UDF IV Shareholder Letter Pushes Back on NexPoint’s Dissident Trustee Nominees
In an ongoing contentious dispute between the parties, United Development Funding IV, a non-traded real estate investment trust in which NexPoint Real Estate Opportunities LLC is a significant shareholder, issued a letter to shareholders in response to notice that NexPoint and its affiliates have submitted nominations for a controlling slate of dissident trustee nominees for election ahead of the company’s 2024 annual shareholder meeting.
In the June 24 letter, the UDF IV board of trustees and management team asserted its commitment to safeguarding the REIT’s assets and maximizing shareholder value and cash distributions despite NexPoint’s “acting against the interests of UDF IV shareholders,” and claimed that the attempt to elect trustees to the UDF IV board is just “the latest step in [NexPoint’s] ongoing, self-interested campaign, which is grounded in misinformation and, we believe, aimed at derailing the continued operations of the [REIT] in an attempt to extract value from the [REIT] at the expense of all other shareholders.”
In February 2024, NexPoint Advisors L.P., a Dallas-based alternative investments firm, commented on the corporate bylaw amendments enacted by UDF IV, which included the removal of restrictions that the board previously enacted to limit the ability of shareholders to propose nominees to the board.
From the Feb. 8 letter, NexPoint said it “seeks to rectify the harm that shareholders have endured for years, and our legal actions are already making an impact; in December, UDF IV finally held its first annual meeting in eight years and since amended its bylaws to remove some of the onerous restrictions that disenfranchised its shareholders. NexPoint intends to continue to push for a full election of all independent trustees and to hold the investment manager and other parties accountable for their roles in harming shareholders.”
The June UDF IV letter goes on to allege that NexPoint taking control of the REIT through dissident trustees would present serious risks for the REIT and its shareholders citing previous attempts to disrupt the REIT’s operations, which resulted in “wasted resources” and “a hostile tender offer, which [NexPoint] extended 13 times, to purchase [REIT] shares” at a discounted price. The letter also touches on NexPoint’s principals – James Dondero and affiliates – and their breach of “fiduciary duties to investors” and “intentional fraudulent transfers, willful misconduct, and self-dealing.”
Finally, UDF IV reiterated ways it has safeguarded the value of the REIT portfolio to drive shareholder returns, such as: declaring cash distributions of approximately $38 million, or approximately $1.24 per share, to shareholders since reinstating distributions in the third quarter of 2019; and managing the portfolio, including originating nine new loans since 2020 for a total commitment of more than $70 million, most of which are attached to existing loans in the portfolio and accelerate the performance of the existing loans.
The latest activity stems from the U.S. Securities and Exchange Commission 2018 settlement with certain executives of UDF IV’s external adviser, including Hollis Greenlaw, who was convicted of fraud in 2022 and sentenced to seven years imprisonment.
In July 2018, the SEC ordered several UDF funds and executives to pay $7.2 million in disgorgement and prejudgment interest, as well as a $1.1 million fine, for misleading investors by failing to disclose that it could not pay its distributions and was using money from a newer fund to pay distributions to investors in an older fund.
The amount was to be deposited into a “Fair Fund” and distributed to investors who owned shares between 2011 to 2015.
NexPoint filed a complaint in August 2022, according to reporting by AltsWire, alleging that the defendants used shareholder money to pay their own personal obligations under an SEC settlement and “then lied about it and tried to cover it up” by making it look like the funds came from a “payment” from its largest borrower and owner of Centurion American, Mehrdad Moayedi.
UDF IV and its board failed to disclose that these “disgorgement payments” were actually paid by the company, not the individuals as required by the settlement. The eligible shareholders who recently received their Fair Fund distributions mistakenly believe these funds were disgorged by the adviser’s executives. The disgorgement payments represent, according to NexPoint, “further misconduct and the continued failure by [UDF IV and the board] to protect shareholders’ interests.”
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