DEF 14A: NexPoint Diversified Real Estate Trust Announces Annual Shareholder Meeting

NexPoint Diversified Real Estate Trust will hold its annual shareholder meeting virtually on June 11, 2024, to elect trustees, approve executive compensation, and ratify the appointment of KPMG LLP as its independent accounting firm.

Summary

• NexPoint Diversified Real Estate Trust (NXDT) is holding its annual meeting of shareholders virtually on June 11, 2024, at 10:30 a.m. Central Time.
• Shareholders will vote on the election of seven trustees, an advisory vote on executive compensation, and the ratification of KPMG LLP as the independent registered public accounting firm for 2024.
• The record date for determining shareholders eligible to vote is April 1, 2024.
• As of April 1, 2024, there were 39,301,419 Common Shares and 3,359,593 Preferred Shares issued and outstanding.
• Shareholders can vote online, by telephone, or by mail, and can attend the virtual meeting to vote electronically.
• Requests to attend the annual meeting must be received by Equiniti Fund Solutions, LLC (EQ) no later than 2:00 p.m. Central Time on June 10, 2024.
• The company has engaged Equiniti Fund Solutions, LLC (our Proxy Solicitor) to serve as our proxy solicitor for the Annual Meeting at a base fee of $3,500 plus reimbursement of reasonable expenses.

Sentiment

Score: 7

Explanation: The document is a standard proxy statement, which is generally neutral in tone. The sentiment is slightly positive due to the routine nature of the proposals and the board's recommendations.

Positives

• The company is providing shareholders with the ability to attend and vote at the annual meeting virtually.
• The board is recommending that shareholders vote in favor of all proposals.
• The company has a code of business conduct and ethics in place.
• The company has a compensation committee that reviews compensation policies and plans.

Risks

• The Advisory Agreement could incentivize the Adviser to utilize leverage more heavily than it otherwise would in order to increase its fees.
• The Related Parties may have economic interests in or other relationships with respect to investments made by us.
• The Related Parties may make and/or hold an investment, including investments in securities, that may compete with, be pari passu, senior or junior in ranking to an, investment, including investments in securities, made and/or held by us or in which partners, security holders, members, officers, directors, agents or employees of such Related Parties serve on boards of directors or otherwise have ongoing relationships.
• Each of such ownership and other relationships may result in restrictions on transactions by us and otherwise create conflicts of interest for us.
• In such instances, the Related Parties may in their discretion make investment recommendations and decisions that may be the same as or different from those made with respect to our investments.
• In connection with any such activities described above, the Related Parties may hold, purchase, sell, trade or take other related actions in securities or investments of a type that may be suitable for us.
• The Related Parties are not required to offer such securities or investments to us or provide notice of such activities to us.
• In addition, in managing our portfolio, our Adviser may take into account its relationship or the relationships of its affiliates with obligors and their respective affiliates, which may create conflicts of interest.
• Furthermore, in connection with actions taken in the ordinary course of business of our Adviser in accordance with its fiduciary duties to its other clients, our Adviser may take, or be required to take, actions which adversely affect our interests.
• The Related Parties have invested and may continue to invest in investments that would also be appropriate for us.
• Such investments may be different from those made on our behalf.
• Neither our Adviser nor any Related Party is necessarily prohibited from making or maintaining such investments, even if they are not favorable to us, subject to their fiduciary duties and disclosure obligations, and subject to our Advisers allocation policy set forth below.
• The investment policies, fee arrangements and other circumstances applicable to such other parties may vary from those applicable to us.
• Our Adviser and/or any Related Party may also provide advisory or other services for a customary fee with respect to investments made or held by us, and neither our shareholders nor we have any right to such fees.
• Our Adviser and/or any Related Party may also have ongoing relationships with, render services to or engage in transactions with other clients, including HFRO, NREF, NRESF, NexPoint Capital and Highland Global Allocation Fund (GAF) as well as VineBrook, NXRT, NSP and NHT and other REITs, who make investments of a similar nature to ours, Delaware Statutory Trusts and with companies whose securities or properties are acquired by us.
• In connection with the foregoing activities our Adviser and/or any Related Party may from time to time come into possession of material nonpublic information that limits the ability of our Adviser to affect a transaction for us, and our investments may be constrained as a consequence of our Advisers inability to use such information for advisory purposes or otherwise to effect transactions that otherwise may have been initiated on our behalf.
• In addition, officers or affiliates of our Adviser and/or Related Parties may possess information relating to our investments that is not known to the individuals at our Adviser responsible for monitoring our investments and performing the other obligations under the Advisory Agreement.
• The Related Parties currently provide services to HFRO, NREF, NRESF, NexPoint Capital, GAF, VineBrook, NXRT, NSP, NHT, Delaware Statutory Trusts, and may in the future provide services to other REITs, funds or other entities that compete with us for similar investments.
• Although the professional staff of our Adviser will devote as much time to our business and investments as our Adviser deems appropriate to perform its duties in accordance with the Advisory Agreement and in accordance with reasonable commercial standards, the staff may have conflicts in allocating its time and services among us and any Related Parties other accounts.
• The Advisory Agreement places restrictions on our Advisers ability to buy and sell investments for us.
• Accordingly, during certain periods or in certain circumstances, our Adviser may be unable to buy or sell investments or to take other actions that it might consider to be in our best interest as a result of such restrictions.
• The directors, officers, employees and agents of the Related Parties, and our Adviser may, subject to applicable law, serve as directors (whether supervisory or managing), officers, employees, partners, agents, nominees or signatories, and receive arms length fees in connection with such service, for us or any Related Party, or for any of our investments or any affiliate thereof, and neither we nor our shareholders have the right to any such fees.
• The Related Parties serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as us, or of other investment funds managed by our Adviser or its affiliates.
• In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interest.
• We may compete with other entities managed by our Adviser and its affiliates for capital and investment opportunities.
• There is no limitation or restriction on our Adviser or any of its Related Parties with regard to acting as investment manager (or in a similar role) to other parties or persons.
• This and other future activities of our Adviser and/or its Related Parties may give rise to additional conflicts of interest.
• Such conflicts may be related to obligations that our Adviser or its affiliates have to other clients.
• Subject to prior approval of our Board, certain Related Parties, including NexBank and Governance Re, Ltd. among others, may provide banking, agency, insurance and other services to us and its operating affiliates for customary fees, and neither we, nor our subsidiaries will have a right to any such fees.
• In addition, the Related Parties may, from time to time, be presented with investment opportunities that fall within our investment objectives and the investment objectives of other clients, funds or other investment accounts managed by the Related Parties, and in such circumstances, the Related Parties expect to allocate such opportunities among us and such other clients, funds or other investment accounts on a basis that the Related Parties determine in good faith is appropriate taking into consideration such factors as the fiduciary duties owed to us and such other clients, funds or other investment accounts, our primary mandates and the primary mandates of such other clients, funds or other investment accounts, the capital available to us and such other clients, funds or other investment accounts, any restrictions on investment, the sourcing of the transaction, the size of the transaction, the amount of potential follow-on investing that may be required for such investment and our other investments and the other investments of such other clients, funds or other investment accounts, the relation of such opportunity to our investment strategy and the strategy of such other clients, funds or other investment accounts, reasons of portfolio balance and any other considerations deemed relevant by the Related Parties in good faith.
• Our Adviser allocates investment opportunities across the entities for which such opportunities are appropriate, consistent with (1) its internal conflict of interest and allocation policies and (2) the requirements of the Advisers Act.
• Our Adviser seeks to allocate investment opportunities among such entities in a manner that is fair and equitable over time and consistent with its allocation policy.
• However, there is no assurance that such investment opportunities will be allocated to us fairly or equitably in the short-term or over time, and there can be no assurance that we will be able to participate in all such investment opportunities that are suitable for us.
• As further described below, our Adviser may effect client cross-transactions where our Adviser causes a transaction to be affected between us and another client advised by our Adviser or any of its affiliates.
• Our Adviser may engage in a client cross-transaction involving us any time that our Adviser believes such transaction to be fair to us and the other client of our Adviser or its affiliates in accordance with our Advisers internal written cross-transaction policies and procedures.
• As further described below, our Adviser may affect principal transactions where we may make and/or hold an investment, including an investment in securities, in which our Adviser and/or its affiliates have a debt, equity or participation interest, in each case in accordance with applicable law and with our Advisers internal written policies and procedures for principal transactions, which may include our Adviser obtaining our consent and approval prior to engaging in any such principal transaction between us and our Adviser or its affiliates.
• Our Adviser may direct us to acquire or dispose of investments in cross trades between us and other clients of our Adviser or its affiliates in accordance with applicable legal and regulatory requirements.
• In addition, we may make and/or hold an investment, including an investment in securities, in which our Adviser and/or its affiliates have a debt, equity or participation interest, and the holding and sale of such investments by us may enhance the profitability of our Advisers own investments in such companies.
• Moreover, we, along with our principals and persons or entities controlling, controlled by or under common control with the Adviser, may invest in assets originated by, or enter into loans, borrowings and/or financings with our Adviser or its affiliates, including but not limited to NexBank and NexPoint Securities, Inc., including in primary and secondary transactions with respect to which our Adviser or a Related Party may receive customary fees from the applicable issuer, and neither we nor our subsidiaries have the right to any such fees.
• In each such case, our Adviser and principals and persons or entities controlling, controlled by or under common control with the Adviser may have a potentially conflicting division of loyalties and responsibilities regarding us and the other parties to such investment.
• Under certain circumstances, our Adviser and its affiliates may determine that it is appropriate to avoid such conflicts by selling an investment at a fair value that has been calculated pursuant to our Advisers valuation procedures to another fund managed or advised by our Adviser or principals and persons or entities controlling, controlled by or under common control with the Adviser.
• In addition, our Adviser may enter into agency cross-transactions where it or any of its affiliates acts as broker for us and for the other party to the transaction, to the extent permitted under applicable law.
• Our Adviser may obtain our written consent as provided herein if any such transaction requires the consent of our Board.
• Our Adviser and/or its Related Parties may participate in creditors or other committees with respect to the bankruptcy, restructuring or workout or foreclosure of our investments.
• In such circumstances, our Adviser may take positions on behalf of itself or Related Parties that are adverse to our interests.
• Our Adviser and/or its Related Parties may act as an underwriter, arranger or placement agent, or otherwise participate in the origination, structuring, negotiation, syndication or offering of investments purchased by us.
• Such transactions are on an arms-length basis and may be subject to arms-length fees.
• There is no expectation for preferential access to transactions involving investments that are underwritten, originated, arranged or placed by our Adviser and/or its Related Parties and neither we nor our shareholders have the right to any such fees.
• There are generally no ethical screens or information barriers among our Adviser and certain of its affiliates of the type that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions.
• If our Adviser, any of its personnel or its affiliates were to receive material non-public information about an investment or issuer, or have an interest in causing us to acquire a particular investment, our Adviser may be prevented from causing us to purchase or sell such asset due to internal restrictions imposed on our Adviser.
• Notwithstanding the maintenance of certain internal controls relating to the management of material non-public information, it is possible that such controls could fail and result in our Adviser, or one of its investment professionals, buying or selling an asset while, at least constructively, in possession of material non-public information.
• Inadvertent trading on material non-public information could have adverse effects on our Advisers reputation, result in the imposition of regulatory or financial sanctions, and as a consequence, negatively impact our Advisers ability to perform its investment management services to us.
• In addition, while our Adviser and certain of its affiliates currently operate without information barriers on an integrated basis, such entities could be required by certain regulations, or decide that it is advisable, to establish information barriers.
• In such event, our Advisers ability to operate as an integrated platform could also be impaired, which would limit our Advisers access to personnel of its affiliates and potentially impair its ability to manage our investments.
• Our 2023 Plan provides us with the ability to grant awards to directors and officers of, and certain consultants to, us, our Adviser and its respective affiliates and other entities that provide services to us.
• The management team of our Adviser may receive awards under the 2023 Plan and will benefit from the compensation provided by these awards.
• In addition to the compensation provided to our Adviser by the Advisory Agreement and any long-term incentive plan, our Adviser may also receive reputational benefits from our future growth through capital-raising transactions and acquisitions.
• The reputational benefit to our Adviser from our future growth could assist our Adviser and its affiliates in pursuing other real estate investments.
• These investments could be made through other entities managed by our Adviser or its affiliates, and there can be no assurance that we will be able to participate in all such investment opportunities.

Future Outlook

The Board may change any of these policies without prior notice to you or a vote of our shareholders.

Management Comments

• James Dondero, President and Chairman: 'It is important that your shares be represented. Whether or not you plan to virtually attend the meeting, please vote using the internet or telephone procedures described on the proxy card or sign, date and promptly mail a proxy card in the provided pre-addressed, postage-paid envelope.'

Industry Context

This is a standard proxy statement for a publicly traded REIT, covering routine matters such as trustee elections, executive compensation, and auditor ratification. The virtual meeting format reflects a growing trend in corporate governance.

Comparison to Industry Standards

• The trustee compensation structure, including cash fees and restricted share units, is typical for REITs of similar size.
• The advisory and administrative fee structure with the external advisor is a common arrangement in externally managed REITs.
• The audit fee paid to KPMG is within the range of fees paid by comparable REITs, but can vary based on complexity and scope of the audit.
• The company's related party transactions are extensive, which is not uncommon for REITs with affiliated advisors, but requires careful scrutiny and independent oversight.

Related Party Transactions

• The Company is externally managed by NexPoint Advisors, L.P. (our Sponsor or NexPoint), an investment advisor registered with the Securities and Exchange Commission (the SEC).
• The Company pays our Adviser annual fees. We do not pay any incentive fees to our Adviser.
• We also generally reimburse our Adviser for operating or offering expenses it incurs on our behalf or in connection with the services it performs for us.
• The Company holds multiple operating accounts at NexBank an affiliate of the Adviser through common beneficial ownership.
• The Companys operating properties, other than undeveloped land, are managed by NexVest Realty Advisors, LLC (NexVest), an affiliate of the Adviser.
• Prior to September 1, 2023, the Company, through one of its TRSs, owned 100% of the outstanding equity and debt of Specialty Financial Products, Ltd. (SFP), an Ireland domiciled private company with limited liability and a Designated Activity Company. At the proposal of NexAnnuity Asset Management, L.P. (NexAnnuity), an affiliate of the Adviser, SFP was formed for the purpose of entering into acquisitions of U.S. life settlement policies approved by NexAnnuity and funded by the issuance of debt securities, or a structured promissory note (the Structured Note) issued by SFP.
• On September 1, 2023, the Company, through one of its TRSs, entered into a contribution agreement to transfer the Structured Note and all its rights, title and interests to a related party NexAnnuity Holdings, Inc. (NHI) and its wholly owned subsidiaries.
• On July 2, 2021, the Company, together with Highland Opportunities and Income Fund (HFRO) and Highland Global Allocation Fund (collectively, the Co-Guarantors) as limited guarantors, entered into a Guaranty of Recourse Obligations (SAFStor Recourse Guaranty I) in favor of ACORE Capital Mortgage, LP (ACORE) in its capacity as Administrative Agent for and on behalf of the Lenders under the a Loan Agreement (SAFStor Loan Agreement I), in an aggregate principal amount of $235.86 million, for the benefit of entities indirectly owned by SAFStor NREA JV I, LLC (SAFStor I), SAFStor NREA JV III, LLC (SAFStor III), SAFStor NREA JV IV, LLC (SAFStor IV), SAFStor NREA JV V, LLC (SAFStor V), SAFStor NREA JV VI, LLC (SAFStor VI), SAFStor NREA JV VII, LLC (SAFStor VII), and SAFStor NREA JV VIII, LLC (SAFStor VIII) (collectively, SAFStor), pursuant to which the Company and the Co-Guarantors guaranteed certain obligations of SAFStor.
• On September 14, 2022, the Company entered into guaranties (the BS Guaranties) for the benefit of JPMorgan Chase Bank, National Association (JPM) and any additional or subsequent lenders from time to time (collectively, BS Lender) under a loan agreement (the BS Loan Agreement), pursuant to which the Company guaranteed certain obligations of the borrowers (BS Borrower) under the BS Loan Agreement.
• On December 8, 2022 and in connection with a restructuring of NSP, the Company, together with NREF, NFRO and NexPoint Real Estate Strategies Fund (collectively, the NSP Co-Guarantors), as guarantors, entered into a Sponsor Guaranty Agreement in favor of Extra Space Storage, LP (Extra Space) pursuant to which the Company and the NSP Co-Guarantors guaranteed obligations of NSP with respect to accrued dividends on NSPs newly created Series D Preferred Stock and two promissory notes in an aggregate principal amount of approximately $64.2 million issued to Extra Space.
• Separately, on September 14, 2022, the Company entered into a Guaranty Agreement (Recourse Obligations), dated September 14, 2022 (the CMBS Guaranty) for the benefit of JPM and any additional or subsequent lenders from time to time (collectively, the CMBS Lender) under a loan agreement (the CMBS Loan Agreement), by and among the borrowers thereunder (collectively, CMBS Borrower) and the CMBS Lender.
• On May 22, 2023, the Company entered into the revolving credit facility with NexBank (the NexBank Revolver), with the option for the Company to receive additional disbursements thereunder up to a maximum amount of $50.0 million.
• During 2022, the Company accrued $0.9 million in interest with respect to its holdings of convertible notes in the operating partnership of NHT that mature between 2039 and 2042 (the NHT OP Notes).
• On March 31, 2022, the Company, through an unconsolidated subsidiary, borrowed approximately $13.5 million from NREF, an entity advised by an affiliate of the Adviser, to finance its acquisition of a 77.0% interest in Tivoli North Property.
• On December 8, 2022, the Company, through NREO, entered into a Contribution Agreement pursuant to which NREO contributed all of its interests in the joint ventures (the SAFStor Ventures) with SAFStor NREA GP I, LLC, SAFStor NREA GP II, LLC and NREA GP III, LLC to NexPoint Storage Partners Operating Company, LLC (the NSP OC) in exchange for approximately 47,064 newly created Class B common operating company units of the NSP OC (Class B Units), representing 14.8% of the outstanding combined classes of common units of the NSP OC (the NSP OC Common Units) immediately after NREOs acquisition of Class B Units.
• On January 7, 2022, the Company received approximately 3,324,332 units of limited partnership of subsidiaries (NREF SubOP Units) of NexPoint Real Estate Finance Operating Partnership, L.P. (the NREF OP) in connection with pro rata liquidating distributions by certain entities through which the Company had invested in the NREF OP subsidiaries.
• On June 8, 2022, the Company, directly or through one or more subsidiaries, contributed $25.0 million to the newly formed NexPoint SFR Operating Partnership, L.P. (the SFR OP) in exchange for common units of the SFR OP (SFR OP Units).
• The Company holds an approximately $7.1 million investment in SFR WLIF III, LLC, an SPE designed to hold an investment in debt issued to VineBrook Homes Operating Partnership, L.P. (the VB OP), an entity that manages single family rental properties, whose parent is advised by an affiliate of the Adviser.
• The Company holds approximately 0.3% of the outstanding common stock of NXRT, a publicly traded multifamily REIT advised by an affiliate of the Adviser.
• The Company owns 46.2% of the outstanding common stock of NHT, a publicly traded hospitality REIT managed by an affiliate of the Adviser which owns 8 properties located throughout the United States.
• In November 2020, the Companys preferred stock investment in Jernigan Capital, Inc. was converted into common shares of NSP, a privately owned self-storage REIT indirectly managed by an affiliate of the Adviser, as part of a transaction where affiliates of the Adviser took Jernigan Capital, Inc. private.
• On November 9, 2023, the Company, directly or through one or more subsidiaries contributed approximately $5.0 million to the NSP OC in exchange for a promissory note in the principal amount of $5.0 million made by the NSP OC (the NSP OC Promissory Note).
• The Company owns a 50% interest in each of Claymore Holdings, LLC and Allenby, LLC, entities created to hold litigation claims which are managed by an affiliate of the Adviser.
• On November 1, 2018, the Company through NREO contributed $70.7 million to the VB OP in exchange for limited partnership units.

Stakeholder Impact

• Shareholders have the opportunity to vote on key matters affecting the company's direction and governance.
• Employees of the Adviser may be impacted by the advisory agreement and compensation structure.
• The company's performance and investment decisions can impact its stakeholders, including shareholders, creditors, and partners.

Next Steps

• Shareholders should review the proxy materials and vote on the proposals.
• Shareholders who wish to attend the virtual annual meeting should follow the instructions provided to register.
• The company will hold the annual meeting on June 11, 2024, and announce the results of the voting.

Key Dates

Keywords

annual meeting, shareholders, trustees, executive compensation, KPMG, proxy statement, NexPoint Diversified Real Estate Trust, NXDT