June 1, 2023
Sell NexPoint Diversified (NXDT)
I’m closing out my NexPoint Diversified (NXDT) recommendation and selling my shares. I had an update call last week; I would characterize the update call as positive (more details below). But upon digesting my notes and thinking about NXDT, I’ve realized that the investment case has changed completely. I recommended the stock because it was transitioning from a closed end fund into a REIT. I was convinced the conversion would result in index fund buying and share buybacks. That hasn’t happened.
Granted, the world changed with higher interest rates and pressure on real estate across the board. But the investment case has really changed now. Today, it is a turnaround story (Cityplace Tower refinancing and redevelopment). I believe there is still considerable value and that the stock is undervalued. However, we aren’t going to see share buybacks, spin-offs or a dividend hike any time soon.
I wouldn’t blame anyone for continuing to hold the stock, but I’m going to step aside for now and revisit once the company is buying back stock or close to a value-unlocking spin-off.
I had a chance to talk to Matthew Goetz, Senior VP of Investments last week. Here are my notes:
I was surprised to see the market on Cityplace Tower go up given challenges refinancing the debt. What was the rationale?
- The valuation is just based on an external appraisal and because NexPoint invested more capital into the building, the appraisal went up.
I understand that you estimate you need another $200MM of capital to complete Cityplace Tower. Where are you going to get that capital? JV?
- NexPoint is likely to get a loan with a 50%/60% loan to value. The rest will have to be equity (will not raise equity at this valuation but will likely monetize other assets to fund).
- This gives me confidence that NexPoint will have no issue refinancing its $144MM mortgage that will come due in September 2023 for Cityplace Tower.
Stock is $10 and the NAV is $24. What’s the plan to close the gap?
- Management wants to get in front of more analysts (sell side and buy side).
- Management wants to continue to publish detailed information to help analysts and investors understand the story.
- Management wants to attract sell side coverage (none currently).
- The story is similar to NexPoint Residential Trust (NXRT) which for a period of years was one of the top performing REITs.
- Eventually going to sell certain mature assets and can use proceeds to buy back the stock. But it all takes time.
Seems like you have two different focuses: Self Storage and Single-Family Rentals. Plan to stay diversified or specialize?
- The business plan for NexPoint is to be an incubator – to build operating companies. But if there is demand from the capital markets for certain assets/spin-offs, NexPoint Diversified will work to do that to unlock value.
Why hasn’t the company bought back its own shares?
- Common equity that the company owns is illiquid and undervalued. The company doesn’t have a ton of excess liquidity currently.
- Over time, assets will be monetized, and it will provide the company with liquidity to be able to buy back its own stock.
What drove the NAV (net asset value) decline? From my perspective, it looks like the stock price decline in NexPoint Real Estate Finance and NexPoint Hospitality Trust were the biggest drivers. Is that right?
- Yes, those were the biggest drivers. They are publicly traded but very illiquid.
From the supplement, it looks like the dividend is not covered. Do you think FFO (funds from operations) will be able to recover in the second half of the year?
- Can’t say much about it, but the dividend currently is not being covered by FFO.
I see you have an airplane listed in your NAV. Is that an investment or an asset that you use for corporate purposes?
- Small investment in a company that leases to American Airlines.
While I continue to believe NexPoint Diversified REIT is undervalued, I’m struggling to see any positive catalysts on the near-term horizon. As such, I’m going to move to the sidelines but will continue to follow the story and hopefully buy back in once a more clear-cut catalyst emerges. SELL