Business context and reporting period
NexPoint Diversified Real Estate Trust (NYSE: NXDT) filed its Form 10-K for the year ended December 31, 2023. The externally managed REIT invests across real estate property types and the capital structure, with a stated objective of current income and capital appreciation. The portfolio includes operating properties and investments in residential, self-storage, office, hospitality, life-science and other assets.
Comparability is limited: the Company became a non-investment-company REIT on July 1, 2022, changed its accounting basis, and presents 2023 against only the six months ended December 31, 2022. Management says a comparison with earlier registered-investment-company periods would not be useful.
Key financial and operating metrics
| Metric | FY 2023 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Total revenue | $63.3 million | $55.1 million |
| Operating income | $11.6 million | $30.8 million |
| Net loss | $(117.2) million | $(81.6) million |
| Net loss attributable to common shareholders | $(121.9) million; $(3.26) per share | $(83.9) million; $(2.26) per share |
| FFO attributable to common shareholders | $(106.3) million; $(2.85) per share | $(74.4) million; $(2.00) per share |
| AFFO attributable to common shareholders | $2.5 million; $0.07 per share | $17.6 million; $0.47 per share |
| Cash from operating activities | $(24.3) million | $31.4 million |
| Cash from investing activities | $22.0 million | $(14.4) million |
| Cash from financing activities | $6.8 million | $(19.1) million |
Revenue in 2023 included $20.3 million of rental income, $7.0 million of interest income and $35.6 million of dividend income. The net loss was driven mainly by $108.2 million of unrealized investment losses, partly offset by interest and dividend income; the unrealized losses included material declines in storage and single-family-rental investments.
At year-end, total assets were $1.098 billion, total liabilities $213.3 million and shareholders’ equity $885.1 million. Cash and cash equivalents were $20.6 million, with an additional $32.6 million of restricted cash. Total debt was approximately $197.3 million, including $142.3 million of Cityplace mortgage debt; that mortgage carried a weighted-average rate of 8.5%. The Company reported $31.7 million of restricted cash in Cityplace lender reserves and $0.9 million in a NexBank interest reserve.
Common dividends declared were $0.60 per share for 2023, with the September and December payments partly in shares and cash. Series A preferred dividends were $1.375 per share. Diluted AFFO coverage of common dividends was 0.11x; GAAP net income and FFO were negative.
Operating-property occupancy was mixed: Cityplace Tower was 51.3% occupied, White Rock Center 67.7%, and 5916 W Loop 289 was vacant after its tenant left in Q4 2023. Cityplace, an office and hospitality conversion under construction, had approximately $190–$210 million of estimated remaining capital expenditures.
Material changes versus the prior comparable period
- Revenue rose to $63.3 million from $55.1 million, but the comparison is between a full year and a six-month period and is not like-for-like.
- Operating income was lower than the prior six-month figure, while net loss widened in absolute terms; unrealized investment losses were the principal driver in both periods.
- Operating cash flow shifted from positive $31.4 million to negative $24.3 million. Management attributes the 2023 use of cash primarily to a $10.7 million income-tax payment.
- Fair-value investments declined to $691.2 million from $754.9 million. Level 3 investments generated approximately $110.6 million of unrealized losses in 2023.
- The Company transferred its SFP life-settlement investment in September 2023 in exchange for NexAnnuity Class A preferred shares; it received $17.5 million of distributions from legacy CLO positions, which are winding down.
- Common shares outstanding increased to 38.39 million from 37.17 million, including shares issued for dividends and Adviser fees.
Outlook, risks, contingencies and unusual items
Management expects available cash, operating cash flows and potential financing to be sufficient for operations, scheduled debt service and dividend requirements for the 12 months after year-end. This outlook depends on refinancing and access to capital. Cityplace’s $142.3 million mortgage was due March 8, 2024 at year-end; on March 8, 2024, the lender extended maturity to March 8, 2025, subject to a $357,776 extension fee and continued amortization. The Company said it is evaluating financing, additional capital, asset sales or a combination to meet obligations.
Other near-term debt includes a $20 million NexBank revolver maturing May 21, 2024, with two possible six-month extensions, and a $20 million Raymond James credit facility maturing October 6, 2025. Management identifies high interest rates, limited commercial real estate credit, refinancing costs, inflation and recession risk as significant pressures. No specific earnings or revenue guidance is provided.
Material risks include substantial leverage and near-term maturities; Cityplace’s low occupancy, redevelopment costs and completion needs; illiquidity and valuation uncertainty; and concentration in affiliated investments. Approximately 51.7% of total assets were Level 3 fair-value investments, making reported values reliant on unobservable assumptions. The filing reports that 84.7% of portfolio net equity was invested in entities managed or advised by Adviser affiliates. Fees are based on managed assets, not investment performance; the expense cap expired June 30, 2023.
The Company disclosed conditional or limited guarantees relating to substantial affiliate debt, including approximately $553.3 million of NSP secured loans, $270.9 million outstanding in SAFStor loan pools, a $77.4 million NHT loan and Cityplace debt of $142.3 million. These are not necessarily direct, unconditional obligations for the full stated balances; triggers, caps and pro-rata terms vary. Management reported that the relevant borrowers were current on payments and in compliance at year-end. The filing also describes ongoing litigation involving the Sponsor and James Dondero, but not claims against the Company; an independent committee reported no evidence the Company engaged in conduct exposing it to liability. The Company said it did not expect a material effect.
There is no clear standalone guidance for future cash generation or dividend coverage. Management intends to continue quarterly dividends, but notes that cash flow may not support all-cash payments; recent common dividends included a share component. The Company reported effective internal control over financial reporting and received unqualified audit opinions. KPMG identified Level 3 investment valuation as a critical audit matter.
Important facts for investors to verify
- Whether Cityplace’s March 2025 maturity extension and planned refinancing provide adequate time and funding, and whether estimated remaining renovation costs change.
- Current liquidity, debt covenant compliance, revolver extensions and the ability to fund near-term maturities without distressed asset sales or additional equity.
- Valuation assumptions and subsequent performance of Level 3 investments, especially affiliated storage, SFR and other private investments.
- The actual economic exposure, triggers and caps under affiliate-related guarantees, and whether any borrower’s payment or covenant status has changed.
- Whether operating cash flow and AFFO can support common and preferred distributions, particularly given low dividend coverage and share-funded common dividends.
- Occupancy, leasing progress and redevelopment milestones at Cityplace and the vacant Lubbock retail property.