UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED
SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-23268
HIGHLAND OPPORTUNITIES AND INCOME FUND
(Exact name of registrant as specified in charter)
300 Crescent
Court
Suite 700
Dallas, Texas 75201
(Address of principal executive offices)(Zip code)
Frank
Waterhouse Treasurer, Principal Accounting Officer, Principal Financial Officer, and Principal Executive Officer
300 Crescent Court
Suite 700
Dallas, Texas 75201
(Name
and Address of Agent for Service)
Registrant’s telephone number, including area code: (866) 351-4440
Date of fiscal year end: December 31
Date of reporting period: June 30, 2024
Item 1. Reports to Stockholders.
A copy of the Semi-Annual Report transmitted to shareholders pursuant to Rule 30e1 under the Investment Company Act of 1940, as amended (the “1940
Act”), is attached herewith.
JUNE 30, 2024 SEMI-ANNUAL REPORT
Highland
Opportunities and Income Fund
HIGHLAND OPPORTUNITIES AND INCOME FUND
TABLE OF CONTENTS
Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
Privacy Policy
We recognize and
respect your privacy expectations, whether you are a visitor to our web site, a potential shareholder, a current shareholder or even a former shareholder.
Collection of Information. We may collect nonpublic personal information about you from the following sources:
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Account applications and other forms, which may include your name, address and social security
number, written and electronic correspondence and telephone contacts; |
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Web site information, including any information captured through the use of “cookies”; and
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Account history, including information about the transactions and balances in your accounts with us
or our affiliates. |
Disclosure of Information. We may share the information we collect with our
affiliates. We may also disclose this information as otherwise permitted by law. We do not sell your personal information to third parties for their independent use.
Confidentiality and Security of Information. We restrict access to nonpublic personal information about you to our employees and
agents who need to know such information to provide products or services to you. We maintain physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information, although you should be aware
that data protection cannot be guaranteed.
A prospectus must precede or
accompany this report. Please read the prospectus carefully before you invest.
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| Fund Profile (unaudited) |
|
|
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|
Highland Opportunities and Income Fund |
Objective
Highland Opportunities and Income Fund seeks growth of
capital along with income.
Net Assets as of June 30, 2024
$844.3 million
Portfolio Data as of June 30, 2024
The information below provides a snapshot of Highland Opportunities and Income Fund at the end of the reporting period. Highland Opportunities and Income
Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
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|
|
| Quality Breakdown as of 6/30/2024(1) |
|
|
% |
|
|
|
| BB |
|
|
3.57 |
|
| B |
|
|
14.03 |
|
| CCC |
|
|
2.75 |
|
| NR |
|
|
79.64 |
|
|
|
|
|
|
|
|
| Top 5 Sectors as of 6/30/2024(1)(2) |
|
|
% |
|
|
|
| Real Estate |
|
|
88.7 |
|
| Healthcare |
|
|
10.1 |
|
| Collateralized Loan Obligation |
|
|
4.9 |
|
| Communication Services |
|
|
2.5 |
|
| Energy |
|
|
1.5 |
|
|
|
| Top 10 Holdings as of 6/30/2024(1)(2)(3) |
|
|
% |
|
|
|
| NFRO SFR REIT, LLC (Common Stock) |
|
|
13.3 |
|
| NFRO Diversified REIT, LLC (Common Stock) |
|
|
12.0 |
|
| NFRO Self Storage REIT, LLC (Common Stock) |
|
|
9.4 |
|
| NFRO Holdings, LLC (Common Stock) |
|
|
8.5 |
|
| NexPoint Real Estate Finance, Inc., REIT (Common Stock) |
|
|
7.1 |
|
| NEXLS LLC %, (LLC Interest) |
|
|
6.5 |
|
| EDS Legacy Partners 8.50%, 12/28/2033 (U.S. Senior Loans) |
|
|
6.4 |
|
| NexPoint SFR Operating Partnership L.P. 7.50%, 5/24/2027
(U.S. Senior Loans) |
|
|
5.7 |
|
| IQHQ, Inc. (Common Stock) |
|
|
5.3 |
|
| NHT Operating Partnership LLC Promissory Note 4.21%, 2/14/2027
(U.S. Senior Loans) |
|
|
4.0 |
|
| (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. |
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|
| Financial Statements |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
A GUIDE TO UNDERSTANDING THE FUND’S FINANCIAL STATEMENTS
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| 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. |
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|
|
| Investment Portfolio (unaudited) |
|
|
| As of June 30, 2024 |
|
Highland Opportunities and Income Fund |
|
|
|
|
|
|
|
|
|
| Shares |
|
Value ($) |
|
| Common Stocks – 68.2% |
|
|
|
|
| COMMUNICATION SERVICES – 1.3% |
|
|
|
|
| 27,134 |
|
MidWave Wireless, Inc. (fka Terrestar Corp.) (a)(b)(c)(d) |
|
|
8,759,398 |
|
| 194,300 |
|
Telesat (d)(e) |
|
|
1,768,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,527,528 |
|
|
|
|
|
|
|
|
| ENERGY – 1.5% |
|
|
|
|
| 1,010,612 |
|
Talos Energy, Inc. (d) |
|
|
12,278,935 |
|
| 1,118,286 |
|
Value Creation, Inc. (a)(b)(d) |
|
|
51,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,330,610 |
|
|
|
|
|
|
|
|
| FINANCIALS – 0.5% |
|
|
|
|
| 182,288 |
|
Meaningful PDCV LP (a)(b)(d) |
|
|
4,557,198 |
|
|
|
|
|
|
|
|
| HEALTHCARE – 3.8% |
|
|
|
|
| 12,026,660 |
|
CCS Medical Inc. (a)(b)(d)(f) |
|
|
32,183,342 |
|
|
|
|
|
|
|
|
| MATERIALS – 0.2% |
|
|
|
|
| 299,032 |
|
MPM Holdings, Inc. (d) |
|
|
1,495,160 |
|
|
|
|
|
|
|
|
| REAL ESTATE – 60.9% |
|
|
|
|
| 3,105,740 |
|
Allenby (a)(b)(d)(f) |
|
|
— |
|
| 10,871,681 |
|
Claymore (a)(b)(d)(f) |
|
|
— |
|
| 68,830 |
|
Haygood (a)(b)(d)(f) |
|
|
— |
|
| 2,006,665 |
|
IQHQ, Inc. (a)(b)(d) |
|
|
45,250,296 |
|
| 34,512 |
|
LLV Holdco LLC – Series A, Membership Interest (a)(b)(d)(f) |
|
|
4,126,245 |
|
| 436 |
|
LLV Holdco LLC – Series B, Membership Interest (a)(b)(d)(f) |
|
|
52,086 |
|
| 1,361,749 |
|
NexPoint Diversified Real Estate Trust, REIT (e)(f) |
|
|
7,530,472 |
|
| 4,372,286 |
|
NexPoint Real Estate Finance, Inc., REIT (e)(f) |
|
|
59,987,761 |
|
| 200,052 |
|
NexPoint Residential Trust, Inc., REIT (e)(f) |
|
|
7,904,054 |
|
| 32,203 |
|
NexPoint Storage Partners, Inc. (a)(b)(d)(f) |
|
|
25,076,601 |
|
| 113,027,459 |
|
NFRO Diversified REIT, LLC (a)(b)(d)(f) |
|
|
101,184,216 |
|
| 2,276,658 |
|
NFRO Holdings, LLC (a)(b)(d)(f) |
|
|
71,947,262 |
|
| 90,436,434 |
|
NFRO Self Storage REIT, LLC (a)(b)(d)(f) |
|
|
79,293,761 |
|
| 4,690,097 |
|
NFRO SFR REIT, LLC (a)(b)(d)(f) |
|
|
112,220,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
514,573,599 |
|
|
|
|
|
|
|
|
|
|
Total Common Stocks
(Cost $930,939,208) |
|
|
575,667,437 |
|
|
|
|
|
|
|
|
| Principal Amount ($) |
|
|
|
|
| U.S. Senior Loans (g) – 24.5% |
|
|
|
|
| COMMUNICATION SERVICES – 1.2% |
|
|
|
|
| 10,187,263 |
|
MidWave Wireless, Inc. (fka Terrestar Corp.), Term Loan D, 1st Lien,12.000%, 02/27/28 (a)(b) |
|
|
10,166,888 |
|
| 73,858 |
|
MidWave Wireless, Inc. (fka Terrestar Corp.), Term Loan H, 1st Lien,12.000%, 02/28/25 (a)(b) |
|
|
73,710 |
|
| 79,161 |
|
MidWave Wireless, Inc. (fka TerreStar Corp.), Term Loan, 1st Lien,12.000%, 02/28/25 (a)(b) |
|
|
79,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,319,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Principal Amount ($) |
|
Value ($) |
|
| U.S. Senior Loans (continued) |
|
|
|
|
| HEALTHCARE – 3.8% |
|
|
|
|
| 16,215,799 |
|
Carestream Health Inc., Term Loan, 1st Lien,12.909%, 09/30/27 |
|
|
14,528,120 |
|
| 17,131,096 |
|
CCS Medical Inc., Junior Credit Term Loan, 1st Lien,11.000%, 01/04/27 (a)(b)(f) |
|
|
17,045,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
31,573,561 |
|
|
|
|
|
|
|
|
| REAL ESTATE – 19.5% |
|
|
|
|
| 53,976,000 |
|
EDS Legacy Partners,8.500%, 12/28/33 (a)(b) |
|
|
53,976,000 |
|
| 6,959,610 |
|
LLV Holdco LLC, Revolving Exit Loan,5.000%, 12/31/24 (a)(b)(f) |
|
|
6,450,065 |
|
| 50,000,000 |
|
NexPoint SFR Operating Partnership L.P.,7.500%, 05/24/27 (a)(b)(f) |
|
|
48,525,000 |
|
| 5,000,000 |
|
NexPoint SFR Operating Partnership, LP,
7.500%, 06/30/27 (a)(b)(f) |
|
|
4,852,500 |
|
| 6,400,000 |
|
NHT Operating Partnership LLC Convertible Promissory Note,
7.500%, 09/30/42 (a)(b)(f) |
|
|
5,052,800 |
|
| 42,889,333 |
|
NHT Operating Partnership LLC Promissory Note,
4.205%, 02/14/27 (a)(b)(f) |
|
|
33,861,129 |
|
| 6,500,000 |
|
NREF Operating IV REIT Sub, LLC,7.
500%, 10/18/27 (a)(b)(f) |
|
|
6,084,000 |
|
| 5,852,170 |
|
NXLST Operating Partnership, LP Promissory Note,
4.200%, 12/31/28 (a)(b) |
|
|
5,852,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
164,653,664 |
|
|
|
|
|
|
|
|
|
|
Total U.S. Senior Loans
(Cost $244,874,900) |
|
|
206,546,826 |
|
|
|
|
|
|
|
|
| Shares |
|
|
|
|
|
|
| LLC Interest – 7.5% |
|
|
|
|
| 957 |
|
NEXLS LLC (a)(b)(f) |
|
|
55,043,483 |
|
| 9,000,000 |
|
SFR WLIF III, LLC (a)(b)(f) |
|
|
8,064,000 |
|
|
|
|
|
|
|
|
|
|
Total LLC Interest
(Cost $46,085,217) |
|
|
63,107,483 |
|
|
|
|
|
|
|
|
| Principal Amount ($) |
|
|
|
|
| Collateralized Loan Obligations – 4.9% |
|
|
|
|
| 6,205,413 |
|
ACAS CLO, Series 2018-1A, Class FRR TSFR3M + 8.172%, 13.50%, 10/18/2028 (h)(i) |
|
|
1,588,379 |
|
| 2,000,000 |
|
Apex Credit CLO, Series 2019-1A, Class D TSFR3M + 7.362%, 12.69%, 4/18/2032 (h)(i) |
|
|
1,950,000 |
|
| 1,500,000 |
|
Atlas Senior Loan Fund, Series 2017-8A, Class F TSFR3M + 7.412%, 12.74%, 1/16/2030 (h)(i) |
|
|
986,625 |
|
| 2,400,000 |
|
Atlas Senior Loan Fund XII, Series 2018-12A, Class E TSFR3M + 6.212%, 11.53%, 10/24/2031 (h)(i) |
|
|
1,704,000 |
|
| 3,324,756 |
|
CIFC Funding, Series 2014-4RA, Class SUB 0.00%, 1/17/2035 (h)(i)(j)(k) |
|
|
950,880 |
|
| 1,000,000 |
|
CIFC Funding, Series 2018-1A, Class ER2 TSFR3M + 6.112%, 11.44%, 1/18/2031 (h)(i) |
|
|
990,000 |
|
SEE GLOSSARY ON PAGE 6 FOR
ABBREVIATIONS ALONG WITH ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. | 3
|
|
|
| Investment Portfolio (unaudited) (continued) |
|
|
| As of June 30, 2024 |
|
Highland Opportunities and Income Fund |
|
|
|
|
|
|
|
|
|
| Principal Amount ($) |
|
Value ($) |
|
| Collateralized Loan Obligations (continued) |
|
|
|
|
| 3,000,000 |
|
CIFC Funding, Series 2015-1A, Class SUB 0.00%, 1/22/2031 (h)(i)(j)(k) |
|
|
338,400 |
|
| 5,462,500 |
|
CIFC Funding, Series 2013-2A, Class SUB 0.00%, 10/18/2030 (h)(i)(j) |
|
|
682,812 |
|
| 2,500,000 |
|
CIFC Funding, Series 2014-1A, Class SUB 0.00%, 1/18/2031 (h)(i)(j) |
|
|
325,000 |
|
| 3,000,000 |
|
Clover Credit Partners CLO III, Series 2017-1A, Class F TSFR3M + 8.212%, 13.54%, 10/15/2029 (h)(i) |
|
|
1,170,000 |
|
| 1,537,000 |
|
Dryden 36 Senior Loan Fund, Series 2019-36A, Class ER2 TSFR3M + 7.142%, 12.47%, 4/15/2029 (h)(i) |
|
|
1,475,520 |
|
| 5,450,000 |
|
Galaxy XXVI CLO, Series 2018-26A, Class F TSFR3M + 8.262%, 13.59%, 11/22/2031 (h)(i) |
|
|
5,014,000 |
|
| 1,000,000 |
|
GoldenTree Loan Management US CLO 3, Series 2018-3A, Class F TSFR3M + 6.762%, 12.09%, 4/20/2030 (h)(i) |
|
|
980,000 |
|
| 2,000,000 |
|
Madison Park Funding XXIX, Series 2018-29A, Class F TSFR3M + 7.832%, 13.16%, 10/18/2030 (h)(i) |
|
|
1,910,000 |
|
| 2,500,000 |
|
Man GLG US CLO, Series 2018-1A, Class DR TSFR3M + 6.162%, 11.49%, 4/22/2030 (h)(i) |
|
|
2,265,438 |
|
| 4,000,000 |
|
Northwoods Capital XII-B, Ltd., Series 2018-12BA, Class F TSFR3M + 8.432%, 13.77%, 6/15/2031 (h)(i) |
|
|
2,930,000 |
|
| 3,110,000 |
|
OZLM XXII, Ltd., Series 2018-22A, Class E TSFR3M + 7.652%, 12.97%, 1/17/2031 (h)(i) |
|
|
1,834,900 |
|
| 2,000,000 |
|
Park Avenue Institutional Advisers CLO, Series 2021-2A, Class E TSFR3M + 7.272%, 12.60%, 7/15/2034 (h)(i) |
|
|
1,920,000 |
|
| 3,150,000 |
|
Saranac CLO III, Ltd., Series 2018-3A, Class ER TSFR3M + 7.500%, 13.11%, 6/22/2030 (h)(i) |
|
|
1,753,762 |
|
| 2,000,000 |
|
Symphony CLO XXVI, Series 2021-26A, Class ER TSFR3M + 7.762%, 13.09%, 4/20/2033 (h)(i) |
|
|
1,943,760 |
|
| 5,955,627 |
|
THL Credit Wind River, Series 2014-2A, Class SUB 0.00%, 1/15/2031 (h)(i)(j)(l) |
|
|
926,100 |
|
| 1,000,000 |
|
Vibrant CLO 1X, Series 2018-9A, Class D TSFR3M + 6.512%, 11.84%, 7/20/2031 (h)(i) |
|
|
908,100 |
|
| 1,275,000 |
|
Voya CLO, Series 2018-2A, Class DR TSFR3M + 5.862%, 11.19%, 4/25/2031 (h)(i) |
|
|
1,096,500 |
|
| 1,000,000 |
|
Webster Park CLO, Series 2018-1A, Class ER TSFR3M + 8.012%, 13.34%,
7/20/2030 (h)(i) |
|
|
927,500 |
|
| 3,000,000 |
|
Zais CLO 3, Ltd., Series 2018-3A, Class DR TSFR3M + 7.172%, 12.50%, 7/15/2031 (h)(i) |
|
|
2,190,000 |
|
| 3,300,000 |
|
Zais CLO 8, Ltd., Series 2018-1A, Class E TSFR3M + 5.512%, 10.84%, 4/15/2029 (h)(i) |
|
|
2,714,250 |
|
|
|
|
|
|
|
|
|
|
Total Collateralized Loan Obligations
(Cost $55,864,169) |
|
|
41,475,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
|
Value ($) |
|
| Preferred Stock – 3.6% |
|
|
|
|
| FINANCIALS – 0.4% |
|
|
|
|
| 150,977 |
|
NexPoint Real Estate Finance REIT 8.50% (f)(m) |
|
|
3,309,416 |
|
|
|
|
|
|
|
|
| HEALTHCARE – 2.6% |
|
|
|
|
| 270,246 |
|
Apnimed, Series C-1 (a)(b)(d)(m)(n) |
|
|
3,288,894 |
|
| 144,132 |
|
Apnimed, Series C-2 (a)(b)(d)(m)(n) |
|
|
1,856,420 |
|
| 2,361,111 |
|
Sapience Therapeutics Inc 8.00% (a)(b)(d)(m) |
|
|
7,673,611 |
|
| 3,440,476 |
|
Sapience Therapeutics Inc, Class B 8.00% (a)(b)(d)(m) |
|
|
9,461,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
22,280,234 |
|
|
|
|
|
|
|
|
| REAL ESTATE – 0.6% |
|
|
|
|
| 325,976 |
|
Braemar Hotels & Resorts, Inc. 5.50% (d)(e)(m) |
|
|
4,192,051 |
|
| 47,300 |
|
Wheeler Real Estate Investment Trust 10.75%, 09/21/2024 (d)(m)(o)(p) |
|
|
912,417 |
|
| 82,301 |
|
Wheeler Real Estate Investment Trust 9.00% (d)(m) |
|
|
189,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,293,760 |
|
|
|
|
|
|
|
|
|
|
Total Preferred Stock
(Cost $30,461,420) |
|
|
30,883,410 |
|
|
|
|
|
|
|
|
| Principal Amount ($) |
|
|
|
|
| Corporate Bonds & Notes – 0.4% |
|
|
|
|
| COMMUNICATION SERVICES – 0.0% |
|
|
|
|
| 3,100 |
|
iHeartCommunications, Inc. 6.38%, 05/01/26 |
|
|
2,414 |
|
|
|
|
|
|
|
|
| FINANCIALS – 0.4% |
|
|
|
|
| 4,000,000 |
|
South Street Securities Funding LLC 6.25%, 12/30/26 (i) |
|
|
3,400,000 |
|
|
|
|
|
|
|
|
| INDUSTRIALS – 0.0% |
|
|
|
|
| 7,500,000 |
|
American Airlines 12/31/49 (a)(b)(j)(q) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total Corporate Bonds & Notes
(Cost $4,097,015) |
|
|
3,402,414 |
|
|
|
|
|
|
|
|
| Shares |
|
|
|
|
|
|
| Registered Investment Companies – 0.1% |
|
|
|
|
| 86,246 |
|
Highland Global Allocation Fund (e)(f) |
|
|
649,432 |
|
| 72,607 |
|
Highland Opportunities and Income Fund (f) |
|
|
453,794 |
|
|
|
|
|
|
|
|
|
|
Total Registered Investment Companies
(Cost $889,981) |
|
|
1,103,226 |
|
|
|
|
|
|
|
|
| Principal Amount ($) |
|
|
|
|
| Repurchase Agreement (r)(s) – 0.0% |
|
|
|
|
| 47,688 |
|
Daiwa Capital Markets 5.350%, dated 06/28/2024 to be repurchased on 07/01/2024, repurchase price $47,709 (collateralized by U.S. Government and Treasury obligations, ranging in par value $3–$5,854, 0.000%–7.50%,
07/11/2024–07/01/2054; with total market value $48,644) |
|
|
47,688 |
|
|
|
|
|
|
|
|
|
|
Total Repurchase Agreement
(Cost $47,688) |
|
|
47,688 |
|
|
|
|
|
|
|
|
SEE GLOSSARY ON PAGE 6 FOR
ABBREVIATIONS ALONG WITH ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. | 4
|
|
|
| Investment Portfolio (unaudited) (concluded) |
|
|
| As of June 30, 2024 |
|
Highland Opportunities and Income Fund |
|
|
|
|
|
|
|
|
|
| Shares |
|
Value ($) |
|
| Cash Equivalent – 5.0% |
|
|
|
|
| MONEY MARKET FUND (t) – 5.0% |
|
|
|
|
| 42,316,283 |
|
Dreyfus Treasury Obligations Cash Management, Institutional Class 5.180% |
|
|
42,316,283 |
|
|
|
|
|
|
|
|
|
|
Total Cash Equivalent
(Cost $42,316,283) |
|
|
42,316,283 |
|
|
|
|
|
|
|
|
| Total Investments – 114.2% |
|
|
964,550,693 |
|
|
|
|
|
|
|
|
| (Cost $1,355,575,881) |
|
|
|
|
| SECURITIES SOLD SHORT – (0.9)% |
|
|
|
|
| COMMON STOCKS – (0.9)% |
|
|
|
|
| INFORMATION TECHNOLOGY – (0.9)% |
|
|
|
|
| (41,100) |
|
Texas Instruments, Inc. |
|
|
(7,995,183 |
) |
|
|
|
|
|
|
|
|
|
Total Common Stocks
(Proceeds $4,920,256) |
|
|
(7,995,183 |
) |
|
|
|
|
|
|
|
|
|
Total Securities Sold Short – (0.9)%
(Proceeds $4,920,256) |
|
|
(7,995,183 |
) |
|
|
|
|
|
|
|
| Other Assets & Liabilities, Net – (13.3)% (u) |
|
|
(112,222,809 |
) |
|
|
|
|
|
|
|
| Net Assets – 100.0% |
|
|
844,332,701 |
|
|
|
|
|
|
|
|
| (a) |
Securities with a total aggregate value of $762,109,348, or 90.3% 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.
|
| (b) |
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 $762,109,348, or 90.3% of net assets, were fair valued under the Fund’s valuation procedures as of June 30, 2024. Please see Notes to Financial Statements. |
| (c) |
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 |
|
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
|
|
Common
Stock |
|
|
|
3/16/2018 |
|
|
$ |
3,093,276 |
|
|
$ |
8,759,398 |
|
|
|
1.0% |
|
| (d) |
Non-income producing security. |
| (e) |
All or part of this security is pledged as collateral for short sales. The fair value of the securities pledged as
collateral was $19,115,796. |
| (f) |
Affiliated issuer. Assets with a total aggregate fair value of $690,897,705, or 81.8% of net assets, were affiliated with
the Fund as of June 30, 2024. |
| (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 Secured Overnight Financing Rate (“SOFR”) or (iii) the Certificate of Deposit rate. As of June 30, 2024, the
SOFR 3 Month rate was 5.33%. 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) |
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. |
| (i) |
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 June 30, 2024, these securities amounted to $44,875,927 or 5.3% of net assets. |
| (j) |
No interest rate available. |
| (k) |
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. |
| (l) |
The issuer is, or is in danger of being, in default of its payment obligation. |
| (m) |
Perpetual security with no stated maturity date. |
| (n) |
There is currently no rate available. |
| (o) |
Securities (or a portion of securities) on loan. As of June 30, 2024, the fair value of securities loaned was $46,625. The
loaned securities were secured with cash and/or securities collateral of $47,688. 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
June 30, 2024 was $47,688. |
| (t) |
Rate reported is 7 day effective yield. |
| (u) |
As of June 30, 2024, $7,949,973 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 6 FOR
ABBREVIATIONS ALONG WITH ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. | 5
|
|
|
| Glossary: (abbreviations that may be used in the preceding statements) (unaudited) |
|
|
| |
|
|
Other Abbreviations:
| CLO |
Collateralized Loan Obligation |
| REIT |
Real Estate Investment Trust |
| TSFR3M |
Term Secured Overnight Financing Rate 3 Month |
|
|
|
| Statement of Assets and Liabilities (unaudited) |
|
|
| As of June 30, 2024 |
|
Highland Opportunities and Income Fund |
|
|
|
|
|
|
|
| |
|
$ |
|
| Assets |
|
|
|
|
| Investments from unaffiliated issuers, at value |
|
|
231,289,017 |
|
| Affiliated investments, at value (Note 9) |
|
|
690,897,705 |
|
|
|
|
|
|
| Total Investments, at value (Cost $1,313,211,910) |
|
|
922,186,722 |
|
| Repurchase Agreement, at value |
|
|
47,688 |
|
| Cash equivalent (Note 2) |
|
|
42,316,283 |
|
| Cash |
|
|
74,009 |
|
| Restricted Cash — Securities Sold Short (Note 2) |
|
|
7,949,973 |
|
| Receivable for: |
|
|
|
|
| Dividends and interest |
|
|
21,091,242 |
|
| Fund shares sold |
|
|
62,763 |
|
| Due from broker |
|
|
1,617 |
|
| Prepaid expenses and other assets |
|
|
13,928 |
|
|
|
|
|
|
| Total assets |
|
|
993,744,225 |
|
|
|
|
|
|
|
|
| Liabilities: |
|
|
|
|
| Securities sold short, at value (Note 2) |
|
|
7,995,183 |
|
| Payable for: |
|
|
|
|
| Investment advisory and administration fees (Note 6) |
|
|
771,050 |
|
| Legal fees |
|
|
455,231 |
|
| Audit fees |
|
|
121,293 |
|
| Investments purchased |
|
|
179,231 |
|
| Collateral from securities loaned (Note 4) |
|
|
47,688 |
|
| Accrued expenses and other liabilities |
|
|
85,599 |
|
|
|
|
|
|
| Total liabilities |
|
|
9,655,275 |
|
|
|
|
|
|
|
|
| Mezzanine Equity: |
|
|
|
|
| Cumulative preferred shares (Series A), net of deferred financing costs (Notes 1 and 2) |
|
|
139,756,249 |
|
|
|
|
|
|
| Net Assets |
|
|
844,332,701 |
|
|
|
|
|
|
|
|
| Net Assets Consist of: |
|
|
|
|
| Paid-in capital |
|
|
1,386,712,100 |
|
| Total accumulated losses |
|
|
(542,379,399 |
) |
|
|
|
|
|
| Net Assets |
|
|
844,332,701 |
|
|
|
|
|
|
| Investments, at cost |
|
|
229,560,022 |
|
| Affiliated investments, at cost (Note 9) |
|
|
1,083,651,888 |
|
| Cash equivalent, at cost (Note 2) |
|
|
42,316,283 |
|
| Repurchase Agreement, at cost |
|
|
47,688 |
|
| Proceeds from securities sold short |
|
|
4,920,256 |
|
| Common Shares |
|
|
|
|
| Shares outstanding ($0.001 par value; unlimited authorization) |
|
|
66,114,497 |
|
| Net asset value per share (Net assets/shares outstanding) |
|
|
12.77 |
|
|
| SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS | 7 |
|
|
|
| Statement of Operations (unaudited) |
|
|
| For the Six Months Ended June 30, 2024 |
|
Highland Opportunities and Income Fund |
|
|
|
|
|
|
|
| |
|
$ |
|
| Investment Income |
|
|
|
|
| Income: |
|
|
|
|
| Dividends from unaffiliated issuers |
|
|
347,068 |
|
| Dividends from affiliated issuers (Note 9) |
|
|
4,670,499 |
|
| Securities lending income (Note 4) |
|
|
1,819 |
|
| Interest from unaffiliated issuers |
|
|
11,283,740 |
|
| Interest from affiliated issuers (Note 9) |
|
|
4,525,206 |
|
| Interest paid in kind from affiliated issuers (Note 9) |
|
|
1,069,962 |
|
| Other income |
|
|
140,647 |
|
|
|
|
|
|
| Total income |
|
|
22,038,941 |
|
|
|
|
|
|
|
|
| Expenses: |
|
|
|
|
| Investment advisory (Note 6) |
|
|
3,179,725 |
|
| Administration fees (Note 6) |
|
|
999,274 |
|
| Legal fees |
|
|
480,968 |
|
| Interest expense, commitment fees, and financing costs |
|
|
321,146 |
|
| Accounting services fees |
|
|
301,180 |
|
| Insurance |
|
|
234,649 |
|
| Trustees fees (Note 6) |
|
|
157,255 |
|
| Audit fees |
|
|
117,441 |
|
| Dividends and fees on securities sold short (Note 2) |
|
|
106,860 |
|
| Reports to shareholders |
|
|
91,994 |
|
| Transfer agent fees |
|
|
83,662 |
|
| Pricing fees |
|
|
51,301 |
|
| Registration fees |
|
|
50,865 |
|
| Custodian/wire agent fees |
|
|
9,668 |
|
|
|
|
|
|
| Total operating expenses |
|
|
6,185,988 |
|
|
|
|
|
|
| Net investment income |
|
|
15,852,953 |
|
|
|
|
|
|
| Preferred dividend expenses |
|
|
(3,896,878 |
) |
|
|
| Net Realized and Unrealized Gain (Loss) |
|
|
|
|
| Realized gain (loss) on: |
|
|
|
|
| Investments from unaffiliated issuers |
|
|
(26,078,574 |
) |
|
|
|
|
|
| Net realized loss |
|
|
(26,078,574 |
) |
|
|
|
|
|
|
|
| Net Change in Unrealized Appreciation (Depreciation) on: |
|
|
|
|
| Investments from unaffiliated issuers |
|
|
29,983,577 |
|
| Investments in affiliated issuers |
|
|
(11,238,072 |
) |
| Securities sold short (Note 2) |
|
|
(989,277 |
) |
|
|
|
|
|
| Net change in unrealized appreciation (depreciation) |
|
|
17,756,228 |
|
|
|
|
|
|
| Net realized and unrealized gain (loss) |
|
|
(8,322,346 |
) |
|
|
|
|
|
| Total increase in net assets resulting from operations |
|
|
3,633,729 |
|
|
|
|
|
|
|
| SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS | 8 |
|
|
|
| Statements of Changes in Net Assets |
|
|
|
|
Highland Opportunities and Income Fund |
|
|
|
|
|
|
|
|
|
| |
|
For the
Six Months Ended
June 30,
2024
(unaudited) ($) |
|
|
For the
Year Ended
December 31,
2023
($) |
|
| Increase (Decrease) in Net Assets |
|
|
|
|
|
|
|
|
|
|
|
| Operations: |
|
|
|
|
|
|
|
|
| Net investment income |
|
|
15,852,953 |
|
|
|
42,387,981 |
|
| Preferred dividend expenses |
|
|
(3,896,878 |
) |
|
|
(7,793,756 |
) |
| Net realized loss |
|
|
(26,078,574 |
) |
|
|
(6,536,718 |
) |
| Net change in unrealized appreciation (depreciation) |
|
|
17,756,228 |
|
|
|
(42,143,190 |
) |
|
|
|
|
|
|
|
|
|
| Net increase (decrease) from operations |
|
|
3,633,729 |
|
|
|
(14,085,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Distributions Declared to Common Shareholders: |
|
|
|
|
|
|
|
|
| Distributions |
|
|
(15,492,500 |
) |
|
|
(41,946,824 |
) |
| Return of capital |
|
|
— |
|
|
|
(21,072,259 |
) |
|
|
|
|
|
|
|
|
|
| Total distributions: |
|
|
(15,492,500 |
) |
|
|
(63,019,083 |
) |
|
|
|
|
|
|
|
|
|
| Increase (decrease) in net assets from operations and distributions |
|
|
(11,858,771 |
) |
|
|
(77,104,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Share transactions: |
|
|
|
|
|
|
|
|
| Value of distributions reinvested |
|
|
419,240 |
|
|
|
1,533,094 |
|
| Shares repurchased of closed-end fund (Note 1) |
|
|
(28,791,648 |
) |
|
|
— |
|
| Gains from the retirement of repurchased shares |
|
|
14,147,875 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Net increase (decrease) from shares transactions |
|
|
(14,224,533 |
) |
|
|
1,533,094 |
|
|
|
|
|
|
|
|
|
|
| Total decrease in net assets |
|
|
(26,083,304 |
) |
|
|
(75,571,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Net Assets |
|
|
|
|
|
|
|
|
| Beginning of period |
|
|
870,416,005 |
|
|
|
945,987,677 |
|
|
|
|
|
|
|
|
|
|
| End of period |
|
|
844,332,701 |
|
|
|
870,416,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in Common Shares: |
|
|
|
|
|
|
|
|
| Issued for distribution reinvested |
|
|
63,611 |
|
|
|
179,578 |
|
| Shares redeemed (Note 1) |
|
|
(2,250,000 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Net increase (decrease) in fund shares |
|
|
(2,186,389 |
) |
|
|
179,578 |
|
|
|
|
|
|
|
|
|
|
|
| SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS | 9 |
|
|
|
| Statement of Cash Flows (unaudited) |
|
|
| For the Six Months Ended June 30, 2024 |
|
Highland Opportunities and Income Fund |
|
|
|
|
|
| |
|
|
$ |
|
| Cash Flows Provided by Operating Activities: |
|
|
|
|
| Net increase in net assets resulting from operations |
|
|
3,633,729 |
|
|
|
| Adjustments to Reconcile Net Decrease in Net Assets Resulting from Operations to Net Cash Provided by
Operating Activities: |
|
|
|
|
| Purchases of investment securities from unaffiliated issuers |
|
|
(39,246,566 |
) |
| Purchases of investment securities from affiliated issuers |
|
|
(36,182,660 |
) |
| Interest paid in kind from affiliated issuers |
|
|
(1,069,962 |
) |
|
Proceeds from disposition of investment securities from unaffiliated issuers |
|
|
99,508,789 |
|
|
Proceeds from disposition of investment securities from affiliated issuers |
|
|
42,927,533 |
|
| Paydowns at cost |
|
|
11,649,214 |
|
| Net (amortization) accretion of discount |
|
|
(446,359 |
) |
|
Proceeds from return of capital of investment securities from affiliated
issuers |
|
|
858,938 |
|
| Proceeds from sales of repurchase agreements, net |
|
|
39,523 |
|
|
Net realized (gain) loss on Investments from unaffiliated issuers |
|
|
26,078,574 |
|
| Net change in unrealized (appreciation) depreciation on investments, investments in affiliated issuers, and
securities sold short |
|
|
(17,756,228 |
) |
|
(Increase) Decrease in receivable for investments sold and principal
paydowns |
|
|
396,758 |
|
| (Increase) Decrease in receivable for dividends and interest |
|
|
(2,892,113 |
) |
| (Increase) Decrease in due from broker |
|
|
(1,617 |
) |
| (Increase) Decrease in prepaid expenses and other assets |
|
|
140,719 |
|
| Increase (Decrease) in payable for investments purchased |
|
|
(1,506,688 |
) |
| Increase (Decrease) in payable to investment advisory |
|
|
(16,968 |
) |
|
Increase (Decrease) in due to broker for short sale proceeds |
|
|
(1 |
) |
|
Increase (Decrease) in payable for upon return of securities loaned |
|
|
(39,523 |
) |
| Increase (Decrease) in payable for audit fees |
|
|
(118,559 |
) |
| Increase (Decrease) in payable for legal fees |
|
|
181,984 |
|
| Increase (Decrease) in accrued expenses and other liabilities |
|
|
(192,517 |
) |
|
|
|
|
|
| Net cash flow provided by operating activities |
|
|
85,946,000 |
|
|
|
|
|
|
|
|
| Cash Flows Used In Financing Activities: |
|
|
|
|
| Distributions paid in cash, net of distributions reinvested |
|
|
(15,073,260 |
) |
| Payments on shares redeemed, net of payable |
|
|
(14,643,773 |
) |
| Proceeds from shares sold, net of receivable |
|
|
91,422 |
|
| Proceeds from reverse repurchase agreements |
|
|
(20,690,000 |
) |
|
|
|
|
|
| Net cash flow used in financing activities |
|
|
(50,315,611 |
) |
|
|
|
|
|
| Net increase in cash |
|
|
35,630,389 |
|
|
|
|
|
|
|
|
| Cash, cash equivalent, and restricted cash: |
|
|
|
|
| Beginning of period |
|
|
14,709,876 |
|
|
|
|
|
|
| End of period |
|
|
50,340,265 |
|
|
|
|
|
|
|
|
| End of period cash balances: |
|
|
|
|
| Cash |
|
|
74,009 |
|
| Cash equivalent |
|
|
42,316,283 |
|
| Restricted cash |
|
|
7,949,973 |
|
|
|
|
|
|
| End of period |
|
|
50,340,265 |
|
|
|
|
|
|
|
|
| Supplemental disclosure of cash flow information: |
|
|
|
|
| Reinvestment of distributions |
|
|
419,240 |
|
|
|
|
|
|
|
Cash paid during the period for interest expense and commitment fees |
|
|
321,146 |
|
|
|
|
|
|
|
| SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS | 10 |
|
|
|
| Financial Highlights |
|
|
|
|
Highland Opportunities and Income Fund |
Selected data for a share outstanding throughout each period/year is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the
Six Months
Ended
June 30,
2024
(unaudited) |
|
|
For the Years Ended December 31, |
|
| |
|
2023 |
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
| Net Asset Value, Beginning of
Period/Year |
|
|
$12.74 |
|
|
|
$13.89 |
|
|
|
$14.29 |
|
|
|
$13.32 |
|
|
|
$13.88 |
|
|
|
$14.28 |
|
|
|
|
|
|
|
|
| Income from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net investment income(a) |
|
|
0.24 |
|
|
|
0.62 |
|
|
|
1.35 |
|
|
|
0.72 |
|
|
|
0.54 |
|
|
|
0.85 |
|
|
|
|
|
|
|
|
| Preferred dividend expense |
|
|
(0.06 |
) |
|
|
(0.11 |
) |
|
|
(0.11 |
) |
|
|
(0.11 |
) |
|
|
(0.11 |
) |
|
|
(0.05 |
) |
|
|
|
|
|
|
|
| Net realized and unrealized gain (loss) |
|
|
(0.15 |
) |
|
|
(0.74 |
) |
|
|
(0.80 |
) |
|
|
1.21 |
|
|
|
(0.10 |
) |
|
|
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Income from Investment Operations |
|
|
0.03 |
|
|
|
(0.23 |
) |
|
|
0.44 |
|
|
|
1.82 |
|
|
|
0.33 |
|
|
|
0.51 |
|
|
|
|
|
|
|
|
| Less Distributions Declared to shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| From net investment income |
|
|
(0.23 |
) |
|
|
(0.61 |
) |
|
|
(0.52 |
) |
|
|
(0.22 |
) |
|
|
(0.43 |
) |
|
|
(0.81 |
) |
|
|
|
|
|
|
|
| From return of capital |
|
|
— |
|
|
|
(0.31 |
) |
|
|
(0.40 |
) |
|
|
(0.70 |
) |
|
|
(0.49 |
) |
|
|
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total distributions declared to shareholders |
|
|
(0.23 |
) |
|
|
(0.92 |
) |
|
|
(0.92 |
) |
|
|
(0.92 |
) |
|
|
(0.92 |
) |
|
|
(0.92 |
) |
|
|
|
|
|
|
|
| Capital Share Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Retirement of Tendered Shares(a) |
|
$ |
0.23 |
|
|
$ |
— |
|
|
$ |
0.08 |
|
|
$ |
0.07 |
|
|
$ |
0.03 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
| Net Asset Value, End of Period/Year(b) |
|
$ |
12.77 |
|
|
$ |
12.74 |
|
|
$ |
13.89 |
|
|
$ |
14.29 |
|
|
$ |
13.32 |
|
|
$ |
13.88 |
|
|
|
|
|
|
|
|
| Market Value, End of Period/Year |
|
$ |
6.25 |
|
|
$ |
7.69 |
|
|
$ |
10.30 |
|
|
$ |
10.99 |
|
|
$ |
10.28 |
|
|
$ |
12.43 |
|
|
|
|
|
|
|
|
| Market Value Total Return(c) |
|
|
(29.16 |
)% |
|
|
(16.94 |
)% |
|
|
1.70 |
% |
|
|
16.35 |
% |
|
|
(8.29 |
)% |
|
|
4.30 |
% |
|
|
|
|
|
|
|
| Ratios based on Average Managed Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross operating expenses(d) |
|
|
0.62 |
% |
|
|
1.25 |
% |
|
|
1.15 |
% |
|
|
1.44 |
% |
|
|
1.83 |
% |
|
|
2.28 |
% |
|
|
|
|
|
|
|
| Net investment income |
|
|
1.58 |
% |
|
|
3.96 |
% |
|
|
7.87 |
% |
|
|
4.53 |
% |
|
|
2.89 |
% |
|
|
3.98 |
% |
|
|
|
|
|
|
|
| Ratios to Average Net Assets / Supplemental Data:(e)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Assets, End of Year/Period (000’s) |
|
$ |
844,333 |
|
|
$ |
870,416 |
|
|
$ |
945,988 |
|
|
$ |
995,615 |
|
|
$ |
950,348 |
|
|
$ |
995,405 |
|
|
|
|
|
|
|
|
| Gross operating expenses(d) |
|
|
1.45 |
% |
|
|
1.45 |
% |
|
|
1.32 |
% |
|
|
1.67 |
% |
|
|
2.68 |
% |
|
|
3.39 |
% |
|
|
|
|
|
|
|
| Net investment income |
|
|
3.71 |
% |
|
|
4.58 |
% |
|
|
8.98 |
% |
|
|
5.26 |
% |
|
|
4.22 |
% |
|
|
5.93 |
% |
|
|
|
|
|
|
|
| Portfolio turnover rate |
|
|
7 |
% |
|
|
6 |
% |
|
|
45 |
% |
|
|
38 |
% |
|
|
22 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
| Average commission rate paid(g) |
|
$ |
0.0001 |
|
|
$ |
0.0203 |
|
|
$ |
0.0092 |
|
|
$ |
0.0348 |
|
|
$ |
0.0969 |
|
|
$ |
0.0032 |
|
| (a) |
Per share data was calculated using average shares outstanding during the year. |
| (b) |
The Net Asset Value per share has been calculated based on net assets which include adjustments made in accordance with
U.S. Generally Accepted Accounting Principles required at year end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share experienced by the shareholder at year end. |
| (c) |
Total return is based on market value per share. Distributions are assumed for purposes of this calculation to be
reinvested at prices obtained under the Fund’s Dividend Reinvestment Plan. 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) |
Includes dividends and fees on securities sold short. |
| (e) |
All
ratios for the period/year have been annualized, unless otherwise indicated. |
| (f) |
Supplemental expense ratios are shown below. |
| (g) |
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. |
|
| SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS | 11 |
|
|
|
| Financial Highlights (concluded) |
|
|
|
|
Highland Opportunities and Income Fund |
Supplemental Expense Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the
Six Months Ended June 30,
2024 |
|
|
For the Years Ended December 31, |
|
| |
|
(unaudited) |
|
|
2023 |
|
|
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) |
|
|
0.62 |
% |
|
|
1.25 |
% |
|
|
1.15 |
% |
|
|
1.44 |
% |
|
|
1.83 |
% |
|
|
2.28 |
% |
|
|
|
|
|
|
|
| Interest expense and commitment fees, and preferred dividend expense |
|
|
0.42 |
% |
|
|
0.86 |
% |
|
|
0.70 |
% |
|
|
0.74 |
% |
|
|
1.17 |
% |
|
|
1.27 |
% |
|
|
|
|
|
|
|
| Dividends and fees on securities sold short |
|
|
0.01 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.01 |
% |
|
|
|
|
|
|
|
| Ratios to Average Net Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating
expenses) |
|
|
1.45 |
% |
|
|
1.45 |
% |
|
|
1.32 |
% |
|
|
1.67 |
% |
|
|
2.68 |
% |
|
|
3.39 |
% |
|
|
|
|
|
|
|
| Interest expense and commitment fees, and preferred dividend expense |
|
|
0.99 |
% |
|
|
0.99 |
% |
|
|
0.80 |
% |
|
|
0.86 |
% |
|
|
1.71 |
% |
|
|
1.90 |
% |
|
|
|
|
|
|
|
| Dividends and fees on securities sold short |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.03 |
% |
|
|
0.01 |
% |
|
|
|
|
|
|
|
| Borrowing at end of period/year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Aggregate Amount Outstanding Excluding Preferred Shares* |
|
|
— |
|
|
|
20,690,000 |
|
|
|
21,722,000 |
|
|
|
— |
|
|
|
200,000,000 |
|
|
|
419,796,600 |
|
|
|
|
|
|
|
|
| Asset Coverage Per $1,000* |
|
|
— |
|
|
|
42,899.43 |
|
|
|
44,549.75 |
|
|
|
— |
|
|
|
5,751.74 |
|
|
|
3,371.16 |
|
|
|
|
|
|
|
|
| Aggregate Amount Outstanding Including Preferred Shares* |
|
|
145,000,000 |
|
|
|
165,690,000 |
|
|
|
166,722,000 |
|
|
|
145,000,000 |
|
|
|
345,000,000 |
|
|
|
564,796,600 |
|
|
|
|
|
|
|
|
| Asset Coverage Per $1,000* |
|
|
6,822.98 |
|
|
|
6,232.05 |
|
|
|
6,674.04 |
|
|
|
7,859.92 |
|
|
|
3,754.63 |
|
|
|
2,762.41 |
|
| * |
See Note 10 for further details. |
|
| SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS | 12 |
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
Note 1. Organization
Highland
Opportunities and 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 NexPoint Funds I (formerly Highland Funds I), a Delaware statutory trust. The Fund is the successor to the accounting and
performance information of the Predecessor Fund.
On June 15, 2023, the Fund changed its name from Highland Income Fund to Highland Opportunities and Income
Fund.
On July 29, 2019, the Fund issued 5.4 million 5.375% Series A Cumulative Preferred shares (NYSE: HFRO.PR.A) with an aggregate liquidation value of
$135 million. Subsequently on August 9, 2019, the underwriters exercised their option to purchase additional overallotment shares of $10mm, resulting in a total Preferred outstanding offering of $145mm.
The Series A Cumulative Preferred shares are perpetual, non-callable for five years, and have a liquidation preference of $25.00
per share. Distributions are scheduled quarterly, with payments beginning on September 30, 2019. Series A Preferred shares trade on the NYSE. Moody’s Investors Service has assigned an A1 rating to the preferred shares.
On May 16, 2023, the Fund announced that the Fund’s Board of Trustees (the “Board”) approved a repurchase program pursuant to which the Fund may
repurchase up to $100 million of its stock in open-market transactions over a two-year period. For the six months ended June 30, 2024, the Fund repurchased 2,322,607 shares at an average price of
$6.52, for a total investment of $15.1 million.
Note 2. Significant Accounting Policies
The following summarizes the significant accounting policies consistently followed by the Fund in the preparation of its financial statements.
Use of Estimates
The Fund is an investment company that follows the
investment company accounting and reporting guidance of Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 946 Financial Services – Investment Companies applicable to investment companies. The Fund’s financial statements have been
prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require NexPoint Asset Management, L.P. (“NexPoint” or the “Investment Adviser”) to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases or decreases in net assets from operations
during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.
Fund Valuation
The net asset value (“NAV”) of the Fund’s
common shares is calculated daily on each day that the NYSE is open for business as of the close of the regular trading session on the NYSE, usually 4:00 PM, Eastern Time. The NAV is calculated by dividing the value of the Fund’s net assets
attributable to common shares by the numbers of common shares outstanding.
Valuation of Investments
Pursuant to Rule 2a-5 under the 1940 Act, the Board has designated NexPoint as the Fund’s valuation designee to perform the
fair valuation determination for securities and other assets held by the Fund. NexPoint acting through its “Valuation Committee,” is responsible for determining the fair value of investments for which market quotations are not readily
available. The Valuation Committee is comprised of officers of NexPoint and certain of NexPoint’s affiliated companies and determines fair value and oversees the calculation of the NAV. The Valuation Committee is subject to Board oversight and
certain reporting and other requirements intended to provide the Board the information it needs to oversee NexPoint’s fair value determinations.
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
SEMI-ANNUAL REPORT | 13
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
market quotations will be valued pursuant to policies and procedures adopted by NexPoint and approved by the Board. Typically, such securities will be valued at the mean between the most recently
quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the
valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services
or broker-dealer sources that the Investment Adviser has determined to have the capability to provide appropriate pricing services.
Securities for which market
quotations are not readily available, or for which the Fund has determined that the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the
value of securities occur between the time when market price is determined and calculation of the Fund’s NAV, will be valued by the Fund at fair value, as determined by the Valuation Committee in good faith in accordance with policies and
procedures established by NexPoint and 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 Valuation Committee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s
most recent sale price and from the prices used by other investment companies to calculate their NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates.
There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences
could have a material impact to the Fund. The NAV shown in the Fund’s financial statements may vary from the NAV published by the Fund as of its year end because portfolio securities transactions are accounted for on the trade date (rather than
the day following the trade date) for financial statement purposes.
Deferred Financing Costs on the Preferred Stock
Deferred financing costs on the preferred shares consist of fees and expenses incurred in connection with the closing of the preferred stock offerings, and are
capitalized at the time of payment. Based on ASC 480-10-S99, preferred stock that, by its terms, is contingently redeemable upon the occurrence of an event that is
outside of the issuer’s control should be classified as mezzanine equity; therefore, these costs are only amortized once it is probable the shares will become redeemable. As of June 30, 2024, the Fund is compliant with all contingent
redemption provisions of the preferred offering, therefore the financing costs are currently unamortized until probable. Deferred financing costs of $5.2 million are presented net with the mezzanine equity on the Statement of Assets and
Liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuer |
|
Shares at
December 31, 2023 |
|
|
Beginning
Value as of December 31, 2023 |
|
|
Issuance Net
Liquidation Value |
|
|
Deferred
Issuance Costs |
|
|
Paydowns |
|
|
Balance net of
Deferred Financing Costs at June 30, 2024 |
|
|
Shares at
June 30, 2024 |
|
|
|
|
|
|
|
|
|
| Cumulative preferred shares (Series A) |
|
|
5,800,000 |
|
|
$ |
139,756,249 |
|
|
$ |
145,000,000 |
|
|
$ |
5,243,751 |
|
|
$ |
— |
|
|
$ |
139,756,249 |
|
|
|
5,800,000 |
|
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income 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:
| 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 Valuation 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 Valuation Committee meets monthly to review the
proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of established policies.
As of June 30, 2024, the Fund’s investments consisted of common stocks, U.S. senior loans, collateralized loan obligations, LLC interests, preferred stock,
corporate bonds and notes, registered investment companies, a repurchase agreement, and a cash equivalent. 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 futures contracts are valued based on the settlement price established each day by the board of trade or exchange on which they principally trade and are classified as Level 1 liabilities.
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.
Reverse repurchase agreements are priced at their acquisition cost, and assessed for credit adjustments, which represent fair value. These investments will generally be
categorized as Level 2 liabilities.
SEMI-ANNUAL REPORT | 15
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
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 be less liquid than publicly traded securities.
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 and liabilities as of June 30, 2024, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total value at
June 30, 2024 ($) |
|
|
Level 1
Quoted Price ($) |
|
|
Level 2
Significant
Observable
Inputs ($) |
|
|
Level 3
Significant Unobservable
Inputs ($) |
|
|
|
|
|
|
| Highland Opportunities and Income Fund |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Communication Services |
|
|
10,527,528 |
|
|
|
1,768,130 |
|
|
|
— |
|
|
|
8,759,398 |
|
|
|
|
|
|
| Energy |
|
|
12,330,610 |
|
|
|
12,278,935 |
|
|
|
— |
|
|
|
51,675 |
|
|
|
|
|
|
| Financials |
|
|
4,557,198 |
|
|
|
— |
|
|
|
— |
|
|
|
4,557,198 |
|
|
|
|
|
|
| Healthcare |
|
|
32,183,342 |
|
|
|
— |
|
|
|
— |
|
|
|
32,183,342 |
|
|
|
|
|
|
| Materials |
|
|
1,495,160 |
|
|
|
— |
|
|
|
1,495,160 |
|
|
|
— |
|
|
|
|
|
|
| Real Estate |
|
|
514,573,599 |
|
|
|
75,422,287 |
|
|
|
— |
|
|
|
439,151,312 |
|
|
|
|
|
|
| U.S. Senior Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Communication Services |
|
|
10,319,601 |
|
|
|
— |
|
|
|
— |
|
|
|
10,319,601 |
|
|
|
|
|
|
| Healthcare |
|
|
31,573,561 |
|
|
|
— |
|
|
|
14,528,120 |
|
|
|
17,045,441 |
|
|
|
|
|
|
| Real Estate |
|
|
164,653,664 |
|
|
|
— |
|
|
|
— |
|
|
|
164,653,664 |
|
|
|
|
|
|
| LLC Interest |
|
|
63,107,483 |
|
|
|
— |
|
|
|
— |
|
|
|
63,107,483 |
|
|
|
|
|
|
| Collateralized Loan Obligations |
|
|
41,475,926 |
|
|
|
— |
|
|
|
41,475,926 |
|
|
|
— |
|
|
|
|
|
|
| Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financials |
|
|
3,309,416 |
|
|
|
3,309,416 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| Healthcare |
|
|
22,280,234 |
|
|
|
— |
|
|
|
— |
|
|
|
22,280,234 |
|
|
|
|
|
|
| Real Estate |
|
|
5,293,760 |
|
|
|
4,192,051 |
|
|
|
1,101,709 |
|
|
|
— |
|
|
|
|
|
|
| Corporate Bonds & Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Communication Services |
|
|
2,414 |
|
|
|
— |
|
|
|
2,414 |
|
|
|
— |
|
|
|
|
|
|
| Financials |
|
|
3,400,000 |
|
|
|
— |
|
|
|
3,400,000 |
|
|
|
— |
|
|
|
|
|
|
| Industrials |
|
|
— |
^ |
|
|
— |
|
|
|
— |
|
|
|
— |
^ |
|
|
|
|
|
| Registered Investment Companies |
|
|
1,103,226 |
|
|
|
1,103,226 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| Repurchase Agreements |
|
|
47,688 |
|
|
|
47,688 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| Cash Equivalents |
|
|
42,316,283 |
|
|
|
42,316,283 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Assets |
|
|
964,550,693 |
|
|
|
140,438,016 |
|
|
|
62,003,329 |
|
|
|
762,109,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Securities Sold Short |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Information Technology |
|
|
(7,995,183 |
) |
|
|
(7,995,183 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Liabilities |
|
|
(7,995,183 |
) |
|
|
(7,995,183 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
956,555,510 |
|
|
|
132,442,833 |
|
|
|
62,003,329 |
|
|
|
762,109,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ^ |
This category includes securities with a value of zero. |
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and 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 six months ended
June 30, 2024.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance
as of
December 31,
2023
$ |
|
|
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 June 30,
2024
$ |
|
|
Change in
Unrealized
Appreciation
(Depreciation)
from
Investments
held at
June 30, 2024
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Communication Services |
|
|
9,148,771 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(389,373 |
) |
|
|
— |
|
|
|
— |
|
|
|
8,759,398 |
|
|
|
(389,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Energy |
|
|
51,675 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51,675 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financials |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(45,499 |
) |
|
|
— |
|
|
|
45,499 |
|
|
|
4,557,198 |
|
|
|
— |
|
|
|
4,557,198 |
|
|
|
45,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Healthcare |
|
|
34,528,541 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,345,199 |
) |
|
|
— |
|
|
|
— |
|
|
|
32,183,342 |
|
|
|
(2,345,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Materials |
|
|
1,495,160 |
|
|
|
— |
|
|
|
(1,495,160 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real Estate |
|
|
431,154,134 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,072,288 |
) |
|
|
(70,575 |
) |
|
|
(7,366,141 |
) |
|
|
21,685,607 |
|
|
|
(5,179,425 |
) |
|
|
439,151,312 |
|
|
|
(7,366,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Senior Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Communication Services |
|
|
9,690,922 |
|
|
|
— |
|
|
|
— |
|
|
|
379 |
|
|
|
— |
|
|
|
— |
|
|
|
12,978 |
|
|
|
615,322 |
|
|
|
— |
|
|
|
10,319,601 |
|
|
|
12,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Healthcare |
|
|
16,324,343 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
129,356 |
|
|
|
591,742 |
|
|
|
— |
|
|
|
17,045,441 |
|
|
|
129,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real Estate |
|
|
177,141,711 |
|
|
|
— |
|
|
|
— |
|
|
|
(99 |
) |
|
|
— |
|
|
|
— |
|
|
|
(10,575,938 |
) |
|
|
4,087,990 |
|
|
|
(6,000,000 |
) |
|
|
164,653,664 |
|
|
|
(10,575,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| LLC Interest |
|
|
61,166,835 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(854 |
) |
|
|
— |
|
|
|
(6,587,363 |
) |
|
|
9,528,865 |
|
|
|
(1,000,000 |
) |
|
|
63,107,483 |
|
|
|
(6,587,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financials |
|
|
26,556 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(107,834 |
) |
|
|
— |
|
|
|
44,025,999 |
|
|
|
— |
|
|
|
(43,944,721 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Healthcare |
|
|
22,280,234 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,280,234 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
763,008,882 |
|
|
|
— |
|
|
|
(1,495,160 |
) |
|
|
280 |
|
|
|
(1,226,475 |
) |
|
|
(70,575 |
) |
|
|
16,949,818 |
|
|
|
41,066,724 |
|
|
|
(56,124,146 |
) |
|
|
762,109,348 |
|
|
|
(27,076,181 |
) |
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 six months
ended June 30, 2024, there was one Common Stock position that transferred out Level 3. The shift was due to updated unobservable inputs, resulting in a transfer from Level 3 to Level 2.
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
Determination of fair value is uncertain because it involves subjective judgements and estimates that are unobservable. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Category |
|
Fair Value at
6/30/2024
$ |
|
|
Valuation Technique |
|
Unobservable Inputs |
|
Range
Input Value(s) (Average Input Value) |
|
|
|
|
|
| Common Stocks |
|
|
484,702,925 |
|
|
Multiples Analysis |
|
Unadjusted Price/MHz-PoP |
|
$0.10 - $0.90 ($0.50) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV / sh multiple |
|
0.85x - 1.10x (0.98x) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Multiples |
|
0.40x - 0.50x (0.45x) |
|
|
|
|
|
|
|
|
|
|
|
Discounted Cash Flow |
|
Discount Rate |
|
7.50% - 33.00% (16.40%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization Rate |
|
5.00% - 10.25% (6.21%) |
|
|
|
|
|
|
|
|
|
|
|
Transaction Analysis |
|
Multiple of EBITDA less CAPEX |
|
6.50x - 8.50x (7.50x) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Sq. Ft. |
|
$30.00 - $32.00 ($31.00) |
|
|
|
|
|
|
|
|
|
|
|
Transaction Indication of Value |
|
Enterprise Value ($mm) |
|
$841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Share |
|
$20.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost ($mm) |
|
$4.50 |
|
|
|
|
|
|
|
|
|
|
|
NAV Approach |
|
N/A |
|
N/A |
|
|
|
|
|
| U.S. Senior Loans |
|
|
192,018,706 |
|
|
Discounted Cash Flow |
|
Discount Rate |
|
6.08% - 22.50% (12.28%) |
|
|
|
|
|
|
|
|
|
|
|
Volatility Analysis |
|
Volatility |
|
55.00% - 65.00% (60.00%) |
|
|
|
|
|
| Preferred Stock |
|
|
22,280,234 |
|
|
Option Pricing Model |
|
Volatility |
|
40% - 90% (65%) |
|
|
|
|
|
|
|
|
|
|
|
Transaction Indication of Value |
|
Enterprise Value ($mm) |
|
$281.40 - $598.60 ($425.75) |
|
|
|
|
|
| LLC Interest |
|
|
63,107,483 |
|
|
Discounted Cash Flow |
|
Discount Rate |
|
5.98% - 14.00% (10.05%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
762,109,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the unobservable inputs utilized for various valuation methodologies, the Fund frequently uses a
combination of two or more valuation methodologies to determine fair value for a single holding. In such instances, the Fund assesses the methodologies and ascribes weightings to each methodology. The weightings ascribed to any individual
methodology ranged from as low as 20% to as high as 80% as of June 30, 2024. 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 inputs used in the fair value measurement of the Fund’s Preferred Stock are: volatility and enterprise
value. 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 Fund’s U.S. Senior Loans are: the discount rate and volatility. 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 Fund’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.
The significant unobservable input used in the fair value measurement of the Fund’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.
Security Transactions
Security transactions are accounted for on the trade
date. Realized gains/(losses) on investments sold are recorded on the basis of the specific identification method for both financial statement and U.S. federal income tax purposes taking into account any foreign taxes withheld.
Income Recognition
Corporate actions (including cash dividends) are recorded
on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
actions, which are recorded as soon after ex-dividend date as such information becomes available and is verified. Interest income and payments in kind are
recorded on the accrual basis.
Accretion of discount on taxable bonds and loans is computed to the maturity date, while amortization of premium on taxable bonds and
loans is computed to the earliest call date, whichever is shorter, both using the effective yield method. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s
tax rules and rates.
The Fund records distributions received from investments in real estate investment trusts (“REIT”) and partnerships in excess of
income from underlying investments as a reduction of cost of investments and/or realized gain. Such amounts are based on estimates if actual amounts are not available, and actual amounts of income, realized gain and return of capital may differ from
the estimated amounts. The Fund adjusts the estimated amounts once the issuers provide information about the actual composition of the distributions.
U.S.
Federal Income Tax Status
The Fund is treated as a separate taxpayer for U.S. federal income tax purposes. The Fund intends to qualify each year as a
“regulated investment company” under Subchapter M of the Internal Revenue Code of 1986 (the “Code”), as amended, and will distribute substantially all of its taxable income and gains, if any, for the tax year, and as such will
not be subject to U.S. federal income taxes. In addition, the Fund intends to distribute, in each calendar year, all of its net investment income, capital gains and certain other amounts, if any, such that the Fund should not be subject to U.S.
federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in Statement of Operations. There were no
interest or penalties during the six months ended June 30, 2024.
The Investment Adviser has analyzed the Fund’s tax positions taken on U.S. federal income
tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for U.S. federal income tax is required in the Fund’s financial statements. The
Fund’s U.S. federal and state income and U.S. federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the
Internal Revenue Service and state departments of revenue. Furthermore, the Investment Adviser of the Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will
significantly change in the next 12 months.
Distributions to Shareholders
The Fund plans to pay distributions from net investment income monthly and net realized capital gains annually to common shareholders. To permit the Fund to maintain
more stable monthly distributions and annual distributions, the Fund may from time to time distribute less than the entire amount of income and gains earned in the relevant month or year, respectively. The undistributed income and gains would be
available to supplement future distributions. In certain years, this practice may result in the Fund distributing, during a particular taxable year, amounts in excess of the amount of income and gains earned therein. Such distributions would result
in a portion of each distribution occurring in that year to be treated as a return of capital to shareholders. Shareholders of the Fund will automatically have all distributions reinvested in Common Shares of the Fund issued by the Fund in
accordance with the Fund’s Dividend Reinvestment Plan (the “Plan”) unless an election is made to receive cash. The number of newly issued Common Shares to be credited to each participant’s account will be determined by dividing
the dollar amount of the dividend by the lesser of (i) the NAV per Common Share determined on the Declaration Date and (ii) the market price per Common Share as of the close of regular trading on the NYSE on the Declaration Date.
Participants in the Plan requesting a sale of securities through the plan agent of the Plan are subject to a sales fee and a brokerage commission.
Statement of
Cash Flows
Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash
Flows. The cash amount shown in the Statement of Cash Flows is the amount included within the Fund’s Statement of Assets and Liabilities and includes cash on hand at its custodian bank and/or
sub-custodian bank(s) cash equivalents, foreign currency and restricted cash held at broker(s).
SEMI-ANNUAL REPORT | 19
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
Cash & Cash Equivalents
The Fund considers liquid assets deposited with a bank and certain short-term debt instruments of sufficient credit quality with original maturities of three months or
less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which
approximates fair value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of this financial report.
These balances may exceed the federally insured limits under the Federal Deposit Insurance Corporation (“FDIC”).
Foreign Currency
Accounting records of the Fund are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign
currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding
taxes, are recorded as unrealized foreign currency gains/(losses). Realized gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The
effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and
unrealized gain or loss on investment securities.
Securities Sold Short
The Fund may sell securities short. A security sold short is a transaction in which the Fund sells a security it does not own in anticipation that the market price of
that security will decline. When the Fund sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. The Fund may have to pay a fee to borrow particular
securities and is obligated to pay over any dividends or other payments received on
such borrowed securities. In some circumstances, the Fund may be allowed by its prime broker to utilize proceeds from securities sold short to purchase additional investments, resulting in
leverage. Cash held as collateral for securities sold short is classified as restricted cash on the Statement of Assets and Liabilities, as applicable. Restricted cash in the amount of $7,749,973 was held with the broker for the Fund. There were
securities fair valued at $19,115,796 posted in the Fund’s segregated account as collateral as of June 30, 2024.
Other Fee Income
Fee income may consist of origination/closing fees, amendment fees, administrative agent fees, transaction break-up fees and
other miscellaneous fees. Origination fees, amendment fees, and other similar fees are nonrecurring fee sources. Such fees are received on a transaction by transaction basis and do not constitute a regular stream of income and are recognized when
incurred.
Note 3. Derivative Transactions
The Fund is subject to equity
securities risk, interest rate risk and currency risk in the normal course of pursuing its investment objectives. The Fund enters into derivative transactions for the purpose of hedging against the effects of changes in the value of portfolio
securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions and for managing the duration of fixed income investments.
Futures Contracts
A futures contract represents a commitment for the future
purchase or sale of an asset at a specified price on a specified date. The Fund may invest in interest rate, financial and stock or bond index futures contracts subject to certain limitations. The Fund invests in futures contracts to manage its
exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund’s exposure to the underlying instrument while selling futures tends to decrease the Fund’s exposure to the underlying
instrument, or economically hedge other Fund investments. With futures contracts, there is minimal counterparty credit risk to the Fund since futures contracts are exchange-traded and the exchange’s clearinghouse, as counterparty to all traded
futures, guarantees the futures against default. The Fund’s risks
SEMI-ANNUAL REPORT | 20
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts’ terms
and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade.
Upon entering into a financial futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the
contract amount, known as initial margin deposit. Subsequent payments, known as variation margins, are made or can be received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an
unrealized gain/(loss) equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain/(loss) on
the expiration or closing of a futures contract.
During the six months ended June 30, 2024, the Fund did not enter into futures transactions for the purpose of
hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, and to gain market exposure for residual and accumulating cash positions. Cash held as collateral for futures contracts is
shown on the Statement of Assets and Liabilities as “Restricted Cash — Futures.” As of June 30, 2024, the Fund did not have any cash held as collateral for futures contracts.
Options
The Fund may utilize options on securities or indices to varying
degrees as part of their principal investment strategy. An option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of
the option the security underlying the option at a specified exercise or “strike” price. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise
price or to pay the exercise price upon delivery of the underlying security. The Fund may hold options, write option contracts, or both.
If an option written by the
Fund expires unexercised, the Fund realizes on the expiration date a capital gain equal to the premium received by the Fund at the time
the option was written. If an option purchased by the Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an
exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, underlying security, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction
can be effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the
premium received from writing the option, or, if the cost of the closing option is more than the premium received from writing the option, a capital loss. The Fund will realize a capital gain from a closing sale transaction if the premium received
from the sale is more than the original premium paid when the option position was opened, or a capital loss, if the premium received from a sale is less than the original premium paid.
As of June 30, 2024, the Fund did not hold written options.
Reverse
Repurchase Agreements
The Fund may engage in reverse repurchase agreement transactions with respect to instruments that are consistent with the Fund’s
investment objective or policies. This creates leverage for the Fund because the cash received can be used to purchase other securities.
A reverse repurchase
transaction is a repurchase transaction in which the Fund is the seller of securities or other assets and agrees to repurchase them at a date certain or on demand. Pursuant to the Repurchase Agreement, the Fund may agree to sell securities or other
assets to Mizuho Securities for an agreed upon price (the “Purchase Price”), with a simultaneous agreement to repurchase such securities or other assets from Mizuho Securities for the Purchase Price plus a price differential that is
economically similar to interest. The price differential is negotiated for each transaction. This creates leverage for the Fund because the cash received can be used to purchase other securities.
At June 30, 2024, the Fund did not hold reverse repurchase agreements.
Additional Derivative Information
The Fund is required to disclose; a) how
and why an entity uses derivative instruments; b) how derivative instruments
SEMI-ANNUAL REPORT | 21
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
and related hedged items are accounted for; c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows; and d) how the
netting of derivatives subject to master netting arrangements (if applicable) affects the net exposure of the Fund related to the derivatives.
Note 4.
Securities Lending
Effective January, 7, 2020, the Fund entered into a securities lending agreement with The Bank of New York Mellon (“BNY” or the
“Lending Agent”).
Securities lending transactions are entered into by the Fund under the Securities Lending Agreement (“SLA”),
which permits the Fund, under certain circumstances such as an event of default, to offset amounts payable by the Fund to the same counterparty against amounts receivable from the counterparty to create a net payment due to or from the Fund.
The following is a summary of securities lending
agreements held by the Fund, with cash collateral of overnight maturities, which would be subject to offset as of June 30, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross
Amount of Recognized Assets
(Value of Securities on Loan) |
|
|
Value of Cash
Collateral
Received(1) |
|
|
Value of
Non-Cash Collateral Received |
|
|
Net
Amount |
|
|
|
|
|
| $ |
46,625 |
|
|
$ |
46,625 |
|
|
$ |
— |
|
|
$ |
— |
|
| (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. |
| Amounts |
designated as (—) are $0. |
The value of loaned securities and related collateral outstanding at June 30, 2024 are shown in the Investment Portfolio. The value of the collateral held may be
temporarily less than that required under the lending contract. As of June 30, 2024, the cash collateral was invested in repurchase agreements with the following maturities:
Remaining Contractual Maturity of the Agreements, as of June 30, 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Overnight and
Continuous |
|
|
<30 Days |
|
|
Between
30 & 90 Days |
|
|
>90
Days |
|
|
Total |
|
|
|
|
|
|
|
| Repurchase Agreement |
|
$ |
47,688 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
47,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
47,688 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
47,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts designated as (—) are $0.
The Fund could seek additional income by making secured loans of its portfolio securities through its custodian. Such
loans would be in an amount not greater than one-third of the value of the Fund’s total assets. BNY would charge a fund fees based on a percentage of the securities lending income.
The fair value of the loaned securities is determined at the close of each business day of the Fund and any additional required collateral is delivered to the Fund, or
excess collateral is returned by the Fund, on the next business day.
The Fund would receive collateral consisting of cash (U.S. and foreign currency), securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities, sovereign debt, convertible bonds,
irrevocable bank letters of credit or such other collateral as may be agreed on by the parties to a securities lending arrangement, initially with a value of 102% or 105% of the market value of
the loaned securities and thereafter maintained at a value of 100% of the market value of the loaned securities. If the collateral consists of non-cash collateral, the borrower would pay the Fund a loan
premium fee. If the collateral consists of cash, BNY would reinvest the cash in repurchase agreements and money market accounts. Although voting rights, or rights to consent, with respect to the loaned securities pass to the borrower, the Fund would
recall the loaned securities upon reasonable notice in order that the securities could be voted by the Fund if the holders of such securities are asked to vote upon or consent to
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
matters materially affecting the investment. The Fund also could call such loans in order to sell the securities involved.
Securities lending transactions were entered into pursuant to SLAs, which would provide the right, in the event of default (including bankruptcy or insolvency) for the non-defaulting party to liquidate the collateral and calculate a net exposure to the defaulting party or request additional collateral. In the event that a borrower defaulted, the Fund, as lender, would offset the
market value of the collateral received against the market value of the securities loaned. The value of the collateral is typically greater than that of the market value of the securities loaned, leaving the lender with a net amount payable to the
defaulting party. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of an SLA counterparty’s bankruptcy or insolvency. Under the SLA, the
Fund can reinvest cash collateral, or, upon an event of default, resell or repledge the collateral, and the borrower can resell or repledge the loaned securities. The risks of securities lending also include the risk that the borrower may not
provide additional collateral when required or may not return the securities when due. To mitigate this risk, the Fund benefits from a borrower default indemnity provided by BNY. BNY’s indemnity generally provides for replacement of securities
lent or the approximate value thereof.
Note 5. U.S. Federal Income Tax Information
The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from GAAP. These differences include (but
are not limited to) investments organized as partnerships for tax purposes, tax treatment of organizational start-up costs, losses deferred due to wash sale transactions, and tax attributes from Fund
reorganizations. Reclassifications are made to the Fund’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net
investment income, realized gains or losses, or NAV of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments.
For the year ended December 31, 2023, permanent differences chiefly resulting from partnerships and return of capital distributions paid by the Fund were identified
and reclassified among the components of the Fund’s net assets as follows:
|
|
|
|
|
|
|
|
|
| Distributable
Earnings (Accumulated Losses) |
|
|
Paid-in-
Capital |
|
|
|
| $ |
20,172,169 |
|
|
$ |
(20,172,169 |
) |
At December 31, 2023, the Fund’s most
recent tax year end, components of distributable earnings (accumulated losses) on a tax basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other
Temporary Losses |
|
|
Accumulated
Capital
Losses |
|
|
Unrealized
Appreciation (Depreciation)(1) |
|
|
|
|
| $ |
(1 |
) |
|
$ |
(206,771,405 |
) |
|
$ |
(337,897,097 |
) |
| (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.
|
As of December 31, 2023, the Fund has capital loss carryovers as indicated below. The capital loss carryovers are available to offset future
realized capital gains to the extent provided in the Code and regulations promulgated thereunder. To the extent that these carryover losses are used to offset future capital gains, the gains offset will not be distributed to shareholders. During the
year ended December 31, 2023, the Fund did not utilize capital carryforwards to offset capital gains.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| No Expiration Short-Term |
|
|
No Expiration |
|
|
Total |
|
|
|
|
| $ |
— |
|
|
$ |
(206,771,405 |
) |
|
$ |
(206,771,405 |
) |
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
The tax character of distributions paid during the last two fiscal years ended December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Ordinary Income |
|
|
Long-term Capital Gain |
|
|
Return of Capital |
|
|
|
|
|
| 2023 |
|
$ |
41,946,824 |
|
|
$ |
— |
|
|
$ |
21,072,259 |
|
|
|
|
|
| 2022 |
|
|
35,874,540 |
|
|
|
— |
|
|
|
27,155,040 |
|
| Amounts |
designated as (—) are $0. |
Unrealized appreciation (depreciation) at June 30, 2024, based on cost of investments, securities sold short and foreign currency transactions for U.S. federal
income tax purposes was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Appreciation |
|
|
Gross Depreciation |
|
|
Net Appreciation/
(Depreciation) |
|
|
(Cost) |
|
|
|
|
|
| $ |
78,895,124 |
|
|
$ |
(469,920,312 |
) |
|
$ |
(391,025,188 |
) |
|
$ |
1,355,575,881 |
|
Qualified Late Year Ordinary and Post October Losses
Under current laws, certain capital losses and specified losses realized after October 31 may be deferred and treated as occurring on the first day of the
following fiscal year. For the fiscal year ended December 31, 2023, the Fund did not defer any qualified late year ordinary nor post October losses.
Note
6. Investment Advisory, Administration and Trustee Fees
For its investment advisory services, the Fund pays the Investment Adviser a monthly fee, computed and
accrued daily, based on an annual rate of the Fund’s Average Daily Managed Assets. Average Daily Managed Assets of a Fund means the average daily value of the total assets of a Fund less all accrued liabilities of a Fund (other than the
aggregate amount of any outstanding borrowings constituting financial leverage). On occasion, the Investment Adviser voluntarily waives additional fees to the extent assets are invested in certain affiliated investments.
The table below shows the Fund’s contractual advisory fee with the Investment Adviser for the six months ended June 30, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
| Annual Fee Rate to the
Investment Adviser |
|
> 1 Billion |
|
|
> 2 Billion |
|
|
|
|
| 0.65% |
|
|
0.60 |
% |
|
|
0.55 |
% |
Administration Fee
The Investment Adviser
provides administrative services to the Fund. For its services, the Investment Adviser receives an annual fee, payable monthly, in an amount equal to 0.20% of the average weekly value of the Fund’s Managed Assets. Under a separate sub-
administration agreement, the Investment Adviser delegates certain
administrative functions and pays the sub-administrator directly for these sub-administration services. Effective
October 1, 2018, the Investment Adviser entered into an administrative services agreement with SEI Investments Global Funds Services, a wholly owned subsidiary of SEI Investments Company.
Fees Paid to Officers and Trustees
Each Trustee who oversees all of the
funds in the NexPoint Fund Complex receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the NexPoint Fund Complex based on relative net assets. The annual retainer for a Trustee who does not
oversee all of the funds in the NexPoint Fund Complex is prorated based on the portion of the $150,000 annual retainer allocable to the funds overseen by such Trustee. The Chairman of the Audit Committee and the Chairman of the Board each receive an
additional annual payment of $10,000 payable in quarterly installments and allocated among each portfolio in the NexPoint Fund Complex based on relative net assets. The “NexPoint Fund Complex” consists of all of the registered investment
companies advised by the Investment Adviser or its affiliated advisers as of the date of this report and NexPoint Capital, Inc., a closed-end management investment company that has elected to be treated as a
business development company under the 1940 Act.
The Fund pays no compensation to its officers, all of whom are employees of the Investment Adviser or one of its
affiliates.
Trustees are reimbursed for actual out-of-pocket expenses relating to
attendance at meetings.
The Trustees do not receive any separate compensation in connection with service on Committees or for
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
attending Board or Committee Meetings. The Trustees do not have any pension or retirement plan.
Expedited
Settlement Agreements
On June 15, 2017 and May 14, 2019, the Fund entered into Expedited Settlement Agreements with two major dealers in the floating
rate loan market, pursuant to which the Fund has the right to designate certain loans it sells to the dealer to settle on or prior to three days from the trade date in exchange for a quarterly fee (the “Expedited Settlement Agreements”).
The Expedited Settlement Agreements are designed to reduce settlement times from the standard seven days to three days for eligible loans. For the six months ended June 30, 2024, the Expedited Settlement Agreement was not used by the Fund.
While the Expedited Settlement Agreements are intended to provide the Fund with additional liquidity with respect to such loans, and may not represent the exclusive
method of expedited settlement of such loans, no assurance can be given that the Expedited Settlement Agreements or other methods for expediting settlements will provide the Fund with sufficient liquidity in the event of abnormally large
redemptions.
Other Matters
NexPoint has entered into a Services
Agreement (the “Services Agreement”) with Skyview Group (“Skyview”), pursuant to which NexPoint will receive administrative and operational support services to enable it to provide the required advisory services to the Fund.
Certain Skyview personnel became dual-employees of NexPoint Services, Inc., a wholly-owned subsidiary of the Investment Adviser. The same services are being performed by
the dual-employees. The Investment Adviser, and not the Fund, will compensate all Investment Adviser, Skyview, and dual-employee personnel who provide services to the Fund.
Indemnification
Under the Fund’s organizational documents, the officers
and Trustees have been granted certain indemnification rights against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund may enter into contracts with service
providers that contain a variety of indemnification clauses. The Fund’s maximum exposure under these arrangements is dependent on future
claims that may be made against the Fund and, therefore, cannot be estimated.
Note 7. Disclosure of
Significant Risks and Contingencies
The Fund’s investments expose the Fund to various risks, certain of which are discussed below. Please refer to the
Fund’s Prospectus and Statement of Additional Information for a full listing of risks associated with the Fund’s investments.
Concentration in Real
Estate Securities Risk
Although the Fund does not invest directly in real estate, the Fund will concentrate its investments in investment vehicles that invest
principally in real estate and real estate related securities, its portfolio will be significantly impacted by the performance of the real estate market and may experience more volatility and be exposed to greater risk than a more diversified
portfolio. The values of companies engaged in the real estate industry are affected by: (i) changes in general economic and market conditions; (ii) changes in the value of real estate properties; (iii) risks related to local economic
conditions, overbuilding and increased competition; (iv) increases in property taxes and operating expenses; (v) changes in zoning laws; (vi) casualty and condemnation losses; (vii) variations in rental income, neighborhood
values or the appeal of property to tenants; (viii) the availability of financing and (ix) changes in interest rates and leverage.
Counterparty Risk
Counterparty risk is the potential loss the Fund may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of
a contract. Counterparty risk is measured as the loss the Fund would record if its counterparties failed to perform pursuant to the terms of their obligations to the Fund. Because the Fund may enter into over-the-counter forwards, options, swaps and other derivative financial instruments, the Fund may be exposed to the credit risk of its counterparties. To limit the counterparty risk associated with such
transactions, the Fund conducts business only with financial institutions judged by the Investment Adviser to present acceptable credit risk.
Credit Risk
The value of debt securities owned by the Fund may be affected by the ability of issuers to make principal and
SEMI-ANNUAL REPORT | 25
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
interest payments and by the issuer’s or counterparty’s credit quality. If an issuer cannot meet its payment obligations or if its credit rating is lowered, the value of its debt
securities may decline. Lower quality bonds are generally more sensitive to these changes than higher quality bonds. Non-payment would result in a reduction of income to the Fund, a reduction in the value of
the obligation experiencing non-payment and a potential decrease in the Fund’s net asset value and the market price of the Fund’s shares.
Currency Risk
A portion of the Fund’s assets may be quoted or
denominated in non-U.S. currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control regulations. The Fund’s investment performance
may be negatively affected by a devaluation of a currency in which the Fund’s investments are quoted or denominated. Further, the Fund’s investment performance may be significantly affected, either positively or negatively, by currency
exchange rates because the U.S. dollar value of securities quoted or denominated in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar.
Derivatives Risk
Derivatives risk is a combination of several risks,
including the risks that: (1) an investment in a derivative instrument may not correlate well with the performance of the securities or asset class to which the Fund seeks exposure, (2) derivative contracts, including options, may expire
worthless and the use of derivatives may result in losses to the Fund, (3) a derivative instrument entailing leverage may result in a loss greater than the principal amount invested, (4) derivatives not traded on an exchange may be subject
to credit risk, for example, if the counterparty does not meet its obligations (see also “Counterparty Risk”), and (5) derivatives not traded on an exchange may be subject to liquidity risk and the related risk that the instrument is
difficult or impossible to value accurately.
Effective August 19, 2022 (the “Compliance Date”), Rule 18f-4
under the 1940 Act (the “Derivatives Rule”) replaced the asset segregation regime of Investment Company Act Release No. 10666 (Release 10666) with a new framework for the use of derivatives by registered funds. As of the Compliance
Date, the SEC rescinded
Release 10666 and withdrew no-action letters and similar guidance addressing a fund’s use of derivatives and began requiring funds to satisfy the
requirements of the Derivatives Rule. As a result, on or after the Compliance Date, the Fund will no longer engage in “segregation” or “coverage” techniques with respect to derivatives transactions and will instead comply with
the applicable requirements of the Derivatives Rule.
The Derivatives Rule mandates that a fund adopt and/or implement: (i) value-at-risk limitations (VaR); (ii) a written derivatives risk management program; (iii) new Board oversight responsibilities; and (iv) new reporting and recordkeeping requirements. In
the event that a fund’s derivative exposure is 10% or less of its net assets, excluding certain currency and interest rate hedging transactions, it can elect to be classified as a limited derivatives user (Limited Derivatives User) under the
Derivatives Rule, in which case the fund is not subject to the full requirements of the Derivatives Rule. Limited Derivatives Users are excepted from VaR testing, implementing a derivatives risk management program, and certain Board oversight and
reporting requirements mandated by the Derivatives Rule. However, a Limited Derivatives User is still required to implement written compliance policies and procedures reasonably designed to manage its derivatives risks.
Distressed and Defaulted Securities Risk
The Fund may invest in companies
that are troubled, in distress or bankrupt. As such, they are subject to a multitude of legal, industry, market, environmental and governmental forces that make analysis of these companies inherently difficult. Further, the Investment Adviser relies
on company management, outside experts, market participants and personal experience to analyze potential investments for the Fund. There can be no assurance that any of these sources will prove credible, or that the resulting analysis will produce
accurate conclusions.
Equity Securities Risk
The risk that stock prices
will fall over short or long periods of time. In addition, common stocks represent a share of ownership in a company, and rank after bonds and preferred stock in their claim on the company’s assets in the event of bankruptcy. In addition to
these risks, preferred stock and convertible securities are also subject to the risk that issuers will not make payments on securities held by the Fund, which could result in
SEMI-ANNUAL REPORT | 26
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
losses to the Fund. The credit quality of preferred stock and convertible securities held by the Fund may be lowered if an issuer’s financial condition changes, leading to greater volatility
in the price of the security.
Exchange-Traded Funds (“ETF”) Risk
The risk that the price movement of an ETF may not exactly track the underlying index and may result in a loss. In addition, shareholders bear both their proportionate
share of the Fund’s expenses and similar expenses of the underlying investment company when the Fund invests in shares of another investment company.
Financial Services Industry Risk
The risk associated with the fact that the
Fund’s investments in Senior Loans are arranged through private negotiations between a borrower (“Borrower”) and several financial institutions. Investments in the financial services sector may be subject to credit risk, interest rate
risk, and regulatory risk, among others. Banks and other financial institutions can be affected by such factors as downturns in the U.S. and foreign economies and general economic cycles, fiscal and monetary policy, adverse developments in the real
estate market, the deterioration or failure of other financial institutions, and changes in banking or securities regulations. The financial services industry is subject to extensive government regulation, which can limit both the amounts and types
of loans and other financial commitments financial services companies can make and the interest rates and fees they can charge. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when
interest rates change. Because financial services companies are highly dependent on short-term interest rates, they can be adversely affected by downturns in the U.S. and foreign economies or changes in banking regulations. Losses resulting from
financial difficulties of Borrowers can negatively affect financial services companies. The financial services industry is currently undergoing relatively rapid change as existing distinctions between financial service segments become less clear.
This change may make it more difficult for the Investment Adviser to analyze investments in this industry. Additionally, the recently increased volatility in the financial markets and implementation of the recent financial reform legislation may
affect the financial services industry as a whole in ways that may be difficult to predict.
Hedging Risk
The Fund may
engage in “hedging,” the practice of attempting to offset a potential loss in one position by establishing an opposite position in another investment. Hedging strategies in general are usually intended to limit or reduce investment risk,
but can also be expected to limit or reduce the potential for profit. For example, if the Fund has taken a defensive posture by hedging its portfolio, and stock prices advance, the return to investors will be lower than if the portfolio had not been
hedged. No assurance can be given that any particular hedging strategy will be successful, or that the Investment Adviser will elect to use a hedging strategy at a time when it is advisable.
High Yield Debt Securities Risk
The risk that below investment grade
securities or unrated securities of similar credit quality (commonly known as “high yield securities” or “junk securities”) are more likely to default than higher rated securities. The Fund’s ability to invest in high-yield
debt securities generally subjects the Fund to greater risk than securities with higher ratings. Such securities are regarded by the rating organizations as predominantly speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. The market value of these securities is generally more sensitive to corporate developments and economic conditions and can be volatile. Market conditions can diminish liquidity and make accurate
valuations difficult to obtain.
Illiquid and Restricted Securities Risk
Certain investments made by the Fund may be illiquid, and consequently the Fund may not be able to sell such investments at prices that reflect the Investment
Adviser’s assessment of their value or the amount originally paid for such investments by the Fund. Illiquidity may result from the absence of an established market for the investments as well as legal, contractual or other restrictions on
their resale and other factors. Furthermore, the nature of the Fund’s investments, especially those in financially distressed companies, may require a long holding period prior to profitability.
Restricted securities (i.e., securities acquired in private placement transactions) and illiquid securities may offer higher yields than comparable
publicly traded securities. The Fund, however, may not be able to sell these securities when the Investment Adviser considers
SEMI-ANNUAL REPORT | 27
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
it desirable to do so or, to the extent they are sold privately, may have to sell them at less than the price of otherwise comparable securities. Restricted securities are subject to limitations
on resale which can have an adverse effect on the price obtainable for such securities. Also, if in order to permit resale the securities are registered under the Securities Act at the Fund’s expense, the Fund’s expenses would be
increased.
Interest Rate Risk
The risk that fixed income securities
will decline in value because of changes in interest rates. When interest rates decline, the value of fixed rate securities already held by the Fund can be expected to rise. Conversely, when interest rates rise, the value of existing fixed rate
portfolio securities can be expected to decline. A fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration.
Leverage Risk
The Fund may use leverage in its investment program, including
the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity
to achieve higher returns on the amounts invested, they also increase the risk of loss. To the extent the Fund purchases securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are
not used. If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed funds, the Fund’s use of leverage would result in a lower rate of return than if the Fund were not leveraged.
LIBOR Transition and Associated Risk
Certain debt securities, derivatives
and other financial instruments have traditionally utilized LIBOR as the reference or benchmark rate for interest rate calculations. However, following allegations of manipulation and concerns regarding liquidity, in July 2017 the U.K. Financial
Conduct Authority, which regulates LIBOR, announced that it would cease its active encouragement of banks to provide the quotations needed to sustain LIBOR. The ICE Benchmark Administration Limited, the administrator of LIBOR, ceased publishing most
liquid U.S. LIBOR maturities on June 30, 2023. It is possible that a subset
of U.S. dollar LIBOR settings will continue to be published on a “synthetic” basis. It is expected that market participants transitioned to the use of alternative reference or benchmark
rates prior to the applicable LIBOR publication cessation date. Additionally, although regulators have encouraged the development and adoption of alternative rates such as the Secured Overnight Financing Rate (“SOFR”), the future
utilization of LIBOR or of any particular replacement rate remains uncertain.
Although the transition process away from LIBOR became increasingly well-defined in
advance of the discontinuation dates, the impact on certain debt securities, derivatives and other financial instruments remains uncertain. Market participants have adopted alternative rates such as SOFR or otherwise amended financial instruments
referencing LIBOR to include fallback provisions and other measures that contemplated the discontinuation of LIBOR or other similar market disruption events, but neither the effect of the transition process nor the viability of such measures is
known. Further, uncertainty and risk remain regarding the willingness and ability of issuers and lenders to include alternative rates and revised provisions in new and existing contracts or instruments. To facilitate the transition of legacy
derivatives contracts referencing LIBOR, the International Swaps and Derivatives Association, Inc. launched a protocol to incorporate fallback provisions. However, there are obstacles to converting certain longer-term securities and transactions to
a new benchmark or benchmarks and the effectiveness of one alternative reference rate versus multiple alternative reference rates in new or existing financial instruments and products has not been determined. Certain proposed replacement rates to
LIBOR, such as SOFR, which is a broad measure of secured overnight U.S. Treasury repo rates, are materially different from LIBOR, and changes in the applicable spread for financial instruments transitioning away from LIBOR will need to be made to
accommodate the differences. Furthermore, the risks associated with the expected discontinuation of LIBOR and transition to replacement rates may be exacerbated if an orderly transition to an alternative reference rate is not completed in a timely
manner.
The utilization of an alternative reference rate, or the transition process to an alternative reference rate, may adversely affect the Fund’s
performance.
SEMI-ANNUAL REPORT | 28
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
Alteration of the terms of a debt instrument or a modification of the terms of other types of contracts to replace LIBOR
or another interbank offered rate (“IBOR”) with a new reference rate could result in a taxable exchange and the realization of income and gain/loss for U.S. federal income tax purposes. The Internal Revenue Service (the “IRS”)
has issued final regulations regarding the tax consequences of the transition from IBOR to a new reference rate in debt instruments and non-debt contracts. Under the final regulations, alteration or
modification of the terms of a debt instrument to replace an operative rate that uses a discontinued IBOR with a qualified rate (as defined in the final regulations) including true up payments equalizing the fair market value of contracts before and
after such IBOR transition, to add a qualified rate as a fallback rate to a contract whose operative rate uses a discontinued IBOR or to replace a fallback rate that uses a discontinued IBOR with a qualified rate would not be taxable.
The IRS may provide additional guidance, with potential retroactive effect.
Management Risk
The risk associated with the fact that the Fund relies on
the Investment Adviser’s ability to achieve its investment objective. The Investment Adviser may be incorrect in its assessment of the intrinsic value of the companies whose securities the Fund holds, which may result in a decline in the value
of fund shares and failure to achieve its investment objective.
Mortgage-Backed Securities Risk
The risk of investing in mortgage-backed securities, and includes interest rate risk, liquidity risk and credit risk, which may be heightened in connection with
investments in loans to “subprime” borrowers. Certain mortgage-backed securities are also subject to prepayment risk. Mortgage-backed securities, because they are backed by mortgage loans, are also subject to risks related to real estate,
and securities backed by private-issued mortgages may experience higher rates of default on the underlying mortgages than securities backed by government-issued mortgages. The Fund could lose money if there are defaults on the mortgage loans
underlying these securities.
Non-Diversification Risk
The risk that an investment in the Fund could fluctuate in value more than an investment in a diversified fund.
As a non-diversified fund for purposes of the 1940 Act, the Fund may invest a larger portion of its assets in the securities of fewer issuers than a
diversified fund. The Fund’s investments in fewer issuers may result in the Fund’s shares being more sensitive to the economic results of those issuers. An investment in the Fund could fluctuate in value more than an investment in a
diversified fund.
Non-U.S. Securities Risk
The Fund may invest in non-U.S. securities. Investing in non-U.S. securities involves
certain risks not involved in domestic investments, including, but not limited to: fluctuations in foreign exchange rates; future foreign economic, financial, political and social developments; different legal systems; the possible imposition of
exchange controls or other foreign governmental laws or restrictions; lower trading volume; much greater price volatility and illiquidity of certain non-U.S. securities markets; different trading and
settlement practices; less governmental supervision; changes in currency exchange rates; high and volatile rates of inflation; fluctuating interest rates; less publicly available information; and different accounting, auditing and financial
recordkeeping standards and requirements.
Options Risk
There are
several risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A transaction in options or securities may be unsuccessful to some degree because of market behavior or unexpected events.
When the Fund writes a covered call option, the Fund forgoes, during the option’s life, the opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to
fulfill its obligation and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.
When the
Fund writes a covered put option, the Fund bears the risk of loss if the value of the underlying stock
SEMI-ANNUAL REPORT | 29
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
declines below the exercise price minus the put premium. If the option is exercised, the Fund could incur a loss if it is required to purchase the stock underlying the put option at a price
greater than the market price of the stock at the time of exercise plus the put premium the Fund received when it wrote the option. While the Fund’s potential gain in writing a covered put option is limited to distributions earned on the liquid
assets securing the put option plus the premium received from the purchaser of the put option, the Fund risks a loss equal to the entire exercise price of the option minus the put premium.
Pandemics and Associated Economic Disruption
An outbreak of respiratory
disease caused by a novel coronavirus (“COVID-19”) was first detected in China in late 2019 and subsequently spread globally. This coronavirus has resulted in, and may continue to result in, closed
borders, enhanced health screenings, disruptions to healthcare service preparation and delivery, quarantines, cancellations, and disruptions to supply chains, workflow operations and consumer activity, as well as general concern and uncertainty. The
impact of this coronavirus has resulted in substantial economic volatility. Health crises caused by outbreaks, such as the coronavirus outbreak, may exacerbate other pre-existing political, social and economic
risks. The impact of this outbreak, and other epidemics and pandemics that may arise in the future, could continue to negatively affect the worldwide economy, as well as the economies of individual countries, individual companies, including certain
Fund service providers and issuers of the Fund’s investments, and the markets in general in significant and unforeseen ways. In addition, governments, their regulatory agencies, or self-regulatory organizations may take actions in response to
the pandemic, including significant fiscal and monetary policy changes, that may affect the instruments in which the Fund invests or the issuers of such instruments. Any such impact could adversely affect the Fund’s performance.
Preferred Stock Risk
Preferred stock, which may include preferred stock in
real estate transactions, represents an equity or ownership interest in an issuer that pays dividends at a specified rate and that has precedence over common stock in the payment of dividends. In the event an issuer is liquidated or declares
bankruptcy, the claims of creditors and owners of bonds take precedence over the
claims of those who own preferred and common stock. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline.
Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed prior to its maturity, which can have a negative impact on the stock’s price when interest rates decline. Unlike
interest on debt securities, preferred stock dividends are payable only if declared by the issuer’s board. The value of convertible preferred stock can depend heavily upon the value of the security into which such convertible preferred stock is
converted, depending on whether the market price of the underlying security exceeds the conversion price.
Real Estate Investment Trust Risk
Real estate investments are subject to various risk factors. Generally, real estate investments could be adversely affected by a recession or general economic downturn
where the properties are located. Real estate investment performance is also subject to the success that a particular property manager has in managing the property.
Real Estate Market Risk
The Fund is exposed to economic, market and
regulatory changes that impact the real estate market generally through its investment in NFRO Diversified REIT, LLC, NFRO Self Storage REIT, LLC, NFRO SFR REIT, LLC, and NFRO Holdings, LLC (together the “REIT Subsidiaries”), which may
cause the Fund’s operating results to suffer. A number of factors may prevent the REIT Subsidiaries’ properties and other real estate-related investments from generating sufficient net cash flow or may adversely affect their value, or
both, resulting in less cash available for distribution, or a loss, to us. These factors include: national, regional and local economic conditions; changing demographics; the ability of property managers to provide capable management and adequate
maintenance; the quality of a property’s construction and design; increases in costs of maintenance, insurance, and operations (including energy costs and real estate taxes); potential environmental and other legal liabilities; the level of
financing used by the REIT Subsidiary and the availability and cost of refinancing; potential instability, default or bankruptcy of tenants in the properties owned by each REIT Subsidiary; the relative illiquidity of real estate investments in
general, which may make it difficult to sell a property at an attractive price or within a reasonable time frame.
SEMI-ANNUAL REPORT | 30
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
Securities Lending Risk
The
Fund may make secured loans of its portfolio securities. Any decline in the value of a portfolio security that occurs while the security is out on loan is borne by the Fund, and will adversely affect performance. Also, there may be delays in
recovery of securities loaned, losses in the investment of collateral, and loss of rights in the collateral should the borrower of the securities fail financially while holding the security.
Senior Loans Risk
The risk associated with Senior Loans, which are typically
below investment grade and are considered speculative because of the credit risk of their issuers. As with any debt instrument, Senior Loans are generally subject to the risk of price declines and as interest rates rise, the cost of borrowing
increases, which may increase the risk of default. In addition, the interest rates of floating rate loans typically only adjust to changes in short-term interest rates; long-term interest rates can vary dramatically from short-term interest rates.
The secondary market for loans is generally less liquid than the market for higher grade debt. Less liquidity in the secondary trading market could adversely affect the price at which the Fund could sell a loan, and could adversely affect the NAV of
the Fund’s shares. The volume and frequency of secondary market trading in such loans varies significantly over time and among loans. Declines in interest rates may increase prepayments of debt obligations and require the Fund to invest assets
at lower yields. No active trading market may exist for certain Senior Loans, which may impair the ability of the Fund to realize full value in the event of the need to liquidate such assets. Adverse market conditions may impair the liquidity of
some actively traded Senior Loans.
Short Sales Risk
Short sales by the
Fund that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Short selling allows
the Fund to profit from declines in market prices to the extent such decline exceeds the transaction costs and costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close
out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out
the short position can itself cause the price of securities to rise further, thereby exacerbating the loss. The Fund may mitigate such losses by replacing the securities sold short before the
market price has increased significantly. Under adverse market conditions, the Fund might have difficulty purchasing securities to meet margin calls on its short sale delivery obligations, and might have to sell portfolio securities to raise the
capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.
If other short positions of
the same security are closed out at the same time, a “short squeeze” can occur where demand exceeds the supply for the security sold short. A short squeeze makes it more likely that the Fund will need to replace the borrowed security at an
unfavorable price.
Structured Finance Securities Risk
A portion of the
Fund’s investments may consist of equipment trust certificates, collateralized mortgage obligations, collateralized bond obligations, collateralized loan obligations or similar instruments. Such structured finance securities are generally
backed by an asset or a pool of assets, which serve as collateral. Depending on the type of security, the collateral may take the form of a portfolio of mortgage loans or bonds or other assets. The Fund and other investors in structured finance
securities ultimately bear the credit risk of the underlying collateral. In some instances, the structured finance securities are issued in multiple tranches, offering investors various maturity and credit risk characteristics, often categorized as
senior, mezzanine and subordinated/equity according to their degree of risk. The riskiest securities are the equity tranche, which bears the bulk of defaults from the bonds or loans serving as collateral, and thus may protect the other, more senior
tranches from default. If there are defaults or the relevant collateral otherwise underperforms, scheduled payments to senior tranches of such securities take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches
take precedence over those to subordinated/equity tranches. A senior tranche typically has higher ratings and lower yields than the underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, other
tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to previous defaults and the disappearance of protecting tranches, market
SEMI-ANNUAL REPORT | 31
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
anticipation of defaults and aversion to certain structured finance securities as a class.
Swap Contracts
The Fund may use swaps as part of its investment strategy or to manage its exposure to interest, commodity, and currency rates as well as adverse movements in
the debt and equity markets. Swap agreements are privately negotiated in the over-the-counter (“OTC”) market or may be executed in a multilateral or other
trade facility platform, such as a registered exchange (“centrally cleared swaps”).
For OTC swaps, any upfront premiums paid and any upfront fees received
are shown as swap premiums paid and swap premiums received in the Statements of Assets and Liabilities, respectively, and amortized over the life of the swap. The daily fluctuation in market value is recorded as unrealized appreciation
(depreciation) on OTC Swaps in the Statements of Assets and Liabilities. Premiums paid or received are recognized as realized gain or loss in the Statement of Operations.
Total return swaps are agreements to exchange the return generated by one instrument for the return generated by another instrument; for example, the agreement to pay
interest in exchange for a market or commodity-linked return based on a notional amount. To the extent the total return of the market or commodity-linked index exceeds the offsetting interest obligation, the Fund will receive a payment from the
counterparty. To the extent it is less, the Fund will make a payment to the counterparty. Periodic payments received or made by the Fund are recorded in “Net realized gain (loss) on swap contracts” on the accompanying Statements of
Operations and Changes in Net Assets as realized gains or losses, respectively. As
of June 30, 2024, the Fund held no open swap contracts.
Valuation Risk
Certain of the Fund’s assets are fair valued, including the Fund’s investment in equity issued by MidWave Wireless (“MidWave”). MidWave is a
nonoperating company that does not currently generate substantial revenue and which primarily derives its value from licenses for use of two spectrum frequencies, the license with respect to one of which was granted a conditional waiver by the FCC
on April 30, 2020. The fair valuation of MidWave involves significant uncertainty as it is materially dependent on estimates of the value of both spectrum licenses.
Gain Contingency
Claymore Holdings, LLC, a partially-owned affiliate of the
Fund, is engaged in ongoing litigation that could result in a possible gain contingency to the Fund. The probability, timing, and potential amount of recovery, if any, are unknown.
Note 8. Investment Transactions Purchases & Sales of Securities
The
cost of purchases and the proceeds from sales of investments, other than short-term securities for the six months ended June 30, 2024, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S Government
Securities |
|
|
Other Securities |
|
|
|
|
|
| Purchases |
|
|
Sales |
|
|
Purchases |
|
|
Sales |
|
|
|
|
|
| $ |
— |
|
|
$ |
— |
|
|
$ |
70,543,165 |
|
|
$ |
150,877,274 |
|
During the six months ended June 30, 2024, the Fund did not have any transactions that qualified under Rule 17a-7 under the 1940 Act.
SEMI-ANNUAL REPORT | 32
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
Note 9. Affiliated Issuers
Under Section 2(a)(3) of the 1940 Act, as
amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Fund as
of June 30, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuer |
|
Shares at
December 31, 2023 |
|
|
Beginning
Value as of December 31, 2023
$ |
|
|
Value of
Transfers In $ |
|
|
Value of
Transfers Out $ |
|
|
Purchases
at Cost
$ |
|
|
Proceeds
from
Sales
$ |
|
|
Distribution
to Return of
Capital
$ |
|
|
Net
Retirement of
Tendered
Shares |
|
|
Change in
Unrealized Appreciation/ (Depreciation)
$ |
|
|
Ending
Value as of June 30, 2024
$ |
|
|
Shares at
June 30, 2024 |
|
|
Affiliated
Income
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Majority Owned, Not Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allenby (Common Stocks) |
|
|
2,142,803 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
962,937 |
|
|
|
— |
|
|
|
316 |
|
|
|
— |
|
|
|
(963,253 |
) |
|
|
— |
|
|
|
2,142,803 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Claymore (Common Stocks) |
|
|
10,359,801 |
|
|
|
168,482 |
|
|
|
— |
|
|
|
— |
|
|
|
511,880 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(680,362 |
) |
|
|
— |
|
|
|
10,359,801 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Haygood (Common Stocks) |
|
|
68,830 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
68,830 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other Affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CCS Medical, Inc. (U.S. Senior Loans & Common Stocks) |
|
|
28,566,014 |
|
|
|
50,852,884 |
|
|
|
— |
|
|
|
— |
|
|
|
591,742 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,215,843 |
) |
|
|
49,228,783 |
|
|
|
29,157,756 |
|
|
|
961,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Highland Global Allocation Fund (Registered Investment Company) |
|
|
86,246 |
|
|
|
677,894 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(28,462 |
) |
|
|
649,432 |
|
|
|
86,246 |
|
|
|
41,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Highland Opportunities and Income Fund (Registered Investment Company) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,149,814 |
|
|
|
(28,791,647 |
) |
|
|
— |
|
|
|
14,081,684 |
|
|
|
13,943 |
|
|
|
453,794 |
|
|
|
72,607 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LLV Holdco LLC (U.S. Senior Loans & Common Stocks) |
|
|
13,879,492 |
|
|
|
15,627,469 |
|
|
|
— |
|
|
|
— |
|
|
|
250,953 |
|
|
|
(7,135,886 |
) † |
|
|
— |
|
|
|
— |
|
|
|
1,885,860 |
|
|
|
10,628,396 |
|
|
|
6,743,606 |
|
|
|
450,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NEXLS LLC (LLC Interest) |
|
|
957 |
|
|
|
52,032,835 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
854 |
|
|
|
— |
|
|
|
3,009,794 |
|
|
|
55,043,483 |
|
|
|
957 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NexPoint Diversified Real Estate Trust REIT (Common Stocks) |
|
|
1,307,416 |
|
|
|
10,393,957 |
|
|
|
— |
|
|
|
— |
|
|
|
292,447 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,155,932 |
) |
|
|
7,530,472 |
|
|
|
1,307,416 |
|
|
|
395,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NexPoint Real Estate Finance REIT (Common Stocks & Preferred Stock) |
|
|
4,523,263 |
|
|
|
72,035,513 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(799,905 |
) |
|
|
— |
|
|
|
(7,938,431 |
) |
|
|
63,297,177 |
|
|
|
4,523,263 |
|
|
|
3,732,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NexPoint Residential Trust, Inc. (Common Stocks) |
|
|
194,932 |
|
|
|
6,711,509 |
|
|
|
— |
|
|
|
— |
|
|
|
181,549 |
|
|
|
— |
|
|
|
(60,203 |
) |
|
|
— |
|
|
|
1,071,199 |
|
|
|
7,904,054 |
|
|
|
200,052 |
|
|
|
121,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NexPoint SFR Operating Partnership, LP (U.S. Senior Loans) |
|
|
61,000,000 |
|
|
|
59,170,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,000,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
207,500 |
|
|
|
53,377,500 |
|
|
|
55,000,000 |
|
|
|
2,546,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NexPoint Storage Partners, Inc. (Common Stocks) |
|
|
32,203 |
|
|
|
25,670,427 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(593,826 |
) |
|
|
25,076,601 |
|
|
|
32,203 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NFRO Diversified REIT, LLC, NFRO Self Storage REIT, LLC, NFRO SFR REIT, LLC (Common Stocks) |
|
|
94,554,073 |
|
|
|
271,618,289 |
|
|
|
— |
|
|
|
— |
|
|
|
19,311,300 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,769,233 |
|
|
|
292,698,822 |
|
|
|
201,866,520 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NFRO Holdings, LLC (Common Stocks) |
|
|
2,276,658 |
|
|
|
71,084,839 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
862,423 |
|
|
|
71,947,262 |
|
|
|
2,276,658 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NHT Operating Partnership LLC Convertible Promissory Note (U.S. Senior Loans) |
|
|
6,400,000 |
|
|
|
5,619,200 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(566,400 |
) |
|
|
5,052,800 |
|
|
|
6,400,000 |
|
|
|
230,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NHT Operating Partnership LLC Secured Promissory Note (U.S. Senior Loans) |
|
|
42,889,333 |
|
|
|
37,664,394 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
(3,803,265 |
) |
|
|
33,861,129 |
|
|
|
42,889,333 |
|
|
|
890,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NREF Operating IV REIT Sub, LLC (U.S. Senior Loans) |
|
|
6,500,000 |
|
|
|
6,126,250 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42,250 |
) |
|
|
6,084,000 |
|
|
|
6,500,000 |
|
|
|
243,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SFR WLIF 1,111, LLC (LLC Interest) |
|
|
10,000,000 |
|
|
|
9,134,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,000,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(70,000 |
) |
|
|
8,064,000 |
|
|
|
9,000,000 |
|
|
|
650,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
284,782,021 |
|
|
|
694,587,942 |
|
|
|
— |
|
|
|
— |
|
|
|
37,252,622 |
|
|
|
(42,927,533 |
) |
|
|
(858,938 |
) |
|
|
14,081,684 |
|
|
|
(11,238,072 |
) |
|
|
690,897,705 |
|
|
|
378,635,908 |
|
|
|
10,265,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
† Includes paydowns.
|
|
|
| Notes to Financial Statements (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
Note 10. Asset Coverage
The
Fund is required to maintain 300% asset coverage with respect to amounts outstanding (excluding short-term borrowings) under its various leverage facilities. Additionally, the Fund is required to maintain 200% asset coverage with respect to the
preferred share issuance as well as its various leverage facilities. Asset coverage is calculated by subtracting the Fund’s total liabilities, not including any amount representing bank borrowings and senior securities, from the Fund’s
total assets and dividing the result by the principal amount of the borrowings outstanding. As of the dates indicated below, the Fund’s debt outstanding and asset coverage was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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)
% |
|
|
|
|
|
|
| 6/30/2024 |
|
|
N/A |
|
|
|
N/A |
|
|
|
145,000,000 |
|
|
|
682.30 |
|
|
|
|
|
|
| 12/31/2023 |
|
|
20,690,000 |
|
|
|
4,298.05 |
|
|
|
165,690,000 |
|
|
|
624.22 |
|
|
|
|
|
|
| 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. |
Note 11. Unconsolidated Significant Subsidiaries
In accordance with Regulation S-X and GAAP, the Fund is not permitted to consolidate any subsidiary or other entity that
is not an investment company, including those in which the Fund has a controlling interest unless the business of the controlled subsidiary consists of providing services to the Fund. In accordance with Regulation
S-X Rules 3-09 and 4-08(g), the Fund evaluates its unconsolidated controlled subsidiaries as significant subsidiaries under the
respective rules. As of June 30, 2024, NFRO Diversified REIT, LLC, NFRO Self Storage REIT, LLC and NFRO Holdings, LLC were considered significant unconsolidated subsidiaries under Regulation S-X Rule 4-08(g). These subsidiaries are wholly owned by the Fund. Based on the requirements under Regulation S-X Rule 4-08(g), the summarized
financial information of these unconsolidated subsidiaries is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance Sheet: |
|
NFRO Diversified
REIT, LLC
June 30, 2024 |
|
|
NFRO Self Storage
REIT, LLC
June 30, 2024 |
|
|
NFRO SFR REIT,
LLC
June 30, 2024 |
|
|
NFRO Holdings, LLC
June 30, 2024 |
|
|
|
|
|
|
| Current Assets |
|
$ |
5,528,000 |
|
|
$ |
724,000 |
|
|
$ |
3,333,000 |
|
|
$ |
19,331,000 |
|
|
|
|
|
|
| Noncurrent Assets |
|
|
136,515,000 |
|
|
|
81,713,000 |
|
|
|
133,081,000 |
|
|
|
50,416,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Assets |
|
|
142,043,000 |
|
|
|
82,437,000 |
|
|
|
136,414,000 |
|
|
|
69,747,000 |
|
|
|
|
|
|
| Current Liabilities |
|
|
2,574,000 |
|
|
|
500,000 |
|
|
|
— |
|
|
|
940,000 |
|
|
|
|
|
|
| Noncurrent Liabilities |
|
|
29,491,000 |
|
|
|
— |
|
|
|
21,053,000 |
|
|
|
1,333,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Liabilities |
|
|
32,065,000 |
|
|
|
500,000 |
|
|
|
21,053,000 |
|
|
|
2,273,000 |
|
|
|
|
|
|
| Preferred Stock |
|
|
1,000 |
|
|
|
104,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| Non-controlling interest (in consolidated investments) |
|
|
3,640,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
| Invested Equity |
|
|
106,337,000 |
|
|
|
81,833,000 |
|
|
|
115,361,000 |
|
|
|
67,474,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Equity |
|
|
109,978,000 |
|
|
|
81,937,000 |
|
|
|
115,361,000 |
|
|
|
67,474,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notes to Financial Statements (unaudited) (concluded) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Summary of Operations: |
|
NFRO Diversified
REIT, LLC
For the
Six Months Ended
June 30, 2024 |
|
|
NFRO Self Storage
REIT, LLC
For the
Six Months Ended
June 30, 2024 |
|
|
NFRO SFR REIT,
LLC
For the
Six Months Ended
June 30, 2024 |
|
|
NFRO Holdings, LLC
For the
Six Months Ended
June 30, 2024 |
|
|
|
|
|
|
| Net Sales |
|
$ |
4,081,000 |
|
|
$ |
27,000 |
|
|
$ |
2,362,000 |
|
|
$ |
1,055,000 |
|
|
|
|
|
|
| Gross Profit |
|
|
3,361,000 |
|
|
|
23,000 |
|
|
|
2,338,000 |
|
|
|
1,055,000 |
|
|
|
|
|
|
| Net Income |
|
|
1,593,000 |
|
|
|
36,000 |
|
|
|
84,000 |
|
|
|
292,000 |
|
|
|
|
|
|
| Net Income attributable to non-controlling interest (in consolidated investments), preferred shares,
and other comprehensive income |
|
|
71,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Note 12. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there were no
such subsequent events to report which have not already been recorded or disclosed in these financial statements and accompanying notes. As of the date of this report, the Fund has repurchased $3.6 million of its stock in open-market
transactions under its repurchase program.
|
|
|
| Additional Information (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
Investment Objective and Strategy Overview
The Fund’s investment objective is to seek growth of capital along with income.
The Fund seeks to achieve its objective by investing directly and indirectly (e.g., through derivatives that are the economic equivalent of direct investments) in the
following categories of securities and instruments: (i) floating rate loans and other securities deemed to be floating rate investments; (ii) investments in securities or other instruments directly or indirectly secured by real estate,
including real estate investment trusts (“REITs”), preferred equity, securities convertible into equity securities and mezzanine debt; and (iii) other instruments, including, but not limited to, secured and unsecured fixed-rate loans
and corporate bonds, distressed securities, mezzanine securities, structured products (including but not limited to mortgage-backed securities, collateralized loan obligations and asset-backed securities), convertible and preferred securities,
equities (public and private), and futures and options.
The Fund will invest at least 25% of its assets in investments in securities or other instruments directly
or indirectly secured by real estate, including REITs, preferred equity, securities convertible into equity securities and mezzanine debt.
Floating Rate
Investments. Floating rate investments are debt obligations of companies or other entities, the interest rates of which float or vary periodically based upon a benchmark indicator of prevailing interest rates. Floating rate investments may
include, by way of example, floating rate debt securities, money market securities of all types, repurchase agreements with remaining maturities of no more than 60 days, collateralized loan obligations and asset backed securities. The reference in
the Fund’s investment objective to capital preservation does not indicate that the Fund may not lose money. NexPoint seeks to employ strategies that are consistent with capital preservation, but there can be no assurance that the Investment
Adviser will be successful in doing so. In making floating rate investments for the Fund, the Fund’s Investment Adviser will seek to purchase instruments that it believes are undervalued or will provide attractive income, while attempting to
minimize losses.
Floating rate loans in which the Fund invests are expected to be adjustable rate senior loans (“Senior Loans”)
to domestic or foreign corporations, partnerships and other entities that operate in a variety of industries and geographic regions (“Borrowers”). Senior Loans are business loans that have a right to payment senior to most other debts of
the Borrower. Senior Loans generally are arranged through private negotiations between a Borrower and several financial institutions (the “Lenders”) represented in each case by one or more such Lenders acting as agent (the
“Agent”) of the several Lenders. On behalf of the Lenders, the Agent is primarily responsible for negotiating the loan agreement (“Loan Agreement”) that establishes the relative terms and conditions of the Senior Loan and rights
of the Borrower and the Lenders.
The Fund may invest in securities of any credit quality. Senior Loans are typically below investment grade securities (also known
as “high yield securities” or “junk securities”). Such securities are rated below investment grade by a nationally recognized statistical rating organization (“NRSRO”) or are unrated but deemed by the Investment Adviser
to be of comparable quality. The Fund may invest without limitation in below investment grade or unrated securities, including in insolvent borrowers or borrowers in default.
The Fund may invest in participations (“Participations”) in Senior Loans, may purchase assignments (“Assignments”) of portions of Senior Loans from
third parties, and may act as one of a group of Lenders originating a Senior Loan (“Primary Lender”). Senior Loans often are secured by specific assets of the Borrower, although the Fund may invest without limitation in Senior Loans that
are not secured by any collateral. When the Fund acts as a Primary Lender, the Fund or the Investment Adviser could be subject to allegations of lender liability. Senior Loans in which the Fund invests generally pay interest at rates that are
periodically re-determined by reference to a base lending rate plus a spread.
Real Estate Investments. The Fund
defines securities of issuers conducting their principal business activities in the real estate industry to include common stock, convertible or non-convertible preferred stock, warrants, convertible or
SEMI-ANNUAL REPORT | 36
|
|
|
| Additional Information (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
non-convertible secured or unsecured debt, and partnership or membership interests issued by:
| |
• |
|
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”); |
| |
• |
|
private real estate investment funds managed by affiliated or unaffiliated institutional asset managers (“Private Real Estate Investment Funds”); |
| |
• |
|
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. |
REITs are pooled investment vehicles that invest primarily in income-producing real estate or real estate-related loans or
interests, and REOCs are companies that invest in real estate and whose shares trade on public exchanges. Foreign REIT equivalents are entities located in jurisdictions that have adopted legislation substantially similar to the REIT tax provisions
in that they provide for favorable tax treatment for the foreign REIT equivalent and require distributions of income to shareholders. The Fund may enter into certain real estate and real-estate related investments through its wholly-owned REIT
subsidiaries, NFRO REIT Sub, LLC, NFRO REIT Sub II, LLC, and NFRO SFR REIT, LLC (together the “REIT Subsidiaries”). With respect to the Fund’s real estate investments, the Investment Adviser seeks to: (i) recognize and allocate
capital based upon where the Investment Adviser believes we are in the current real estate cycle, and as a result (ii) minimize drawdowns during market downturns and maximize risk adjusted returns during all market cycles, though there can be
no assurance that this strategy will
achieve this objective. The Fund will rely on the expertise of the Investment Adviser and its affiliates to determine the appropriate structure for structured credit investments, which may
include bridge loans, common and preferred equity or other debt-like positions, as well as the acquisition of such instruments from banks, servicers or other third parties.
Preferred equity and mezzanine investments in real estate transactions come in various forms which may or may not be documented in the borrower’s organizational
documents. Generally, real estate preferred equity and/or mezzanine investments are typically junior to first mortgage financing but senior to the borrower’s or sponsor’s equity contribution. The investments are typically structured as an
investment by a third-party investor in the real estate owner or various affiliates in the chain of ownership in exchange for a direct or indirect ownership interest in the real estate owner entitling it to a preferred/priority return on its
investment. Sometimes, the investment is structured much like a loan where (i) “interest” on the investment is required to be paid monthly by the “borrower” regardless of available property cash flow; (ii) the entire
investment is required to be paid by a certain maturity date; (iii) default rate “interest” and penalties are assessed against the “borrower” in the event payments are not made timely; and (iv) a default in the
repayment of investment potentially results in the loss of management and/or ownership control by the “borrower” in the company in favor of the investor or other third-party.
Other Investments. The Fund may invest up to 15% of its net assets in entities that are excluded from registration under the 1940 Act by virtue of section 3(c)(1)
and 3(c)(7) of the 1940 Act (such as private equity funds or hedge funds). This limitation does not apply to any collateralized loan obligations, certain of which may rely on Section 3(c)(1) or 3(c)(7) of the 1940 Act.
In addition, the Fund may invest in equity securities of companies of any market capitalization, market sector or industry. Equity securities of U.S. or non-U.S. issuers in which the Fund may invest include common stocks, preferred stocks, convertible securities, depositary receipts and warrants to buy common stocks. The Fund may invest in securities issued by
SEMI-ANNUAL REPORT | 37
|
|
|
| Additional Information (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
other investment companies, including investment companies that are advised by the Investment Adviser or its affiliates, to the extent permitted by applicable law and/or pursuant to exemptive
relief from the SEC, and exchange-traded funds (“ETFs”). Fees and expenses of such investments will be borne by shareholders of the investing fund (the Fund), and the Investment Adviser voluntarily waives the higher of the two fees for the
portion of the Fund’s management fee attributable to the Fund’s investment in the affiliated investment company.
The Fund’s investment in fixed
income securities may include convertible securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock or other equity security of
the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible income securities in that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible securities. The value of a convertible security is influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value. Convertible securities rank senior to common stock in
a corporation’s capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to redemption at the option of the issuer at a price established in the convertible security’s
governing instrument. Depending on the relationship of the conversion price to the market value of the underlying securities, convertible securities may trade more like equity securities than debt instruments.
The Fund may invest without limitation in warrants and may also use derivatives, primarily swaps (including equity, variance and volatility swaps), options and futures
contracts on securities, interest
rates, non-physical commodities and/or currencies, as substitutes for direct investments the Fund can make. The Fund may also use derivatives such as
swaps, options (including options on futures), futures, and foreign currency transactions (e.g., foreign currency swaps, futures and forwards) to any extent deemed by the Investment Adviser to be in the best interest of the Fund, and to the extent
permitted by the Investment Company Act of 1940, as amended (the “1940 Act”), to hedge various investments for risk management and speculative purposes.
The Fund may also engage in short sales of securities and may seek additional income by making secured loans of its portfolio securities.
The Fund may engage in securities lending by making secured loans of its portfolio securities amounting to not more than
one-third of its total assets, thereby realizing additional income.
The Fund may invest in illiquid and restricted
securities. Illiquid securities are those that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities.
The Fund may invest without limitation in securities (including loans) of non-U.S. issuers, including emerging market issuers.
Such securities (including loans) may be denominated in U.S. dollars, non-U.S. currencies or multinational currency units. Except as otherwise expressly noted in the Statement of Additional Information
(“SAI”), all percentage limitations and ratings criteria apply at the time of purchase of securities. The Fund may borrow an amount up to 33 1/3% of its total assets (including the amount borrowed) and may use leverage in the form of
preferred shares in an amount up to 50% of the Fund’s total assets (including the amount borrowed. The Fund may borrow for investment purposes and for temporary, extraordinary or emergency purposes. To the extent the Fund borrows more money
than it has cash or short-term cash equivalents and invests the proceeds, the Fund will create financial leverage. The use of borrowing for investment purposes increases both investment opportunity and investment risk.
When adverse market, economic, political or currency conditions domestically or abroad occur, the Fund may temporarily invest all or a portion of its total
SEMI-ANNUAL REPORT | 38
|
|
|
| Additional Information (unaudited) |
|
|
| June 30, 2024 |
|
Highland Opportunities and Income Fund |
assets in defensive investments. Such investments may include fixed-income securities, high quality money market instruments, cash and cash equivalents. To the extent the Fund takes a temporary
defensive position, it may not achieve its investment objective.
The Fund is a non-diversified fund as defined in the 1940
Act, but it intends to adhere to the diversification requirements applicable to regulated investment companies (“RICs”) under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund is not intended to be a complete
investment program.
Additional Portfolio Information
The Investment
Adviser and its affiliates manage other accounts, including registered and private funds and individual accounts. Although investment decisions for the Fund are made independently from those of such other accounts, the Investment Adviser may,
consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Fund, including investments in different levels of the capital structure of a company, such as
equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital structure. The Investment Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of
portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may create situations where a client could be
disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When the Fund and one or more of such other accounts is prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to be equitable to the Fund and such other accounts. The Investment Adviser also may aggregate orders to purchase and sell securities for the Fund
and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all accounts including the Fund, in some cases
these
activities may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund.
Dividend Reinvestment Plan
Unless the registered owner of Common Shares
elects to receive cash by contacting Equiniti Trust Company, LLC (“EQ” or the “Plan Agent”), as agent for shareholders in administering the Plan, a registered owner will receive newly issued Common Shares for all dividends
declared for Common Shares of the Fund. If a registered owner of Common Shares elects not to participate in the Plan, they will receive all dividends in cash paid by check mailed directly to them (or, if the shares are held in street or other
nominee name, then to such nominee) by EQ, as dividend disbursing agent.
Shareholders may elect not to participate in the Plan and to receive all dividends in cash
by sending written instructions or by contacting EQ, as dividend disbursing agent, at the address set forth below.
Participation in the Plan is completely voluntary
and may be terminated or resumed at any time without penalty by contacting the Plan Agent before the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend. Some brokers
may automatically elect to receive cash on the shareholders’ behalf and may reinvest that cash in additional Common Shares of the Fund for them. The Plan Agent will open an account for each shareholder under the Plan in the same name in which
such shareholder’s Common Shares are registered.
Whenever the Fund declares a dividend payable in cash,
non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Agent through receipt of additional
unissued but authorized Common Shares from the Fund (“newly issued Common Shares”). The number of newly issued Common Shares to be credited to each participant’s account will be determined by dividing the dollar amount of the dividend
by the lesser of (i) the net asset value per Common Share determined on the Declaration Date and (ii) the market price per Common Share as of the close of regular trading on the New York Stock Exchange (the “NYSE”) on the
Declaration Date. The
SEMI-ANNUAL REPORT | 39
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| Additional Information (unaudited) |
|
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| June 30, 2024 |
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Highland Opportunities and Income Fund |
Plan Agent maintains all shareholders’ accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax
records. Common Shares in the account of each Plan participant will be held by the Plan Agent on behalf of the Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Agent will
forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance with the instructions of the participants. In the case of shareholders such as banks, brokers or nominees which hold shares for
others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified from time to time by the record shareholder’s name and held for the account of beneficial owners who participate
in the Plan. There will be no brokerage charges with respect to Common Shares issued directly by the Fund.
The automatic reinvestment of dividends will not relieve
participants of any federal, state or local income tax that may be payable (or required to be withheld) on such dividends. Accordingly, any taxable dividend received by a participant that is reinvested in additional Common Shares will be subject to
federal (and possibly state and local) income tax even though such participant will not receive a corresponding amount of cash with which to pay such taxes. Participants who request a sale of shares through the Plan Agent are subject to a $2.50
sales fee and pay a brokerage commission of $0.05 per share sold. The Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to
include a service charge payable by the participants. All correspondence concerning the Plan should be directed to the Plan Agent at Equiniti Trust Company, LLC PO Box 500 Newark, NJ 07101.
Shareholder Loyalty Program
To promote loyalty and long-term alignment of
interests among the Company’s shareholders, the Investment Adviser offers an incentive to shareholders that buy and hold the Company’s common shares for a period of at least twelve months through its Shareholder Loyalty Program (the
“Program”). To participate in the Program, existing shareholders must open an account (the “Account”)
with the Program’s administrator, Maxim Group, LLC (“Maxim”). Subsequently, if a participant makes contributions to the Account during a defined trading period to purchase shares,
the Investment Adviser will make a corresponding contribution equal to 2% of the participant’s contributions. For example, if a participant contributes $10,000 to the Account during a defined trading period to purchase shares, the Investment
Adviser will make a corresponding contribution of $200, to purchase additional shares for the participant (the “Bonus Shares”). In addition, Program participants will not be required to pay any customary selling commissions or distribution
fees on the purchase of shares under the Program. The Investment Adviser will bear the costs of brokerage fees in connection with the Program. While the portion of the Company’s common shares that are acquired through the participant’s
contribution will vest immediately, Bonus Shares will not vest until the first anniversary of the date that the Bonus Shares were purchased. Vested shares will be held in the Account and Bonus Shares will be held in an account at Maxim for the
conditional benefit of the shareholder. Under the Program, Participants must purchase a minimum of $10,000 worth of shares in the initial subscription and $5,000 in each Subsequent subscription, unless the Investment Adviser, in its sole discretion,
decides to permit subscriptions for a lesser amount. If the Company’s common shares are trading at a discount, Maxim will purchase common shares on behalf of participants in open-market purchases. If the Company’s common shares are trading
at a premium, Maxim may purchase common shares on behalf of participants in open market purchases or the Company may sell common shares to the shareholder Loyalty Program by means of a prospectus or otherwise. All dividends received on shares that
are purchased under the Program will be automatically reinvested through the Program. A participant’s interest in a dividend paid to the holder of a vested share will vest immediately. A participant’s interest in a dividend paid to the
holder of a Bonus Share will vest at the same time that the Bonus Share’s vesting requirements are met. In addition, for dividends paid to holders of shares that were purchased with a participant’s contributions, the Investment Adviser
will take a corresponding contribution to the amount of the reinvested dividend equal to 2% of the dividend amount. Maxim maintains
SEMI-ANNUAL REPORT | 40
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|
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| Additional Information (unaudited) |
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| June 30, 2024 |
|
Highland Opportunities and Income Fund |
all shareholders’ accounts in the Program and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Shares in the
account of each Program participant will be held by Maxim on behalf of the Program participant, and each shareholder proxy will include those shares purchased or received pursuant to a Program. Maxim will forward all proxy solicitation materials to
participants and vote proxies for shares held under the Program in accordance with the instructions of the participants. In the case of shareholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, Maxim
will administer the Program on the basis of the number of common shares certified from time to time by the record shareholder’s name and held for the account of beneficial owners who participate in the Program. The Company and the Investment
Adviser reserve the right to amend or terminate the Program. To help align the interests of the Investment Adviser’s employees with the interests of the Company’s shareholders, the Investment Adviser offers a similar program to its
employees. Participants in the Program should be aware that their receipt of Bonus Shares under the Program constitutes taxable income to them. In addition, such participants owe taxes on that portion of any distribution that constitutes taxable
income in respect of shares of our common stock held in their Program accounts, whether or not such shares of common stock have vested in the hands of the participants. To the extent any payments or distributions under the Program are subject to
U.S. federal, state or local taxes, the Company, any participating affiliate of the Company or the agent for the Program may satisfy its tax withholding obligation by (1) withholding shares of Stock allocated to the participant’s account,
(2) deducting cash from the participant’s account or (3) deducting cash from any other compensation the participant may receive. Program participants should consult their tax advisers regarding the tax consequences to them of
participating in the Program. The Program may create an incentive for shareholders to invest additional amounts in the Company. Because the Investment Adviser’s management fee is based on a percentage of the assets of the Company, the Program
will result in increased net revenues to the Investment Adviser if the increase in the management fee due to the
increased asset base offsets the costs associated with establishing and maintaining the Program.
SEMI-ANNUAL REPORT | 41
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| Important Information About This Report |
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| Investment Adviser NexPoint Asset Management, L.P.
300 Crescent Court, Suite 700 Dallas, TX 75201
Transfer Agent
Equiniti Trust Company, LLC PO Box 500
Newark, NJ 07101
Underwriter NexPoint Securities, Inc.
300 Crescent Court, Suite 700 Dallas, TX 75201
Custodian
Bank of New York Mellon 240 Greenwich Street
New York, NY 10286
Independent Registered Public Accounting Firm Cohen & Company,
Ltd. 1350 Euclid Ave., Suite 800 Cleveland, OH 44115
Fund Counsel
K&L Gates LLP 1 Congress St., Suite 2900
Boston, MA 02114-2023 |
|
As of January 1, 2021, paper copies of the Fund’s shareholder reports will no longer be sent by mail. Instead, the reports will be made
available on https://www.nexpointassetmgmt.com/resources/#forms, and you will be notified and provided with a link each time a report is posted to the website. You may request to receive paper reports from the Fund or from your financial
intermediary free of charge at any time. For additional information regarding how to access the Fund’s shareholder reports, or to request paper copies by mail, please call shareholder services at 1-800-357-9167.
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to their portfolio securities, and the Fund’s proxy voting
records for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-800-357-9167 and (ii) on the Securities and Exchange Commission’s website at http://www.sec.gov.
The Fund files its complete schedules of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year as an
exhibit to its report on Form N-PORT within sixty days after the end of the period. The Fund’s Form N-PORT are available on the Commission’s website at
http://www.sec.gov and also may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. Shareholders may also obtain the Form N-PORT by visiting the Fund’s website at
www.nexpointassetmgmt.com. The Statement of Additional Information includes additional
information about the Fund’s Trustees and is available upon request without charge by calling 1-800-357-9167. |
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Highland Opportunities and Income Fund
SEMI-ANNUAL REPORT, JUNE 30, 2024
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| www.nexpointassetmgmt.com |
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HFRO-SAR-0624 |
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial
Expert.
Not applicable.
Item 4. Principal
Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not
applicable.
Item 6. Schedule of Investments.
(a) Schedule of Investments as of the close of the reporting period is included as part of the Semi-Annual Report to Shareholders filed under Item 1 of this
form.
(b) Not applicable.
Item 7. Financial
Statements and Financial Highlights for Open-End Management Companies
Not Applicable.
Item 8. Changes in and Disagreements with Accountants for Open-End Management Investment Companies
Not Applicable.
Item 9. Proxy Disclosures for Open-End Management Investment Companies
Not Applicable.
Item 10. Renumeration Paid to Directors, Officers, and Others for Open-End Management Investment Companies
Not Applicable.
Item 11. Statement Regarding
Basis for Approval of Investment Advisory Contract
Not applicable.
Item 12. Disclosure of Proxy
Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 13. Portfolio Managers of Closed-End Management Investment Companies.
(a) Not applicable.
(b) Not applicable.
Item 14. Purchases
of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
No such purchases were made by or on behalf of the Highland Opportunities and Income Fund (the “Registrant”) or any “affiliated purchaser”
during the period covered by this report.
Item 15. 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 16. Controls and Procedures.
(a) The
Registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the Registrant’s disclosure controls and procedures (as defined in
Rule 30a-3(c) under the 1940 Act (17 CFR 270.30a-3 (c)) are effective, as of a date within 90 days of the filing date of the report that includes the
disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17
CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Exchange Act (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 17. Disclosure
of Securities Lending Activities for Closed-End Management Investment Companies.
(a)
(1) Gross income from securities lending
activities: $0
(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: $ 1,819
(b) The Registrant may lend up to 33 1/3% of the Registrant’s total assets held by the Fund’s custodian to certain qualified brokers, except those
securities which the Registrant or the Advisor specifically identifies as not being available. By lending its investment securities, the Registrant attempts to increase its net investment income through the receipt of interest on the loan. Any gain
or loss in the market price of the securities loaned that might occur and any interest or dividends declared during the term of the loan would accrue to the account of the Registrant. Risks of delay in recovery of the securities or even loss of
rights in the collateral may occur should the borrower of the securities fail financially. Risks may also arise to the extent that the value of the collateral decreases below the value of the securities loaned. Upon entering into a securities
lending transaction, the Registrant receives cash or other securities as collateral in an amount equal to or exceeding 100% of the current market value of the loaned securities with respect to securities of the U.S. government or its agencies, 102%
of the current market value of the loaned securities with respect to U.S. securities and 105% of the current market value of the loaned securities with respect to foreign securities. Any cash received as collateral is generally invested by the
Fund’s custodian acting in its
capacity as securities lending agent. Non-cash collateral is not disclosed in the Registrant’s Statement of Assets and
Liabilities as it is held by the lending agent on behalf of the Registrant and the Registrant does not have the ability to re-hypothecate those securities. A portion of the
dividends received on the collateral may be rebated to the borrower of the securities and the remainder is split between the Fund’s custodian, as the securities lending agent, and the Registrant.
Item 18. Recovery of Erroneously Awarded Compensation
(a) Not applicable.
(b) Not applicable.
Item 19. Exhibits.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(a)(4) Not applicable.
(b) Certifications
pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
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 OPPORTUNITIES AND INCOME FUND
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| By (Signature and Title): |
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/s/ Frank Waterhouse |
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Frank Waterhouse |
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Treasurer, Principal Accounting Officer, Principal Financial Officer, and Principal Executive Officer |
Date: September 6, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
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| By (Signature and Title): |
|
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/s/ Frank Waterhouse |
|
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Frank Waterhouse |
|
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Treasurer, Principal Accounting Officer, Principal Financial Officer, and Principal Executive Officer |
Date: September 6, 2024
Item 13(a)(2)
EX-99.CERT
Certification Pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act
I, Frank Waterhouse, certify that:
| 1. |
I have reviewed
this report on Form N-CSR of Highland Opportunities and Income Fund (the “Registrant”); |
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the
periods presented in this report; |
| 4. |
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) and internal control
over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) for the Registrant and have: |
| |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared; |
| |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles; |
| |
(c) |
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
| |
(d) |
Disclosed in this report any change in the Registrant’s internal control over financial reporting 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; and |
| 5. |
The Registrant’s other certifying officer(s) and I have disclosed to the Registrant’s auditors and
the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
| |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and |
| |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the Registrant’s internal control over financial reporting. |
|
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| By: |
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/s/ Frank Waterhouse |
|
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Frank Waterhouse |
|
|
Treasurer, Principal Accounting Officer,
Principal Financial Officer, and
Principal Executive Officer |
Date: September 6, 2024
Item 13(b)
EX-99.906CERT
Certification Pursuant to Rule 30a-2(b) under the 1940 Act
and Section 906 of the
Sarbanes-Oxley Act
I, Frank Waterhouse, Treasurer, Principal Accounting Officer, Principal Financial Officer, and Principal Executive Officer of Highland Opportunities and
Income Fund (the “Registrant”), certify that:
| |
1. |
This Form N-CSR of the Registrant (the
“Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| |
2. |
The information contained in this Report fairly presents, in all material respects, the financial condition and
results of operations of the Registrant. |
|
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| By: |
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/s/ Frank Waterhouse |
|
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Frank Waterhouse |
|
|
Treasurer, Principal Accounting Officer,
Principal Financial Officer, and Principal Executive
Officer |
Date: September 6, 2024
Grafico Azioni Highland Opportunities a... (NYSE:HFRO-A)
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Da Dic 2024 a Gen 2025
Grafico Azioni Highland Opportunities a... (NYSE:HFRO-A)
Storico
Da Gen 2024 a Gen 2025
