N-CSR 1 d331557dncsr.htm FORM N-CSR Form N-CSR
Table of Contents

 

 

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

 

 

 


Table of Contents

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


Table of Contents

LOGO

 

NexPoint Real Estate Strategies Fund

 

 

 

Annual Report

December 31, 2016

 

 


Table of Contents

NexPoint Real Estate Strategies Fund

 

TABLE OF CONTENTS

 

Portfolio Manager Commentary

     1  

Fund Profile

     3  

Financial Statements

     4  

Investment Portfolio

     5  

Statement of Assets and Liabilities

     6  

Statement of Operations

     8  

Statement of Changes in Net Assets

     9  

Statement of Cash Flows

     11  

Financial Highlights

     12  

Notes to Financial Statements

     15  

Report of Independent Registered Public Accounting Firm

     24  

Additional Information

     25  

Important Information About This Report

     33  

Economic and market conditions change frequently.

There is no assurance that the trends described in this report will continue or commence.

 

Privacy Policy

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.

Collection of Information. We may collect nonpublic personal information about you from the following sources:

 

   

Account applications and other forms, which may include your name, address and social security number, written and electronic correspondence and telephone contacts;

   

Web site information, including any information captured through the use of “cookies”; and

   

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.


Table of Contents

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


Table of Contents

PORTFOLIO MANAGER COMMENTARY (unaudited)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

 

 

LOGO

 

    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


Table of Contents

FUND PROFILE (Unaudited)

 

 

 

  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.

 

Industry Classifications as of 12/31/2016 (%)(1)  

Real Estate

       96.3  

Other Investments and Assets & Liabilities(2)

       3.7  
Real Estate Investments (Debt vs. Equity) as of
12/31/2016 (%)
(1)
 

Public Equities

       32.2  

Private Equities

        

Public Debt & Preferred Stock

       22.5  

Private Debt(4)

       41.6  

Other Investments and Assets & Liabilities(2)

       3.7  
 

 

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


Table of Contents

FINANCIAL STATEMENTS

 

 

 

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


Table of Contents

INVESTMENT PORTFOLIO

 

 

 

As of December 31, 2016   NexPoint Real Estate Strategies Fund

 

    Principal Amount ($)    

 

Amortized

    Cost ($) (a)    

   

    Value ($)    

 
 

U.S. Senior Loans (b) - 26.8%

   
  REAL ESTATE (c) - 26.8%    
  1,950,000    

RCP Keystone Hotel LLC 2nd Lien Term Loan
14.50%, 11/15/2019

    1,931,186       1,950,000  
   

 

 

   

 

 

 
 

Total U.S. Senior Loans

    1,931,186       1,950,000  
   

 

 

   

 

 

 
 

Corporate Bonds & Notes - 8.0%

   
  REAL ESTATE - 8.0%    
  300,000    

CoreCivic, Inc.
4.63%, 05/01/2023

    275,622       297,000  
  300,000    

GEO Group, Inc. (The)
5.13%, 04/01/2023

    275,580       289,500  
   

 

 

   

 

 

 
      551,202       586,500  
   

 

 

   

 

 

 
 

Total Corporate Bonds & Notes

    551,202       586,500  
   

 

 

   

 

 

 

    Shares    

           
 

Common Stocks - 47.0%

   
  REAL ESTATE - 47.0%    
  8,642    

Blackstone Mortgage Trust, Inc., Class A, REIT

    250,105       259,865  
  15,900    

Brookdale Senior Living, Inc. (d)

    197,749       197,478  
  12,325    

CBL & Associates Properties, Inc., REIT

    150,858       141,738  
  4,870    

Century Communities, Inc. (d)

    100,468       102,270  
  3,703    

CubeSmart, REIT

    100,370       99,129  
  36,909    

Independence Realty Trust, Inc., REIT

    331,561       329,228  
  12,300    

Kennedy Wilson Europe Real Estate PLC

    150,381       145,754  
  3,372    

Life Storage, Inc., REIT

    304,224       287,497  
  9,737    

Monogram Residential Trust, Inc., REIT

    102,965       105,354  
  15,400    

NexPoint Residential Trust, Inc., REIT(e)

    300,788       344,036  
  1,012,750    

NRESF REIT SUB LLC(e)

    1,010,244       1,077,161  
  98,040    

RAIT Financial Trust, REIT

    302,944       329,414  
   

 

 

   

 

 

 
      3,302,657       3,418,924  
   

 

 

   

 

 

 
 

Total Common
Stocks

    3,302,657       3,418,924  
   

 

 

   

 

 

 

    Shares    

 

Amortized

    Cost ($) (a)    

   

    Value ($)    

 
 

Preferred Stocks - 14.5%

   
  REAL ESTATE - 14.5%    
  4,556    

Resource Capital Corp., REIT 8.25%

    99,968       102,282  
  4,500    

Resource Capital Corp., REIT 8.63%

    100,307       103,500  
  14,550    

RAIT Financial Trust, REIT, Series A 7.75%

    298,592       292,601  
  13,500    

RAIT Financial Trust, REIT, Series B 8.38%

    297,396       287,010  
  12,039    

RAIT Financial Trust, REIT, Series C 8.88%

    277,940       273,646  
   

 

 

   

 

 

 
      1,074,203       1,059,039  
   

 

 

   

 

 

 
 

Total Preferred Stocks

    1,074,203       1,059,039  
   

 

 

   

 

 

 
 

Cash Equivalents - 24.2%

   
  1,758,690    

State Street Institutional U.S. Government Money Market Fund, Premier Class

    1,758,690       1,758,690  
   

 

 

   

 

 

 
 

Total Cash Equivalents

    1,758,690       1,758,690  
   

 

 

   

 

 

 
 

Total Investments - 120.5%

    8,617,938       8,773,153  
   

 

 

   

 

 

 
 

Other Assets & Liabilities,
Net - (20.5)%

      (1,492,563
     

 

 

 
 

Net Assets - 100.0%

      7,280,590  
     

 

 

 

 

(a) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
(b) Fixed rate senior loan.
(c) Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate value of $3,027,161, or 41.6% of net assets, were fair valued under the Fund’s valuation procedures as of December 31, 2016.
(d) Non-income producing security.
(e) Affiliated issuer. Assets with a total aggregate market value of $1,421,197, or 19.5% of net assets, were affiliated with the Fund as of December 31, 2016.

 

Glossary:
PLC   Public Limited Company
REIT   Real Estate Investment Trust

 

 

 

See accompanying Notes to Financial Statements.       5


Table of Contents

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.


Table of Contents

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


Table of Contents

STATEMENT OF OPERATIONS

 

 

 

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.


Table of Contents

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


Table of Contents

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.


Table of Contents

STATEMENT OF CASH FLOWS

 

 

 

  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


Table of Contents

FINANCIAL HIGHLIGHTS

 

 

 

  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.


Table of Contents

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


Table of Contents

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.


Table of Contents

NOTES TO FINANCIAL STATEMENTS

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

Note 1. Organization

NexPoint Real Estate Strategies Fund (the “Fund”) is a Delaware statutory trust and is registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, closed-end management investment company that operates as an interval fund. The Fund commenced operations on July 1, 2016. This report includes information for the period ended December 31, 2016. The Fund pursues its investment objective by investing, under normal circumstances, at least 80% of its assets (defined as net assets plus the amount of any borrowing for investment purposes) in real estate and real estate related securities. NexPoint Advisors, L.P. (“NexPoint” or “the Investment Adviser”), an affiliate of Highland Capital Management, L.P. (“Highland”), is the investment adviser to the Fund.

Note 2. Significant Accounting Policies

The following summarizes the significant accounting policies consistently followed by the Fund in the preparation of its financial statements.

Use of Estimates

The Fund is an investment company that applies the accounting and reporting guidance of Accounting Standards Codification Topic 946 applicable to investment companies. The Fund’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require the Investment Adviser to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Fund Valuation

The net asset value (“NAV”) of the Fund’s common shares is calculated daily on each day that the NYSE is open for business as of the close of the regular trading session on the NYSE, usually 4:00 PM, Eastern Time. The NAV is calculated by dividing the value of the Fund’s net assets attributable to common shares by the numbers of common shares outstanding.

Valuation of Investments

In computing the Fund’s net assets attributable to its common shares, securities with readily available market quotations on the NYSE, National Association of Securities

Dealers Automated Quotation (“NASDAQ”), or other nationally recognized exchange, use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotations will be valued pursuant to policies adopted by the Fund’s Board of Trustees (the “Board”). Typically, such securities will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that the Investment Adviser has determined to have the capability to provide appropriate pricing services and have been approved by the Board.

Securities for which market quotations are not readily available, or for which the Fund has determined that the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of the Fund’s NAV), will be valued by the Fund at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including, among other things: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Fund’s NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates.

There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Fund. The NAV shown in the Fund’s financial statements may vary from the NAV published by the Fund as of its period end because portfolio securities transactions are accounted for on the trade date

 

 

Annual Report       15


Table of Contents

NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

(rather than the day following the trade date) for financial statement purposes.

Fair Value Measurements

The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:

 

Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;

 

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and

 

Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The Investment Adviser has established policies and procedures, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser and its affiliates. The Pricing Committee meets monthly to review the proposed valuations for investments and

financial instruments and is responsible for evaluating the overall fairness and consistent application of established policies.

As of December 31, 2016, the Fund’s investments consisted of REITs and other real estate investments including senior loans, corporate bonds and notes, common stocks, preferred stocks and cash equivalents. The fair value of the Fund’s bonds are generally based on quotes received from brokers or independent pricing services. Bonds with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Bonds that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

The fair value of the Fund’s common and preferred stocks that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The Fund’s real estate investments include equity interests in limited liability companies and equity issued by Real Estate Investment Trusts (“REITs”) that invest in commercial real estate. The fair value of real estate investments that are not actively traded on national exchanges are based on internal models developed by the Investment Adviser. The significant inputs to the models include cash flow projections for the underlying properties, capitalization rates and appraisals performed by independent valuation firms. These inputs are not readily observable, and the Fund has classified the investments as Level 3 assets.

At the end of each calendar quarter, the Investment Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Investment Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.

 

 

16       Annual Report


Table of Contents

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
December 31, 2016

    

Level 1
Quoted

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
December 31,
2016

   

Change in
Unrealized
Gain/(Loss)
on Level 3

securities still
held at
December 31,
2016

 

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  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $     $     $     $ 686   $     $ 83,225     $ 2,943,250     $     $ 3,027,161     $ 83,225  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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
12/31/2016

    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


Table of Contents

NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

Security Transactions

Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of the specific identification method for both financial statement and U.S. federal income tax purposes taking into account any foreign taxes withheld.

Income Recognition

Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis.

Accretion of discount and amortization of premium on taxable bonds and loans are computed to the call or maturity date, whichever is shorter, using the effective yield method. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates.

U.S. Federal Income Tax Status

The Fund is treated as a separate taxpayer for U.S. federal income tax purposes. The Fund intends to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and generally will distribute substantially all of its taxable income and capital gains, if any, for the tax year, and as such will not be subject to U.S. federal income taxes on any income or capital gains so distributed. In addition, the Fund intends to distribute, in each calendar year, all of its net investment income, capital gains and certain other amounts, if any, such that the Fund should not be subject to U.S. federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded.

The Investment Adviser has analyzed the Fund’s tax positions taken on U.S. federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for U.S. federal income tax is required in the Fund’s financial statements. The Fund’s U.S. federal and state income and U.S. federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. Furthermore, the Investment Adviser of the Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.

Distributions to Shareholders

The Fund plans to pay distributions from net investment income monthly and net realized capital gains annually to common shareholders. To permit the Fund to maintain more stable monthly distributions and annual distributions, the Fund may from time to time distribute less than the entire amount of income and gains earned in the relevant month or year, respectively. The undistributed income and gains would be available to supplement future distributions. In certain years, this practice may result in the Fund distributing, during a particular taxable year, amounts in excess of the amount of income and gains earned therein. Such distributions would result in a portion of each distribution occurring in that year to be treated as a return of capital to shareholders. Shareholders of the Fund will automatically have all distributions reinvested in Common Shares of the Fund issued by the Fund in accordance with the Fund’s Dividend Reinvestment Plan (the “Plan”) unless an election is made to receive cash. The number of newly issued Common Shares to be credited to each participant’s account will be determined by dividing the dollar amount of the dividend by the lesser of (i) the NAV per Common Share determined on the Declaration Date and (ii) the market price per Common Share as of the close of regular trading on the NYSE on the Declaration Date. Participants in the Plan requesting a sale of securities through the plan agent of the Plan are subject to a sales fee and a brokerage commission.

Organization and Offering Costs

Organization costs include the cost of incorporating, such as the cost of legal services and other fees pertaining to the Fund’s organization, and are expensed as incurred. Offering costs include legal fees pertaining to the preparation of the Fund’s initial registration statement and other costs pertaining to the public offering of the Fund’s shares of common stock. Offering costs are accounted for as a deferred charge until operations begin and thereafter are amortized to expense over 12 months on a straight-line basis. Both organization costs and offering costs are subject to an expense limitation agreement as described further in Note 5.

Cash & Cash Equivalents

The Fund considers liquid assets deposited with a bank and certain short-term debt instruments of sufficient credit quality with original maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is

 

 

18       Annual Report


Table of Contents

NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

determined by converting to U.S. dollars on the date of the Statement of Assets and Liabilities.

Foreign Currency

Accounting records of the Fund are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes, are recorded as unrealized foreign currency gains/(losses). Realized gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment, as applicable.

Note 3. U.S. Federal Income Tax Information

The character of income and capital gains to be distributed is determined in accordance with the Code, U.S. Treasury regulations, and other applicable authority, which may differ from U.S. GAAP. These differences include (but are not limited to) investments organized as partnerships for tax purposes, foreign taxes, investments in futures, losses deferred to off-setting positions, tax treatment of organizational start-up costs, losses deferred due to wash sale transactions, dividends deemed paid upon shareholder redemption of Fund shares and tax attributes from Fund reorganizations. Reclassifications are made to the Fund’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under the Code, U.S. Treasury regulations, and other applicable authority. These reclassifications have no impact on the NAV of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments.

For the period ended December 31, 2016, permanent differences chiefly resulting from foreign currency gains and losses, and distributions from real estate investment trusts, were identified and reclassified among the components of the Fund’s net assets as follows:

 

Undistributed Net
Investment  Income
    Accumulated Net
Realized  Gain/(Loss)
    Paid-in-Capital  
$ 20,607     $ (20,606   $ (1

 

For the period ended December 31, 2016, the Fund’s most recent tax year end, components of distributable earnings on a tax basis are as follows:

 

Undistributed
Ordinary
Income
    Undistributed
Long-Term
Capital Gains
    Net Tax
Appreciation/
(Depreciation)
 
$ 28,480     $ 23,359     $ 150,068  

 

(1) Other Temporary Differences is comprised of deferred REIT income.

For the period ended December 31, 2016, the Fund did not have capital loss carryovers.

The tax character of distributions paid during the period ended December 31, 2016 (unless otherwise indicated) is as follows:

 

Distributions Paid From:   2016  

Ordinary Income(1)

  $ 73,746  

 

(1) For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions.

The above mentioned distributions are reflected on a tax basis. The tax basis distributions are less than the book basis distributions reflected on the Statement of Changes in Net Assets.

Unrealized appreciation and depreciation at December 31, 2016, based on cost of investments and cash equivalent for U.S. federal income tax purposes is:

 

Gross
Appreciation
  Gross
Depreciation
    Net
Appreciation/
(Depreciation
(1)
    Cost  
$205,060   $ (54,992   $ 150,068     $ 8,623,085  

 

(1) Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to wash sales, foreign currency gains and losses and non-taxable dividends.

Qualified Late Year Ordinary and Post October Losses

Under current laws, certain capital losses realized after October 31 may be deferred (and certain ordinary losses after January 1st may be deferred) and treated as occurring on the first day of the following taxable year.

Note 4. Asset Coverage

The Fund is required to maintain 300% asset coverage with respect to amounts borrowed. Asset coverage is calculated by subtracting the Fund’s total liabilities, not including any amount representing bank loans and senior securities, from the Fund’s total assets and dividing the result by the principal amount of the borrowings outstanding. As of December 31, 2016, the Fund was in compliance with asset coverage requirements.

 

 

Annual Report       19


Table of Contents

NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

Note 5. Investment Advisory, Service and Distribution, Trustee and Other Fees

Investment Advisory Fee

The Investment Adviser to the Fund receives an annual fee, paid monthly, in an amount equal to 1.25% of the Fund’s Daily Gross Assets. The Fund’s “Daily Gross Assets” is an amount equal to the total assets of the Fund, including assets resulting from leverage, less any liabilities not representing leverage.

Service and Distribution Fees

The Distributor serves as the principal underwriter and distributor of the Fund’s shares. The Distributor receives the front-end sales charge imposed on the sale of Class A Shares and the contingent deferred sales charge (“CDSC”) imposed on certain redemptions of Class A and Class C Shares. The Fund has adopted a “Shareholder Servicing Plan and Agreement” (the “Plan”) under which the Fund may compensate financial industry professionals for providing ongoing services in respect of clients with whom they have distributed shares of the Fund. The Plan operates in a manner consistent with Rule 12b-1 under the 1940 Act, which regulates the manner in which an open-end investment company may directly or indirectly bear the expenses of distributing its shares. Although the Fund is not an open-end investment company, it has undertaken to comply with the terms of Rule 12b-1 as a condition of an exemptive order under the 1940 Act which permits it to have a multi-class structure, CDSCs and distribution and shareholder servicing fees. Under the Plan, the Fund may incur expenses on an annual basis equal to 0.25% of the average net assets of the Class A and Class C Shares.

Class C shares will pay to the Distributor a distribution fee that will accrue at an annual rate equal to 0.75% of the Fund’s average daily net assets attributable to Class C shares and will be payable on a quarterly basis.

Expense Limitation Agreement

The Investment Adviser and the Fund have entered into an expense limitation and reimbursement agreement (the “Expense Limitation Agreement”) under which the Investment Adviser has agreed contractually to waive its fees and to pay or absorb the ordinary operating expenses of the Fund (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 (the “Expense Limitation”). “Daily Gross Assets” is defined in the Expense Limitation Agreement as an amount equal to total assets, less any

liabilities, but excluding liabilities evidencing leverage. If the Fund incurs expenses excluded from the Expense Limitation Agreement, the Fund’s expense ratio would be higher and could exceed the Expense Limitation. In consideration of the Investment Adviser’s agreement to limit the Fund’s expenses, the Fund has agreed to repay the Investment Adviser in the amount of any fees waived and Fund expenses paid or absorbed, subject to the limitations that: (1) the reimbursement for fees and expenses will be made only if payable not more than three years from the date of the reimbursement; and (2) the reimbursement may not be made if it would cause the Expense Limitation as of the time of waiver to be exceeded. The Expense Limitation Agreement will remain in effect at least until one year after the effective date of this registration statement, unless and until the Board approves its modification or termination. The Expense Limitation Agreement may be terminated only by the Board. After the expiration of the Expense Limitation Agreement, the agreement may be renewed at the discretion of the Investment Adviser and the Board. On December 31, 2016, the amount subject to possible future recoupment under the Fund’s expense limitation was $255,057, and expires during the fiscal year ended December 31, 2019.

Fees Paid to Officers and Trustees

Each Trustee who is not an “interested person” of the Fund as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex overseen by such Trustee based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser or its affiliated advisers and NexPoint Capital Inc. a closed-end management investment company that has elected to be treated as a business development company under the 1940 Act as of the date of this report. Although the Fund believes that Mr. Powell is technically no longer an “interested person” of the Fund, in light of his previous employment with certain affiliates of the Investment Adviser as well as his ongoing provision of consulting services to affiliates of the Investment Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an “interested person” of the Fund. Therefore, the Fund intends to treat Mr. Powell as an “interested person” of the Fund for all purposes other than compensation (Mr. Powell will be compensated at the same rate as the Independent Trustees) from December 16, 2015 until December 4, 2017 (the second anniversary of his resignation).

The Fund pays no compensation to its officers, all of whom are employees of the Investment Adviser or one of its affiliates.

 

 

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NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

Receivable from Investment Adviser

The balance shown as “Receivable from Investment Adviser” on the Statement of Assets and Liabilities represents amounts owed to the Fund as a result of amounts waived or reimbursed under the Expense Limitation Agreement.

Other Related Party Transactions

On December 29, 2016, the Fund entered into a short-term promissory note (the “Promissory Note”) with Highland for $1,500,000. The Promissory Note does not bear interest and is due and payable by the Fund upon demand, with prepayment allowed.

Note 6. Disclosure of Significant Risks and Contingencies

The primary risks of investing in the Fund are described below in alphabetical order:

Concentration in Real Estate Securities Risk

The Fund may focus its investments in instruments of only a few companies. The concentration of the Fund’s portfolio in any one obligor would subject the Fund to a greater degree of risk with respect to defaults by such obligor, and the concentration of the portfolio in any one industry would subject the Fund to a greater degree of risk with respect to economic downturns relating to such industry.

Debt Securities Risk

When the Fund invests in debt securities, the value of the investment in the Fund will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of debt securities. In general, the market price of debt securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities. Other risk factors include credit risk (the debtor may default) and prepayment risk (the debtor may pay its obligation early, reducing the amount of interest payments). These risks could affect the value of a particular investment, possibly causing the Fund’s share price and total return to be reduced or fluctuate more than other types of investments. This kind of market risk is generally greater for funds investing in debt securities with longer maturities.

Leverage Risk

The Fund may use leverage in its investment program, including the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk of loss. To the

extent the Fund purchases securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used. If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed funds, the Fund’s use of leverage would result in a lower rate of return than if the Fund were not leveraged.

Liquidity Risk

There is currently no secondary market for the shares and the Fund expects that no secondary market will develop. Limited liquidity is provided to shareholders only through the Fund’s quarterly repurchase offers for no less than 5% of the shares outstanding at NAV. There is no guarantee that shareholders will be able to sell all of the shares they desire in a quarterly repurchase offer.

REIT Risk

Real estate investments may be affected by changes in the real estate markets generally as well as changes in the values of the properties owned by the REIT or securing the mortgages owned by the REIT. REITs are dependent upon management skill and are not diversified. REITs are also subject to heavy cash flow dependency, defaults by borrowers, self-liquidation, and the possibility of failing to qualify for special tax treatment under the Code, and to maintain an exemption under the 1940 Act. Finally, certain REITs may be self-liquidating at the end of a specified term, and run the risk of liquidating at an economically inopportune time.

Note 7. Investment Transactions Purchases & Sales of Securities

The cost of purchases and the proceeds from sales of investments, excluding short-term obligations, for the period ended December 31, 2016, were as follows:

 

Other Securities  
Purchases     Sales  
$ 7,458,949     $ 639,464  
 

 

Annual Report       21


Table of Contents

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     $  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Majority Owned, Not Consolidated

             

NRESF REIT SUB, LLC (Common Stocks)

          1,012,750             1,077,161             1,012,750        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

          1,028,150     $     $ 1,421,197     $ 6,560     $ 1,313,538     $  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Commenced Operations.

 

Note 9. Recent Accounting Pronouncements

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The amendments in this update makes improvements to the requirements for accounting for equity investments and simplifying the impairment assessment of equity investments. For public entities this update will be effective for fiscal years beginning after December 15, 2017. For all other entities, this update will be effective for fiscal years beginning after December 31, 2018, and for interim periods within fiscal years beginning after December 15, 2019. The Investment Adviser is currently evaluating the impact of this new guidance on the Fund’s financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments in this update clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. For public entities this update will be effective for interim periods and fiscal years beginning after December 15, 2016. For all other entities, this update will be effective for fiscal years beginning after December 31, 2017, and for interim periods within fiscal years beginning after December 15, 2018. The Investment Adviser is currently evaluating the impact of this new guidance on the Fund’s financial statements.

In August, 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments. The amendments in this update address eight specific issues, where there has been diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. For public entities this update will be effective for fiscal

years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Investment Adviser is currently evaluating the impact of this new guidance on the Fund’s financial statements.

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. The Investment Adviser is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on the Fund’s financial statements and related disclosures.

In November, 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require the statement of cash flows explain the change during the period in the total of cash, cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For public entities this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Investment Adviser is currently evaluating the impact of this new guidance on the Fund’s financial statements.

 

 

22       Annual Report


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NOTES TO FINANCIAL STATEMENTS (concluded)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

In December 2016, the FASB issued Accounting Standards Update 2016-19, Technical Corrections and Improvements. The amendments in this update include an amendment to FASB ASC Topic 820, Fair Value Measurement and Disclosures to clarify the difference between a valuation approach and a valuation technique. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. For public entities, this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Investment Adviser is currently evaluating the impact of this new guidance on the Fund’s financial statements.

Note 10. Subsequent Events

The Investment Adviser has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued. Other than the matter below, no such subsequent events were identified.

The Promissory Note was paid off in full on January 3, 2017.

 

 

Annual Report       23


Table of Contents

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.

LOGO

Boston, Massachusetts

February 27, 2017

 

24       Annual Report


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ADDITIONAL INFORMATION (unaudited)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

Additional Portfolio Information

The Investment Adviser and its affiliates manage other accounts, including registered and private funds and individual accounts. Although investment decisions for the Fund are made independently from those of such other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Fund, including investments in different levels of the capital structure of a company, such as equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital structure. The Investment 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, this may create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When the Fund and one or more of such other accounts is prepared to invest in, or desires to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to be equitable to the Fund and such other accounts. The Investment Adviser also may aggregate orders to purchase and sell securities for the Fund and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all accounts including the Fund, in some cases these activities may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund.

Approval of NexPoint Real Estate Strategies Fund Investment Advisory Agreement

At a meeting held on February 18-19, 2016 the Board of Trustees (the “Board”) gave preliminary consideration to information bearing on the approval, for an initial two-year period, of the advisory agreement between NexPoint Real Estate Strategies Fund (the “Fund”) and NexPoint Advisors, L.P. (the “Investment Adviser”) (the “Advisory Agreement”). One of the purposes of this meeting was to ensure that the Trustees had the opportunity to consider matters they deemed relevant in evaluating the Advisory Agreement, and to request any additional information they considered reasonably necessary for their deliberations.

At a meeting held on March 22, 2016, the Board, including the Board members who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended) of the Fund (collectively, the “Independent

Trustees”), again considered, and approved the Advisory Agreement for an initial two-year period.

As part of its review process, the Board requested, through its independent legal counsel, and received from the Investment Adviser, various information and written materials in connection with the meetings of the Board held on February 18-19, 2016 and March 22, 2016, including: (1) information regarding the financial soundness of the Investment Adviser and on the anticipated profitability of the Advisory Agreement to the Investment Adviser; (2) information on the advisory and compliance personnel of the Investment Adviser, including compensation arrangements for portfolio managers; (3) information on internal compliance procedures of the Investment Adviser; (4) comparative information showing how the Fund’s proposed fees and anticipated operating expenses compare to those of other registered investment companies and comparable funds that follow investment strategies similar to those of the Fund; (5) information regarding the investment performance of other accounts managed by the Investment Adviser that follow investment strategies similar to the Fund; and (6) information on any legal proceedings or regulatory audits or investigations affecting the Investment Adviser or its respective affiliates. The Trustees also received a memorandum from independent counsel describing the Trustees’ responsibilities in considering the Advisory Agreement. The Trustees reviewed various factors that were discussed in independent counsel’s legal memoranda, the detailed information provided by the Investment Adviser and other relevant information and factors. The Trustees’ conclusions as to the approval of the Advisory Agreement were based on a comprehensive consideration of all information provided to the Trustees without any single factor being dispositive in and of itself. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors.

The nature, extent, and quality of the services to be provided by the Investment Adviser — The Board considered the portfolio management services to be provided by the Investment Adviser under the Advisory Agreement and the activities related to portfolio management, including use of technology, research capabilities and investment management staff. The Board discussed the relevant experience and qualifications of the personnel who would provide advisory services, including the background and experience of the members of the Fund’s portfolio management team. The Trustees reviewed the management structure, assets under management and investment philosophies and processes of the Investment Adviser. The

 

 

Annual Report       25


Table of Contents

ADDITIONAL INFORMATION (unaudited) (continued)

 

 

 

December 31, 2016   NexPoint Real Estate Strategies Fund

 

Trustees also reviewed and discussed information regarding the Investment Adviser’s compliance policies, procedures and personnel, including compensation arrangements. The Board took into account the Investment Adviser’s risk assessment, monitoring process and regulatory history. The Board concluded that the Investment Adviser had the quality and depth of personnel and investment methods essential to performing its duties under the Advisory Agreement, and that the nature and the quality of such advisory services supported the approval of the Advisory Agreement.

The Investment Adviser’s historical performance — As the Fund did not yet have a performance record, the Board considered the historical performance of the Investment Adviser in managing other funds subject to the Board’s oversight and reflected on previous discussions regarding matters bearing on the Investment Adviser’s performance at their meetings throughout the year. The Board also considered the historical performance of a peer group of funds based on the Fund’s strategy. The Board also considered the portfolio management team’s experience managing similar strategies and the portfolio management team’s performance in managing those strategies.

The costs of the services to be provided by the Investment Adviser and the profits to be realized by the Investment Adviser and its affiliates from the relationship with the Fund — The Board gave consideration to the advisory fee to be paid by the Fund under the Advisory Agreement and considered the financial condition of the Investment Adviser. The Independent Trustees also examined the advisory fees to be paid by the Fund in light of fees paid to other investment managers by comparable funds, as well as other fees charged to comparable funds. The Board considered the Fund’s proposed total expenses as compared to a peer group of funds. The Board also considered the so-called “fall-out benefits” to the Investment Adviser with respect to the Fund, such as the reputational value of serving as the investment adviser to the Fund, potential fees paid to the Investment Adviser’s affiliates by the Fund or portfolio companies for services provided and the benefits of research made available to the Investment Adviser by reason of brokerage commissions, if any, generated by the Fund’s securities transactions.

The Board considered the projected profitability to the Investment Adviser. The Board also considered that the Investment Adviser would enter into an expense limitation agreement with the Fund, pursuant to which the Investment Adviser would agree to waive a portion of its advisory fee and/or reimburse certain expenses as a means of limiting the Fund’s total annual operating expenses. The Board also took into consideration the amounts to be waived and/or reimbursed.

After such review, the Trustees determined that the anticipated profitability to the Investment Adviser of the Advisory Agreement was reasonable.

The extent to which economies of scale would be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of shareholders — The Board considered the potential effect that economies of scale might have in the future on the Fund’s expense ratio and the total advisory fee that would be paid under the Advisory Agreement. The Board and the Investment Adviser determined to continue to review ways, and the extent to which, economies of scale might be shared between the Investment Adviser on the one hand and shareholders of the Fund on the other.

Conclusion — Following a further discussion of the factors above and the merits of the Advisory Agreement and its various provisions, it was noted that in considering the approval of the Advisory Agreement, no single factor was determinative to the decision of the Board. Rather, after weighing all of the factors and reasons discussed above, the Trustees, including the Independent Trustees, unanimously agreed that the Advisory Agreement, including the advisory fee to be paid to the Investment Adviser, is fair and reasonable to the Fund in light of the services that the Investment Adviser proposes to provide, the expenses that it incurs and the reasonably foreseeable asset levels of the Fund.

 

 

26       Annual Report


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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
Occupation(s)

During the
Past Five Years

  Number  of
Portfolios in
Highland Fund
Complex
Overseen
by the Trustee(2)
  Other
Directorships/
Trusteeships
Held During the
Past Five Years
 

Experience,
Qualifications,

Attributes, Skills for
Board Membership

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


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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
Occupation(s)

During the
Past Five Years

  Number  of
Portfolios in
Highland Fund
Complex
Overseen
by the Trustee(2)
  Other
Directorships/
Trusteeships
Held During the
Past Five Years
 

Experience,
Qualifications,

Attributes, Skills for
Board Membership

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


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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
Occupation(s)

During the
Past Five Years

  Number  of
Portfolios in
Highland Fund
Complex
Overseen
by the Trustee(2)
  Other
Directorships/
Trusteeships
Held During the
Past Five Years
 

Experience,
Qualifications,

Attributes, Skills for
Board Membership

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


Table of Contents

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
Occupation(s)

During the
Past Five Years

  Number  of
Portfolios in
Highland Fund
Complex
Overseen
by the Trustee(2)
  Other
Directorships/
Trusteeships
Held During the
Past Five Years
 

Experience,
Qualifications,

Attributes, Skills for
Board Membership

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.

 

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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.

 

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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).

 

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IMPORTANT INFORMATION ABOUT THIS REPORT

 

 

 

Investment Adviser

NexPoint Advisors, L.P.

200 Crescent Court, Suite 700

Dallas, TX 75201

Transfer Agent

DST Systems, Inc.

210 W 10th, 8th Floor

Kansas City, MO 64105

Custodian

State Street Bank and Trust Company

One Lincoln Street

Boston, MA 02111

Independent Registered Public Accounting Firm

KPMG LLP

Two Financial Center

60 South Street

Boston, MA 02111

Fund Counsel

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199-3600

This report has been prepared for shareholders of NexPoint Real Estate Strategies Fund (the “Fund”). The Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-844-485-9167 to request that additional reports be sent to you.

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities, and the Fund’s proxy voting record for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-844-485-9167 and (ii) on the SEC’s website at http://www.sec.gov.

The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at http://www.sec.gov and also may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. Shareholders may also obtain the Form N-Q by visiting the Fund’s website at www.NexPointAdvisors.com.

As required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, the Fund’s principal executive officer and principal financial officer made quarterly certifications, included in filings with the SEC on Forms N-CSR and N-Q relating to, among other things, the Fund’s disclosure controls and procedures and internal controls over financial reporting, as applicable.

The Statement of Additional Information includes additional information about the Fund’s Trustees and is available upon request without charge by calling 1-844-485-9167.

 

 

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LOGO

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


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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.

 

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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.

 

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(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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