The thesis here is a bit incomplete at this stage but promising if you followed NXRT, NHF trades at $9.45 or 55% of net asset value (pre-covid that discount was more in the 15% range), as part of the conversion to a REIT they'll be selling non-REIT related assets presumably near NAV of $17.19 per share, capturing that discount by then buying distressed real estate in the post-covid fallout. By applying a similar NXRT value-add strategy, NHF will look to sell newly stabilized assets and then recycling that capital back into opportunistic real estate, rinse and repeat, creating sort of a multiplier effect. The new-REIT will have a pretty wide investment mandate, essentially any asset class is fair game according to the proxy although I assume they'll stay away from multi-family and hospitality/lodging as NexPoint already has publicly traded REITs that focus on those sectors. The public REIT market likes simple stories, this doesn't appear like it will be one, at least not initially, but NHF does intend to maintain a monthly dividend, so it could entice retail investors interested in yield.
NHF's current portfolio is sort of grab bag of assets, looking at it and its seems a bit incoherent, many readers will recognize some of the individual equity names, several bankruptcy reorgs and other special situations, NHF even has 8 shares of NOL shell Pendrell for those looking to pick some up in the coming months. They also own CLO debt and equity, which has generally held up well through the crisis and are probably worth more than where they're marked. But 25% of the portfolio is in a wholly owned REIT they've once again incubated, NexPoint Real Estate Opportunities, which owns self-storage facilities, a Dallas office building (City Place Office Tower), a new construction Marriott hotel in Dallas and a single family rental operator. Again, not a real coherent strategy, this idea is a bit of a leap of faith based on their past track record and we'll likely know more in the next 6-9 months through this conversion. I picked up a smallish position with the intention to add more as the story unfolds.
Other quick thoughts:
- NHF post REIT conversion will be externally managed, the fee agreement has an expense cap at 1.5% of assets for the first year and there are no incentive fees. This is a similar setup to NXRT, I believe some of the "investor friendly" aspects of the fee agreement are related to being a historical 40 act mutual fund and not just out of the kindness of management's heart.
- Speaking of management, James Dondero will be the CEO, he has a litigious reputation (feel free to Google), but again, hard to argue with what the team did with NXRT and he owns 11.5% of the fund/stock.
- They have a repurchase plan in place that allows them to repurchase 10% of the stock over a one year period (plan was put into place on 4/24/20), unclear if they've acted on it at all or if they would with the new change in plans.
- One big benefit of being a REIT over a CEF will be index inclusion, joining the REIT indices should improve the valuation and analyst coverage.
I like the idea since NREF is already trading back to a discount of ~15% vs 45% for NHF. When they mark NAV for NHF, are they also using NREF at 100% NAV vs the discount at 15%? From your linked holdings, it looks like 30MM in value at 3/31.
ReplyDeleteThe big question for me is the 230MM holding in NexPoint Real Estate Opportunities, LLC. Is that marked correctly? The market is saying no, due to the high discount to NAV. Perhaps a chunk of that is due to the Marriot new build in Dallas? Any idea how much the hotel is valued at?
It's a fair question, NexPoint Real Estate Opportunities was marked at $292MM prior to covid, hard to know the puts and takes to that valuation. Also hard to tell what percentage of NREO is the office/hotel and how much is the self storage/SRF, the latter has certainly held up pretty well through the crisis. I figure we'll know more in the coming months.
DeleteVery interesting, Self storage is an area of real estate I'm interested in owning and the special situation catalyst with the conversion makes this very interesting to me.
ReplyDeleteA tender offer is out
ReplyDeletehttps://markets.ft.com/data/announce/detail?dockey=600-202010150925PR_NEWS_USPRX____NY59558-1
Interestingly, they say that the tender offer will only be made to "current" shareholders. How does this work administratively? And on which date on has to be a current shareholder? Today, or when the tender offer commences? Any ideas?
Good question *shrug*
DeleteI do think this is pretty bullish if you believe in the thesis/management team, essentially loads the spring even more to the common stock.
you think the preferred might be worth it if they give you $12? what would the yield be 8? 9? 10?
ReplyDeleteI would think it would be sub-8? 7.5%? Otherwise I don't think it would make a ton of sense for NHF.
DeleteBut it does lever up the common even further, in the proxy they said 3x equity, the preferred would be equity, so this really tightens the spring.
5.5%! Let's see if they get enough takers, I sure hope they do.
DeleteAny idea where the preferreds will start trading? Close to par-value? In the tender offer, the preferreds will be valued at their nominal value, I understand, so the gain from participating in the offer will really also depend on the market value of the preferreds.
Delete5.5% feels aggressive to me, from NHF's perspective, but they must have took the temperature of investors or have an idea where they think enough shareholders will tender to get it done? I'd be surprised if it traded at par/nominal value, but I'm hoping it does.
DeleteI don't plan on tendering any shares at this point unless we get an election selloff or something else happens.
I assume you've seen the related transaction where NexPoint Advisors is buying Jernigan Capital for $900 million. When I saw this, I thought to myself "Interesting, they are going to buy this, and drop it into the new NHF REIT, which already has a self-storage business via NexPoint Real Estate Opportunities. Maybe the focus of NHF will shift to self-storage."
ReplyDeleteThen I saw the comment from Dondero: "We plan to build on this vision as a private company, maintaining unparalleled asset quality and continuing the current growth trajectory."
Why would they buy a self-storage business (Jernigan) and operate it privately, while they already have a self-storage business wrapped in their existing public REIT? Unless they plan to combine Jernigan with their self-storage REIT held inside of NHF, they end up in a situation where their private company is competing with the publicly-held self-storage operation. This seems both slimy and inefficient. You have any thoughts on this?
I think that's more boilerplate language when you take out a public companies shareholders for cash and NHF hadn't received the shareholder vote to become a REIT yet. I get the concern about potential double dipping, like would Nexpoint earn fees on NHF and then operate separate REITs like JCAP and NREO within NHF, earn fees at both levels, it is something to watch for, but that's not what they've done at their other REITs. Dondero has an earn reputation as slimy, something to watch for.
DeleteSelf storage seems to make sense for the direction they're headed, WSJ had a article yesterday about BX's buying another self storage platform and the general covid thesis around self storage:
https://www.wsj.com/articles/blackstone-to-buy-simply-self-storage-for-about-1-2-billion-11603656073
MDC, do you still like NHF at around $14?
ReplyDeleteLove it. They've officially filed to de-register as a 40 act fund, should get the REIT announcement soon and hopefully some investor relations push after that, explaining the story, regular conference calls, index inclusion, etc.
DeleteI really want to like this but it's hard to get passed the double dipping...and even triple dipping. Just a bad marker, although their history shows can still make money with bad people, just not a good feeling. It reminds of when Merrill sold hedge funds of funds of funds with a 5.75% load!
ReplyDeleteIt is a lot to untangle and Dondero is back in the news again as Highland (the creditors) is suing him for these "lifeboats" like NexPoint. But I think slowly over time it'll untangle, he's been hands off with the other NexPoint vehicles, maybe he will be here too. They also got significant pushback on the conversion of the sister fund, HFRO, I like this better as its a REIT versus a HoldCo, but could be some added motivation to get this vehicle to work so they could go back to HFRO with a success story.
DeleteThanks for sharing your thoughts.
ReplyDeleteHey MDC - do you know if NXDT plans on liquidating their affiliate stakes? I know they plan on liquidating their securities but I haven't found anything regarding their large stakes in the other Nexpoint funds/strategies. I ask because I'm wondering if there are there any tax consequences for shareholders if they sell these positions? They may have large capital gains in these positions that could be passed to REIT shareholders upon a sale. If they sold these the double dipping would go away, which would be nice, but I'm concerned about the tax angle.
ReplyDeleteIt's a good question, I'm not sure, my sense is they won't liquidate their affiliate stakes for now. I hope they do a quarterly conference call soon, I might try to sneak on before this has analyst coverage to ask some of these questions.
DeleteHey MDC. Any opinion on what happens to the LLC interests in the portfolio?
ReplyDeleteI don't really know, there's a lot of wood to chop here, not saying its going to be a quick re-rate, but once it starts reporting as a REIT/operating company and not a 40 Act Fund, I think the accounting will look cleaner.
DeleteHey MDC - Happy New Year and congrats on a great 2021. I'm on board here in NXDT as well...the discount the NAV is just to big to ignore. I am a bit concerned though about overall real estate prices and associated cap rates. I see NXDT as a fund trading at a big discount to a somewhat over-inflated NAV. Residential R/E is particularly concerning to me. It's around 42% of their NAV and I expect they are comping the NAV to public resi REIT peers for this portion of the fund. Valuations look silly to me in resi REITs. AMH is trading at 32x FFO and with a 1% yield. NXRT is trading at 35x FFO, 5x book, and a 2% yield. They are buying & selling homes at 3.5% cap rates! That's a bit frightening to me. R/E values are much more sensitive to rates when rates are low. With high inflation and rates on the move I would expect cap rates to move higher, obv pressuring NAV. I've thought about hedging out the resi R/E within NXDT by shorting NXRT. Doing so you also hedge out any Nexpoint taint and better isolate the NXDT NAV discount. This might be a little too cute but am noodling on it. Just wanted to share my thoughts.
ReplyDeleteThanks for your thoughts, I'm sort of on the opposite end, I view their resi exposure as a positive. They're in the middle of the country, sun belt type markets, not the gateway markets that might be more exposed. NXRT in particular is more workforce type housing, I would expect lower rents to be less pressured. I also have a big bet on sunbelt multi-family, every week it seems like BX/BREIT is buying up another large portfolio.
DeleteAgreed, however, my concern is more on valuation. 3.5% cap rates and >30x FFO in a rising rate environment strikes me as extremely expensive. You have to believe rates are going to remain extremely depressed...3.5% is below the historical fed funds rate. Of course fed funds haven't seen 3.5% since pre-crisis, but they were 2.5% just a couple years ago. Now, inflation is running hot, the fed is tightening and every cap rate chart I look at for almost every REIT sector (save office) and every geo shows a huge spike in valuations. The equity risk premium just seems very low, while at the same time the risk free rate is depressed and appears prone to move a lot higher. My two cents. Appreciate the dialogue MDC. Still long here and love the NAV discount but nervous on the underlying NAV.
ReplyDelete