CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)

 

As of September 30, 2022    Highland Income Fund

 

Shares

   Value ($)  
 

Common Stocks — 56.8%

 
 

COMMUNICATION SERVICES1.1%

 
  97,600     

Telesat(a)

     762,256  
  96,700     

Telesat, Class B(a)

     755,227  
  27,134     

TerreStar Corporation(a)(b)(c)(d)

     9,578,573  
     

 

 

 
        11,096,056  
     

 

 

 
 

CONSUMER DISCRETIONARY0.0%

 
  1,450     

Toys ‘R’ Us(a)(b)(c)

     31,683  
     

 

 

 
 

ENERGY0.0%

 
  1,118,286     

Value Creation, Inc.(a)(b)(c)

     —    
     

 

 

 
 

GAMING/LEISURE0.5%

 
  34,512     

LLV Holdco LLC - Series A, Membership Interest(a)(b)(c)(e)

     5,116,737  
  436     

LLV Holdco LLC - Series B, Membership Interest(a)(b)(c)(e)

     64,590  
     

 

 

 
        5,181,327  
     

 

 

 
 

HEALTHCARE2.6%

 
  12,026,660     

CCS Medical Inc.(a)(b)(c)(e)

     26,639,052  
     

 

 

 
 

MATERIALS0.1%

 
  299,032     

MPM Holdings, Inc.(a)

     1,495,160  
     

 

 

 
 

REAL ESTATE52.5%

 
  1,474,379     

Allenby(a)(b)(c)(e)

     —    
  10,359,801     

Claymore(a)(b)(c)(e)

     —    
  574,004     

Healthcare Realty Trust, Class A, REIT

     11,967,983  
  68,862     

Independence Realty Trust, Inc., REIT

     1,152,061  
  2,356,665     

IQHQ, Inc.(b)(c)

     65,986,620  
  4,372,286     

NexPoint Real Estate Finance(e)

     65,496,841  
  154,840     

NexPoint Residential Trust, Inc., REIT(e)

     7,155,156  
  32,203     

NexPoint Storage Partners, Inc.(a)(b)(c)(e)

     45,219,355  
  90,436,434     

NFRO REIT SUB II, LLC(a)(b)(c)(e)

     150,189,415  
  35,074,157     

NFRO REIT SUB, LLC(a)(b)(c)(e)

     168,409,617  
  844,371     

Washington Real Estate Investment Trust, REIT(f)

     14,827,155  
     

 

 

 
        530,404,203  
     

 

 

 
  

Total Common Stocks (Cost $821,094,450)

     574,847,481  
  

 

 

 

Principal Amount ($)

      
 

U.S. Senior Loans (g) — 23.6%

 
 

COMMUNICATION SERVICES0.8%

 
  8,305,032     

TerreStar Corporation, Term Loan D, 02/27/28 (b)(c)

     8,242,744  
  60,212     

TerreStar Corporation, Term Loan H, 02/28/23 (b)(c)

     59,760  
  64,535     

TerreStar Corporation, Term Loan, 1st Lien, 02/28/23 (b)(c)

     64,051  
     

 

 

 
        8,366,555  
     

 

 

 

Principal Amount ($)

   Value ($)  
 

U.S. Senior Loans (continued)

 
 

CONSUMER PRODUCTS0.3%

 
  3,240,074     

Dayco Products LLC, Term Loan B, 1st Lien, LIBOR USD 3 Month + 4.250%, 05/08/23

     3,209,698  
     

 

 

 
 

ENERGY0.6%

 
  6,403,998     

Quarternorth Energy Holding, Term Loan, 2nd Lien, 08/27/26

     6,393,335  
     

 

 

 
 

GAMING/LEISURE1.5%

 
  22,764,040     

Ginn-LA CS Borrower LLC, Term Loan A, 1st Lien, (b)(c)(i)

     878,282  
  48,791,955     

Ginn-LA CS Borrower LLC, Term Loan B, 1st Lien, (b)(c)(i)

     —    
  15,278,036     

LLV Holdco LLC, Revolving Exit Loan, 12/31/22 (b)(c)(e)

     13,689,120  
     

 

 

 
        14,567,402  
     

 

 

 
 

HEALTHCARE1.5%

 
  15,501,667     

CCS Medical Inc., Junior Credit Term Loan, 1st Lien, 01/04/27 (b)(c)(e)

     15,501,667  
     

 

 

 
 

INFORMATION TECHNOLOGY6.0%

 
  61,411,237     

EDS Legacy Partners, LIBOR USD 3 Month + 2.750%, 12/14/23 (b)(c)(e)

     60,452,853  
     

 

 

 
 

METALS & MINING1.2%

 
  13,112,017     

Peabody Energy Corporation, 2018 Refinancing Term Loan, 1st Lien, 03/31/25

     12,512,864  
     

 

 

 
 

REAL ESTATE11.3%

 
  65,000,000     

NexPoint SFR Operating Partnership, LP, 05/24/27 (b)(c)(e)

     65,000,000  
  6,400,000     

NHT Operating Partnership LLC Convertible Promissory Note, 09/30/42 (b)(c)(e)

     6,400,000  
  42,550,000     

NHT Operating Partnership LLC Secured Promissory Note, 02/14/27 (b)(c)(e)

     42,550,000  
     

 

 

 
        113,950,000  
     

 

 

 
 

RETAIL0.4%

 
  3,905,331     

GNC Holdings LLC, Term Loan, 2nd Lien, 10/07/26

     3,594,525  
     

 

 

 
  

Total U.S. Senior Loans (Cost $332,983,602)

     238,548,899  
  

 

 

 
 

Collateralized Loan Obligations — 11.2%

 
  5,800,000     

Acas CLO, Series 2015-1A, Class FRR ICE LIBOR USD 3 Month + 7.910%, 10.65%, 10/18/2028 (j)(k)

     3,427,603  
 


CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2022    Highland Income Fund

 

Principal Amount ($)

   Value ($)  
 

Collateralized Loan Obligations (continued)

 
  2,000,000     

Apex Credit CLO, Series 2019-1A, Class D ICE LIBOR USD 3 Month + 7.100%, 9.84%, 4/18/2032 (j)(k)

     1,597,600  
  1,500,000     

Atlas Senior Loan Fund, Series 2017-8A, Class F ICE LIBOR USD 3 Month + 7.150%, 9.89%, 1/16/2030 (j)(k)

     942,450  
  2,400,000     

Atlas Senior Loan Fund XII, Series 2018-12A, Class E ICE LIBOR USD 3 Month + 5.950%, 8.73%, 10/24/2031 (j)(k)

     2,022,000  
  1,250,000     

Cathedral Lake CLO, Series 2017-1A, Class DR ICE LIBOR USD 3 Month + 7.250%, 9.76%, 10/15/2029 (j)(k)

     1,014,875  
  2,000,000     

Cathedral Lake VII, Series 2021-7RA, Class E ICE LIBOR USD 3 Month + 7.770%, 10.28%, 1/15/2032 (j)(k)

     1,760,000  
  5,462,500     

CIFC Funding, Series 2013-2A, Class SUB 0.00%, 10/18/2030 (h)(j)(k)

     1,174,437  
  1,000,000     

CIFC Funding, Series 2018-1A, Class ER2 ICE LIBOR USD 3 Month + 5.850%, 8.59%, 1/18/2031 (j)(k)

     895,000  
  3,000,000     

CIFC Funding, Series 2015-1A, Class SUB 0.00%, 1/22/2031 (h)(j)(k)(l)

     742,500  
  3,324,756     

CIFC Funding, Series 2014-4RA, Class SUB 0.00%, 1/17/2035 (h)(j)(k)(l)

     947,555  
  2,500,000     

CIFC Funding, Series 2014-1A, Class SUB 0.00%, 1/18/2031 (h)(j)(k)

     550,000  
  3,000,000     

Covenant Credit Partners CLO III, Series 2017-1A, Class F ICE LIBOR USD 3 Month + 7.950%, 10.46%, 10/15/2029 (j)(k)

     2,190,000  
  1,537,000     

Dryden 36 Senior Loan Fund, Series 2019-36A, Class ER2 ICE LIBOR USD 3 Month + 6.880%, 9.39%, 4/15/2029 (j)(k)

     1,383,300  
  4,000,000     

Eaton Vance CLO, Series 2019-1A, Class F ICE LIBOR USD 3 Month + 8.250%, 10.76%, 4/15/2031 (j)(k)

     3,320,000  
  40,385,754     

FREMF Mortgage Trust, Series 2021-KF112, Class CS SOFR30A + 6.250%, 8.53%, 1/25/2031 (j)(k)

     40,474,098  

Principal Amount ($)

   Value ($)  
 

Collateralized Loan Obligations (continued)

 
  5,450,000     

Galaxy XXVI CLO, Series 2018-26A, Class F ICE LIBOR USD 3 Month + 8.000%, 10.98%, 11/22/2031 (j)(k)

     4,251,000  
  1,000,000     

GoldenTree Loan Management US CLO 3, Series 2018-3A, Class F ICE LIBOR USD 3 Month + 6.500%, 9.21%, 4/20/2030 (j)(k)

     782,100  
  2,500,000     

GoldenTree Loan Opportunities IX, Series 2018-9A, Class FR2 ICE LIBOR USD 3 Month + 7.640%, 10.45%, 10/29/2029 (j)(k)

     2,050,833  
  2,125,000     

ICG US CLO, Series 2022-1A, Class DJ TSFR3M + 5.730%, 7.84%, 7/20/2035 (j)(k)

     2,098,438  
  4,000,000     

Jay Park CLO, Ltd., Series 2018-1A, Class ER ICE LIBOR USD 3 Month + 7.350%, 10.06%, 10/20/2027 (j)(k)

     3,460,000  
  3,000,000     

KKR CLO 18, Series 2017-18, Class E ICE LIBOR USD 3 Month + 6.450%, 9.19%, 7/18/2030 (j)(k)

     2,710,950  
  1,400,000     

Madison Park Funding XX, Series 2018-20A, Class ER ICE LIBOR USD 3 Month + 5.300%, 8.07%, 7/27/2030 (j)(k)

     1,226,820  
  2,350,000     

Madison Park Funding XXIV, Series 2019-24A, Class ER TSFR3M + 7.462%, 9.94%,
10/20/2029 (j)(k)

     2,170,695  
  2,000,000     

Madison Park Funding XXIX, Series 2018-29A, Class F ICE LIBOR USD 3 Month + 7.570%, 10.31%, 10/18/2030 (j)(k)

     1,832,600  
  1,000,000     

Madison Park Funding XXX, Series 2018-30A, Class F ICE LIBOR USD 3 Month + 6.850%, 9.36%, 4/15/2029 (j)(k)

     850,400  
  490,000     

Magnetite VII, Ltd., Series 2018-7A, Class ER2 ICE LIBOR USD 3 Month + 6.500%, 9.01%, 1/15/2028 (j)(k)

     428,750  
  2,500,000     

Man GLG US CLO, Series 2018-1A, Class DR ICE LIBOR USD 3 Month + 5.900%, 8.61%, 4/22/2030 (j)(k)

     1,991,313  
  4,000,000     

Northwoods Capital XII-B, Ltd., Series 2018-12BA, Class F ICE LIBOR USD 3 Month + 8.170%, 11.46%, 6/15/2031 (j)(k)

     2,720,000  
  2,900,000     

OHA Credit Partners XII, Series 2018-12A, Class FR ICE LIBOR USD 3 Month + 7.680%, 10.46%, 7/23/2030 (j)(k)

     2,411,785  
 


CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2022    Highland Income Fund

 

Principal Amount ($)

   Value ($)  
 

Collateralized Loan Obligations (continued)

 
  3,110,000     

OZLM XXII, Ltd., Series 2018-22A, Class E
ICE LIBOR USD 3 Month + 7.390%, 10.13%, 1/17/2031 (j)(k)

     2,177,000  
  2,000,000     

Park Avenue Institutional Advisers CLO, Series 2021-2A, Class E ICE LIBOR USD 3 Month + 7.010%, 9.52%, 7/15/2034 (j)(k)

     1,780,000  
  3,150,000     

Saranac CLO III, Ltd., Series 2018-3A, Class ER
ICE LIBOR USD 3 Month + 7.500%, 11.10%, 6/22/2030 (j)(k)

     2,178,225  
  2,000,000     

Symphony CLO XXVI, Series 2021-26A, Class ER ICE LIBOR USD 3 Month + 7.500%, 10.21%, 4/20/2033 (j)(k)

     1,820,000  
  5,955,627     

THL Credit Wind River, Series 2014-2A, Class SUB 0.00%, 1/15/2031 (b)(c)(h)(i)(j)(k)

     1,179,214  
  2,200,000     

TICP CLO I-2, Series 2018-IA, Class E
ICE LIBOR USD 3 Month + 8.000%, 10.77%, 4/26/2028 (j)(k)

     1,877,150  
  4,150,000     

TICP CLO III-2, Series 2018-3R, Class F
ICE LIBOR USD 3 Month + 7.980%, 10.69%, 4/20/2028 (j)(k)

     3,505,920  
  1,000,000     

Vibrant ClO 1X, Series 2018-9A, Class D
ICE LIBOR USD 3 Month + 6.250%, 8.96%, 7/20/2031 (j)(k)

     780,000  
  1,275,000     

Voya CLO, Series 2018-2A, Class DR
TSFR3M + 5.862%, 8.40%, 4/25/2031 (j)(k)

     994,500  
  1,000,000     

Webster Park CLO, Series 2018-1A, Class ER
ICE LIBOR USD 3 Month + 7.750%, 10.46%, 7/20/2030 (j)(k)

     880,000  
  3,000,000     

Zais CLO 3, Ltd., Series 2018-3A, Class DR
ICE LIBOR USD 3 Month + 6.910%, 9.42%, 7/15/2031 (j)(k)

     2,141,250  
  3,300,000     

Zais CLO 8, Ltd., Series 2018-1A, Class E
ICE LIBOR USD 3 Month + 5.250%, 7.76%, 4/15/2029 (j)(k)

     2,557,500  
     

 

 

 
  

Total Collateralized Loan Obligations (Cost $127,567,324)

     113,297,861  
  

 

 

 

Shares

   Value ($)  
 

LLC Interest — 4.9%

 
  830     

NEXLS LLC(b)(c)(e)

     40,523,955  
  10,000,000     

SFR WLIF III, LLC(b)(c)(e)

     9,384,000  
     

 

 

 
  

Total LLC Interest
(Cost $40,834,362)

     49,907,955  
  

 

 

 

Units

      
 

Warrants — 3.3%

 
 

ENERGY3.3%

 
  5,801     

Arch Resources, Expires 10/08/2023(a)(b)(c)

     403,344  
  85,465     

Quarternorth Energy Holding Inc. Tranche 1, Expires 08/27/2029(a)

     726,452  
  164,598     

Quarternorth Energy Holding Inc. Tranche 2, Expires 08/27/2029(a)

     905,289  
  254,538     

Quarternorth Energy Holding Inc. Tranche 3, Expires 08/27/2029(a)

     31,138,524  
     

 

 

 
  

Total Warrants
(Cost $31,011,555)

     33,173,609  
  

 

 

 

Shares

      
 

Preferred Stock — 3.0%

 
 

FINANCIALS0.5%

 
  3,980     

Eastland CLO 1.00%, 05/01/2022(b)(c)(k)

     40,392  
  34,500     

Eastland CLO II (a)(b)(c)(m)(n)

     350,134  
  8,860     

Gleneagles CLO , 12/30/2049(a)(b)(c)(k)(m)

     160,741  
  40,000     

Granite Point Mortgage Trust 7.00%(f)(n)(o)

     810,400  
  62,600     

Grayson CLO , 11/01/2021(b)(c)(k)(m)

     689,261  
  150,977     

NexPoint Real Estate Finance 8.50%(e)(f)(n)

     3,368,297  
  12,553     

Rockwall CDO , 08/01/2024(a)(b)(c)(k)(m)

     90,134  
  4,800     

Rockwall CDO (b)(c)(m)(n)

     81  
     

 

 

 
        5,509,440  
     

 

 

 
 

HEALTHCARE2.0%

 
  270,246     

Apnimed (b)(c)(m)(n)

     2,400,004  
  2,361,111     

Sapience Therapeutics Inc 8.00%(b)(c)(n)

     7,791,666  
  3,440,476     

Sapience Therapeutics Inc,
Class B 8.00%(a)(b)(c)(n)

     9,805,357  
     

 

 

 
        19,997,027  
     

 

 

 
 


CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2022    Highland Income Fund

 

Shares

   Value ($)  
 

Preferred Stock (continued)

 
 

REAL ESTATE0.5%

 
  267,154     

Braemar Hotels & Resorts, Inc.,
REIT 5.50%(a)(n)

     3,948,536  
  249,514     

G-LA Resorts Holdings (a)(b)(c)(m)(n)

     249,514  
  47,300     

Wheeler Real Estate Investment Trust, REIT 8.75% (a)(n)(p)

     552,464  
  82,301     

Wheeler Real Estate Investment Trust, REIT 9.00%(a)(n)

     189,293  
     

 

 

 
        4,939,807  
     

 

 

 
  

Total Preferred Stock (Cost $73,611,954)

     30,446,274  
  

 

 

 
 

Registered Investment Companies — 1.5%

 
  48,649     

Highland Global Allocation Fund (e)

     424,219  
  1,156,943     

NexPoint Diversified Real Estate Trust (e)(f)

     14,519,635  
     

 

 

 
  

Total Registered Investment Companies (Cost $18,149,407)

     14,943,854  
  

 

 

 
 

Exchange-Traded Funds — 0.6%

 
  54,265     

Direxion Daily S&P 500 Bull 3X

     2,907,519  
  146,675     

ProShares UltraPro QQQ

     2,833,761  
     

 

 

 
        5,741,280  
     

 

 

 
  

Total Exchange-Traded Funds
(Cost $7,928,086)

     5,741,280  
  

 

 

 

Principal Amount ($)

      
 

Corporate Bonds & Notes — 0.4%

 
 

COMMUNICATION SERVICES — 0.0%

 
  3,100     

iHeartCommunications, Inc. 6.38%, 05/01/26

     2,882  
     

 

 

 
 

FINANCIALS — 0.4%

 
  4,000,000     

South Street Securities Funding LLC 6.25%, 12/30/26 (k)

     3,600,000  
     

 

 

 
 

INDUSTRIALS — 0.0%

 
  7,500,000     

American Airlines 12/31/49 (b)(c)(h)(i)(q)

     —    
     

 

 

 
 

UTILITIES0.0%

 
  15,222,107     

Bruce Mansfield Pass-Through Trust 6.85%, 06/01/34 (i)

     —    
     

 

 

 
  

Total Corporate Bonds & Notes (Cost $4,047,650)

     3,602,882  
  

 

 

 

Shares

      
 

Master Limited Partnership — 0.2%

 
 

ENERGY0.2%

 
  179,200     

Energy Transfer L.P.

     1,976,576  
     

 

 

 
  

Total Master Limited Partnership (Cost $1,869,174)

     1,976,576  
  

 

 

 

Units

   Value ($)  
 

Rights — 0.0%

 
 

UTILITIES0.0%

 
  4,933     

Texas Competitive Electric Holdings Co., LLC (a)

     6,166  
     

 

 

 
  

Total Rights
(Cost $–)

     6,166  
  

 

 

 

Principal Amount ($)

      
 

Repurchase Agreement(r)(s) — 0.0%

 
  191,697     

Citigroup Global Markets, Inc.
3.050%, dated 09/30/2022 to be repurchased on 10/03/2022, repurchase price $191,746 (collateralized by U.S. Government and Treasury obligations, ranging in par value $1,819 - $113,605, 1.375% - 4.500%, 04/15/2025 – 12/01/2048; with total market value $195,697)

     191,697  
     

 

 

 
  

Total Repurchase Agreement
(Cost $191,697)

     191,697  
  

 

 

 

Shares

      
 

Cash Equivalent — 10.7%

 
 

MONEY MARKET FUND(t) — 10.7%

 
  108,066,882     

Dreyfus Treasury Obligations Cash Management, Institutional Class 2.850%

     108,066,882  
     

 

 

 
  

Total Cash Equivalent (Cost $108,066,882)

     108,066,882  
  

 

 

 
 

Total Investments – 116.2%

     1,174,751,416  
  

 

 

 
 

    (Cost $1,567,356,143)

  
 

Securities Sold Short— (0.6)%

 
 

Common Stocks — (0.6)%

 
 

INFORMATION TECHNOLOGY(0.6)%

 
  (41,100)     

Texas Instruments, Inc.

     (6,361,458
     

 

 

 
  

Total Common Stocks (Proceeds $4,920,256)

     (6,361,458
     

 

 

 
  

Total Securities Sold Short - (0.6)% (Proceeds $4,920,256)

     (6,361,458
     

 

 

 
 

Other Assets & Liabilities, Net - (15.6)%(u)

     (157,320,921
  

 

 

 
 

Net Assets - 100.0%

     1,011,069,037  
  

 

 

 
 


CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2022    Highland Income Fund

 

(a)

Non-income producing security.

(b)

Securities with a total aggregate value of $757,141,916, or 74.9% of net assets, were classified as Level 3 within the three-tier fair value hierarchy. Please see Consolidated Notes to Investment Portfolio 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 Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board 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 $757,141,916, or 74.9% of net assets, were fair valued under the Fund’s valuation procedures as of September 30, 2022. Please see Notes to Consolidated Investment Portfolio.

(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 Period
End
    Percent
of Net
Assets
 

TerreStar Corporation

  Common
Stocks
    3/16/2018     $ 3,093,276     $ 9,578,573       0.9

 

(e)

Affiliated issuer. Assets with a total aggregate fair value of $740,104,509, or 73.2% of net assets, were affiliated with the Fund as of September 30, 2022.

(f)

Securities (or a portion of securities) on loan. As of September 30, 2022, the fair value of securities loaned was $471,817. The loaned securities were secured with cash and/or securities collateral of $482,704. Collateral is calculated based on prior day’s prices.

(g)

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 September 30, 2022, the LIBOR USD 3 Month rate was 3.75%. 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.

(h)

No interest rate available.

(i)

The issuer is, or is in danger of being, in default of its payment obligation.

(j)

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.

(k)

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 September 30, 2022, these securities amounted to $117,878,389 or 11.7% of net assets.

(l)

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.

(m)

There is currently no rate available.

(n)

Perpetual security with no stated maturity date.

(o)

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 September 30, 2022.

(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 September 30, 2022 was $191,697.

(t)

Rate reported is 7 day effective yield.

(u)

As of September 30, 2022, $6,512,295 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in “Other Assets & Liabilities, Net”.

 


CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (concluded)

 

As of September 30, 2022    Highland Income Fund

 

Reverse Repurchase Agreement outstanding as of September 30, 2022 were as follows:

 

Counterparty

  

Collateral Pledged

  Interest
Rate %
    Trade
Date
    Repurchase
Amount
    Principal
Amount
    Value  

Mizuho Securities

   FREMF Mortgage Trust, Series 2021-KF103, Class CS, 11/02/2022     4.7       3/10/2022     $ (24,284,000   $ (24,284,000   $ (24,284,000
          

 

 

   

 

 

 

Total Reverse Repurchase Agreement

        $ (24,284,000   $ (24,284,000
       

 

 

   

 

 

 

 


NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)

 

As of September 30, 2022    Highland Income Fund

 

Organization

Highland Income Fund (the “Fund”) is organized as an unincorporated business trust under the laws of The Commonwealth of Massachusetts. The Fund is registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, closed-end management investment company. On September 25, 2017, the Fund acquired the assets of Highland Floating Rate Opportunities Fund (the “Predecessor Fund”), a series of Highland Funds I, a Delaware statutory trust. The Fund is the successor to the accounting and performance information of the Predecessor Fund.

Basis of Consolidation

The Fund consolidates HFRO Sub, LLC (“HFRO Sub”), a Delaware wholly owned subsidiary, for financial reporting, and the holdings of HFRO Sub, LLC and its operations are included within the consolidated financial statements for the Fund. HFRO Sub is a bankruptcy remote financing vehicle used to obtain leverage with the portfolio of bank loans serving as collateral. All inter-company accounts and transactions have been eliminated in the consolidation. As of March 8, 2021, the HFRO Sub and related Financing Agreement was terminated.

Valuation of Investments

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

Securities for which market quotations are not readily available, or for which the Fund has determined that the price received from a

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

There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Fund.

Fair Value Measurements

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


NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2022    Highland Income Fund

 

Level 1    Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;
Level 2 —        Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and
Level 3 —    Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

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

The fair value of the Fund’s senior loans and bonds are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans and bonds that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

The fair value of the Fund’s common stocks, registered investment companies, rights and warrants that are not actively traded on

national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option.

At the end of each calendar quarter, the Investment Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity,

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

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


NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2022    Highland Income Fund

 

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund’s assets as of September 30, 2022 is as follows:

 

     Total value at
September 30,
2022

($)
     Level 1 Quoted
Price

($)
     Level 2 Significant
Observable Inputs

($)
    Level 3 Significant
Unobservable
Inputs

($)
 

Highland Income Fund

 

Assets

          

Common Stocks

          

Communication Services

     11,096,056        1,517,483        —         9,578,573  

Consumer Discretionary

     31,683        —          —         31,683  

Energy

     —          —          —         —   (1) 

Gaming/Leisure

     5,181,327        —          —         5,181,327  

Healthcare

     26,639,052        —          —         26,639,052  

Materials

     1,495,160        —          1,495,160       —    

Real Estate

     530,404,203        100,599,196        —         429,805,007  

U.S. Senior Loans

          

Communication Services

     8,366,555        —          —         8,366,555  

Consumer Products

     3,209,698        —          3,209,698       —    

Energy

     6,393,335        —          6,393,335       —    

Gaming/Leisure

     14,567,402        —          —         14,567,402  

Healthcare

     15,501,667        —          —         15,501,667  

Information Technology

     60,452,853        —          —         60,452,853  

Metals & Mining

     12,512,864        —          12,512,864       —    

Real Estate

     113,950,000        —          —         113,950,000  

Retail

     3,594,525        —          3,594,525       —    

Collateralized Loan Obligations

     113,297,861        —          112,118,647       1,179,214  

LLC Interest

     49,907,955        —          —         49,907,955  

Warrants

          

Energy

     33,173,609        —          32,770,265       403,344  

Preferred Stock

          

Financials

     5,509,440        3,368,297        810,400       1,330,743  

Healthcare

     19,997,027        —          —         19,997,027  

Real Estate

     4,939,807        4,690,293        —         249,514  

Registered Investment Companies

     14,943,854        14,943,854        —         —    

Exchange Traded Funds

     5,741,280        5,741,280        —         —    

Corporate Bonds & Notes

          

Communication Services

     2,882        —          2,882       —    

Financials

     3,600,000        —          3,600,000       —    

Industrials

     —          —          —         —   (1) 

Utilities

     —          —          —   (1)      —    

Master Limited Partnerships

          

Energy

     1,976,576        1,976,576        —         —    

Rights

          

Utilities

     6,166        —          6,166       —    

Repurchase Agreement

     191,697        191,697        —         —    

Cash Equivalents

     108,066,882        108,066,882        —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

     1,174,751,416        241,095,558        176,513,942       757,141,916  
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

          

Securities Sold Short

          

Common Stocks

          

Information Technology

     (6,361,458      (6,361,458      —         —    

Reverse Repurchase Agreement

     (24,284,000      —          (24,284,000     —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities

     (30,645,458      (6,361,458      (24,284,000     —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     1,144,105,958        234,734,100        152,229,942       757,141,916  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1)

This category includes securities with a value of zero.


NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2022    Highland Income Fund

 

The table below sets forth a summary of changes in the Fund’s assets measured at fair value using significant unobservable inputs (Level 3) for the period ended September 30, 2022.

 

Category

  Fair Value at
09/30/22

$
    Valuation Technique     Unobservable Inputs     Range
Input Value(s)
(Average Input
Value)
 

Common Stocks

    471,235,642       Multiples Analysis       Unadjusted Price/MHz-PoP       $0.09 - $0.95 ($0.515)  
      Net Asset Value       N/A       $28.00  
      Discounted Cash Flow       Discount Rate       10.00% - 29.5% (15.85%)  
        Capitalization Rate       5.50% - 9.50% (7.50%)  
      Transaction Analysis       Multiple of EBITDA less CAPEX       11.50x - 13.00x (12.25x)  
        Price per Sq. Ft.       $25.00 - $31.00 ($28.00)  
      Transaction Indication of Value       Enterprise Value ($mm)       $891.00  

U.S. Senior Loans

    212,838,477       Discounted Cash Flow       Discount Rate       8.375% -  17.50% (12.34%)  
      Transaction Indication of Value       Net Purchase Price ($mm)       $6.36  
        Cost Price       N/A  
      Third Party Indication of Value       Broker Quote       Various  

Collateralized Loan Obligation

    1,179,214       Third Party Indication of Value       Broker Quote       Various  

Preferred Stock

    21,577,284       NAV Approach       Discount Rate       70.0%  
      Transaction Indication of Value       Cost Price       N/A  

LLC Interest

    49,907,955       Discounted Cash Flow       Discount Rate       1.49% - 5.43% (3.46%)  
          14.0%  

Warrants

    403,344       Black–Scholes Model       Volatilty       87.94%  
 

 

 

       
    757,141,916        

Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates without observable inputs and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments.

For the quarter ended September 30, 2022, there was one Warrant position that transferred into Level 3.


NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2022    Highland Income Fund

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

     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
September 30,
2022
     Change in
Unrealized
Appreciation
(Depreciation)
from
Investments
held at
September 30,
2022
 
     $      $      $      $      $     $     $     $      $     $      $  

Common Stocks

                            

Communication Services

     9,098,844        —          —          —          —         —         479,729       —          —         9,578,573        479,729  

Consumer Discretionary

     31,683        —          —          —          (82,427     —         82,427       —          —         31,683        82,427  

Financials

     105,659,195        —          —          —          —         36,500,572       (36,419,725     —          (105,740,042     —          —    

Gaming/Leisure

     3,321,591        —          —          —          —         —         1,859,736       —          —         5,181,327        1,859,736  

Healthcare

     385,699        —          —          —          —         —         (19,717,901     45,971,254        —         26,639,052        (19,717,901

Real Estate

     379,145,661        —          —          —          (119,080,852     (509,145     31,013,221       139,236,122        —         429,805,007        31,013,221  

U.S. Senior Loans

                            

Communication Services

     7,755,762        —          —          23        —         —         (58,403     669,173        —         8,366,555        (58,403

Gaming/Leisure

     16,635,684        —          —          —          —         —         (796,220     —          (1,272,062     14,567,402        (4,140,516

Healthcare

     48,880,946        —          —          —          —         —         20,638,034       40,848,841        (94,866,154     15,501,667        (25,177,174

Information Technology

     49,533,000        —          —          —          —         —         6,508,617       4,411,236        —         60,452,853        6,508,617  

Real Estate

     80,337,570        —          —          —          —         1,987,290       (987,290     172,424,972        (139,812,542     113,950,000        —    

Utilities

     59,423        —          —          —          —         —         (59,423     —          —         —          —    

Collateralized Loan Obligations

     1,471,635        —          —          —          —         —         (292,421     —          —         1,179,214        (292,421

LLC Interest

     46,562,686        —          —          —          —         274,657       1,386,704       13,205,294        (11,521,386     49,907,955        1,386,704  

Warrants

                            

Energy

     —          256,694        —          —          —         —         146,650       —          —         403,344        146,650  

Preferred Stock

                            

Financials

     27,952,200        24,278,638        —          —          —         —         (50,900,095     —          —         1,330,743        (50,900,095

Healthcare

     —          —          —          —          —         —         427,023       19,570,004        —         19,997,027        427,023  

Real Estate

     249,515        —          —          —          —         —         (1     —          —         249,514        (1

Claims

     52,138        —          —          —          —         —         (52,138     —          —         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     777,133,232        24,535,332        —          23        (119,163,279     38,253,374       (46,741,476     436,336,896        (353,212,186     757,141,916        (58,382,404

In addition to the unobservable inputs utilized for various valuation methodologies, the Company frequently uses a combination of two or more valuation methodologies to determine fair value for a single holding. In such instances, the Company assesses the methodologies and ascribes weightings to each methodology. The weightings ascribed to any individual methodology ranged from as low as 10% to as high as 90% as of September 30, 2022. The selection of weightings is an inherently subjective process, dependent on professional judgement. These selections may have a material impact to the concluded fair value for such holdings.

The significant unobservable input used in the fair value measurement of the Company’s Preferred Stock is the discount rate. Significant decreases (increases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s U.S. Senior Loans are the discount rate, net purchase price, and broker quote. Significant decreases (increases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.

The significant unobservable input used in the fair value measurement of the Company’s LLC interests is the discount rate. Significant decreases (increases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.

The significant unobservable input used in the fair value measurement of the Company’s Collateralized Loan Obligations is the broker quote. Significant decreases (increases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s common stock are the unadjusted price/MHz-PoP multiple, EBITDA multiple, revenue multiple, discount rate, price per sq. ft., enterprise value, NAV per share multiple, and capitalization rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the risk discount is accompanied by a directionally opposite change in the assumption for the price/MHz-PoP multiple.


NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) (concluded)

 

As of September 30, 2022    Highland Income Fund

 

Affiliated Issuers

Under Section 2 (a)(3) of the Investment Company Act of 1940, as amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Fund for the period ended September 30, 2022:

 

            Beginning                   Distribution     Net     Change in     Ending Value                
            Value as of                   to     Realized     Unrealized     as of                
     Shares at      December 31,      Purchases at      Proceeds     Return of     Gain/(Loss)     Appreciation/     September 30,      Shares at      Affiliated  
     December 31,      2021      Cost      from Sales     Capital     on Sales     (Depreciation)     2022      September 30,      Income  

Issuer

   2021      $      $      $     $     $     $     $      2022      $  

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        86,650,095        (86,196,154

    —         —         920,133       42,140,719        27,528,327        1,116,879  

EDS Legacy Partners (U.S. Senior Loans)

     57,000,000        49,533,000        4,411,237        —         —         —         6,508,616       60,452,853        61,411,237        3,340,992  

Highland Global Allocation Fund (Registered Investment Company)

     48,649        441,246        —  

 

     —         (29,641     —         12,614       424,219        48,649        5,824  

Highland Income Fund (Registered Investment Company)

     9,600        105,504        19,033,778        (24,644,167     —         5,502,880       2,005       —          —          —    

LLV Holdco LLC (U.S. Senior Loans & Common Stocks)

     13,247,111        19,078,993        3,337,935        (1,272,062 )(a)      —         —         (2,274,419     18,870,447        15,312,984        3,759,705  

NEXLS LLC (LLC Interest)

     763        35,315,956        3,205,294        —         —         —         2,002,705       40,523,955        830        —    

NexPoint Diversified Real Estate Trust (Registered Investment Company)

     1,156,943        15,711,286        —          —         (512,294     —         (679,357     14,519,635        1,156,943        8,330  

NexPoint Real Estate Finance (Common Stocks & Preferred Stock)

     552,534        10,636,280        98,663,739        (11,521,327     (9,154     —         (28,904,400     68,865,138        4,523,263        5,264,843  

NexPoint Residential Trust, Inc. (Common Stocks)

     153,276        12,849,127        111,461        —         (152,480     —         (5,652,952     7,155,156        154,840        (23,575 )† 

NexPoint SFR Operating Partnership, LP (U.S. Senior Loans)

     —          —          65,000,000        —         —         —         —         65,000,000        65,000,000        1,462,500  

NexPoint Storage Partners, Inc. (Common Stocks)

     18,568        25,868,009        18,995,600        —         —         —         355,746       45,219,355        32,203        —    

NFRO REIT SUB, SUB II, LLC (Common Stocks)

     106,355,853        310,315,649        120,206,579        —         (119,080,853     —         7,157,657       318,599,032        125,510,591        —    

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        —         —         —         —         6,400,000        6,400,000        —    

NHT Operating Partnership LLC Secured Promissory Note (U.S. Senior Loans)

     —          —          42,550,000        —         —         —         —         42,550,000        42,550,000        1,681,022  

SFR WLIF I, III, LLC (LLC Interest)

     11,854,986        11,246,731        10,000,000        (11,521,387     —         (333,599     (7,745     9,384,000        10,000,000        120,093  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total

     275,156,426        543,886,407        490,087,045        (158,987,832     (119,784,422     4,994,474       (20,091,163     740,104,509        371,464,047        16,736,613  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

The Fund’s reported affiliated income from NexPoint Residential Trust, Inc., includes current year return of capital adjustments of $(152,480), resulting in the Fund reporting a negative value for income received from NexPoint Residential Trust, Inc. Excluding the current year adjustments, the Fund received $128,905 in dividend income from NexPoint Residential Trust, Inc.

(a)

Denotes paydown.


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