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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Highland Opportunities and Income Fund | NYSE:HFRO | NYSE | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
0.20 | 3.12% | 6.61 | 6.66 | 6.46 | 6.46 | 271,819 | 01:00:00 |
Item 1. |
Reports to Stockholders. |
1 | ||||
4 | ||||
5 | ||||
6 | ||||
12 | ||||
13 | ||||
14 | ||||
15 | ||||
16 | ||||
18 | ||||
39 | ||||
40 | ||||
50 | ||||
54 |
• |
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. |
As of December 31, 2022 |
Highland Income Fund (NYSE: HFRO) |
Annual Report |
1 |
As of December 31, 2022 |
Highland Income Fund (NYSE: HFRO) |
2 |
Annual Report |
As of December 31, 2022 |
Highland Income Fund (NYSE: HFRO) |
Average Annual Total Returns |
||||||||||||
HFRO |
1 Year |
5 Year |
10 Year |
|||||||||
NAV | 3.39 | % | 4.99 | % | 5.13 | % | ||||||
Market Price | 1.70 | % | -0.25 | % | 2.73 | % |
Annual Report |
3 |
Highland Income Fund |
Quality Breakdown as of 12/31/2022(%) (1) |
||||
BBB |
0.59 | |||
BB |
2.73 | |||
B |
13.18 | |||
CCC |
7.03 | |||
NR |
76.47 |
Top 5 Sectors as of 12/31/2022(%) (1)(2)(3) |
||||
Real Estate |
69.7 | |||
Collateralized Loan Obligations |
11.0 | |||
Healthcare |
7.7 | |||
LLC Interest |
6.2 | |||
Information Technology |
5.5 |
Top 10 Holdings as of 12/31/2022(%) (1)(2)(3) |
||||
NFRO REIT SUB, LLC (Common Stocks) |
14.8 | |||
NFRO REIT SUB II, LLC (Common Stocks) |
12.9 | |||
NFRO SFR REIT, LLC (Common Stocks) |
7.5 | |||
NexPoint Real Estate Finance REIT (Common Stocks) |
7.3 | |||
NexPoint SFR Operating Partnership, LP, 05/24/27 (U.S. Senior Loans) |
6.7 | |||
EDS Legacy Partners 10.25%, 12/14/23 (U.S. Senior Loans) |
6.3 | |||
IQHQ, Inc. (Common Stocks) |
5.9 | |||
NEXLS LLC (LLC Interest) |
5.2 | |||
NHT Operating Partnership LLC Secured Promissory Note, 5.50%, 02/14/27 (U.S. Senior Loans) |
4.1 | |||
NexPoint Storage Partners, Inc. (Common Stocks) |
4.1 |
(1) |
Quality is calculated as a percentage of total credit instruments held by the portfolio. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not that of the Fund itself. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change, including daily. The ratings assigned by credit rating agencies are but one of the considerations that the Fund’s investment adviser incorporates into its credit analysis process, along with such other issuer specific factors as cash flows, capital structure and leverage ratios, ability to deleverage through free cash flow, quality of management, market positioning and access to capital, as well as such security-specific factors as the terms of the security (e.g., interest rate, and time to maturity) and the amount of any collateral. |
(2) |
Sectors and holdings are calculated as a percentage of total net assets. |
(3) |
Excludes the Fund’s investment in a cash equivalent. |
4 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Investment Portfolio |
The Investment Portfolio details all of the Fund’s holdings and its market 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 share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all of the Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and noninvestment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period. | |
Statement of Operations |
This statement reports income earned by the Fund and the expenses incurred 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. | |
Statements of Changes in Net Assets |
These statements detail how the Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting periods. The Statements of Changes in Net Assets also details changes in the number of 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 share was affected by the Fund’s operating results. The Financial Highlights also disclose the classes’ 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, certain of 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. |
Annual Report |
5 |
As of December 31, 2022 |
Highland Income Fund |
6 |
See Glossary on page 11 for abbreviations along with accompanying Notes to Financial Statements. |
As of December 31, 2022 |
Highland Income Fund |
Principal Amount ($) |
Value ($) |
|||||||
Collateralized Loan Obligations (continued) |
||||||||
3,000,000 | CIFC Funding, Series 2015-1A 0.00%, 1/22/2031 (g)(h)(i)(j) |
615,000 | ||||||
3,324,756 | CIFC Funding, Series 2014-4RA 0.00%, 1/17/2035 (g)(h)(i)(j) |
706,511 | ||||||
2,500,000 | CIFC Funding, Series 2014-1A 0.00%, 1/18/2031 (g)(h)(i) |
375,000 | ||||||
3,000,000 | Covenant Credit Partners CLO III, Series 2017-1A, Class F ICE LIBOR USD 3 Month + 7.950%, 12.03%, 10/15/2029 (g)(h) |
1,815,000 | ||||||
1,537,000 | Dryden 36 Senior Loan Fund, Series 2019-36A, Class ER2 ICE LIBOR USD 3 Month + 6.880%, 10.96%, 4/15/2029 (g)(h) |
1,335,038 | ||||||
4,000,000 | Eaton Vance CLO, Series 2019-1A, Class F ICE LIBOR USD 3 Month + 8.250%, 12.33%,4/15/2031 (g)(h) |
3,120,000 | ||||||
36,203,269 | FREMF Mortgage Trust, Series 2021- KF112, Class CS SOFR30A + 6.250%, 9.98%, 1/25/2031 (g)(h)(u) |
36,203,269 | ||||||
5,450,000 | Galaxy XXVI CLO, Series 2018-26A, Class F ICE LIBOR USD 3 Month + 8.000%, 12.66%, 11/22/2031 (g)(h) |
3,924,000 | ||||||
1,000,000 | GoldenTree Loan Management US CLO 3, Series 2018-3A, Class F ICE LIBOR USD 3 Month + 6.500%, 10.74%, 4/20/2030 (g)(h) |
751,250 | ||||||
2,500,000 | GoldenTree Loan Opportunities IX, Series 2018-9A, Class FR2 ICE LIBOR USD 3 Month + 7.640%, 12.05%, 10/29/2029 (g)(h) |
1,976,667 | ||||||
2,125,000 | ICG US CLO, Series 2022-1A, Class DJ TSFR3M + 5.730%, 7.84%, 7/20/2035 (g)(h) |
1,989,552 | ||||||
4,000,000 | Jay Park CLO, Ltd., Series 2018-1A, Class ER ICE LIBOR USD 3 Month + 7.350%, 11.59%, 10/20/2027 (g)(h) |
3,380,000 | ||||||
3,000,000 | KKR CLO 18, Series 2017-18, Class E ICE LIBOR USD 3 Month + 6.450%, 10.64%,7/18/2030 (g)(h) |
2,635,800 | ||||||
1,400,000 | Madison Park Funding XX, Series 2018-20A, Class ER ICE LIBOR USD 3 Month + 5.300%, 9.66%, 7/27/2030 (g)(h) |
1,166,760 | ||||||
2,350,000 | Madison Park Funding XXIV, Series 2019-24A, Class ER TSFR3M + 7.462%, 11.42%, 10/20/2029 (g)(h) |
2,179,860 | ||||||
2,000,000 | Madison Park Funding XXIX, Series 2018-29A, Class F ICE LIBOR USD 3 Month + 7.570%, 11.76%, 10/18/2030 (g)(h) |
1,613,000 | ||||||
1,000,000 | Madison Park Funding XXX, Series 2018-30A, Class F ICE LIBOR USD 3 Month + 6.850%, 10.93%, 4/15/2029 (g)(h) |
802,300 | ||||||
490,000 | Magnetite VII, Ltd., Series 2018-7A, Class ER2 ICE LIBOR USD 3 Month + 6.500%, 10.58%, 1/15/2028 (g)(h) |
406,700 |
See Glossary on page 11 for abbreviations along with accompanying Notes to Financial Statements. |
7 |
As of December 31, 2022 |
Highland Income Fund |
8 |
See Glossary on page 11 for abbreviations along with accompanying Notes to Financial Statements. |
As of December 31, 2022 |
Highland Income Fund |
Shares |
Value ($) |
|||||||
Cash Equivalent - 2.7% |
||||||||
MONEY MARKET FUND (t) - 2.7% |
||||||||
25,072,014 | Dreyfus Treasury Obligations Cash Management, Institutional Class 4.170% |
25,072,014 | ||||||
Total Cash Equivalent (Cost $25,072,014) |
25,072,014 | |||||||
Total Investments - 115.5% |
1,092,253,995 |
|||||||
(Cost $1,460,096,862) |
||||||||
Securities Sold Short - (0.7)% |
||||||||
Common Stocks - (0.7)% |
||||||||
INFORMATION TECHNOLOGY - (0.7)% |
||||||||
(41,100) | Texas Instruments, Inc. |
(6,790,542 | ) | |||||
Total Common Stocks (Proceeds $4,920,256) |
(6,790,542 | ) | ||||||
Total Securities Sold Short - (0.7)% (Proceeds $4,920,256) |
(6,790,542 | ) | ||||||
Other Assets & Liabilities, Net - (14.8)% (v) |
(139,475,776 |
) | ||||||
Net Assets - 100.0% |
945,987,677 |
|||||||
(a) | Non-income producing security. |
(b) | Securities with a total aggregate value of $752,868,908, or 79.6% of net assets, were classified as Level 3 within the three-tier fair value hierarchy. Please see Notes to Financial Statements for an explanation of this hierarchy, as well as a list of unobservable inputs used in the valuation of these instruments. |
(c) | Represents fair value as determined by the Investment Adviser pursuant to the policies and procedures approved by the Board of Trustees (the “Board”). The Board has designated the Investment Adviser as “valuation designee” for the Fund pursuant to Rule 2a-5 of the Investment Company Act of 1940, as amended. The Investment Adviser considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $752,868,908, or 79.6% of net assets, were fair valued under the Fund’s valuation procedures as of December 31, 2022. Please see Notes to Financial Statements. |
(d) | Restricted Securities. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Fund does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under the policies and procedures established by the Board. Additional Information regarding such securities follows: |
Restricted Security |
Security Type |
Acquisition Date |
Cost of Security |
Fair Value at Year End |
Percent of Net Assets |
|||||||||||||
TerreStar Corporation |
Common Stocks |
3/16/2018 | $ | 3,093,276 | $ | 9,887,358 | 1.0 | % |
(e) | Affiliated issuer. Assets with a total aggregate fair value of $750,571,576, or 79.3% of net assets, were affiliated with the Fund as of December 31, 2022. |
(f) | Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Fund invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. As of December 31, 2022, the LIBOR USD 3 Month rates were 4.77%. Senior loans, while exempt from registration under the Securities Act of 1933, as amended (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity maybe substantially less than the stated maturity shown. |
(g) | Variable or floating rate security. The rate shown is the effective interest rate as of period end. The rates on certain securities are not based on published reference rates and spreads and are either determined by the issuer or agent based on current market conditions; by using a formula based on the rates of underlying loans; or by adjusting periodically based on prevailing interest rates. |
(h) | Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. The Board has determined these investments to be liquid. At December 31, 2022, these securities amounted to $107,264,904 or 11.3% of net assets. |
(i) | No interest rate available. |
(j) | Interest only security (“IO”). These types of securities represent the right to receive the monthly interest payments on an underlying pool of mortgages. Payments of principal on the pool reduce the value of the “interest only” holding. |
(k) | The issuer is, or is in danger of being, in default of its payment obligation. |
(l) | Perpetual security with no stated maturity date. |
(m) | There is currently no rate available. |
(n) | Variable or floating rate security. The base lending rates are generally the lending rate offered by one or more European banks such as the LIBOR. The interest rate shown reflects the rate in effect December 31, 2022. |
(o) | Securities (or a portion of securities) on loan. As of December 31, 2022, the fair value of securities loaned was $389,253. The loaned securities were secured with cash and/or securities collateral of $402,719. Collateral is calculated based on prior day’s prices. |
(p) | Step Coupon Security. Coupon rate will either increase (step-up bond) or decrease (step-down bond) at regular intervals until maturity. Interest rate shown reflects the rate currently in effect. |
(q) | Represents value held in escrow pending future events. No interest is being accrued. |
(r) | Tri-Party Repurchase Agreement. |
(s) | This security was purchased with cash collateral held from securities on loan. The total value of such securities as of December 31, 2022 was $402,719. |
(t) | Rate reported is 7 day effective yield. |
(u) | As of December 31, 2022, investments with a total aggregate value of $36,203,269 were fully or partially segregated with broker(s)/custodian as collateral for reverse repurchase agreements. |
(v) | As of December 31, 2022, $6,782,322 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in “Other Assets & Liabilities, Net”. |
See Glossary on page 11 for abbreviations along with accompanying Notes to Financial Statements. |
9 |
As of December 31, 2022 |
Highland Income Fund |
Counterparty |
Collateral Pledged |
Interest Rate % |
Trade Date |
Repurchase Amount |
Principal Amount |
Value |
||||||||||||||||
Mizuho | FREMF Mortgage Trust, Series 2021- | |||||||||||||||||||||
Securities | KF103, Class CS, 02/01/2023 | 5.88 | 12/15/2022 | $ | (21,722,000 | ) | $ | (21,722,000 | ) | $ | (21,722,000 | ) | ||||||||||
Total Reverse Repurchase Agreement |
$ | (21,722,000 | ) | $ | (21,722,000 | ) | ||||||||||||||||
10 |
See Glossary on page 11 for abbreviations along with accompanying Notes to Financial Statements. |
Other Abbreviations: | ||
CDO | Collateralized Debt Obligation | |
ICE | Intercontinental Exchange | |
LIBOR | London Interbank Offered Rate | |
REIT | Real Estate Investment Trust | |
USD | United States Dollar |
Annual Report |
11 |
As of December 31, 2022 |
Highland Income Fund |
$ |
||||
Assets |
||||
Investments from unaffiliated issuers, at value (a) |
316,207,686 | |||
Affiliated investments, at value (Note 9) |
750,571,576 | |||
Total Investments, at value (Cost $1,434,622,129) |
1,066,779,262 | |||
Repurchase Agreements, at value |
402,719 | |||
Cash equivalent (Note 2) |
25,072,014 | |||
Cash |
139,323 | |||
Restricted Cash — Securities Sold Short (Note 2) |
6,782,322 | |||
Receivable for: |
||||
Cash pledged as collateral on reverse repurchase agreements |
1,870,000 | |||
Dividends and interest |
28,046,175 | |||
Fund shares sold |
124,115 | |||
Due from broker |
6,886 | |||
Prepaid expenses and other assets |
357,523 | |||
Total assets |
1,129,580,339 | |||
Liabilities: |
||||
Securities sold short, at value (Proceeds $4,920,256) (Note 2) |
6,790,542 | |||
Reverse Repurchase Agreements (Note 3) |
21,722,000 | |||
Payable for: |
||||
Investments purchased |
13,100,000 | |||
Investment advisory and administration fees (Note 6) |
865,164 | |||
Collateral from securities loaned (Note 4) |
402,719 | |||
Legal fees |
344,730 | |||
Printing fees |
159,135 | |||
Audit fees |
155,000 | |||
Accrued expenses and other liabilities |
297,123 | |||
Total liabilities |
43,836,413 | |||
Mezzanine Equity: |
||||
Cumulative preferred shares (Series A), net of deferred financing costs (Notes 1 and 2) |
139,756,249 | |||
Net Assets |
945,987,677 |
|||
Net Assets Consist of: |
||||
Paid-in capital |
1,454,795,842 | |||
Total accumulated losses |
(508,808,165 | ) | ||
Net Assets |
945,987,677 |
|||
Investments, at cost |
363,409,113 | |||
Affiliated investments, at cost (Note 9) |
1,071,213,016 | |||
Cash equivalents, at cost (Note 2) |
25,072,014 | |||
Repurchase Agreements, at cost |
402,719 | |||
Proceeds from securities sold short |
4,920,256 | |||
Common Shares |
||||
Shares outstanding ($0.001 par value; unlimited authorization) |
68,121,308 | |||
Net asset value per share (Net assets/shares outstanding) |
13.89 | |||
(a) Includes fair value of securities on loan |
389,253 |
12 |
See accompanying Notes to Financial Statements. |
For the Year Ended December 31, 2022 |
Highland Income Fund |
$ |
||||
Investment Income |
||||
Income: |
||||
Dividends from unaffiliated issuers |
70,457,158 | |||
Dividends from affiliated issuers (Note 9) |
6,270,395 | |||
Securities lending income (Note 4) |
46,353 | |||
Interest from unaffiliated issuers |
14,668,227 | |||
Interest from affiliated issuers (Note 9) |
10,225,535 | |||
Interest paid in kind from unaffiliated issuers |
905,745 | |||
Interest paid in kind from affiliated issuers (Note 9) |
3,050,153 | |||
ROC reclass from affiliated issuers (Note 9) |
(70,410 | ) | ||
Total income |
105,553,156 | |||
Expenses: |
||||
Investment advisory (Note 6) |
7,269,814 | |||
Administration fees (Note 6) |
2,339,062 | |||
Legal fees |
1,056,052 | |||
Accounting services fees |
691,901 | |||
Interest expense, commitment fees, and financing costs |
384,897 | |||
Reports to shareholders |
299,982 | |||
Trustees fees (Note 6) |
223,384 | |||
Insurance |
204,893 | |||
Dividends and fees on securities sold short (Note 2) |
192,751 | |||
Audit fees |
183,404 | |||
Pricing fees |
173,437 | |||
Transfer agent fees |
158,387 | |||
Registration fees |
146,323 | |||
Conversion fees (Note 2) |
138,426 | |||
Custodian/wire agent fees |
28,790 | |||
Total operating expenses |
13,491,503 | |||
Net investment income |
92,061,653 | |||
Preferred dividend expenses |
(7,793,750 | ) | ||
Net Realized and Unrealized Gain (Loss) |
||||
Realized gain (loss) on: |
||||
Investments from unaffiliated issuers |
78,379,604 | |||
Investments in affiliated issuers (Note 9) |
8,345,554 | |||
Securities sold short (Note 2) |
7,121,644 | |||
Written options contracts (Note 3) |
37,559 | |||
Futures contracts (Note 3) |
41,918,345 | |||
Net realized gain |
135,802,706 | |||
Net Change in Unrealized Appreciation (Depreciation) on: |
||||
Investments |
(146,548,259 | ) | ||
Investments in affiliated issuers (Note 9) |
(49,911,663 | ) | ||
Securities sold short (Note 2) |
2,725,741 | |||
Futures contracts (Note 3) |
4,568,959 | |||
Net change in unrealized appreciation (depreciation) |
(189,165,222 | ) | ||
Net realized and unrealized gain (loss) |
(53,362,516 | ) | ||
Total increase in net assets resulting from operations |
30,905,387 | |||
See accompanying Notes to Financial Statements. |
13 |
Highland Income Fund |
Year Ended December 31, 2022 ($) |
Year Ended December 31, 2021 ($) |
|||||||
Increase (Decrease) in Net Assets |
||||||||
Operations: |
||||||||
Net investment income |
92,061,653 | 51,197,156 | ||||||
Preferred dividend expenses |
(7,793,750 | ) | (7,793,756 | ) | ||||
Net realized gain (loss) |
135,802,706 | (81,417,609 | ) | |||||
Net change in unrealized appreciation (depreciation) |
(189,165,222 | ) | 168,217,003 | |||||
Net increase from operations |
30,905,387 | 130,202,794 | ||||||
Distributions Declared to Common Shareholders: |
||||||||
Distributions |
(35,874,540 | ) | (15,595,827 | ) | ||||
Return of capital |
(27,155,040 | ) | (50,110,849 | ) | ||||
Total distributions: |
(63,029,580 | ) | (65,706,676 | ) | ||||
Increase (decrease) in net assets from operations and distributions |
(32,124,193 | ) | 64,496,118 | |||||
Share transactions: |
||||||||
Value of distributions reinvested |
1,718,646 | 1,661,743 | ||||||
Shares repurchased of closed-end fund (Note 1) |
(24,643,897 | ) | (25,760,920 | ) | ||||
Gains from the retirement of repurchased shares |
5,422,282 | 4,870,013 | ||||||
Net decrease from shares transactions |
(17,502,969 | ) | (19,229,164 | ) | ||||
Total increase (decrease) in net assets |
(49,627,162 | ) | 45,266,954 | |||||
Net Assets |
||||||||
Beginning of year |
995,614,839 | 950,347,885 | ||||||
End of year |
945,987,677 | 995,614,839 | ||||||
Change in Common Shares: |
||||||||
Issued for distribution reinvested |
152,754 | 152,218 | ||||||
Shares redeemed (Note 1) |
(1,679,705 | ) | (1,854,281 | ) | ||||
Net decrease in fund shares |
(1,526,951 | ) | (1,702,063 | ) | ||||
14 |
See accompanying Notes to Financial Statements. |
For the Year Ended December 31, 2022 |
Highland Income Fund |
$ |
||||
Cash Flows Provided by Operating Activities: |
||||
Net increase in net assets resulting from operations |
30,905,387 | |||
Adjustments to Reconcile Net Increase in Net Assets Resulting from Operations to Net Cash Provided by Operating Activities: |
||||
Purchases of investment securities from unaffiliated issuers |
(293,297,707 | ) | ||
Purchases of investment securities from affiliated issuers |
(601,190,765 | ) | ||
Interest paid in kind from unaffiliated issuers |
(905,745 | ) | ||
Interest paid in kind from affiliated issuers |
(3,050,153 | ) | ||
Proceeds from disposition of investment securities from unaffiliated issuers |
330,382,156 | |||
Proceeds from disposition of investment securities from affiliated issuers |
163,314,139 | |||
Paydowns at cost |
104,825,104 | |||
Net (amortization) accretion of discount |
(997,654 | ) | ||
Proceeds from return of capital of investment securities from affiliated issuers |
192,675,501 | |||
Purchases of repurchase agreements, net |
(246,362 | ) | ||
Purchases to cover securities sold short |
(6,836,960 | ) | ||
Purchases to cover written options |
(588,290 | ) | ||
Proceeds of written options |
625,849 | |||
Net realized (gain) loss on Investments from unaffiliated issuers |
(78,379,604 | ) | ||
Net realized (gain) loss on Investments from affiliated issuers |
(8,345,554 | ) | ||
Net realized (gain) loss on written options and securities sold short |
(7,159,203 | ) | ||
Net change in unrealized (appreciation) depreciation on investments, investments in affiliated issuers, and securities sold short |
193,734,181 | |||
(Increase) Decrease in receivable for cash pledged as collateral on reverse repurchase agreements |
(1,870,000 | ) | ||
(Increase) Decrease in receivable for investments sold and principal paydowns |
580,003 | |||
(Increase) Decrease in receivable for dividends and interest |
(12,829,428 | ) | ||
(Increase) Decrease in receivable for variation margin |
712,785 | |||
(Increase) Decrease in due from broker |
(6,886 | ) | ||
(Increase) Decrease in prepaid expenses and other assets |
56,527 | |||
Increase (Decrease) in payable for investments purchased |
(2,070,483 | ) | ||
Increase (Decrease) in payable to investment advisory |
9,862 | |||
Increase (Decrease) in payable for upon return of securities loaned |
246,362 | |||
Increase (Decrease) in payable for printing fees |
50,025 | |||
Increase (Decrease) in payable for audit fees |
155,000 | |||
Increase (Decrease) in payable for legal fees |
132,011 | |||
Increase (Decrease) in accrued expenses and other liabilities |
(171,382 | ) | ||
Net cash flow provided by operating activities |
458,716 | |||
Cash Flows Used In Financing Activities: |
||||
Distributions paid in cash, net of distributions reinvested |
(61,310,934 | ) | ||
Payments on shares redeemed, net of payable |
(19,221,615 | ) | ||
Proceeds from shares sold, net of receivable |
(5,093 | ) | ||
Proceeds from reverse repurchase agreement |
21,722,000 | |||
Net cash flow used in financing activities |
(58,815,642 | ) | ||
Net decrease in cash |
(58,356,926 | ) | ||
Cash, cash equivalents, restricted cash and due to/from broker: |
||||
Beginning of year |
90,350,585 | |||
End of year |
31,993,659 | |||
End of year cash balances: |
||||
Cash |
139,323 | |||
Cash equivalent |
25,072,014 | |||
Restricted cash |
6,782,322 | |||
End of year |
31,993,659 | |||
Supplemental disclosure of cash flow information: |
||||
Reinvestment of distributions |
1,718,646 | |||
Cash paid during the year for interest expense and commitment fees |
384,897 | |||
See accompanying Notes to Financial Statements. |
15 |
Highland Income Fund |
* | Per share data prior to November 3, 2017 has been adjusted to give effect to an approximately 2 to 1 reverse stock split as part of the conversion to a closed-end fund. |
** | For the six-month period ended December 31, 2018. Effective April 11, 2019, the Fund had a fiscal year change from June 30 to December 31. |
‡ | Reflects the financial highlights of Class Z of the open-end fund prior to the conversion. |
(a) | Per share data was calculated using average shares outstanding during the period. |
(b) | 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. |
(c) | Total return is based on market value per share for periods after November 3, 2017. Distributions are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s Dividend Reinvestment Plan. Prior to November 3, 2017, total return is at net asset value assuming all distributions are reinvested. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been lower. |
(d) | Not annualized. |
(e) | Excludes 12b-1 fees from partial period operating as an open-end fund. Following the conversion on November 3, 2017, the Fund is no longer subject to 12b-1 fees. |
(f) | Includes dividends and fees on securities sold short. |
(g) | All ratios for the period have been annualized, unless otherwise indicated. |
(h) | Supplemental expense ratios are shown below. |
(i) | Represents the total dollar amount of commissions paid on portfolio transactions divided by total number of portfolio shares purchased and sold for which commissions were charged. The period prior to the Conversion Date is not presented. |
16 |
See accompanying Notes to Financial Statements. |
Highland Income Fund |
For the Years Ended December 31, |
For the Period Ended December 31, 2018** |
For the Year Ended June 30, 2018*‡ |
||||||||||||||||||||||
2022 |
2021 |
2020 |
2019 |
|||||||||||||||||||||
Ratios based on Average Managed Assets |
||||||||||||||||||||||||
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses) |
1.15 | % | 1.44 | % | 1.83 | % | 2.28 | % | N/A | N/A | ||||||||||||||
Interest expense and commitment fees, and preferred dividend expense |
0.70 | % | 0.74 | % | 1.17 | % | 1.27 | % | N/A | N/A | ||||||||||||||
Dividends and fees on securities sold short |
0.02 | % | 0.02 | % | 0.02 | % | 0.01 | % | N/A | N/A | ||||||||||||||
Ratios to Average Net Assets |
||||||||||||||||||||||||
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses) |
1.32 | % | 1.67 | % | 2.68 | % | 3.39 | % | 3.10 | % | 1.79 | % | ||||||||||||
Interest expense and commitment fees, and preferred dividend expense |
0.80 | % | 0.86 | % | 1.71 | % | 1.90 | % | 1.63 | % | 0.49 | % | ||||||||||||
Dividends and fees on securities sold short |
0.02 | % | 0.02 | % | 0.03 | % | 0.01 | % | — | % (j) |
— | % (j) | ||||||||||||
Borrowing at end of year/period: |
||||||||||||||||||||||||
Aggregate Amount Outstanding Excluding Preferred Shares* |
21,722,000 | — | 200,000,000 | 419,796,600 | 496,141,100 | 498,563,423 | ||||||||||||||||||
Asset Coverage Per $1,000* |
44,549.75 | — | 5,751.74 | 3,371.16 | 3,068.79 | 3,177.35 | ||||||||||||||||||
Aggregate Amount Outstanding Including |
||||||||||||||||||||||||
Preferred Shares* |
166,722,000 | 145,000,000 | 345,000,000 | 564,796,600 | 496,141,100 | 498,563,423 | ||||||||||||||||||
Asset Coverage Per $1,000* |
6,674.04 | 7,859.92 | 3,754.63 | 2,762.41 | 3,068.79 | 3,177.35 |
* | See Note 10 for further details. |
(j) | Represents less than 0.005%. |
See accompanying Notes to Financial Statements. |
17 |
December 31, 2022 |
Highland Income Fund |
18 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Issuer |
Shares at December 31, 2021 |
Beginning Value as of December 31, 2021 |
Issuance Net Liquidation Value |
Deferred Issuance Costs |
Paydowns |
Balance net of Deferred Financing Costs at December 31, 2022 |
Shares at December 31, 2022 |
|||||||||||||||||||||
Cumulative preferred shares (Series A) |
5,800,000 | $ | 139,756,249 | $ | 145,000,000 | $ | 5,243,751 | $ | — | $ | 139,756,249 | 5,800,000 | ||||||||||||||||
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. |
Annual Report |
19 |
December 31, 2022 |
Highland Income Fund |
Total value at December 31, 2022 ($) |
Level 1 Quoted Price ($) |
Level 2 Significant Observable Inputs ($) |
Level 3 Significant Unobservable Inputs ($) |
|||||||||||||
Highland Income Fund |
||||||||||||||||
Assets |
||||||||||||||||
Common Stocks |
||||||||||||||||
Communication Services |
11,344,608 | 1,457,250 | — | 9,887,358 | ||||||||||||
Consumer Discretionary |
13,895 | — | — | 13,895 | ||||||||||||
Energy |
— | — | — | – | (1) | |||||||||||
Gaming/Leisure |
5,635,995 | — | — | 5,635,995 | ||||||||||||
Healthcare |
22,261,348 | — | — | 22,261,348 | ||||||||||||
Materials |
1,495,160 | — | 1,495,160 | — | ||||||||||||
Real Estate |
546,560,722 | 119,138,060 | — | 427,422,662 |
20 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Total value at December 31, 2022 ($) |
Level 1 Quoted Price ($) |
Level 2 Significant Observable Inputs ($) |
Level 3 Significant Unobservable Inputs ($) |
|||||||||||||
U.S. Senior Loans |
||||||||||||||||
Communication Services |
8,616,085 | — | — | 8,616,085 | ||||||||||||
Energy |
6,389,333 | — | 6,389,333 | — | ||||||||||||
Gaming/Leisure |
13,833,090 | — | — | 13,833,090 | ||||||||||||
Healthcare |
28,151,521 | — | 12,742,864 | 15,408,657 | ||||||||||||
Information Technology |
59,271,980 | — | — | 59,271,980 | ||||||||||||
Real Estate |
108,158,431 | — | — | 108,158,431 | ||||||||||||
Retail |
3,570,052 | — | 3,570,052 | — | ||||||||||||
Collateralized Loan Obligations |
103,784,904 | — | 103,784,904 | — | ||||||||||||
LLC Interest |
59,010,136 | — | — | 59,010,136 | ||||||||||||
Warrants |
||||||||||||||||
Energy |
38,073,368 | — | 38,073,368 | — | ||||||||||||
Preferred Stock |
||||||||||||||||
Financials |
4,770,790 | 2,818,544 | 686,000 | 1,266,246 | ||||||||||||
Healthcare |
22,083,025 | — | — | 22,083,025 | ||||||||||||
Real Estate |
5,813,329 | 5,813,329 | — | — | ||||||||||||
Registered Investment Company |
458,274 | 458,274 | — | — | ||||||||||||
Exchange-Traded Funds |
11,867,027 | 11,867,027 | — | — | ||||||||||||
Corporate Bonds & Notes |
||||||||||||||||
Communication Services |
2,857 | — | 2,857 | — | ||||||||||||
Financials |
3,480,000 | — | 3,480,000 | — | ||||||||||||
Industrials |
— | — | — | — | (1) | |||||||||||
Utilities |
— | — | — | (1) |
— | |||||||||||
Master Limited Partnership |
||||||||||||||||
Energy |
2,127,104 | 2,127,104 | — | — | ||||||||||||
Rights |
||||||||||||||||
Utilities |
6,228 | — | 6,228 | — | ||||||||||||
Repurchase Agreements |
402,719 | 402,719 | — | — | ||||||||||||
Cash Equivalent |
25,072,014 | 25,072,014 | — | — | ||||||||||||
Total Assets |
1,092,253,995 | 169,154,321 | 170,230,766 | 752,868,908 | ||||||||||||
Liabilities |
||||||||||||||||
Securities Sold Short |
||||||||||||||||
Common Stocks |
||||||||||||||||
Information Technology |
(6,790,542 | ) | (6,790,542 | ) | — | — | ||||||||||
Reverse Repurchase Agreement |
(21,722,000 | ) | — | (21,722,000 | ) | — | ||||||||||
Total Liabilities |
(28,512,542 | ) | (6,790,542 | ) | (21,722,000 | ) | — | |||||||||
Total |
1,063,741,453 | 162,363,779 | 148,508,766 | 752,868,908 | ||||||||||||
(1) |
This category includes securities with a value of zero. |
Annual Report |
21 |
December 31, 2022 |
Highland Income Fund |
Balance as of December 31, 2021 $ |
Transfers Into Level 3 $ |
Transfers Out of Level 3 $ |
Accrued Discounts (Premiums) $ |
Distribution to Return Capital $ |
Realized Gain (Loss) $ |
Net Change in Unrealized Appreciation (Depreciation) $ |
Net Purchases $ |
Net Sales $ |
Balance as of December 31, 2022 $ |
Change in Unrealized Appreciation (Depreciation) from Investments held at December 31, 2022 $ |
||||||||||||||||||||||||||||||||||
Common Stocks |
||||||||||||||||||||||||||||||||||||||||||||
Communication Services |
9,098,844 | — | — | — | — | — | 788,514 | — | — | 9,887,358 | 788,514 | |||||||||||||||||||||||||||||||||
Consumer Discretionary |
31,683 | — | — | — | (82,427 | ) | — | 64,639 | — | — | 13,895 | 63,639 | ||||||||||||||||||||||||||||||||
Gaming/Leisure |
3,321,591 | — | — | — | — | — | 2,314,404 | — | — | 5,635,995 | 2,314,404 | |||||||||||||||||||||||||||||||||
Healthcare |
385,699 | — | — | — | — | — | (24,095,605 | ) | 45,971,254 | — | 22,261,348 | (24,095,605 | ) | |||||||||||||||||||||||||||||||
Real Estate |
379,145,661 | — | — | — | (190,163,539 | ) | (509,145 | ) | (21,111,900 | ) | 260,061,585 | — | 427,422,662 | (21,294,900 | ) | |||||||||||||||||||||||||||||
U.S. Senior Loans |
||||||||||||||||||||||||||||||||||||||||||||
Communication Services |
7,755,762 | — | — | 31 | — | — | (45,453 | ) | 905,745 | — | 8,616,085 | (45,453 | ) | |||||||||||||||||||||||||||||||
Gaming/Leisure |
16,635,684 | — | — | — | — | (67,924,983 | ) | 63,017,931 | 3,533,154 | (1,428,696 | ) | 13,833,090 | (4,191,765 | ) | ||||||||||||||||||||||||||||||
Healthcare |
48,880,946 | — | — | — | — | — | 20,545,024 | 40,848,841 | (94,866,154 | ) 1 |
15,408,657 | (25,270,184 | ) | |||||||||||||||||||||||||||||||
Information Technology |
49,533,000 | — | — | — | — | — | 5,327,744 | 4,411,236 | — | 59,271,980 | 5,327,744 | |||||||||||||||||||||||||||||||||
Real Estate |
80,337,570 | — | — | — | — | — | (6,018,912 | ) | 173,652,315 | (139,812,542 | ) 1 |
108,158,431 | (6,018,912 | ) | ||||||||||||||||||||||||||||||
Utilities |
59,423 | — | — | — | — | (1,840,163 | ) | 1,780,740 | — | — | — | — | ||||||||||||||||||||||||||||||||
Collateralized Loan Obligations |
1,471,635 | — | (1,471,635 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
LLC Interest |
46,562,687 | — | — | — | — | (333,599 | ) | 8,637,141 | 15,665,294 | (11,521,387 | ) | 59,010,136 | 8,028,886 | |||||||||||||||||||||||||||||||
Preferred Stock |
||||||||||||||||||||||||||||||||||||||||||||
Financials |
133,611,395 | 24,278,638 | — | — | 375,432 | 92,371,672 | (143,630,849 | ) | — | (105,740,042 | ) | 1,266,246 | (50,964,592 | ) | ||||||||||||||||||||||||||||||
Healthcare |
— | — | — | — | — | — | 913,012 | 21,170,013 | — | 22,083,025 | 913,012 | |||||||||||||||||||||||||||||||||
Real Estate |
249,514 | — | — | — | — | 111,635 | — | — | (361,149 | ) | — | — | ||||||||||||||||||||||||||||||||
Claims |
52,138 | — | — | — | — | (1,814,883 | ) | 1,762,745 | — | — | — | — | ||||||||||||||||||||||||||||||||
Total |
777,133,232 | 24,278,638 | (1,471,635 | ) | 31 | (189,870,534 | ) | 20,060,534 | (89,750,825 | ) | 566,219,437 | (353,729,970 | ) | 752,868,908 | (114,445,212 | ) | ||||||||||||||||||||||||||||
1 |
Sales from paydowns. There was no realized gain (loss). |
22 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Category |
Fair Value at 12/31/22 $ |
Valuation Technique |
Unobservable Inputs |
Range Input Value(s) (Average Input Value) | ||||||
Common Stocks |
465,221,258 | Multiples Analysis | Unadjusted Price/MHz-PoP |
$0.09 - $0.95 ($0.52) | ||||||
NAV / sh multiple Revenue Multiples |
1.10x - 1.45x (1.28x) 0.32x -0.42x (0.37x) | |||||||||
Net Asset Value | N/A | $28.00 | ||||||||
Liquidation Analysis | Recovery Rate | 40% -100% (70%) | ||||||||
Discounted Cash Flow | Discount Rate | 8.75% -32.50% (15.70%) | ||||||||
Capitalization Rate | 5.13% - 9.50% (6.75%) | |||||||||
Transaction Analysis | Multiple of EBITDA less CAPEX | 12.50x - 15.00x (13.75x) | ||||||||
Price per Sq. Ft. | $22.00 - $33.00 ($28.67) | |||||||||
Transaction Indication of Value | Enterprise Value ($mm) | $872 -$969 ($920.50) | ||||||||
Cost Price ($mm) | $56.20 | |||||||||
U.S. Senior Loans |
205,288,243 | Discounted Cash Flow | Discount Rate | 8.00%- 20.00% (11.18%) | ||||||
Volatility Analysis | Volatility | 30.00% -60.00% 46.67%) | ||||||||
Preferred Stock |
23,349,271 | NAV Approach | Discount Rate | 70.0% | ||||||
Option Pricing Model | Volatility | 40% - 60% (50%) | ||||||||
Transaction Indication of Value | Recap Price | $11.10 | ||||||||
LLC Interest |
59,010,136 | Discounted Cash Flow | Discount Rate | 4.73% - 14.00% (9.22%) | ||||||
752,868,908 |
Annual Report |
23 |
December 31, 2022 |
Highland Income Fund |
24 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Report |
25 |
December 31, 2022 |
Highland Income Fund |
Fair Value |
||||||||
Risk Exposure |
Asset Derivative |
Liability Derivative |
||||||
Equity Price Risk |
$ | — | (1) |
$ | — | (1) |
(1) |
As of December 31, 2022, the Fund did not have any outstanding derivatives. Includes cumulative unrealized depreciation of futures contracts as reported in the Investment Portfolio, if applicable, and within the components of net assets section of the Statement of Assets and Liabilities. |
26 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Risk Exposure |
Net Realized Gain/(Loss) on Derivatives |
Net Change in Unrealized Appreciation/ (Depreciation) on Derivatives |
||||||
Equity Price Risk |
$ | 41,955,904 | (1) |
$ | 4,568,959 | (2) |
(1) |
Statement of Operations location: Realized gain (loss) on futures and written options contracts. |
(2) |
Statement of Operations location: Net change in unrealized appreciation (depreciation) on futures contracts. |
Income Fund |
Units/ Contracts |
Appreciation/ (Depreciation) |
||||||
Futures Contracts |
— | $ | 1,164,004 |
Gross Amount of Recognized Assets (Value of Securities on Loan) |
Value of Cash Collateral Received (1) |
Value of Non-Cash Collateral Received |
Net Amount |
|||||||||
$389,253 | $ | 389,253 | $ | — | $ | — |
(1) |
Collateral received in excess of market value of securities on loan is not presented in this table. The total cash collateral received by the Fund is disclosed in the Statement of Assets and Liabilities. |
Overnight and Continuous |
<30 Days |
Between 30 & 90 Days |
>90 Days |
Total |
||||||||||||||||
Repurchase Agreements |
$ | 402,719 | $ | — | $ | — | $ | — | $ | 402,719 | ||||||||||
Total |
$ | 402,719 | $ | — | $ | — | $ | — | $ | 402,719 | ||||||||||
Annual Report |
27 |
December 31, 2022 |
Highland Income Fund |
Distributable Earnings (Accumulated Losses) |
Paid-in-Capital |
|||
$4,877,268 | $ | (4,877,268 | ) |
Other Temporary Losses |
Accumulated Capital Losses |
Unrealized Appreciation (Depreciation) (1) |
||||||
$— | $ | (193,465,924 | ) | $ | (315,342,241 | ) |
(1) |
Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to wash sales, non-taxable dividends, partnerships, PFICs, REIT basis adjustments and difference in premium amortization methods for book and tax. |
No Expiration Short- Term |
No Expiration Long-Term |
Total |
||||||
$— | $ | (193,465,924 | ) | $ | (193,465,924 | ) |
Ordinary Income |
Long-term Capital Gain |
Return of Capital |
||||||||||
2022 |
$ | 35,874,540 | $ | — | $ | 27,155,040 | ||||||
2021 |
15,595,827 | — | 50,110,849 |
Gross Appreciation |
Gross Depreciation |
Net Appreciation/ (Depreciation) |
Cost |
|||||||||
$131,976,649 | $ | (447,318,890 | ) | $ | (315,342,241 | ) | $ | 1,405,718,901 |
28 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Fee Rate to the Investment Advisor |
> 1 Billion |
> 2 Billion |
||||||
0.65% | 0.60 | % | 0.55 | % |
Annual Report |
29 |
December 31, 2022 |
Highland Income Fund |
30 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Report |
31 |
December 31, 2022 |
Highland Income Fund |
32 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Report |
33 |
December 31, 2022 |
Highland Income Fund |
34 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Report |
35 |
December 31, 2022 |
Highland Income Fund |
U.S Government Securities |
Other Securities |
|||||||||||||
Purchases |
Sales |
Purchases |
Sales |
|||||||||||
$ | — | $ | — | $ | 625,142,978 | $ | 500,400,792 |
Issuer |
Shares at December 31, 2021 |
Beginning Value as of December 31, 2021 $ |
Purchases at Cost $ |
Proceeds from Sales $ |
Distribution to Return of Capital $ |
Net Realized Gain/ (Loss) on Sales $ |
Change in Unrealized Appreciation/ (Depreciation) $ |
Ending Value as of December 31, 2022 $ |
Shares at December 31, 2022 |
Affiliated Income $ |
||||||||||||||||||||||||||||||
Majority Owned, Not Consolidated |
||||||||||||||||||||||||||||||||||||||||
Allenby (Common Stocks) |
1,474,379 | — | — | — | — | — | — | — | 1,474,379 | — | ||||||||||||||||||||||||||||||
Claymore (Common Stocks) |
10,359,801 | — | — | — | — | — | — | — | 10,359,801 | — | ||||||||||||||||||||||||||||||
Other Affiliates |
||||||||||||||||||||||||||||||||||||||||
CCS Medical, Inc. (U.S. Senior Loans & Common Stocks) |
72,299,652 | 40,766,645 | 85,754,878 | (101,386,296 | ) | — | — | 12,534,778 | 37,670,005 | 27,528,327 | 577,484 | |||||||||||||||||||||||||||||
EDS Legacy Partners (U.S. Senior Loans) |
57,000,000 | 49,533,000 | 4,411,237 | — | — | — | 5,327,743 | 59,271,980 | 61,411,237 | 4,308,176 |
36 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Issuer |
Shares at December 31, 2021 |
Beginning Value as of December 31, 2021 $ |
Purchases at Cost $ |
Proceeds from Sales $ |
Distribution to Return of Capital $ |
Net Realized Gain/ (Loss) on Sales * $ |
Change in Unrealized Appreciation/ (Depreciation) $ |
Ending Value as of December 31, 2022 $ |
Shares at December 31, 2022 |
Affiliated Income $ |
||||||||||||||||||||||||||||||
Highland Global Allocation Fund (Registered Investment Company) |
48,649 | 441,246 | — | — | (29,817 | ) | — | 46,845 | 458,274 | 48,649 | 17,470 | |||||||||||||||||||||||||||||
Highland Income Fund (Registered Investment Company) |
9,600 | 105,504 | 19,033,778 | (25,301,659 | ) | — | 6,160,372 | 2,005 | — | — | — | |||||||||||||||||||||||||||||
LLV Holdco LLC (U.S. Senior Loans & Common Stocks) |
13,247,111 | 19,078,993 | 3,533,154 | (1,272,062 | ) (a) |
— | — | (1,871,000 | ) | 19,469,085 | 15,508,203 | 3,881,591 | ||||||||||||||||||||||||||||
NEXLS LLC (LLC Interest) |
763 | 35,315,956 | 5,665,294 | — | — | — | 8,620,116 | 49,601,366 | 882 | — | ||||||||||||||||||||||||||||||
NexPoint Diversified Real Estate Trust REIT (Common Stocks) |
1,156,943 | 15,711,286 | 1,641,249 | — | — | — | (3,052,880 | ) | 14,299,655 | 1,275,616 | 711,967 | |||||||||||||||||||||||||||||
NexPoint Real Estate Finance REIT (Common Stocks & Preferred Stock) |
552,534 | 10,636,280 | 87,142,412 | — | — | — | (25,484,527 | ) | 72,294,165 | 4,523,263 | 4,989,861 | |||||||||||||||||||||||||||||
NexPoint Residential Trust, Inc. (Common Stocks) |
153,276 | 12,849,127 | 1,524,948 | — | (163,901 | ) | — | (6,099,264 | ) | 8,110,910 | 186,372 | 1,471 | ||||||||||||||||||||||||||||
NexPoint SFR Operating Partnership, LP (U.S. Senior Loans) |
— | — | 65,000,000 | — | — | — | (1,409,200 | ) | 63,590,800 | 65,000,000 | 2,681,250 | |||||||||||||||||||||||||||||
NexPoint Storage Partners, Inc. (Common Stocks) |
18,568 | 25,868,009 | 18,995,600 | — | — | — | (6,200,495 | ) | 38,663,114 | 32,203 | — | |||||||||||||||||||||||||||||
NFRO REIT SUB II, LLC, NFRO REIT SUB, LLC, NFRO SFR REIT, LLC (Common Stocks) |
106,355,853 | 310,315,649 | 241,215,043 | — | (190,163,540 | ) | — | (28,201,331 | ) | 333,165,821 | 139,114,085 | — | ||||||||||||||||||||||||||||
NexPoint Real Estate Finance Operating Partnership, L.P., NREF OP II (LLC Interest) |
624,311 | 12,017,981 | 11,521,327 | (23,832,735 | ) | — | (174,807 | ) | 468,234 | — | — | — | ||||||||||||||||||||||||||||
NHT Operating Partnership LLC Convertible Promissory Note (U.S. Senior Loans) |
— | — | 6,400,000 | — | — | — | (601,600 | ) | 5,798,400 | 6,400,000 | 121,333 | |||||||||||||||||||||||||||||
NHT Operating Partnership LLC Secured Promissory Note (U.S. Senior Loans) |
— | — | 42,777,343 | — | — | — | (4,008,112 | ) | 38,769,231 | 42,777,343 | 1,705,854 | |||||||||||||||||||||||||||||
SFR WLIF I, III, LLC (LLC Interest) |
11,854,986 | 11,246,731 | 10,000,000 | (11,521,387 | ) | — | (333,599 | ) | 17,025 | 9,408,770 | 10,000,000 | 479,216 | ||||||||||||||||||||||||||||
Total |
275,156,426 | 543,886,407 | 604,616,263 | (163,314,139 | ) | (190,357,258 | ) | 5,651,966 | (49,911,663 | ) | 750,571,576 | 385,640,360 | 19,475,673 | |||||||||||||||||||||||||||
(a) | Denotes paydown. |
* |
Excludes capital gain distributions of $2,693,588 included in realized gain (loss) on investments from affiliated issuers on the Statement of Operations. |
Annual Report |
37 |
December 31, 2022 |
Highland Income Fund |
Date |
Amount Outstanding Excluding Preferred Shares $ |
Asset Coverage of Indebtedness Excluding Preferred Shares % |
Amount Outstanding Including Preferred Shares $ |
Asset Coverage of Indebtedness Including Preferred Shares (2) % |
||||||||||||
12/31/2022 |
21,722,000 | 4,454.98 | 166,722,000 | 667.40 | ||||||||||||
12/31/2021 |
N/A | N/A | 145,000,000 | 785.99 | ||||||||||||
12/31/2020 |
200,000,000 | 575.25 | 345,000,000 | 375.50 | ||||||||||||
12/31/2019 |
419,796,600 | 337.13 | 564,796,600 | 276.25 | ||||||||||||
12/31/2018 (1) |
496,141,100 | 306.80 | 496,141,100 | 306.80 | ||||||||||||
6/30/2018 |
498,563,423 | 317.70 | 498,563,423 | 317.70 | ||||||||||||
6/30/2017 |
N/A | N/A | N/A | N/A | ||||||||||||
6/30/2016 |
N/A | N/A | N/A | N/A | ||||||||||||
6/30/2015 |
51,500,000 | 1,641.40 | 51,500,000 | 1,641.40 | ||||||||||||
6/30/2014 |
60,000,000 | 1,577.60 | 60,000,000 | 1,577.60 | ||||||||||||
6/30/2013 |
N/A | N/A | N/A | N/A |
1 |
For the six-month period ended December 31, 2018. Effective April 11, 2019, the Fund had a fiscal year change from June 30 to December 31. |
2 |
As referenced in Note 1, the Fund issued $145mm in preferred shares subject to the 200% Asset Coverage of Indebtedness requirements under the 1940 Act. |
NFRO REIT Sub, LLC December 31, 2022 $ |
NFRO REIT Sub II, LLC December 31, 2022 $ |
|||||||
Balance Sheet: |
||||||||
Current Assets |
26,251,000 | 188,000 | ||||||
Noncurrent Assets |
285,967,000 | 134,882,000 | ||||||
|
|
|
|
|||||
Total Assets |
312,218,000 | 135,070,000 | ||||||
Current Liabilities |
20,358,000 | — | ||||||
Noncurrent Liabilities |
160,232,000 | — | ||||||
|
|
|
|
|||||
Total Liabilities |
180,590,000 | — | ||||||
Preferred Stock |
1,000 | 104,000 | ||||||
Non-Controlling interest (in consolidated investments) |
3,642,000 | — | ||||||
Invested Equity |
127,985,000 | 134,966,000 | ||||||
|
|
|
|
|||||
Total Equity |
131,628,000 | 135,070,000 | ||||||
|
|
|
|
NFRO REIT Sub, LLC For the Year Ended December 31, 2022 $ |
NFRO REIT Sub II, LLC For the Year Ended December 31, 2022 $ |
|||||||
Summary of Operations: |
||||||||
Net Sales |
9,478,000 | (4,640,000 | ) | |||||
Gross Profit (Loss) |
(1,767,000 | ) | (4,648,000 | ) | ||||
Net Income (Loss) |
(2,554,000 | ) | 44,544,000 | |||||
Net Income (Loss) attributable to non-controlling interest (in consolidated investments), preferred shares, and other comprehensive income |
147,000 | — |
38 |
Annual Report |
Annual Report |
39 |
December 31, 2022 |
Highland Income Fund |
• | commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities (“RMBS”) and other real estate credit investments, which include existing first and second mortgages on real estate, either originated or acquired in the secondary market, and secured, unsecured and/or convertible notes offered by real estate operating companies (“REOCs”) and REITs; |
• | publicly traded REITs managed by affiliated or unaffiliated asset managers and their foreign equivalents (“Public REITs”); |
• | REOCs; |
• | private real estate investment funds managed by affiliated or unaffiliated institutional asset managers (“Private Real Estate Investment Funds”); |
40 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
• | registered closed-end funds that invest principally in real estate (collectively, “Public Investment Funds”); |
• | real estate exchange traded funds (“ETFs”); and |
• | publicly-registered non-traded REITs (“Non-Traded REITs”) and private REITs, generally wholly-owned by the Fund or wholly-owned or managed by an affiliate. |
Annual Report |
41 |
December 31, 2022 |
Highland Income Fund |
Return of Capital |
Long-Term Capital Gain Distribution |
Ordinary Income Distribution |
Total Distribution |
|||||||||
43.08% | 0.00 | % | 56.92 | % | 100.00 | % |
Qualified Dividends and Corporate Dividends Received Deduction (1) |
Qualified Dividend Income (15% tax rate for QDI) (2) |
Interest Related Dividends (3) |
U.S. Government Interest (4) |
Qualifying Business Income (5) |
||||||||||||
0.45% | 0.58 | % | 42.21 | % | 0.00 | % | 13.58 | % |
(1) | The percentage in this column represents the amount of “Qualifying for Corporate Receivable Deduction Dividends” and is reflected as a percentage of ordinary income distributions. |
(2) | The percentage in this column represents the amount of “Qualifying Dividend Income” and is reflected as a percentage of “Ordinary Income Distributions.” It is the intention of the Fund to designate the maximum amount permitted by law. |
(3) | The percentage in this column represents the amount of “Interest Related Dividends” and is reflected as a percentage of ordinary income distributions exempt from U.S. withholding tax when paid to foreign investors. |
(4) | “U.S. Government Interest” represents the amount of interest that was derived from direct U.S. Government obligations and distributed during the fiscal year. This amount is reflected as a percentage of total ordinary income distributions (the total of short term capital gain and net investment income distributions). Generally, interest from direct U.S. Government obligations is exempt from state income tax. However, for shareholders who are residents of California, Connecticut and New York, the statutory threshold requirements were not satisfied to permit exemption of these amounts from state income. |
(5) | The percentage of this column represents that amount of ordinary dividend income that qualified for 20% Business Income Deduction. |
42 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Report |
43 |
December 31, 2022 |
Highland Income Fund |
44 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Report |
45 |
December 31, 2022 |
Highland Income Fund |
46 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Report |
47 |
December 31, 2022 |
Highland Income Fund |
48 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Annual Report |
49 |
December 31, 2022 |
Highland Income Fund |
Name and Date of Birth |
Position(s) with the Fund |
Term of Office 1 and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Number of Portfolios in the NexPoint Fund Complex Overseen by the Trustee |
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 | Trustee since December 2013; 3 year term (expiring at 2023 annual meeting). | Retired. | 8 | Director of KC Concessions, Inc. (since January 2013); Director of American Sports Enterprise, Inc. (since January 2013); Chairman and owner, Kane County Cougars Baseball Club (since January 2013); Director of The Midwest League of Professional Baseball Clubs, Inc. (from January 2013 to December 2021); Director of Kane County Cougars Foundation, Inc. (since January 2013); Director of Galen Robotics, Inc. (since August 2016); Chairman and Director of FC Global Realty, Inc. (from May 2017 to June 2018); Chairman; Director of First Capital Investment Corp. (from March 2017 to March 2018); Director and Special Advisor to Vault Data, LLC (since February 2018); and Director of American Association of Professional Baseball, Inc. (since February 2021). | 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. |
50 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Name and Date of Birth |
Position(s) with the Fund |
Term of Office 1 and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Number of Portfolios in the NexPoint Fund Complex Overseen by the Trustee |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Qualifications, Attributes, Skills for Board Membership | ||||||
Independent Trustees |
||||||||||||
Ethan Powell (6/20/1975) | Trustee; Chairman of the Board | Trustee since December 2013; Chairman of the Board since December 2013; 3 year term (expiring at 2025 annual meeting). | Principal and CIO of Brookmont Capital Management, LLC since May 2020; CEO, Chairman and Founder of Impact Shares LLC since December 2015; Trustee/ Director of the NexPoint Fund Complex from June 2012 until July 2013 and since December 2013; and Director of Kelly Strategic Management since August 2021. | 8 | 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 NexPoint Fund Complex; significant administrative and managerial experience. | ||||||
Bryan A. Ward (2/4/1955) | Trustee | Trustee since inception in 2006; 3 year term (expiring at 2025 annual meeting). | Business Development Banker, CrossFirst Bank since January 2023 (President-Dallas from October 2020 until January 2023 and Senior Advisor from April 2019 until October 2022), Private Investor, BW Consulting, LLC since 2014; and Anderson Consulting/Accenture 1991-2013. | 8 | None. |
Significant experience on this and/ or other boards of directors/ trustees, Audit Committee Chair; significant managerial and executive experience; significant experience as a management consultant. |
Annual Report |
51 |
December 31, 2022 |
Highland Income Fund |
Name and Date of Birth |
Position(s) with the Fund |
Term of Office 1 and Length of Time Served |
Principal Occupation(s) During Past Five Years |
Number of Portfolios in the NexPoint Fund Complex Overseen by the Trustee |
Other Directorships/ Trusteeships Held During the Past Five Years |
Experience, Qualifications, Attributes, Skills for Board Membership | ||||||
Independent Trustees |
||||||||||||
Dorri McWhorter (6/30/1973) | Trustee | Trustee since May 2022; 3 year term (expiring at 2023 annual meeting). | President & CEO, YMCA of Metropolitan Chicago (2021- Present); Chief Executive Officer, YWCA Metropolitan Chicago (2013- 2021). | 8 | Board Director of William Blair Funds (since 2019); Board Director of Skyway Concession Company, LLC (since 2018); Board Director of Illinois CPA Society (2017-2022); Board Director of Lifeway Foods, Inc. (since 2020); Board Director of Green Thumb Industries, Inc. (February 2022 to October 2022); Member of Financial Accounting Standards Advisory Council (since 2021); Board Director of LanzaTech Global, Inc. (since 2023). | Significant managerial and executive experience, including experience as president and chief executive officer; significant background and experience in financial accounting; significant experience on other boards of directors, including for other registered investment companies. | ||||||
Interested Trustee |
||||||||||||
John Honis (6/16/1958) | Trustee | Trustee since July 2013; 3 year term (expiring at 2024 annual meeting). | President of Rand Advisors, LLC (August 2013 - August 2022); President of Valience Group, LLC since July 2021. | 8 | Manager of Turtle Bay Resort, LLC (August 2011 – December 2018) | 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. |
1 | On an annual basis, as a matter of Board policy, the Governance and Compliance Committee reviews each Trustee’s performance and determines whether to extend each such Trustee’s service for another year. The Board adopted a retirement policy wherein the Governance and Compliance 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 and Compliance Committee reports its findings to the Board. |
52 |
Annual Report |
December 31, 2022 |
Highland Income Fund |
Name and Date of Birth |
Position(s) with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years Officers | |||
Officers | ||||||
Dustin Norris (1/6/1984) |
Executive Vice President | Indefinite Term; Executive Vice President since April 2019. | Head of Distribution and Chief Product Strategist at NexPoint since March 2019; President of NexPoint Securities, Inc. since April 2018; Head of Distribution at NexPoint from November 2017 until March 2019; Chief Product Strategist at NexPoint from September 2015 to March 2019; Officer of the NexPoint Fund Complex since November 2012. | |||
Frank Waterhouse (4/14/1971) |
Treasurer, Principal Accounting Officer, Principal Financial Officer and Principal Executive Officer | Indefinite Term; Treasurer since May 2015; Principal Accounting Officer since October 2017; Principal Executive Officer and Principal Financial Officer since April 2021. | Chief Financial Officer of Skyview Group since February 2021; Chief Financial Officer and Partner of NexPoint Asset Management, L.P. (“NexPoint”) from December 2011 and March 2015, respectively, to February 2021; Treasurer of the NexPoint Fund Complex since May 2015; Principal Financial Officer October 2017 to February 2021; Principal Executive Officer February 2018 to February 2021. | |||
Will Mabry (7/2/1986) |
Assistant Treasurer | Indefinite Term; Assistant Treasurer since April 2021. | Director, Fund Analysis of Skyview Group since February 2021. Prior to his current role at Skyview Group, Mr. Mabry served as Senior Manager – Fund Analysis, Manager – Fund Analysis, and Senior Fund Analyst for HCMLP. | |||
Stephanie Vitiello (6/21/1983) |
Secretary, Chief Compliance Officer and Anti-Money Laundering Officer | Indefinite Term; Secretary since April 2021; Chief Compliance Officer and Anti-Money Laundering Officer since November 2021. | Chief Compliance Officer, Anti-Money Laundering Officer and Counsel of Skyview Group since February 2021. Prior to her current role at Skyview Group, Ms. Vitiello served as Managing Director – Distressed, Assistant General Counsel, Associate General Counsel and In- House Counsel for HCMLP. | |||
Rahim Ibraham (8/17/1989) |
Assistant Secretary | Indefinite Term; Assistant Secretary since November 2021. | Counsel and Compliance Manager at Skyview Group since March 2022. Prior to his current role at Skyview Group, Mr. Ibrahim served as a Compliance Analyst for Skyview Group from May 2021 to March 2022; Compliance Associate for Loring, Wolcott & Coolidge Trust, LLC from October 2019 until May 2021; Corporate Paralegal at Maples Group from April 2018 to October 2019; Associate Engagement Specialist-Compliance at Eze Software Group from June 2017 to April 2018. |
Annual Report |
53 |
54 |
Annual Report |
Highland Income Fund |
Annual Report, December 31, 2022 |
www.nexpointassetmgmt.com |
HFRO-AR-1222 |
Item 2. | Code of Ethics. |
(a) | Highland Income 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 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 in each of the last two fiscal years 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 for those fiscal years are $155,000 for the fiscal year ended December 31, 2021 and $162,750 for the fiscal year ended December 31, 2022. |
Audit-Related Fees
(b) | The aggregate fees billed in each of the last two fiscal years 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, 2021 and $0 for the fiscal year ended December 31, 2022. |
Tax Fees
(c) | The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $14,000 for the fiscal year ended December 31, 2021 and $14,000 for the fiscal year ended December 31, 2022. 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 in each of the last two fiscal years 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, 2021 and $0 for the fiscal year ended December 31, 2022. |
(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) 100%
(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. |
(g) | The aggregate non-audit fees billed by the Registrant’s 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 for each of the last two fiscal years of the Registrant was $0 for the fiscal year ended December 31, 2021 and $0 for the fiscal year ended December 31, 2022. |
(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. |
(a) | 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 (the “Exchange Act”). It is composed of the following Trustees, each of whom is not an “interested person” as defined in the 1940 Act: |
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. |
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 NexPoint Asset Management, L.P. (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”).
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.
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.
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. |
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.
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.
Supplemental Information of Issuers
In the event that the Company becomes aware that an issuer has filed with the Securities and Exchange Commission (the “SEC”) supplemental information in response to a Proxy Advisor’s voting recommendation, sufficiently in advance of the submission deadline which would reasonably be expected to affect the Company’s voting determination, the Compliance Department will review such supplemental information and provide the supplemental information to the relevant Portfolio Manager(s). The Portfolio Manager shall communicate to the Compliance Department whether or not the previously provided voting instructions should be changed, and the Compliance Department document the extent to which the supplemental information was considered and/or impacted the voting.
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.
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 advisor y fee for a Retail Fund advised by the Company or an affiliate). |
(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, including any supplemental information an issuer files with the SEC that the Company becomes aware of. 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. |
(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
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. |
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 manager, who is primarily responsible for the day-to-day management of the Registrant’s portfolio, is James Dondero.
James Dondero — Mr. Dondero is the founder and principal of NexPoint Asset Management, LP (“NPA”), a Dallas-based alternative investment firm. Mr. Dondero has over 30 years of experience investing across the alternative landscape. In that time, he established a number of integrated businesses to manage investments in real estate, private equity, and high-yield and structured credit, among other areas. Mr. Dondero holds various leadership roles across the NPA businesses; he serves as a portfolio manager for several funds and is an officer and director at NPA’s publicly traded REITs. Additionally, Mr. Dondero holds director positions at several companies within financial services, real estate, and other industries. He is the chairman of NexBank Capital, Inc. and a director of SeaOne Holdings, LLC. A dedicated philanthropist, Mr. Dondero actively contributes to initiatives in education, veterans’ affairs, and community and economic development, and has been instrumental in supporting a number of civic and cultural institutions in the Dallas-Fort Worth area. He is a member of the Southern Methodist University Cox School of Business Executive Board and the George W. Bush Presidential Center Executive Advisory Council. Mr. Dondero graduated from the University of Virginia where he earned highest honors (Beta Gamma Sigma, Beta Alpha Psi) from the McIntire School of Commerce with dual majors in accounting and finance. He received certification as a Certified Managerial Accountant (CMA) and is a holder of the right to use the Chartered Financial Analyst (CFA) designation.
(a)(2) | Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest |
The following table provides information about funds and accounts, other than the Registrant, for which the Registrant’s portfolio manager is primarily responsible for the day-to-day portfolio management as of December 31, 2022.
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 |
7 | $ | 1,793 | 1 | $ | 55 | ||||||||||
Other Pooled Investment |
3 | $ | 5,397 | 4 | $ | 5,397 | ||||||||||
Other Accounts: |
— | $ | — | — | $ | — |
Potential Conflicts of Interests
NexPoint Asset Management, L.P. (“NAM” 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. For the purposes of this section, the term “Highland” shall include the Adviser and its affiliated investment advisors, and all affiliates listed on its Form ADV, as filed via an amendment with the SEC January 20th, 2022 (CRD No. 149653).
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.
Highland 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. Highland 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, Highland furnishes advisory services to numerous clients in addition to the Registrant, and Highland may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts that have performance or higher fees paid to Highland 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, Highland, 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 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.
The Adviser, its affiliates or their partners, directors, officers or employees similarly serve or may serve other entities that operate in the same or related lines of business, including accounts managed by an investment adviser affiliated with 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 Registrant 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, pursuant to policies and procedures adopted by the Adviser and its advisory affiliates that are designed to manage potential conflicts of interest, which may, subject to applicable regulatory constraints, involve pro rata co-investment by the funds and such other clients or may involve a rotation of opportunities among the funds and such other clients. The Registrant will only make investments in which the Adviser or an affiliate hold an interest to the extent permitted under the 1940 Act and SEC staff interpretations or pursuant to the terms and conditions of the exemptive order received by certain advisers and funds affiliated with the Registrant, dated April 19, 2016. For example, exemptive relief is not required for the Registrant to invest in syndicated deals and secondary loan market transactions in which the Adviser or an affiliate has an interest where price is the only negotiated point. The order applies to all “Investment Companies,” including future closed-end investment companies registered under the 1940 Act that are managed by affiliated advisers, which includes the Registrant. The Registrant, therefore, may in the future invest in accordance with the terms and conditions of the exemptive order. To mitigate any actual or perceived conflicts of interest, allocation of limited offering securities (such as IPOs and registered secondary offerings) to principal accounts that do not include third party investors may only be made after all other client account orders for the security have been filled. However, there can be no assurance that such
policies and procedures will in every case ensure fair and equitable allocations of investment opportunities, particularly when
considered in hindsight.
Conflicts may arise in cases when clients and/or the Adviser and other affiliated entities invest in different parts of an issuer’s capital structure, including circumstances in which one or more clients own private securities or obligations of an issuer and other clients may own public securities of the same issuer. In addition, one or more clients may invest in securities, or other financial instruments, of an issuer that are senior or junior to securities, or financial instruments, of the same issuer that are held by or acquired for, one or more other clients. For example, if such issuer encounters financial problems, decisions related to such securities (such as over the terms of any workout or proposed waivers and amendments to debt covenants) may raise conflicts of interests. In such a distressed situation, a client holding debt securities of the issuer may be better served by a liquidation of the issuer in which it may be paid in full, whereas a client holding equity securities of the issuer might prefer a reorganization that holds the potential to create value for the equity holders. In the event of conflicting interests within an issuer’s capital structure, Highland generally will pursue the strategy that Highland believes best reflects what would be expected to be negotiated in an arm’s length transaction, but in all instances with due consideration being given to Highland’s fiduciary duties to each of its accounts (without regard to the nature of the accounts involved or fees received from such accounts). This strategy may be recommended by one or more Highland investment professionals. A single person may make decisions with respect to more than one part of an issuer’s capital structure. Highland personnel board members may still make recommendations to the applicable investment professional(s). A portfolio manager with respect to any applicable Highland registered investment company clients (“Retail Accounts”) will make an independent determination as to which course of action he or she determines is in the best interest of the applicable Retail Accounts. Highland may use external counsel for guidance and assistance. 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.
Another type of conflict may arise if one client account buys a security and another client account sells or shorts the same security. Currently, such opposing positions are generally not permitted within the same account without prior trade approval by the Adviser’s Chief Compliance Officer. However, a portfolio manager may enter into opposing positions for different clients to the extent each such client has a different investment objective and each such position is consistent with the investment objective of the applicable client. In addition, transactions in investments by one or more affiliated client accounts may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of other client accounts.
Because certain client accounts may have investment objectives, strategies or legal, contractual, tax or other requirements that differ (such as the need to take tax losses, realize profits, raise cash, diversification, etc.), an affiliated adviser may purchase, sell or continue to hold securities for certain client accounts contrary to other recommendations. In addition, an affiliated adviser may be permitted to sell securities or instruments short for certain client accounts and may not be permitted to do so for other affiliated client accounts.
As a result of the Fund’s arrangements with NexPoint, there may be times when NexPoint, the Adviser or its affiliates have interests that differ from those of the Fund’s shareholders, giving rise to a conflict of interest. The Fund’s officers serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Fund does, or of investment funds managed by the Adviser or its affiliates. Similarly, the Adviser or its affiliates may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of the Fund or its shareholders. For example, the Fund’s officers have, and will continue to have, management responsibilities for other investment funds, accounts or other investment vehicles
managed or sponsored by the Adviser and its affiliates. The Fund’s investment objective may overlap, in part or in whole, with the investment objective of such affiliated investment funds, accounts or other investment vehicles. As a result, those individuals may face conflicts in the allocation of investment opportunities among the Registrant and other investment funds or accounts advised by or affiliated with the Adviser. The Adviser will seek to allocate investment opportunities among eligible accounts in a manner that is fair and equitable over time and consistent with its allocation policy. However, the Fund can offer no assurance that such opportunities will be allocated to it fairly or equitably in the short-term or over time.
In addition, it is anticipated that a portion of the Registrant’s assets will be represented by real estate investment trusts (“REITs”), asset backed securities and/or collateralized loan obligations (“CLOs”) sponsored, organized and/or managed by the Adviser and its affiliates or its historical affiliates. The Adviser will monitor for conflicts of interest in accordance with its fiduciary duties and will provide the independent trustees of the Registrant with an opportunity to periodically review the Registrant’s investments in such REITs, asset-backed securities and/or CLOs and assure themselves that continued investment in such securities remains in the best interests of the Registrant and its shareholders. The Adviser may effect client cross-transactions where it causes a transaction to be effected between the Registrant and another client advised by the Adviser or any of its affiliates. The Adviser may engage in a client cross-transaction involving the Registrant any time that the Adviser believes such transaction to be fair to the Registrant and the other client of the Adviser or its affiliates. As further described below, the Adviser may effect principal transactions where the Registrant may make and/or hold an investment, including an investment in securities, in which the Adviser and/or its affiliates have a debt, equity or participation interest, in each case in accordance with applicable law, which may include the Adviser obtaining the consent and approval of the Registrant prior to engaging in any such principal transaction between the Registrant and the Adviser or its affiliates.
The Adviser may direct the Registrant to acquire or dispose of investments in cross trades between the Registrant and other clients of the Adviser or its affiliates in accordance with applicable legal and regulatory requirements. In addition, to the extent permitted by the 1940 Act and SEC staff interpretations, the Registrant may make and/or hold an investment, including an investment in securities, in which the Adviser and/or its affiliates have a debt, equity or participation interest, and the holding and sale of such investments by the Registrant may enhance the profitability of the Adviser’s own investments in such companies.
(a)(3) Compensation Structure of Portfolio Manager(s) or Management Team Members
NAM’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 pre-tax relative performance of a portfolio manager’s underlying account, the pre-tax combined performance of the portfolio manager’s underlying accounts, and the pre-tax relative performance of the portfolio manager’s underlying accounts measured against other employees. Portfolio managers are compensated generally based on their investment performance. The portfolio managers and other investment professionals are ranked based on the alpha generated by their portfolio versus their target index benchmark. Their investment performance is evaluated both versus a target index benchmark return and also compared to the returns of their peers at NAM and its affiliates. Other attributes which may be considered in the evaluation process are communication, teamwork, attitude and leadership.
The target indices for the Registrant’s portfolio managers are the Morningstar Bank Loan Fund Category and CS Leveraged Loan Index.
NAM is owned by Highland Capital Management Services, Inc., a Delaware corporation (“HCM Services”) and its general partner, Strand Advisors XVI, Inc., of which Mr. James Dondero is the sole stockholder. HCM Services is controlled by Mr. Dondero and Mr. Mark Okada by virtue of their respective share ownership. Mr. Dondero does not receive compensation based upon investment performance of the funds for which he serves as portfolio manager and instead shares in the profits of NAM.
The principal components of compensation include a base salary, a discretionary bonus and various retirement benefits.
Base compensation. Generally, portfolio managers receive base compensation based on their seniority and/or their position with NAM, which may include the amount of assets supervised and other management roles within NAM. Base compensation is determined by taking into account current industry norms and market data to ensure that NAM 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.
Because each person’s compensation is based on his or her individual performance, NAM 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 NAM.
(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, 2022.
Name of Portfolio Managers |
Dollar Ranges of Equity Securities Beneficially | |
James Dondero |
Over $1,000,000 |
(b) Not applicable.
Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
Period1 |
(a) Total Number of Shares Purchased |
(b) Average Price Paid per Share |
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
January 1, 2022 to January 31, 2022 |
635,201 | 11.0189 | 635,201 | 12,001,130 | ||||||||||||
February 1, 2022 to February 29, 2022 |
475,820 | 11.4852 | 475,820 | 6,536,238 | ||||||||||||
March 1, 2022 to March 31, 2022 |
559,084 | 11.6910 | 559,084 | — | ||||||||||||
April 1, 2022 to April 31, 2022 |
— | — | — | — | ||||||||||||
May 1, 2022 to May 31, 2022 |
— | — | — | — | ||||||||||||
June 1, 2022 to June 30, 2022 |
— | — | — | — | ||||||||||||
July 1, 2022 to July 31, 2022 |
— | — | — | — | ||||||||||||
August 1, 2022 to August 31, 2022 |
— | — | — | — | ||||||||||||
September 1, 2022 to September 31, 2022 |
— | — | — | — | ||||||||||||
October 1, 2022 to October 31, 20222 |
— | — | — | — | ||||||||||||
November 1, 2022 to November 31, 2022 |
— | — | — | — | ||||||||||||
December 1, 2022 to December 31, 2022 |
— | — | — | — | ||||||||||||
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|
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|
|
|
|
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Total |
1,670,105 | 11.3768 | 1,670,105 | — | ||||||||||||
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(1) | On October 13, 2021, the Board authorized the repurchase of $40 million of the Company’s common shares over a six-month period. |
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.
Item 11. | Controls and Procedures. |
Assessment of the Registrant’s Control Environment
(a) Evaluation of Disclosure Controls and Procedures.
The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 (the “Exchange Act”) and the 1940 Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
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 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. | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies. |
(a)
(1) | Gross income from securities lending activities: $46,353 |
(2) | All fees and/or compensation for securities lending activities and related services: $0 |
(3) | Aggregate fees/compensation: $0 |
(4) | Net income from securities lending activities: $46,353 |
(b) | “The Registrant’s most recent fiscal year ended December 31, 2021, The Bank of New York (“BNY”) served as the Registrant’s securities lending agent.” |
As a securities lending agent, BNY is responsible for the implementation and administration of the Registrant’s securities lending program. Pursuant to its respective Securities Lending Agreement (“Securities Lending Agreement”) with the Registrant, BNY, as a general matter, performs various services, including the following:
• | Locating borrowers; |
• | Monitoring daily the value of the loaned securities and collateral (i.e. the collateral posted by the party borrowing); |
• | Negotiation of loan terms; |
• | Selection of securities to be loaned; |
• | Recordkeeping and account servicing; |
• | Monitoring of dividend activity and material proxy votes relating to loaned securities, and; |
• | Arranging for return of loaned securities to the registrant at loan termination. |
Item 13. | Exhibits. |
(a)(1) |
(a)(2) |
(a)(3) | Not applicable. |
(a)(4)(i) | Not applicable. |
(a)(4)(ii) | Not applicable. |
(b) |
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.
HIGHLAND INCOME FUND
By (Signature and Title): | /s/ Frank Waterhouse | |
Frank Waterhouse | ||
Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Treasurer | ||
Date: March 10, 2023 |
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 person(s) on behalf of the Registrant and in the capacities and on the dates indicated.
By (Signature and Title): | /s/ Frank Waterhouse | |
Frank Waterhouse | ||
Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Treasurer | ||
Date: March 10, 2023 |
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