person recommending or providing input on how to vote has an interest in the vote that may present a conflict of interest.
In addition, all Company investment professionals are expected to perform their tasks relating to the voting of proxies in accordance with the principles set forth above, according the first priority to the best interest of the relevant Clients. If at any time a Portfolio Manager or any other investment professional becomes aware of a potential or actual conflict of interest regarding any particular voting decision, he or she must contact the Compliance Department promptly and, if in connection with a proxy that has yet to be voted, prior to such vote. If any investment professional is pressured or lobbied, whether from inside or outside the Company, with respect to any particular voting decision, he or she should contact the Compliance Department promptly. The CCO will use his or her best judgment to address any such conflict of interest and ensure that it is resolved in accordance with his or her independent assessment of the best interests of the relevant Clients.
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In the event of a conflict, the Company may choose to address such conflict by: (i) voting in accordance with the Proxy Advisor’s recommendation; (ii) the CCO determining how to vote the proxy (if the CCO approves deviation from the Proxy Advisor’s recommendation, then the CCO shall document the rationale for the vote); (iii) “echo voting” or “mirror voting” the proxy in the same proportion as the votes of other proxy holders that are not Clients; or (iv) with respect to Clients other than Retail Funds, notifying the affected Client of the material conflict of interest and seeking a waiver of the conflict or obtaining such Client’s voting instructions. Where the Compliance Department deems appropriate, third parties may be used to help resolve conflicts. In this regard, the CCO or his or her delegate shall have the power to retain fiduciaries, consultants or professionals to assist with voting decisions and/or to delegate voting or consent powers to such fiduciaries, consultants or professionals.
Where a conflict of interest arises with respect to a voting decision for a Retail Fund, the Company shall disclose the conflict and the rationale for the vote taken to the Retail Fund’s Board of Directors/Trustees at the next regularly scheduled quarterly meeting. The Compliance Department will maintain a log documenting the basis for the decision and will furnish the log to the Board of Trustees.
Material Conflicts of Interest
The following relationships or circumstances are examples of situations that may give rise to a material conflict of interest for purposes of this Policy. This list is not exclusive or determinative; any potential conflict (including payments of the types described below but less than the specified threshold) should be identified to the Company’s Compliance Department:
(i) | The issuer is a Client of the Company, or of an affiliate, accounting for more than 5% of the Company’s or affiliate’s annual revenues. |
(ii) | The issuer is an entity that reasonably could be expected to pay the Company or its affiliates more than $1 million through the end of the Company’s next two full fiscal years. |
(iii) | The issuer is an entity in which a “Covered Person” (as defined in the Company’s Policies and Procedures Designed to Detect and Prevent Insider Trading and to Comply with Rule 17j-1 of the Investment Company Act of 1940, as amended (the “Code of Ethics”)) has a beneficial interest contrary to the position held by the Company on behalf of Clients. |
(iv) | The issuer is an entity in which an officer or partner of the Company or a relative of any such person is or was an officer, director or employee, or such person or relative otherwise has received more than $150,000 in fees, compensation and other payment from the issuer during the Company’s last three fiscal years; provided, however, that the Compliance Department may deem such a relationship not to be a material conflict of interest if the Company representative serves as an officer or director of the issuer at the direction of the Company for purposes of seeking control over the issuer. |
(v) | The matter under consideration could reasonably be expected to result in a material financial benefit to the Company or its affiliates through the end of the Company’s next two full fiscal years (for example, a vote to increase an investment advisory fee for a Retail Fund advised by the Company or an affiliate). |
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(vi) | Another Client or prospective Client of the Company, directly or indirectly, conditions future engagement of the Company on voting proxies in respect of any Client’s securities on a particular matter in a particular way. |
(vii) | The Company holds various classes and types of equity and debt securities of the same issuer contemporaneously in different Client portfolios. |
(viii) | Any other circumstance where the Company’s duty to serve its Clients’ interests, typically referred to as its “duty of loyalty,” could be compromised. |
Notwithstanding the foregoing, a conflict of interest described above shall not be considered material for the purposes of this Policy in respect of a specific vote or circumstance if:
The securities in respect of which the Company has the power to vote account for less than 1% of the issuer’s outstanding voting securities, but only if: (i) such securities do not represent one of the 10 largest holdings of such issuer’s outstanding voting securities and (ii) such securities do not represent more than 2% of the Client’s holdings with the Company.
The matter to be voted on relates to a restructuring of the terms of existing securities or the issuance of new securities or a similar matter arising out of the holding of securities, other than common equity, in the context of a bankruptcy or threatened bankruptcy of the issuer.
Recordkeeping
Following the submission of a proxy vote, the Fund will maintain a report of the vote and all relevant documentation.
The Fund shall retain records relating to the voting of proxies and the Company shall conduct due diligence, including on Proxy Voting Services and Proxy Advisors, as applicable, to ensure the following records are adequately maintained by the appropriate party:
(i) | Copies of this Policy and any amendments thereto. |
(ii) | A current copy of the Proxy Advisor’s voting guidelines, as amended. |
(iii) | A copy of each proxy statement that the Company receives regarding Client securities. The Company may rely on a third party to make and retain, on the Company’s behalf, a copy of a proxy statement, provided that the Company has obtained an undertaking from the third party to provide a copy of the proxy statement promptly upon request. |
(iv) | Records of each vote cast by the Company on behalf of Clients. The Company may satisfy this requirement by relying on a third party to make and retain, on the Company’s behalf, a record of the vote cast, provided that the Company has obtained an undertaking from the third party to provide a copy of the record promptly upon request. |
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(v) | A copy of any documents created by the Company that were material to making a decision how to vote or that memorializes the basis for that decision. |
(vi) | A copy of each written request for information on how the Company voted proxies on behalf of the Client, and a copy of any written response by the Company to any (oral or written) request for information on how the Company voted. |
These records shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the Company’s fiscal year during which the last entry was made in the records, the first two years in an appropriate office of the Company.2
Enforcement of this Policy
It shall be the responsibility of the Compliance Department to handle or coordinate the enforcement of this Policy. The Compliance Department will periodically sample proxy voting records to ensure that proxies have been voted in accordance with this Policy, with a particular focus on any proxy votes that require additional analysis (e.g., proxies voted contrary to the recommendations of a Proxy Advisor).
If the Compliance Department determines that a Proxy Advisor or Proxy Voting Service may have committed a material error, the Compliance Department will investigate the error, taking into account the nature of the error, and seek to determine whether the Proxy Advisor or Proxy Voting Service is taking reasonable steps to reduce similar errors in the future.
In addition, no less frequently than annually, the Compliance Department will review the adequacy of this Policy to ensure that it has been implemented effectively and to confirm that this Policy continues to be reasonably designed to ensure that proxies are voted in the best interest of Clients.
Disclosures to Clients and Investors
The Company includes a description of its policies and procedures regarding proxy voting in Part 2 of Form ADV, along with a statement that Clients can contact the CCO to obtain a copy of these policies and procedures and information about how the Company voted with respect to a Client’s securities. This Policy is, however, subject to change at any time without notice.
As a matter of policy, the Company does not disclose how it expects to vote on upcoming proxies. Additionally, the Company does not disclose the way it voted proxies to unaffiliated third parties without a legitimate need to know such information.
2 | If the Company has essentially immediate access to a book or record (on the Company’s proprietary system or otherwise) through a computer located at an appropriate office of the Company, then that book or record will be considered to be maintained at an appropriate office of the Company. “Immediate access” to books and records includes that the Company has the ability to provide promptly to Securities and Exchange Commission (the “SEC”) examination staff hard copies of the books and records or access to the storage medium. The party responsible for the applicable books and records as described above shall also be responsible for ensuring that those books and records for the first two years are either physically maintained in an appropriate office of the Company or that the Company otherwise has essentially immediate access to the required books and records for the first two years. |
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Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) | Identification of Portfolio Manager(s) or Management Team Members and Description of Role of Portfolio Manager(s) or Management Team Members |
The Registrant’s portfolio managers, who are primarily responsible for the day-to-day management of the Registrant’s portfolio, are James Dondero and Matthew McGraner.
James Dondero – Mr. Dondero has over 25 years of experience in the credit markets. In addition to his role at NexPoint Advisors, L.P., Mr. Dondero is the President of Highland Capital Management, L.P. (“HCM”), which he co-founded in 1993. Prior to founding HCM, Mr. Dondero served as Chief Investment Officer of Protective Life’s GIC subsidiary and helped grow the business from concept to over $2 billion between 1989 and 1993. His portfolio management experience includes mortgage-backed securities, investment grade corporates, leveraged bank loans, high-yield bonds, emerging market debt, derivatives, and equity securities. He received a BS in Commerce (Accounting and Finance) from the University of Virginia. Mr. Dondero is a Certified Public Accountant, a Certified Management Accountant, and has earned the right to use the Chartered Financial Analyst designation.
Matthew McGraner – Mr. McGraner serves as a Managing Director at HCM, Chief Investment Officer and a member of the investment committee of NexPoint Residential Trust, Inc., Chief Investment Officer and Executive Vice President of NexPoint Multifamily Capital Trust, Inc. and Chief Investment Officer and Executive Vice President of NexPoint Hospitality Trust, Inc. Mr. McGraner joined HCM in May 2013. With over eight years of real estate, private equity and legal experience, his primary responsibilities are to lead the strategic direction and operations of the real estate platform at HCM, as well as source and execute investments, manage risk and develop potential business opportunities, including fundraising, capital markets transactions and joint ventures. Mr. McGraner also is a licensed attorney and was formerly an associate at Jones Day, with a practice primarily focused on private equity, real estate and mergers and acquisitions. Mr. McGraner has led the acquisition and financing of over $1.5 billion of real estate and advised on $16.3 billion of mergers and acquisitions and private equity transactions. Mr. McGraner received a BS from Vanderbilt University and JD from Washington University School of Law.
(a)(2) | Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest |
Other Accounts Managed by Portfolio Manager(s) or Management Team Member |
The following table provides information about funds and accounts, other than the Registrant, for which the Registrant’s portfolio managers are primarily responsible for the day-to-day portfolio management as of December 31, 2016.
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James Dondero
Type of Accounts | Total # of Accounts Managed |
Total Assets (millions) |
# of Accounts Managed with Performance-Based Advisory Fee |
Total Assets with Performance-Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
8 | $ | 1,778 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
2 | $ | 508 | 2 | $ | 508 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
Matthew McGraner
Type of Accounts | Total # of Accounts Managed |
Total Assets (millions) |
# of Accounts Managed with Performance-Based Advisory Fee |
Total Assets with Performance-Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Other Pooled Investment Vehicles: |
2 | $ | 508 | 2 | $ | 508 | ||||||||||
Other Accounts: |
0 | $ | 0 | 0 | $ | 0 |
Potential Conflicts of Interests
NexPoint Advisors, L.P. (“NexPoint” or the “Adviser”) and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other parties and manage other accounts and private investment vehicles similar to the Registrant. In connection with such other investment management activities, the Adviser and/or its general partner, limited partners, officers, affiliates and employees may decide to invest the funds of one or more other accounts or recommend the investment of funds by other parties, rather than the Registrant’s monies, in a particular security or strategy. In addition, the Adviser and such other persons will determine the allocation of funds from the Registrant and such other accounts to investment strategies and techniques on whatever basis they consider appropriate or desirable in their sole and absolute discretion.
The Adviser has built a professional working environment, a firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. The Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, the Adviser furnishes advisory services to numerous clients in addition to the Registrant, and the Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts that are hedge funds or have performance or higher fees paid to the Adviser or in which portfolio managers have a personal interest in the receipt of such fees) that may be the same as or different from those made to the Registrant. In addition, the Adviser, its affiliates and any of their partners, directors, officers, stockholders or employees may or may not have an interest in the securities whose purchase and sale the Adviser recommends to the Registrant. Actions with respect to securities of the same kind may be the same as or different from the action that the Adviser, or any of its affiliates, or any of their partners, directors, officers, stockholders or employees or any member of their
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families may take with respect to the same securities. Moreover, the Adviser may refrain from rendering any advice or services concerning securities of companies of which any of the Adviser’s (or its affiliates’) partners, directors, officers or employees are directors or officers, or companies as to which the Adviser or any of its affiliates or partners, directors, officers and employees of any of them has any substantial economic interest or possesses material non-public information. In addition to its various policies and procedures designed to address these issues, the Adviser includes disclosure regarding these matters to its clients in both its Form ADV and investment advisory agreements.
The Adviser, its affiliates or their partners, directors, officers and employees similarly serve or may serve other entities that operate in the same or related lines of business or of investment funds managed by affiliates of the Adviser. Accordingly, these individuals may have obligations to investors in those entities or funds or to other clients, the fulfillment of which might not be in the best interests of the Registrant. As a result, the Adviser will face conflicts in the allocation of investment opportunities to the Fund and other funds and clients. In order to enable such affiliates to fulfill their fiduciary duties to each of the clients for which they have responsibility, the Adviser will endeavor to allocate investment opportunities in a fair and equitable manner which may, subject to applicable regulatory constraints, involve pro rata co-investment by the Registrant and such other clients or may involve a rotation of opportunities among the Registrant and such other clients.
The Adviser and its affiliates have both subjective and objective procedures and policies in place designed to manage potential conflicts of interest involving clients so that, for example, investment opportunities are allocated in a fair and equitable manner among the Registrant and such other clients. An investment opportunity that is suitable for multiple clients of the Adviser and its affiliates may not be capable of being shared among some or all of such clients due to the limited scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940 Act. There can be no assurance that the Adviser’s or its affiliates’ efforts to allocate any particular investment opportunity fairly among all clients for whom such opportunity is appropriate will result in an allocation of all or part of such opportunity to the Registrant. Not all conflicts of interest can be expected to be resolved in favor of the Registrant.
(a)(3) Compensation Structure of Portfolio Manager(s) or Management Team Members
NexPoint’s financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors, including the relative performance of a portfolio manager’s underlying account, the combined performance of the portfolio managers’ underlying accounts, and the relative performance of the portfolio managers’ underlying accounts measured against other employees. The principal components of compensation include a base salary, a discretionary bonus, various retirement benefits and one or more of the incentive compensation programs established by NexPoint, such as its “Short-Term Incentive Plan” and its “Long-Term Incentive Plan,” described below.
Base compensation. Generally, portfolio managers receive base compensation based on their seniority and/or their position with NexPoint, which may include the amount of assets supervised and other management roles within NexPoint. Base compensation is determined by taking into account current industry norms and market data to ensure that NexPoint pays a competitive base compensation.
Discretionary compensation. In addition to base compensation, portfolio managers may receive discretionary compensation, which can be a substantial portion of total compensation. Discretionary compensation can include a discretionary cash bonus paid to recognize specific business contributions and to ensure that the total level of compensation is competitive with the market, as well as participation in incentive plans, including one or more of the following:
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Short-Term Incentive Plan. The purpose of this plan is to attract and retain the highest quality employees for positions of substantial responsibility, and to provide additional incentives to a select group of management or highly-compensated employees of NexPoint in order to promote the success of NexPoint.
Long Term Incentive Plan. The purpose of this plan is to create positive morale and teamwork, to attract and retain key talent, and to encourage the achievement of common goals. This plan seeks to reward participating employees based on the increased value of NexPoint through the use of Long-Term Incentive Units.
Because each person’s compensation is based on his or her individual performance, NexPoint does not have a typical percentage split among base salary, bonus and other compensation. Senior portfolio managers who perform additional management functions may receive additional compensation in these other capacities. Compensation is structured such that key professionals benefit from remaining with NexPoint.
(a)(4) Disclosure of Securities Ownership
The following table sets forth the dollar range of equity securities beneficially owned by the portfolio managers in the Registrant as of December 31, 2016.
Name of Portfolio Managers |
Dollar Ranges of Equity Securities Beneficially Owned by Portfolio Managers | |
James Dondero | Over $1,000,000 | |
Matthew McGraner | $500,000-$1,000,000 |
(b) | Not applicable. |
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders may recommend nominees to the Registrant’s Board.
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Item 11. Controls and Procedures.
(a) | The Registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act (17 CFR 270.30a-3 (c)) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the Registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
Item 12. Exhibits.
(a)(1) | Code of ethics, or amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. |
(a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
(a)(3) | Not applicable. |
(b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEXPOINT REAL ESTATE STRATEGIES FUND
By (Signature and Title): | /s/ James Dondero | |
James Dondero | ||
President and Principal Executive Officer |
Date: March 8, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By (Signature and Title): | /s/ James Dondero | |
James Dondero | ||
President and Principal Executive Officer |
Date: March 8, 2017
By (Signature and Title): | /s/ Brian Mitts | |
Brian Mitts | ||
Vice President, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer |
Date: March 8, 2017
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