Description

It’s been a little more than a year since NexPoint Diversified Real Estate Trust (NXDT) converted from a closed-end fund to a diversified REIT in an unfavorable market environment with interest rates increasing at historical pace and magnitude. With the stock now trading at a higher discount to NAV of ~50%, we believe NXDT presents a timely and compelling investment with a very attractive risk / reward profile. 

We recommend referring to pmgs24’s write-up on NXDT posted exactly a year ago which provides helpful background on the REIT conversion and the key underlying portfolio assets, which are essentially unchanged. Excluding the Cityplace Tower valuation which we acknowledge is likely overstated, the remaining portfolio has minimal exposure to real estate markets, such as office or retail, which have experienced material markdowns over the last year with rising interest rates. We believe the remaining portfolio valuations should be relatively resilient especially with NXDT’s largest exposure being single-family rental (~33% of NAV), which has been one of the strongest performing REIT sectors. Invitation Homes (INVH) and American Homes 4 Rent (AMH) are both up more than 20% year-to-date.

NXDT has made a great deal of progress on certain initiatives following the REIT conversion such as greater clarity and improved financial disclosure, recent addition to the Russell 2000, and progress in transitioning the business / investments as a diversified REIT. However, there are other items that have been on hold and will ultimately serve as catalysts to reduce the fund’s massive discount.

Some of the examples are: 

1. Hosting earnings calls with Q&A 

2. Adding sell-side analyst coverage

3. Listing of Vinebrook Homes as a standalone, publicly traded SFR REIT through a spin-off

Based on NXDT’s latest investor presentation from May 23rd following Q1 ’23 earnings, it is clear that the portfolio of investments are quite varied with a mix of public and private investments and no exposure to any particular asset representing more than 20% of NAV.

While there are some assets with marks which concern us, such as Cityplace Tower ($105mm equity value which is net of $108mm of non-recourse net debt), the magnitude of the discount offers ample margin of safety against even a complete write-down of Cityplace equity to $0. In that scenario, NAV/sh would decline to $21.50/sh and the stock would still be trading at > 40% discount. If the stock were to trade at ~15% to 20% discount to PF NAV / sh ($16.10 to $17.20/sh), it would represent ~30% to 40% upside.

NXDT Investor Presentation (May '23)

Catalyst

• Increase in investor engagement (earnings calls, sellside coverage)
• Monetization of portfolio assets (e.g. VineBrook public listing via IPO or spin-off)
• Share repurchase at large discount to NAV