DEF 14A of Nexpoint Diversified Real Estate Trust
Filed Apr 22, 2024 · FY20230001437749-24-012708
Nominees to be elected for terms expiring at the Annual Meeting in 2025
Nominees to be elected for terms expiring at the Annual Meeting in 2025 James Dondero, age 61, has served as our President since 2015 and as chairman of our Board since July 2022. Mr. Dondero has also served as President and chairman of the board of directors of NexPoint Real Estate Finance, Inc. (“NREF”), a publicly traded mortgage real estate investment trust (a “REIT”), since February 2020, NexPoint Residential Trust, Inc. (“NXRT”), a publicly traded multifamily REIT since May 2015, and as chairman of the board of directors of VineBrook Homes Trust Inc. (“VineBrook”), a single-family rental (“SFR”) REIT, since August 2022. Additionally, Mr. Dondero was President and a member of the board of directors of VineBrook from February 2019 to August 2021. Mr. Dondero is also: founder and president of NexPoint Advisors, L.P. (our “Sponsor” or “NexPoint”), an investment advisor registered with the Securities and Exchange Commission (the “SEC”); and chairman of NexBank. Mr. Dondero co-founded Highland Capital Management, L.P. (“Highland”), in 1993 with Mark Okada and served as President from 2004 to 2020. Mr. Dondero has over 30 years of experience investing in credit and equity markets and has helped pioneer credit asset classes. Mr. Dondero has also served as the Chief Executive Officer of NexPoint Hospitality Trust, Inc. (“NHT”), a publicly traded hospitality REIT listed on the TSX Venture Exchange, since December 2019. Mr. Dondero also served as a director of Jernigan Capital, Inc., a self-storage lending REIT, from August 2016 to November 2020. Mr. Dondero currently serves as President of NexPoint Capital, Inc. (“NexPoint Capital”), and NexPoint Real Estate Strategies Fund (“NRESF”), both of which are affiliates of NexPoint Real Estate Advisors X, L.P. (our “Adviser”). In addition, he has served as a member of the board of directors of NexPoint Homes Trust, Inc. (“NXHT”), an SFR REIT, since June 2022. NREF, VineBrook, NXRT, NXHT, our Sponsor, NexBank, NHT, NexPoint Capital, and NRESF are all affiliates of the Company. On October 16, 2019, Highland filed for Chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware. On April 13, 2018, the Bankruptcy Court for the Northern District of Texas entered orders for relief placing Acis Capital Management, L.P. and Acis Capital Management GP, LLC in involuntary bankruptcy. Mr. Dondero served as President of Acis Capital Management GP, LLC, which was the general partner of Acis Capital Management, L.P. On January 31, 2019, the court confirmed Acis’s plan of reorganization. Mr. Dondero was selected to serve on our Board because of his prior service as a director and his experience as an executive officer. Brian Mitts, age 53, has served as a member of our Board and as our Chief Financial Officer, Executive VP-Finance, Treasurer and Assistant Secretary since July 2022. Mr. Mitts is also a member of the investment committee of our Sponsor. Mr. Mitts co-founded NexPoint Real Estate Advisors, L.P. (“NREA”), which is the parent of our Adviser, as well as NXRT, NREF and other real estate businesses with Mr. McGraner and Mr. Dondero. Currently, Mr. Mitts leads our financial reporting and accounting teams and is integral in financing and capital allocation decisions. Prior to co-founding NREA, NXRT and NREF, Mr. Mitts was Chief Operations Officer of Highland Funds Asset Manager, L.P., the external advisor of open-end and closed-end funds where he managed the operations of these funds and helped develop new products. Mr. Mitts was also a co-founder of our Sponsor. He has worked for NREA or its affiliates since 2007. Mr. Mitts served as a director of NXRT since September 2014 and as the Chief Financial Officer, Executive Vice President-Finance and Treasurer of NXRT since March 2015. In February 2019, Mr. Mitts was also appointed Secretary of NXRT. From September 2014 to March 2015, Mr. Mitts served as President and Treasurer of NXRT. Mr. Mitts has also served as the Chief Financial Officer, Executive VP-Finance, Treasurer and Corporate Secretary of NHT since December 2018. In addition, he has served as a director of VineBrook since July 2018, as Chief Financial Officer, Treasurer and Assistant Secretary of VineBrook since November 2018, as President since February 2023 and assumed the title of Chief Executive Officer in addition to President in February 2024. From July 2018 to October 2018, Mr. Mitts served as President and Treasurer of VineBrook and from September 2021 to February 2023, Mr. Mitts served as Interim President of VineBrook. Additionally, Mr. Mitts has served as a member of the board of directors and as the Chief Financial Officer, Executive VP-Finance, Secretary and Treasurer of NREF since June 2019. Since November 2020, Mr. Mitts has also served as Chief Financial Officer, Secretary and Treasurer of NexPoint Storage Partners, Inc. (“NSP”), a self-storage REIT, and as a member of the board of directors of NSP since March 2023. In addition, Mr. Mitts has also served as President and Treasurer of NXHT since February 2022 and additionally as Chief Executive Officer, Chief Financial Officer, and Assistant Secretary and as a member of the board of directors of NXHT since June 2022. NREF, VineBrook, NXRT, NXHT, NSP and NHT are all affiliates of the Company. Mr. Mitts was selected to serve on our Board because of his prior service as a director and his experience as an executive officer. Edward Constantino, age 77, has served as a member of our Board since March 2022. Mr. Constantino has served as a member of the board of directors of NXRT since March 2015, as a member of the board of directors of VineBrook since February 2019 and as a member of the board of directors of NREF since February 2020. He has also served as a member of the board of directors of NXHT since June 2022. Mr. Constantino has over 40 years of audit, advisory and tax experience working for two major accounting firms, Arthur Andersen LLP and KPMG. Mr. Constantino retired from KPMG in late 2009, where he was an audit partner in charge of the firm’s real estate and asset management businesses. Mr. Constantino is, and since 2010 has been, a member of the board of directors of Patriot National Bancorp, Inc. Mr. Constantino has also served as a consultant for the law firm Skadden, Arps, Slate, Meagher & Flom LLP. He is a licensed CPA, a member of the American Institute of Certified Public Accountants and a member of the New York State Society of Public Accountants. He is currently a member of the board of trustees and part of the Finance and Investment Committee at St. Francis College in Brooklyn Heights, New York. He is also a board member and audit committee chair of ARC Trust, Inc. and ARC Trust III, Inc. Mr. Constantino was selected to serve on our Board because of his extensive accounting experience, particularly in the real estate field.
Nominees to be elected for terms expiring at the Annual Meeting in 2025
Scott Kavanaugh, age 63, has served as a member of the Board since July 2022. Mr. Kavanaugh has served as a member of the board of directors of NXRT since March 2015, as a member of the board of directors of VineBrook since December 2018, and as a member of the board of directors of NREF since February 2020. He has also served as a member of the board of directors of NXHT since June 2022. Mr. Kavanaugh is, and since December 2009 has been the CEO of First Foundation Inc. (“FFI”), a financial services company. From June 2007 until December 2009, he served as President and Chief Operating Officer of FFI. Mr. Kavanaugh has been the Vice-Chairman of FFI since June 2007. He also is, and since September 2007 has been, the Chairman and CEO of FFI’s wholly owned banking subsidiary, First Foundation Bank. Mr. Kavanaugh was a founding stockholder and served as an Executive Vice President and Chief Administrative Officer and a member of the board of directors of Commercial Capital Bancorp, Inc., the parent holding company of Commercial Capital Bank, from 1999 until 2003. From 1998 until 2003, Mr. Kavanaugh served as the Executive Vice President and Chief Operating Officer and a director of Commercial Capital Mortgage. From 1993 to 1998, Mr. Kavanaugh was a partner and head of trading for fixed income and equity securities at Great Pacific Securities, Inc., a west coast-based regional securities firm. Mr. Kavanaugh is, and since 2009 has been, a member of the board of directors of Colorado Federal Savings Bank and its parent holding company, Silver Queen Financial Services, Inc. Mr. Kavanaugh was selected to serve on the Board because of his expertise in investment management and his experience as both an executive officer and a director of multiple companies. Dr. Arthur Laffer, age 83, has served as a member of the Board since July 2022. Dr. Laffer has served as a member of the board of directors of NXRT since May 2015, as a member of the board of directors of VineBrook since December 2018, and as a member of the board of directors of NREF since February 2020. He has also served as a member of the board of directors of NXHT since June 2022. Dr. Laffer is the founder and chairman of Laffer Associates, an economic research and consulting firm and served as the chairman and director of Laffer Investments, a registered investment advisor, from 1999 to 2019. Dr. Laffer served as a director of GEE Group, Inc., a provider of specialized staffing solutions, from 2014 to 2020. Dr. Laffer also served as a director of EVO Transportation and Energy Services, Inc. from 2018 to 2019. A former member of President Reagan’s Economic Policy Advisory Board during the 1980s, Dr. Laffer’s economic acumen and influence have earned him the distinction in many publications as the Father of Supply-Side Economics. He has served on several boards of directors of public and private companies, including staffing company MPS Group, Inc., which was sold to Adecco Group for $1.3 billion in 2009. Dr. Laffer has served as a director of VerifyMe, Inc. since 2019. Dr. Laffer was previously a consultant to Secretary of the Treasury William Simon, Secretary of Defense Donald Rumsfeld and Secretary of the Treasury George Shultz. In the early 1970s, Dr. Laffer was the first to hold the title of Chief Economist at the Office of Management and Budget under Dr. Shultz. Additionally, Dr. Laffer was formerly the Distinguished University Professor at Pepperdine University and a member of the Pepperdine University board of directors. He also served as Charles B. Thornton Professor of Business Economics at the University of Southern California and as Associate Professor of Business Economics at the University of Chicago. Dr. Laffer was selected to serve on the Board because of his expertise in economics and his experience as a director of multiple companies. Carol Swain, age 70, has served as a member of the Board since August 2022. In addition, she has served as a member of the board of directors of NXRT, as a member of the board of directors of VineBrook and as a member of the board of directors of NREF since August 2022. She has also served as a member of the board of directors of NXHT since August 2022. Dr. Swain is an author, speaker, political commentator and entrepreneur. She founded Unity Training Solutions LLC in November 2020 and founded Carol Swain Enterprises, LLC in October 2014. Dr. Swain previously was a professor at Vanderbilt University from August 1999 to 2017. Dr. Swain has also served on the Tennessee Advisory Committee to the U.S. Civil Rights Commission, the National Endowment for the Humanities, and the 1776 Commission. Dr. Swain received her Bachelor of Arts from Roanoke College, a master’s degree in political science from Virginia Tech, a Ph.D. in political science from the University of North Carolina at Chapel Hill and a Master of Legal Studies from Yale Law School. Dr. Swain was selected to serve on our Board because of her experience in the fields of political science, law and government. Catherine Wood, age 68, has served as a member of the Board since August 2022. In addition, she has served as a member of the boards of directors of NREF and VineBrook since July 2020, and as a member of the board of directors of NXRT since July 2020. She has also served as a member of the board of directors of NXHT since June 2022. Ms. Wood is currently Chief Executive Officer, Chief Investment Officer, and a board member of ARK Investment Management LLC (“ARK”), an SEC-registered investment advisor, which she founded in January 2014. Ms. Wood is also currently Chief Executive Officer, Chief Investment Officer and a board member of ARK ETF Trust. Prior to ARK, Ms. Wood spent 12 years at AllianceBernstein as Chief Investment Officer of Global Thematic Strategies. Ms. Wood joined AllianceBernstein from Tupelo Capital Management, a hedge fund she co-founded. Prior to her tenure at Tupelo Capital Management, Ms. Wood worked for 18 years at Jennison Associates LLC as Chief Economic Officer and several other positions. Ms. Wood started her career in Los Angeles at The Capital Group as an Assistant Economist. Ms. Wood received her Bachelor of Science, summa cum laude, in Finance and Economics from the University of Southern California. Ms. Wood was selected to serve on the Board because of her experience as it relates to disruptive technologies, business models and processes, which provides an important perspective to the Board.
Director Compensation Table
Director Compensation Table The following table provides information regarding the compensation of our non-management trustees for the year ended December 31, 2023.
Director Compensation Table
| Name | Fees Earned or Paid in Cash | Stock Awards(1) | Total | | James Dondero | $- | $- | $- | | Brian Mitts | $- | $- | $- | | Edward Constantino | $35,000 | $77,988 | $113,488 | | Scott Kavanaugh | $37,500 | $77,988 | $115,488 | | Dr. Arthur Laffer | $27,500 | $77,988 | $105,488 | | Dr. Carol Swain | $20,000 | $77,988 | $97,988 | | Catherine Wood | $-(2) | $77,988 | $77,988 |
Director Compensation Table
| (1) These restricted share units were granted on April 4, 2023 and vested on April 4, 2024, the first anniversary of the grant date. The grant date fair value of each award was equal to the closing price of the Company’s Common Shares on the date of the grant as calculated in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. Pursuant to the rules of the SEC, the amounts shown in this column exclude the impact of estimated forfeitures related to service-based vesting conditions. See Note 11 to our consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding the assumptions made in determining these values. As of December 31, 2023, our non-management trustees each held 7,463 restricted share units. | | (2) Ms. Wood has waived the annual trustee’s fee payable in cash. |
Summary Compensation Table
Summary Compensation Table The following table sets forth the compensation paid to or accrued by those named executive officers for whom we are able to quantify such compensation for services the named executive officer rendered to us during the fiscal years presented.
Summary Compensation Table
| NAME AND PRINCIPAL POSITION | YEAR | STOCK AWARDS ($)(1) | TOTAL ($) | | James Dondero President | 2023 | $1,961,068 | $1,961,068 | | | 2022(2) | — | — | | Matt McGraner Executive VP, Chief Investment Officer and Secretary | 2023 | $1,866,204 | $1,866,204 | | | 2022(2) | — | — | | Dustin Norris Executive VP | 2023 | $519,898 | $519,898 | | | 2022(2) | -- | -- |
Summary Compensation Table
| (1) The amounts reported in the “Stock Awards” column represent the aggregate grant date fair value of restricted share units, calculated in accordance with FASB ASC Topic 718. Pursuant to SEC rules, the amounts shown in this column exclude the impact of estimated forfeitures related to service-based vesting conditions. See Note 11 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding the assumptions made in determining these values. |
Summary Compensation Table
| (2) No compensation was paid to, earned by or awarded to any of our named executive officers during the fiscal year ended December 31, 2022. |
Outstanding Equity Awards at Fiscal Year-End
Outstanding Equity Awards at Fiscal Year-End The following table contains information regarding outstanding equity awards held by our named executive officers as of December 31, 2023.
Outstanding Equity Awards at Fiscal Year-End
| | STOCK AWARDS | | | NAME | NUMBER OF SHARES OR UNITS OF STOCK THAT HAVE NOT VESTED (#) | MARKET VALUE OF SHARES OR UNITS OF STOCK THAT HAVE NOT VESTED ($)(1) | | James Dondero | 187,662(2) | $$1,491,913 | | Matt McGraner | 180,498(3) | $$1,434,959 | | Dustin Norris | 49,751(4) | $$395,520 |
Outstanding Equity Awards at Fiscal Year-End
| (1) Market value is based on the closing price of our Common Shares as of December 29, 2023 ($7.95), the last trading day of the year. |
Outstanding Equity Awards at Fiscal Year-End
| (2) Consists of restricted share units granted on April 4, 2023. As of December 31, 2023, there were 187,662 restricted shares units not vested, which vested one-fourth on April 4, 2024, and which will vest one-fourth on April 4, 2025, one-fourth on April 4, 2026 and one-fourth on April 4, 2027. |
Outstanding Equity Awards at Fiscal Year-End
| (3) Consists of restricted share units granted on April 4, 2023. As of December 31, 2023, there were 180,498 restricted shares units not vested, which vested one-fourth on April 4, 2024, and which will vest one-fourth on April 4, 2025, one-fourth on April 4, 2026 and one-fourth on April 4, 2027. |
Outstanding Equity Awards at Fiscal Year-End
| (4) Consists of restricted share units granted on April 4, 2023. As of December 31, 2023, there were 49,751 restricted shares units not vested, which vested one-fourth on April 4, 2024, and which will vest one-fourth on April 4, 2025, one-fourth on April 4, 2026 and one-fourth on April 4, 2027. |
Pension Benefits
Pension Benefits We do not provide any of our officers with pension benefits.
Nonqualified Deferred Compensation
Nonqualified Deferred Compensation We do not provide any of our officers with any nonqualified deferred compensation plans.
Potential Payments Upon Termination of Employment or Change in Control
Potential Payments Upon Termination of Employment or Change in Control In the event any officer’s employment with our Adviser is terminated involuntarily by the Adviser for reasons other than for cause, by the officer for good reason, or otherwise due to such officer’s death, disability or retirement, all outstanding restricted share units granted that have not previously vested or been forfeited, will vest. If a change in control occurs and the award is not assumed or converted into a replacement award in a manner described in the award agreement, all outstanding awards held by our officers that have not previously vested or been forfeited, will vest. See “—Outstanding Equity Awards at Fiscal Year-End” above for the market value of outstanding equity awards as of December 31, 2023 that would have vested if any of the events described above occurred on December 31, 2023. In general, except as may be otherwise prescribed by the compensation committee in any award agreement, the Company’s 2023 Long Term Incentive Plan (the “2023 Plan”) provides that a change of control will be deemed to have occurred if: (a) individuals who constitute the Board on the effective date of the 2023 Plan cease for any reason to constitute at least a majority of the Board, unless their replacements are approved as described in the 2023 Plan (subject to certain exceptions described in the 2023 Plan); (b) a person or group becomes the beneficial owner of 35% or more of the then-outstanding Common Shares or the combined voting power of our then-outstanding securities entitled to vote generally in the election of directors, subject to certain exceptions; (c) the Company closes a reorganization, merger, consolidation, significant sale or purchase of assets or other similar transaction resulting in a substantial change in its ownership or leadership, in each case which causes the persons or groups who are the beneficial owners of 35% or more of the then-outstanding Common Shares or the combined voting power of our then-outstanding securities entitled to vote generally in the election of trustees to cease to be such beneficial owners of the entity resulting from such transaction, in substantially the same proportions of ownership as immediately prior to such transaction, as further described in the 2023 Plan; (d) the Company’s shareholders approve its complete liquidation or dissolution; or (e) the Adviser is terminated.
Pay Versus Performance
Pay Versus Performance As required by Item 402(v) of Regulation S-K, we are providing the following information regarding the relationship between executive compensation and our financial performance for each of the last three completed calendar years. In determining the “compensation actually paid” to our named executive officers (“NEOs”), we are required to make various adjustments to amounts that have been previously reported in the Summary Compensation Table in previous years, as the SEC’s valuation methods for this section differ from those required in the Summary Compensation Table. The table below summarizes compensation values both previously reported in our Summary Compensation Table, as well as the adjusted values required in this section. Note that for our NEOs other than our principal executive officer (the “PEO”), compensation and any applicable adjustments are reported as averages. On July 1, 2022 (the “Deregistration Date”), the SEC issued an order pursuant to Section 8(f) of the Investment Company Act of 1940 (the “1940 Act”) declaring that the Company had ceased to be an investment company under the 1940 Act (the “Deregistration Order”). Prior to receipt of the Deregistration Order, the Company was party to an investment advisory agreement and no executive officers received any compensation. Following receipt of the Deregistration Order, the Company is party to the Advisory Agreement and pays our Adviser the fees described herein. Since none of the Company’s executive officers received compensation in excess of $100,000 during the years ended December 31, 2022 and 2021, the Company’s sole named executive officer for each of the years ended December 31, 2021 and 2022 was Mr. Dondero, who as the Company’s President served as its PEO. Prior to receipt of the Deregistration Order, the Company was an investment company registered under the 1940 Act. As required by Item 402(v) of Regulation S-K, we have provided below information regarding our financial performance for each of the last three completed calendar years, but note that through the Deregistration Date, the Company was an investment company registered under the 1940 Act so the information regarding our financial performance may not be comparable to other companies that were operating companies not registered under the 1940 Act for the periods presented. The compensation committee does not use compensation actually paid as a basis for making compensation decisions. Further, the Company does not use financial performance measures to link compensation actually paid to the NEOs to Company performance.
Pay Versus Performance
| Year | Summary compensation table total for PEO | Compensation actually paid to PEO (1) | Average summary compensation table total for non-PEO named executive officers | Average compensation actually paid to non-PEO named executive officers (2) | Value of initial fixed $100 investment based on Total Shareholder Return | Net income (in thousands) | | 2023 | $1,961,068 | $1,491,913 | $1,193,051 | $915,240 | $87 | $(117,241) | | 2022 | - | - | - | - | $116(3) | $47,571(4) | | 2021 | - | - | - | - | $135(3) | $250,010(4) |
Pay Versus Performance
(1) Mr. Dondero was our PEO for all three reporting years. As described elsewhere in this proxy statement, we did not pay any compensation to Mr. Dondero during either of the reporting years ended December 31, 2021 or 2022. The following are the adjustments made during the year ended December 31, 2023 to arrive at the compensation actually paid to our PEO during the year ended December 31, 2023:
Pay Versus Performance
| Adjustments | 2023 | | Amounts reported under “Stock Awards” in Summary Compensation Table | $(1,961,068) | | Fair Value of Awards Granted in Year that Remain Unvested as of Year-End | $1,491,068 | | Total Adjustments | $(469,155) |
Pay Versus Performance
(2) As described elsewhere in this proxy statement, we did not pay any compensation to any executive officers during the reporting years ended December 31, 2022 and 2021, so the Company has no non-PEO named executive officers for the reporting years ended December 31, 2022 and 2021. The non-PEOs for the year ended December 31, 2023 are Matt McGraner and Dustin Norris. The following are the adjustments made during the year ended December 31, 2023 to arrive at the average compensation actually paid to our non-PEOs during the year ended December 31, 2023:
Pay Versus Performance
| Adjustments | 2023 | | Amounts reported under “Share Awards” in Summary Compensation Table | $(1,193,051) | | Fair Value of Awards Granted in Year that Remain Unvested as of Year-End | $915,240 | | Total Adjustments | $(277,811) |
Pay Versus Performance
(3) On the Deregistration Date, the Company ceased to be an investment company registered under the 1940 Act. Since the Deregistration Date, we fully implemented the change in our business mandate that our shareholders had approved on June 19, 2020 to focus primarily on investing in various commercial real estate property types and across the capital structure, including but not limited to equity, mortgage debt, mezzanine debt and preferred equity. (4) Represents net investment income plus net realized and unrealized gain on investments for the periods presented in which the Company was an investment company registered under the 1940 Act. Relationship between Compensation Actually Paid and Performance Measures The following charts set forth the relationship between the compensation actually paid to the PEO and the average compensation actually paid to the NEOs other than the PEO for fiscal years 2023, 2022 and 2021 (collectively, “Compensation Actually Paid”) to each of (1) net income and (2) total shareholder return. As discussed above, the Company paid no compensation to our PEO and had no non-PEO named executive officers for fiscal years 2021 and 2022 and prior to the Deregistration Date, the Company was an investment company registered under the 1940 Act.