Company: NXDT
Filing Date: 2025-01-21
Form Type: 424B3
Source: 0001437749-25-001494
Chunk: 1767

Company: NEXPOINT DIVERSIFIED REAL ESTATE TRUST
Filing Date: 2025-01-21
Form: 424B3
Chunk 1767
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 based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. The NHT segment has an interest rate cap agreement related to the notes payable on the Park City and Bradenton properties. As of June 30, 2024, the interest rate cap agreements effectively cap one-month SOFR on $37.3 million of the NHT segment's floating rate mortgage and mezzanine indebtedness at a weighted average rate of 6.70%.

To comply with the provisions of ASC 820, Fair Value Measurement, the NHT segment incorporates credit valuation adjustments to appropriately reflect both the NHT segment’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the NHT segment’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the NHT segment and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to the NHT segment's derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. Additionally, in the case of interest rate caps, the NHT segment has no performance obligation, so no credit valuation adjustment is necessary. As a result, all of the NHT segment’s derivatives held as of June 30, 2024 were classified as Level 2 of the fair value hierarchy.

Changes in fair value of the interest rate caps are recorded directly as interest expense on the Consolidated Statement of Operations and Comprehensive Income. For the three and six months ended June 30, 2024, NHT recorded $0.1 million, and $0.1 million, respectively, in interest expense related to changes in the fair value of interest rate caps. The combined fair value of the interest rate caps is $0.8 million as of June 30, 2024, and is recorded as interest rate caps in the Consolidated Balance Sheets.

As of June 30, 2024, the NHT segment had the following outstanding interest rate caps:

| Type of Derivative |     | Hedged Financial Instrument |     | Notional |        |