Yet Another Value Podcast - Rich Howe thinks NXDT could be the next NXRT

Episode Date: February 3, 2022

Rich Howe, founder of stock spinoff investing, walks through the bull case for NXDT. NXDT is a closed end fund trading at a huge discount to NAV; the fund is planning to transition to a REIT and Rich thinks that makes the stock very catalyst rich. A related company, NXRT, pursued a similar move ~6 years ago and their stock has gone up ~6x since.You can find all my writings here: https://yetanothervalueblog.substack.com/My thread on NXDT: https://twitter.com/AndrewRangeley/status/1488504533709991943?s=20&t=1i5ngJavxgKCHeNtsTWz1ARich's twitter: https://twitter.com/stockspinoffssStock Spinoff Investing: https://stockspinoffinvesting.com/premium/Chapters0:00 Intro1:40 NXDT overview6:55 Insider buying9:45 NXRT parallels12:00 NXDT's discount to NAV13:10 NXDT's level 3 assets and their valuation16:45 Vinebrook homes, one of NXDT's holdings24:30 Why has NXDT's NAV discount widened?27:10 NXDT investing into controlled entities31:30 What is NXDT's post-REIT strategy?34:30 Why is it taking so long to switch to a REIT?37:50 Will NXDT buyback shares?40:00 NXDT's fees43:30 Post-REIT dividend policy47:55 Closing NXDT thoughts50:00 Rich's favorite recent spin: JXN55:00 BHC: the spin Rich is looking forward to the most

All right. Hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker, and with me today, I'm happy to have Rich How. Rich is the founder of Stockspinoffinvesting.com. Rich, how's it going? Hey, doing well. Thanks for having me on, Andrew. I'm a big fan. I'm a big fan of years. I'll get to that in a second. But let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. Please consult a financial advisor, do your own work. This isn't financial. financial advice. And then the second way I started your podcast is with a pitch for you, my guess, this is actually going to be the easiest pitch I've ever done. You know,

spinoffs are a always an interesting area of the market. If you're looking into spinoffs, the only spinoff subscription service I do is stop spinoffinvesting.com. I'm a very happy sub, does great work. I say every spinoff that comes out, you've got a write up, you've got a thesis, you've got a model on, you know, some you'll say are interesting, some of you won't, but every spinoff you cover it. And I think you do fantastic work. And, uh, it's, What is the price of subscription these days? So let's see. It is $6.29 for an annual subscription and it's $67, kind of random numbers for a monthly subscription.

Well, you know, I've been a subscriber for a year and a half, I would say, and I love it. So hopefully that's as good a recommendation as I can give. But all that out the way, let's turn to the stock we're going to talk about today. It's funny we're having you on for the first time for this one because this is not a spinoff, though. There are event spin-off-y type qualities here. the stock is next point diversified the ticker is nxdt and all out all that out the way rich i'll turn it over to you why are we so interested in nxtd t yeah thanks so much andrew um so yeah it's funny so i mean i do my site my site is named stock spinoffinvesting dot com i cover all the spinoffs that's my

primary hunting ground but at the end of the day i'm just looking like everybody else for for good opportunities, and more often than not, it's going to be in a spin-off or in a special situation. And so, NXDT is a good example of a special situation that I think is obviously pretty interesting. So just to, you know, to take a step back at a high level, you know, one of the reasons why spinoffs are so interesting is because essentially you have a chance to be buying something that is being indiscriminately sold. So if you do your work ahead of time and you can value the spinoff and you come up with

a fair value, you can determine what you think is a good price to buy at. And you're oftentimes buying from shareholders who have just received a tiny spin-off didn't choose to invest in that spinoff and are more likely than not going to be sellers at the end of the day. And so it's a really kind of interesting setup, you know, not all spin-offs work. You know, many don't work in some go bankrupt, but it's usually kind of an interesting and efficient area of the market to look at. And the reason why NXDT is also interesting is because it has kind of a similar dynamic

in that it's really right now, it's an orphan security. So currently it's a closed and fun, even though it's actually the name is diversified. I've read currently right now. It's a closed-end fund. There aren't many investors, natural investors for closed-end funds. Closed-in funds are generally sold. You know, they're not bought. It's kind of, you know, maybe like an annuity where when a closed-end fund has an IPO, usually the brokers who ever sell the IPO get a big, you know, 5% commission because it is so profitable for the underlying manager. So long story short, NXTT is a closed-end fund that was launched. way back in 2006, and it has been basically managing kind of primarily focused on real estate assets. But if you look at its portfolio, there's a bunch of, you know, kind of weird stuff, random equities, post-equity reorg, some distressed debt. It's kind of like a weird bit of a portfolio. And as a result of that, there's not many people that are interested in owning basically almost a micro cap closed-end fund. It has a market cap.

of about $500 million. But the thing that that's so interesting to me is that it's going to become, it's going to go transition from being an orphan security to a non-orphin security. So I love these setups when you have a cheap asset and it's going to go from something that basically nobody has an interest in owning to a lot of people potentially having an interest in owning. And so basically, a next point has changed their name. So it's not a closed end fund anymore by name.

they're a diversified REIT, and they are in the process, and it's taken a while, it's taken a while, I'm sure we'll talk about that, but they're basically going to be transitioning from being a closed-end fund to being a REIT. Basically, transition from a closed-end fund to a REIT makes all the sense in the world. You know, usually closed-end funds trade at some sort of discount. And NXDT is trading at a 40% discount. Usually most REITs don't trade it a discount to NAV. They typically traded a multiple of funds from operation or from EBIDA. So it's basically by essentially changing from a closed-end fund to a REIT, the security will be open to a whole other class of potential investors that can basically invest.

There's a whole other host of reasons why I think it's potentially interesting. But the biggest one is it's trading at a big discount to NAV right now, at a 40% discount. So if it were to revert to, you know, NAV, that could be a very nice, you know, 50% plus return there. The other interesting thing is the CEO of the company, James Dendero, has been, it's almost like he's been buying indiscriminately. It's like every day he's in the market buying more shares. He owns about 14% of the company. So that's a very sizable investment for him. So at a high level, you know, I'm happy to obviously dive into questions, but the situation seems like a low risk setup.

You have about a four and a half percent current dividend yield. It's trading at a big discount to NAV, and NAV has been growing, and they have some pretty nice assets in there. And then you have the potential catalyst, which I'm guessing will happen within the next six months, whereby they transition to a REIT and open up a whole swath of other investors, whether they're passive index funds or individual investors who are interested in investing in the REAP. So that's kind of the pitch in a nutshell, and that's why I own it. That is perfect pitch, perfect pitch. Let's start with some of the more bullcases and then I'll

provide it. Not that it's huge pushback, but there are some concerns here, right? So I guess the first thing, you mentioned persistent insider buying, and I just want to clean it up with something that I think actually makes it more bullet. It's not that he's in the market every day. I believe if you look, since June, every day that the insider trading window is open, he's in the market, which I don't know if that's different than being in the market every day. Maybe that's more bullish. Maybe that's less bullish. But I just think that's interesting. Like window open, the dude is in there. And this is not a super liquid stock. And I guess he's probably buying like the VWAT max that he's allowed to buy. Would you disagree with anything I just said there? No, no, that's a really good point. I didn't even

realize that he's just waiting till the insider trading window is open for him to participate. But it's that's that, no, that that's exactly right. Yeah, he's not buying, it's in a liquid stock, but he's buying good chunks of stock. It's not like he's buying 10 grand here and there as kind of a window dressing event. I think at the beginning of the year, he owned about 10% of the company. And throughout 2021, he's increased his stake to closer to 15%. So he's been doing some meaningful buying. And I think, and again, you tell me if I'm wrong, I don't want to put words in your mouth or be too much of a softball host here. But I think a lot of the concerns and red flags around the company that we're going to talk about and we're certainly going to address throughout the podcast,

I think the answer to a lot of them can be, hey, the man who knows the valuations, the man who has the most insidery info into the company, every chance he has a chance to buy shares, it seems like he's doing so. Now, you know, insiders know you can play the buy a little bit, token buying game, get people interested, but it doesn't seem to be that. So I do think like people should keep in the back of their heads because there will be some red flags we address. But I think that is like the overarching answer to a lot of those questions where you lean one way or the other. Again, don't want to put words in your mouth, but you tell me how you think about that. Exactly right. And I think that's the biggest thing that's really giving me comfort here because the assets, I think this is part of the reason why there's a big discount and why it's been trading at a big

discount to NAV. It's because there isn't a tremendous amount of granularity into what those assets are valued. As you're, you know, when you were prepping for the podcast, you mentioned that 80% of the assets are basically kind of valued, you know, independently using kind of, you know, Coms and DCF and other metrics. And, you know, I'm sure they're doing a fine job doing that, but it's not like they're just taking, it's not like they own 100 different shares of publicly traded stock and they're updating the NAV every day. So what gives me a lot of confidence is, you know, I'm not a professional real estate investor. But the fact is it looks like it's turning it a big discount to NAV. It looks like the cash flows are real. And then a presumably pretty sophisticated individual is, as you said, pretty much. buying at any chance he gets. Great, great. And I want to dive into the asset concerns you talked about in a second, but I do think there's one other area on the bull side that I think is worth addressing because, you know, for event investors, this is a little bit before my time,

but it's not that long ago. In 2014 or 2015, there was a company called NXRT that went from closed end fund to REIT. The stock is up since then. It's up about 6X, whereas the Russell 2000 is worth is up maybe 80%, you know, probably read indexes around something like the rest of it does. So this stock has been a screaming home run. And I know a lot of event investors who, you know, maybe not made their careers, but made a lot, a lot on this trade. So NXRT has a lot of similarities to NXDT, the stock we're talking about. So I just wanted to give it over to you if you want to talk about those similarities and why that might have a lot to do with this situation. Yeah. So essentially, it's kind of weird, but this was a closed end fund. And it's the

only time that I've seen it, but essentially this fund, which had a different ticker at the time, actually, you know, this fund being NXRT is what you're referring to. NXRT, or NXDT, previously its ticker was NHF, I believe. It actually spun out. It basically incubated this multi-family reet. And then that became NXRT, which was spun out. And as you have said, has become, has gone to be a 5x. So, yeah, that's kind of in the background, too, that and Next Point controls that read as well. So, you know, clearly they do have some expertise in the real estate market. They do know how to add value. They've done it before.

It's a little different in this case, NXDT, the company that we're talking about today, essentially is the parent of NXRT, which was the spinoff that spun off and performed incredibly well. So, you know, we can kind of get into the strategy and what the strategy is going to be once this reconversion actually takes place. But from talking with investor relations, and there's not much that they can really, really share. But their strategy really is to continue to be an incubator and to kind of reading between the lines, spin out additional assets like NXRT, which I think, you know, would help to close the gap to NAB. be. Perfect, perfect. And let's use that to talk about, you know, right? And as you and I are talking to stock is between 14 and 1450, this is a little bit on the liquid side, but, you know, it's liquid enough unless you're managing real big boy money. You can get a position here. But at 14 to 1450, where is NAV? And then we'll dive into the assets and if you can trust NAB, if that makes

sense. Yep. Yep. So, yeah, so the market cap right now is there are about 37 million shares outstanding. So the market cap's about a little bit over $500 million, $500 million. And I can't do the math in my head. I know the NAV per share is about $2350, but the shares are trading a little bit about 14. So it's about a 40% discount to NAV on a per share basis. Perfect, perfect. And that brings us to the first.

I think there's two big questions here. That brings us to probably the first and most pressing of the concerns. Can you trust NAB? You know, people can go look in my, I'll put my tweet thread in here as well as the link to stocks been up investing in the show notes. People can go look at my thread. I included a screenshot from the Sammy annual report or maybe it was from the Q3 fact sheet. But, you know, of the, let's call it a billion in assets is roughly what it rounds to. Of the billion in assets, a little over 800 million, if that's the number we're using of the assets would be level three assets. Level three assets. So a level one asset would be GE stock. Super liquid. Every day you can go point to a price, right?

A level two asset would be an e-liquid stock that you can point to a price. But, you know, maybe you wouldn't actually be able to get that price. But a level three asset is it's a private equity fund. It's not traded. Now, you can go model it, right? You can say, hey, we own a cable company. Cable companies in the public market trade for 10x EBDA. We'll slap a 10x EBITL multiple on it.

Maybe we give it an e-liquidity discount. But, you know, you are, there is no liquid comp for it. You are trusting a model for the valuation. So of the a billion in assets, about 80%, of them are modeled valuation assets, what I call them. So the first question to you, the most important question I think for is that 80% of assets, do you trust that number? How do you gain comfort in that number? Yeah. So, yeah, so first, kind of, so first they do own a REIT, which they kind of IPO, they incubated and then IPOed out of NXDT called Next Point Real Estate

finance. And so that is, that accounts for about 16% of NAV. And so that is the, um, the part of the portfolio, the part of the NAV that is valued on a day to day basis. And essentially what they do is they basically, uh, the NAV of, um, NXDT fluctuates based on the price changes in, in that security. So you can, you know, you can do research on on that, that part of the portfolio. Um, the market is, is kind of valuing that, that independently. The rest of, of the portfolio, we do not have much granularity into. In terms of the biggest parts of the portfolio, you have Vinebrook Homes, which is basically a single-family rent-to-own operation.

So they are a single-family, they own a portfolio of about 14,000 single-family rentals, which they rent out across the Mideast. And so they're very similar to kind of like an invitation. homes at a much lower scale than invitation homes. Invitation homes is a lot bigger. This is the blackstone entity that does the same thing. They buy a bunch of homes. They rent them up. Historically, you know, this has been a very good place to be. Vinebrook Holmes is a trust. It does file financials. And so you, with the SEC, so you can go in and try to try to get a sense of, of, you know, what you think this thing is worth. They also publish a monthly nav. Again, you know,

it's it's it's it's done i think by green street advisors or with input from green street advisors so you know theoretically it's done by experts but again it isn't it isn't a market price um so i guess i don't have tremendous confidence in or i guess tremendous i don't have a lack of confidence i don't have complete confidence in whether um that asset is necessarily uh marked correctly historically, or at least in the past year or two, the single family rental market has been a good place to be, as has, you know, most residential investments other than, you know, office or maybe retail. So I am comforted by the fact that it's, it's been a good place to be over the past couple of years. And you do have a good comp in terms of invitation homes. The other big asset,

which represents about 12. Just before you go to the other big asset, if I can just pause you on Vinebrook. So I noticed they were public, not publicly traded, but they had public financials. You could go look at up, Vinebrooks, Holmes Trust, their SEC filer and everything, feel free to say, I don't know to this question, but one thing that jumped out to me, just glancing at their 8Ks, right, is they actually do issue stock pretty frequently. So I'm looking from December, they filed an 8K from December 2nd to January 14th. We issued 1.1 million shares for about $60 million. They issued it right around NAV, you know, NAVs 53-54.

they issued it about 5354. My question is, do you know who they're issuing stock to? Is NXT participating pro rata taking all of this down? Are they issuing it only through, you know, the brokers who are selling it to retail shareholders? I'm just wondering, $60 million is not nothing. Who's taking all of this that they're selling? Totally. Yeah, great question.

And I don't know. Yeah, it's a great question. I'll definitely look into that. But it's also interesting that they're issuing it at NAV. Because presumably somebody believes that NAV enough that they're actually buying at that price. But I don't know. The short answer is I don't know if I don't think it's NXDT. I think they're kind of trying to conserve cash.

But that's a good data point. Just I suspect, again, I have not done crazy amounts of work. I'm just glancing at the 8K. And when you were talking about it, I had noticed before. I suspect because they say we issued shares for $60.4 million in aggregate. And we also paid $2.9 million of selling commissions and fees and $3.5. connection. I suspect it's to retail shareholders through brokers because that's about a 5% fee. That's generally what you see. But no guarantees in there. Anyway, you were about to talk about

the other assets behind Vineberghomes before I so rudely interrupted you. No, no, no. That's a great point. It's a really, really interesting data point. And I guess before I kind of go on, you know, basically the majority right now, they're repositioning the portfolio so that they own really a bunch of different assets. You know, the majority is is real estate, but they've been trying to sell the call post reorg, bankruptcy companies and other kind of random stubs that they own and redeploy the proceeds into more real estate assets. So I think as of the Q3NAV report, they had something like 70% of their assets. In real estate, this is obviously what you want to do if you are transitioning to a read.

But the one underlying message that I guess I want to come across is we already talked about the single family rental asset, but they also. also have basically a bunch of assets that are focused on, I think, just good places to be. So they have good exposure to single and multifamily residential. And then they also have exposure to basically self-storage assets, which has been, you know, a really good place to be, you know, historically, but also throughout the pandemic. So their next biggest asset is called NextPoint Storage Partners. They own, they have about 12% of NAV is tied up in this.

This is basically a billion-dollar storage platform originating, um, originating company. It was acquired, um, partly through an acquisition. Currently right now, as of the mid-year report, they have about 52 self-storage investments across the U.S. and 41% of those are wholly owned. I, you know, historically self-storage has been a good place, especially in the pandemic, um, in terms of different sub-sectors of real estate, but I don't have tremendous granularity or insight into whether or not these assets are marked appropriately. Any other questions, Andrew, before I go on to the next big asset?

No, I think that was great. I think that was great. Okay. So the other big asset, which is kind of interesting, is city place tower. So those of you who are watching or listening, who are in Texas, maybe you can check out this asset in person. But essentially, this is a tower in Dallas, Texas. It's a 42-story office tower that was acquired in 2018.

it is you know this me being kind of a generic real estate investor Dallas seems to be a good place to be business friendly you know good climate low taxes it seems like people are oil and gas coming back Dallas is ready to rake in the cash there yeah exactly but also like I was I was amazed that like taxes are are really low in Dallas or in Texas I didn't appreciate that you have the good climate, so people, you know, perhaps even entrepreneurs coming from from California that want to come from, go to a more business, business friendly state. And then you also have the head or the tailwinds from the boom in the oil and gas market. So, you know, it's a nice, it seems like it would be a good place to own real estate. The other interesting angle here that I,

that I picked up just from reading the historical end report is that this asset is in the process of basically opening an international intercontinental hotel. It's going to open in early 2023, and it is going to basically occupy about eight floors of the 42 floors in the building. And there's a little throwaway line in the, I think it's the 2020 in a report that says that next point expects NOI to double once the building is stabilized. And so again, I don't know how much of that was baked into the acquisition price in 2018, but presumably if NOI is going to double, you could see a nice pickup in terms of kind of asset value once that asset is stabilized in 2023. So that's the other pretty big asset that I think is worth talking about.

I think one of the themes you've heard me talk about is I don't have tremendous insight, unfortunately, into whether the marks are accurate on this portfolio. It seems to be selling at a big discount. The stock seems to be selling at a big discount to NAV. But there are a couple of things that give me comfort. And we've already, you know, we've already hit on hit on one of them. But the first is that this is a fund that historically has traded closer to about a 20% discount to any of these to NAVs. So most closed into funds traded a discount to their net asset value, you know, whether that's 10% or 20%. 40% is pretty extreme. And I guess my point is the assets were valued the same way last year in the year before as they are today.

So, you know, even if you're not completely comfortable with how the assets are valued, I guess I get a little bit more comfort that the stock, the security is trading at a 40% discount today versus 20% pre-pandemic. So that's the first data point that gives me a little comfort. And then the other data point, again, is that we've talked about is that James Dondero is just buying kind of relentlessly in the open market. You know, again, he's increased his stake from about 10% of the company to about 14% and he's buying really any chance he get. You know, I don't think he's a fairly, I presume he's a fairly sophisticated investor. I don't think he would be buying if he didn't

have confidence in the marks. So those are the two points that really give me comfort, even though there isn't much granularity into, or at least I don't have much granularity into, you know, the underlying marks on those on those assets let me ask you real quick you've mentioned twice the the company uses created a 20% discount to NAV and I think that's pre-pandemic is when it mainly traded for 20% and now today 40% discounts envy is there anything that's changed particularly between obviously there was a pandemic you know I'm I'm living here cooped up in my studio apartment and everything but you know is there anything material that has changed between now and then because I you could say hey pre-pandemic this was I'm just throwing

I haven't looked at the balance sheet pre-pandemic, but you could say pre-pandemic, everything they did was they owned all publicly listed stocks, right? And they traded a 20% discounts to NAB. And then in the pandemic, they sold all those and they bought a bunch of of E-liquid private investments. And now it trades at a 40% discount. So you could say 20 to 40, and then I'd say, oh, yeah, but now you're getting the liquidity in the discount and everything. So has anything materially changed between the 20% to 40% a couple of years ago to 40% today? Yeah, a couple of things have changed. So the first thing is next. in real estate financial, which is their biggest asset. So that actually became public. So that that went

from being a, you know, level three asset to a, you know, basically level one asset. So that's, you know, you would say that that's a positive. The other, the other change, and this is something that I think is really important, especially in the context of who would buy a closed end fund, is the yield. So the yield, the dividend has been cut twice. And we probably should have talked about this earlier, but that is incredibly, I think that's really important. And I think that actually is a potential bulk case that the dividend could eventually be reinstated a lot higher. Let's talk about the dividend, because I think that would actually play more when we start talking REIT. So we'll talk about that in a second. But I do want to talk that asset that went

level three to level one. Again, like, I do work for this podcast, but I didn't go through four years worth of fishing stuff. And that does strike me as interesting in one particular respect. When it went from a level three asset to a level one asset, do you know how closely it kind have followed the pre the pre level one asset valuation yeah it's so funny um i don't i don't know that but um it's a phenomenal um question and i was actually as i was kind of finalizing my notes for this podcast i would that was on my list of something to do because it would give you insight right the key the key point is it would give you insight into are the other level three assets actually marked correctly so that's on my list of things to do um but but it's a great point well well you and i

we'll follow up on that offline because I'm always interested. But look, people ask me all the time, like, hey, why do you write? Why do you podcasts? And the answer is a lot of times it's stuff like that, right? When you say, when we do the interview, that question, it might, it kind of sounds obvious when, when someone poses it, but when you're doing work on a company, like there's so many things you're thinking about. There's so many things you're doing. It's very easy to not kind of think about that. Like, that's a real clear mark, but it's very easy to pass it over. And that's one of the great things about writing, doing these interviews and stuff. So just for everyone who's thinking about writing or coming on the podcast. That's one of the reasons to do it.

Let's talk. Okay. So I think we went through a lot of the assets. And we're going to talk some other things in a second. But a lot of these assets, I do think one of the things people worry about is not just the level three nature of these, but a lot of the assets are, you know, next point controls this reed and next point controls a lot of the assets that they're investing in. So there's two ways people are worried about there. We'll talk fees in a second, but fees on fees, fee layering is one way they worry. And we'll talk that in a second. Put that aside from now, the other thing people worry is not only you have level three assets that are marked to market, but you have this controlled entity investing into other controlled

entity. And, you know, not that whenever you say controlled entities, investing into other controlled entity, anyone who's investing for a while, you know, immediately the hairs on the back of their neck stand up because they're like, oh, this is all I've been burned a hundred times before. So can you just talk about that kind of risk right there? Yeah, I mean, I think there's no way to get around it. So it definitely is, it definitely is a risk. And I think, you know, I think there are, there have been maybe some corporate governance, you know, concerns in the past, you know, with with, with the next point in the fact that

they are, you know, essentially managing a vehicle that's investing in another, that's investing in another read. So, you know, by definition, you're, you know, you're essentially stack, stacking fees. I, I guess, again, it goes back to, this is a concern. I think that the markets have for a long time, you know, historically that return. that that concern was priced kind of at a 20% discount to the NAV. Right now it's priced at a 40% discount. So, you know, my thought process is that that is, you know, it is perhaps reflected in the current share price.

But it is, you know, it is a concern. I don't think there's any way that you can, you know, get around that. I will say it is going to be an externally managed REIT, which is, you know, a negative it's going to be next point that is going to be kind of managing the REIT. they are capping expenses in the year following conversion at, I think, 150 basis points, which I, which I'm not a read expert by any means, but I think is, is kind of in the realm of reasonability in terms of, you know, what external managers typically charge. And I'm looking on the right-handed side of my screen because I'm trying to remember,

I mean, NXRT, which again, this is so many people when I said we were going to talk NXT, I had so many event fund people reach out and they were like, that's been on my list, including myself personally, it's been on my list because I remember NXRT, NXT rhymes with NXRT. I've been meaning to look at it. NXRT is obviously they were externally managed, so that's one thing. Like you can have a screaming home run when you're an externally managed to read. And I think when they spun, they had a lot of the same NXDT like, oh, we invest on a lot of related party issues and they cleaned that up over time. But I can't remember correctly.

I was trying to get cleared into that. Do you remember? Yeah. So it was in remains in externally managed REIT. The strategy there was essentially. you know, that fund was incubated within NXDT and then, but the strategy was really to basically kind of streamline the process, redeploy assets into multi-family, you know, B class, B-class real estate, lever the assets up kind of appropriately. I don't think they were kind of

optimally leverage within the, within the close-end fund structure. I think that's part of the reason, you know, when you're in a close-in fund, your leverage is a little bit, a little bit restricted. And so, yeah, that was, you know, it was externally managed. It continues to be. And then there was some reposition of the portfolio, which ended up, you know, essentially creating value, creating net asset value and growing earnings over time. This is just NXDT. It's one of the funny ones because I could paint two stories so easily for you. Like, you've heard of doing a postmortem, right, where you're investing in something you say, a postmortem is, hey, if I die, if I lose on this investment, you write how you probably

lost before it even happened so you can think through the risk. And here, the post-mortem's really simple, right? You invest it into a controlled company that invest in other controlled companies like, boom, post-mortem rights itself. But the pre, the like the bold thesis writes itself too, right? NXRT was a six-x. It followed the exact same path as this. There were the exact same concerns. I would like a six-x, please, right? So that's pretty simple. A couple, I want to ask a couple other things, but I just want to hammer one other point home. And XRT, right? That was a big winner.

Single family homes, B class, very simple story to sell. NXT, if and when they get their REIT going, and that's a question, and we'll address that in a second. But if and when they get the REITs going, like, they've just got to mismash passes, right? You mentioned the self-storage. You mentioned that they're invested in the private single-family homes and everything. Like, what is, they say that their NX development. I think they kind of think of themselves as a spin factory for all these other things.

And XRT's got roots here. But like, you can't have. a REIT that's a spin-off factory, right? So what is their strategy going to be? What's the core focus three years from now if they become a REIT? What are we going to be talking about? Yeah. So it's really, so in terms of they haven't shared a whole lot, you know, they did file a proxy when they basically wanted shareholders to vote in favor of the of the reconversion. And when they made that presentation, they, you know, made all the points that you would expect that they would make. That REITs, you know, typically don't trade it at a discount, closed in

funds do. You get more analyst coverage. There's more liquidity. You get inclusion in all the indexes. But they didn't really dive too deeply into kind of what the strategy would be other than saying that they were going to be a diversified reet. I did, you know, have a chance to catch up with IRA recently. And, you know, she couldn't give me a lot of guidance. And I think a lot of that, you know, will come with time. But that they basically want to kind of continue, they view themselves is a little bit of an incubator and that they're going to be, you know, potentially she referenced the NX RT spinoff and also the NREF IPO slash spinoff. So she essentially, you know, the guidance that I got was that essentially it's going to be kind of like a spin off factory, you know,

going forward. Like it's going to be an incubator where they incubate new strategies and essentially spin them off to investors. And then one other point that I wanted to make before we move on, is you're right. In terms of the postmortem, it's a controlled entity investing into another controlled entity. As you said, the postmortem could write itself. What I like about this situation is that I think the downside is pretty limited. So it is trading at a big discount to NIV. It does pay a pretty decent dividend yield about four and a half percent. And it seems like, you know, in following spinoffs, a lot of times the spin-off will be announced. And everybody gets excited, the stock pops and then everybody just kind of forgets about it. And I think it just

seems like there's a lot of fatigue with the stock. You know, people were writing about it last in 2020 when the initial proposal came out where they were going to transition into a REIT. And so I think there's a lot of people who are like, oh, I don't really care. You know, this is never going to happen anyway. And so that leads me to believe that perhaps, you know, even if this is indefinitely delayed or perhaps it doesn't even, it doesn't even take place the downside's pretty limited. And so maybe you don't get the upside, but you don't lose a lot either. Let's dive into that point. So I agree with you. You know, this shareholders approved, they were, NXDT was looking for approval to convert from close end fund to a reet in August

2020, not 2021, 2021, 2020. So we're approaching 18 months that they've been going through it. I think they got approval around August or September 2020. So 18 months from then to now, that is the definition of at this point, people are like, yeah, it's never going to to happen. The market has just gotten fatigue on this thing. Right. So the question to you is, why is this taking so long? You know, when they got approval, they thought it would happen for, they thought they'd be done first half of 2021. We've missed that by a year. I haven't seen a ton of new stuff. I think the last press release they put out on the conversion was in October. So why is this taking so long? Do you think this is actually going to happen? And I think you already

address this, but we can address one more time. If it doesn't happen, so what? What happens? Yeah. So I think, I think is it going to happen? You know, I think it's going to happen. They continue to come out, you know, every quarter and say, you know, we're making progress. We're making progress. You know, it's a little bit more delayed. But at the end of the day, I don't, you know, I don't know, I don't know. The company has talked to the SEC. They have provided the SEC. You know, there's a process where they go back and forth with the SEC, answer all the SEC's questions. And the company per IR has basically answered all the SEC's questions. And there have been no more questions. So you would think that the spin-off or the conversion, you know, would happen, you know, at some point. What have the SEC's questions focused on? So investor relations didn't really articulate. But what she did, what she did say was, you know, how long is it going to take you to basically reposition the portfolio to be kind of 80% plus, focused on, focused on real estate. I think there were some, you know, questions about that,

about that timeline. The other questions, and then the other thing that they focused on was basically operating as a REIT. So right now they're kind of operating under the basis that they're going to distribute, you know, 90% of taxable income, which I don't think is very hard for them to comply with. But that is, you know, that's kind of the process as it's gone so far. far. The one other point that I will mention is that the proxy statement that was filed two years ago in 2020, summer of 2020, basically stated that, you know, it could take up to, I think, Q2 of 2022 or summer of 2020. So it's not completely unprecedented. You know, the SEC is a bureaucratic institution. To some extent, you're just waiting, waiting on them. So it has been delayed. It is a little

bit disappointing. I think ultimately it does happen, but I think we already, we already touched on it a little bit. If it doesn't happen, I, I tend to think, you know, maybe the stock sells off because people are, people are pissed. But I think if it, if it didn't happen, it would probably be the announcement would probably be with in conjunction with, hey, we're doing, you know, a big tender offer to buy back a bunch of stock, or we're doing X, Y, Z to create your holder value. And again, it gets back to kind of the insider ownership and the alignment there. That actually brings me nicely to one of my final questions, the share buybacks. You know, I think this company has a decent history of buying back shares.

They did, they actually did some share buybacks in 2020. In conjunction with going through the REAP process, they did a really big buyback, which was also kind of interesting because they, it was not a buyback. It was a tender offer with an exchange where they gave out some prefts, 20% cash, 80% preps. Don't have to dive into those mechanics, but they used it to retire like 15% of shares outstanding at a nice discount to book, very nice trade. especially if you believe book, if you think this is going to trade it at NAB when it goes to

read. Right now they are not buying shares. So my two questions, and you kind of address the one angle of it, was why are they not buying back shares? Does it have something to do with being stalled out by the reed process? And if they can convert to a REIT or if they can't convert to a REIT and they continue to trade a discount, do you expect they'll buyback shares going forward? I do. I do not know exactly why they're not buying back shares in the market. on the one hand, you could think, you know, maybe, maybe for some reason due to the transition to a rate, they're prohibited from buying back their own shares. If that were the case, I don't know, maybe you would think that insiders would be prohibited from buying,

from buying as well. I don't know. But I don't know. It's interesting. In 2020, they were buying back, you know, shares hand over fist. Right now, they're not, I don't know exactly why they're not able to do that. But I assume it does have something to do with that. with the conversion process because they've been very consistent in their messaging that, hey, we're trading at a big discount to NAV. We don't think that necessarily reflects for value. We're going to do everything in our power to question, or did I cover it? No, that was great.

You were cutting out for a second there, but I think all that came through and you definitely address those questions. Last question, I want to rewind just a little bit and make sure we address this. You know, traditionally the issue with closed-end funds, and this is closed-end funds as a general, not NXT specific, is a closed-end fund because, you know, it's not a mutual fund where you can redeem if the manager is bad. Closed-in funds are basically locked in fee streams unless an activist comes and tells them to liquidate. And, you know, everyone knows if you're paying a manager one or one and a half percent just to manage what looks like a mutual fund or something like, just go do a Vanguard ETF. So closing funds generally trade for a discount because of that management fee stream. The NCC is a little different because you can't exactly go by an index of all the different

like little non-operative. These are publicly trade investments. So they charge about 1% annually, 20 basis point, 1% management fee. I think like 20 basis points to cover other custodial things. They pay their board trustees pretty well. But, you know, the fees are not crazy here by any stretch of the imagination. However, I do. So I'll give you that part of the answer.

But I do think a lot of people say, yeah, they're not crazy, but they're also investing in related party entities, which then charge fees. So when you look at the whole thing and the whole dominoes, like the fee stream gets pretty high. I know some people were asking, like, what's the look through fee stream if you include all of those assets? I don't know if you know that answer. But I just want to talk about the fees and kind of that fee layering concern. Yeah. So, yeah, I mean, it definitely, it definitely is a concern. You know, you articulated very well, you know, essentially, you know, they're managing, you know, call it 900 million assets, a billion dollars of assets. Many of those assets are invested in, you know, other REITs that they're also

charging, charging fees on. I, in terms of the, you know, the total, I guess from my perspective, where I come out on this is, I mean, I would prefer that they, that they didn't do that. I guess the other, I guess a couple of points here. The first point is that, yes, they are, charging double fees. If you're charging double fees as a close-end fund, you know, why not, why not just not bother converting to a reet? Like, why not just continue to charge, you know, double fees? Like, why even bother going ahead and converting to a reet and trying to increase shareholder

value if all you really care about is that, is that fee stream? So I think that's, you know, that's point number one. Point number two is they have, you know, historically spun off, you know, either through IPO or pure spinoff, some of these kind of related parties. And it seems to me, based on my conversations with the management team or with, with investor relations, that that is going to be part of the strategy going forward. So you're going to be getting rid of. If they do that, you will be getting rid of the double layer of fees.

And then you also, if you as an investor are getting a part of the portfolio at NAV, you know, obviously the rest of the company's got the gap to NAB is going to have to shrink because of that. So, you know, the way that I think about it is it is a concern. I think, you know, hopefully through spinoffs and other types of situations, other types of transactions, the double layering of fees goes away. But, you know, but I think that's also why the opportunity exists. I think that's why it trades at a 40% discount. So I think, you know, partially it's, it's kind of reflected in the show price. last thing I want to ask you about and then we'll kind of do closing thoughts and everything

the dividend right dividends like generally I'm very dividend and agnostic honestly I'd much rather see share buybacks because I think the things I own are undervalued and I love to see retiring shares but dividends for closing funds can be nice because if they trade in a discount and they're paying out cash to you like as you said if they're spending stuff off and all of a sudden you're realizing NAB the discount the gap kind of widens and widens as you're getting that cash back right so I want to the main thing I want to ask about the dividend instead of ranting about dividends. Once they convert to our REIT, they've discussed what the go-forward dividend strategy will be. I know right now the dividend yields about four or four and a half percent, and that's one

of the things you like about it. But once they convert to the REIT, the dividend will probably look different. So let's talk about assuming they can convert to the REIT. What happens to the dividend and we can kind of go from there? Yeah. So first of all, so they've cut their dividend like pretty drastically. So, I mean, as recently as as October of 2020, so really, really not that long ago, the dividend was cut. It's a monthly dividend and it was cut from 20 cents down to 10 cents. That was really, that step was really taken partially because, you know, real estate assets, you know, at that point, we had no vaccines. People were still very concerned about COVID. We weren't, you know, thinking that we're going to be seeing the end of it.

And so I think, you know, it makes sense to kind of retain liquidity a little bit and can I push back on that? I hear you all know that. And that would be one suggestion. But I believe if I remember correctly, around the same time they cut the dividend, they actually ramped up the share buybacks. So your way of saying it could be one. And my way of saying it could be, hey, the shares were so under value, they wanted more cash to buyback shares. And the truth could be somewhere in the middle, right? Like companies can be a lot more flexible with share buybacks than dividends. But. that's just another interpretation. And you can correct me if I was wrong there. No, I think that's definitely, I mean, I agree completely that I would, I prefer to see share buybacks and instead of dividends in terms of actually increasing value, especially if you have an asset that you think is trying to get a discount to fair value. So I think that's definitely a prudent use of cash. I mean, the other, in the press release that they put out where they talked about, you know, why they're cutting the dividend, they did say kind of industry market conditions,

They also said that they're transitioned the portfolio to a more higher quality portfolio, which isn't necessarily going to yield as high, generate as much cash flow, but it's their higher value assets. And then, but maybe the real reason was they were just like, hey, we think the stock's cheap and, you know, all the stuff that they put out was, it wasn't true. And they just wanted to buy back the stock, which I think, which I think would make, would make a ton of sense. So that was the first one. And then they also basically cut the dividend again. So it went from a 20, 20 cent dividend per month to a 10 cent dividend in October of 2020. And then a little bit later, so I'm looking for the date of this.

They cut the dividend. Or no, the dividend was cut. I believe the second dividend was cut. So it went from 20 cents to 10 cents. And then from 10 cents down to 5 cents. the second cut was in October of 2020, and that was also kind of in conjuncture with basically that, you know, that, that, that share buyback. But essentially, I think, and I think part of the reason why they cut the dividend, it was to buy back shares, but it was also because

they were in the process of transition to portfolio. There were going to be some kind of one-time expenses in terms of transitioning from being a closed and fund to a REIT. So I think they were doing in part to retain cash flow. And I don't have tremendous insight into kind of what the free cash flow generation of the business is going to be post post conversion. But my sense is that they can, they'll be able to pay out more than they were paying out more than their more than five cents per month, which could attract another, you know, whole stream of potential retail investors that are attracted to, you know, a REIT with a relative. So the hope is you flip it from a close in fund to a REIT that intracts a lot of buyers, right?

It opens you up to retail. It opens you up to REIT indexes, maybe retail buyers who want a consistent REIT dividend come in, and then maybe you start increasing the REIT so you get in the growthy read indexes. And, you know, we've heard it before and it can work out great. I've also seen it work out poorly. But it generally works out poorly when you rely only on the financial engineering and you don't have any like real asset value there. last thing I went about ask about

NXDT. We've covered a lot. I'm actually surprised about how much we've covered. I think we did a nice job. But is there anything we didn't hit on an NXDT that you wish we had hit or anything that maybe we glossed over a bit that you think we should have hit a little harder? No, I think we've hit on everything that really

deserves attention. I'm not a re-investor. So anybody on Twitter who wants to reach out and kind of share data points and kind of, you know, give me bull cases, bear cases. I'd love to hear it, so would love feedback. The other, I think the only other point that I wanted to hit on is just to provide some data in terms of what we can expect if the reed conversion

takes place. So I looked at all the reeds that are classified as diversified reeds from the North American Real State Investment Trust Association, so Ney-Reed. And I tried to, this is a little bit informal, but I basically just tried to dig up all the diversified U.S. traded reeds and figure out how much passive ownership there is. And if you have a market cap that is below $500 million, even if you're a diversified reed, there's very little passive ownership. But once you get up above $500 million to a billion,

the passive ownership increases very significantly. So I think there was one read, I'm blanking on the name, I can look it up, that had a market cap of about $700 million or $800 million, which is where I think NXDT would be. And there was about 17% passive ownership based on, you know, Vanguard or State Street and Black Rock. So I think, you know, once, if this catalyst does happen, I think we are going to get in front of some indiscriminate buying pressure. And just to hit your point home for you, right now, there's basically no passive. Exactly.

So you'd be looking at, who knows, but if it gets into the indexes added, you probably get 15 to 20% of the shares needs to be bought by the indexes. And then there's always some index huggers and followers who follow. And that's a real catalyst. people poop out, you know, people who kind of, people poop pot, but getting passive fund flows can certainly drive a stock. Okay, that's great. Hey, I've got two more for you. I'm going to put you on the spot. We haven't talked about these, but we might as well. You are the stock spinoff guy. I get your weekly Friday letter, so I'm leading the horse a little bit. But outside of NXT, you know, what is your favorite, what is your favorite recent spinoff that you're kind of following? Yeah. So the name that I like, so my biggest position is, Jackson Financial. So I don't know if you've looked at that one at all, but I've looked at it a little bit. I've also looked at Bright House BHF, which is a comp to Jackson Financial. And look, I love the thesis. I'll let you go on these, but I will just say, pull up the 10K and read through the accounting. My God. It's more like, to me, it's more a basketball position

where you want to play the event, the angle and the quant fund, but it's just hard to take a huge swing at it because the underlying assumptions and it's just tough. But I'm sorry to rant. please go ahead. No, 100%. And I am not by any means in accounting annuity expert, a life insurance expert. But the setup initially was really interesting because it was, you know, it was basically spun off from Prudential PLC, a UK listed company selling off a U.S. subsidiary. So the setup was beautiful. It was, you know, the ratio was perfect. It was, I think for every 40 shares due under Prudential, you were going to get one share of Jackson Financial. And then- Do you want to just explain why that ratio is perfect for people looking for alpha?

I know, but, you know, just to drive that home. Exactly. Yeah. So say you own, yeah, so essentially if you own, let's see, if you own a parent. 400 chairs. Use 400 shares of prudential for this. 400 shares of prudential. Essentially, you're going to get one share of this tiny little crappy spinoff that is just a rounding error in your portfolio.

not only is it a rounding error, but it's a bad business, right? It's, it's an annuity business. It's also trades in the U.S. You're a U.K., you're a U.K. investor owning a U.K. company. You never made a decision to invest in this pure play American annuity company. So it's, so essentially, it's just a complete, you know, pure greenblatt set up for kind of indiscriminate selling pressure. So that's the reason why there was a lot of selling pressure. Typically, with spinoffs, you want to wait until at least 50% of the share count has traded before establishing a position, even if you think the stock's, you know, an attractive, an attractive stock at trading an attractive valuation. So, you know, this one was kind of a perfect case study for that. After 50% of shares started trading,

you know, the stock started to recover a little bit. The thing that was really interesting about Jackson was that they had initially telegraphed that they were going to be returning at its lows about 16% of the market cap through dividends and through share buybacks. I was hoping that a good portion of that would be returned through a dividend. I know buybacks are a lot better in terms of created value than dividends, but in terms of a hard catalyst to force a stock to rewrite, dividends are amazing. Like with contour brands, you know, we saw it. We saw it the same thing, you know, with Jackson Financial. And the other reason why I was so excited is because Breit House has been buying back stock

forever and it hasn't done anything. It hasn't done anything for the stock price. And so my interpretation of that, it's incredibly simplistic, but it's basically nobody is, nobody believes the earnings are real. To your point about, you know, what are all these accounting adjustments? If the earnings were real, you would have comfort paying out a dividend. You don't have comfort paying out of dividends so you're going to use that cash to buy back stock.

You don't think it's a rear car. So my thesis was that signaling that they're going to pay a dividend would basically signal to investors that management had a lot of confidence in the cash and the cash flows. So the stock is still trading it like two times earnings. It's trading at about, you know, five and a half percent dividend yield. Bright House does not pay a dividend yield that's been using its extra cash to buyback shares. Equitable holdings has a dividend yield closer to, you know, two and a half percent. So I think there's a lot of room for that yield to compress.

And then they're also buying back a bunch of stocks. So they've been buying back stock on a very accelerated basis. So that's one that I think even though it's kind of hard to wrap your head around, it's still pretty interesting. Look, I'm kicking myself because it's worked absolutely pitch perfectly, you know, exactly how you said it was going to work. As you said, like, if I just look, it spun off. And I think the day it spun off, the share price was around 30.

And by November, it was around, you know, 25, 20. And as you and I are talking today, it's at 38. So from November to we're talking on February 1st or 2nd, it's gone from 25 or 27 to 28 to 38. And by the way, markets have been in mini meltdown mode over that time. So it's like literally pitch perfect for why spinoffs, why four selling and all this type of stuff can really work. Last question for you.

And then I'll let you go. We talked about NXCT, great idea currently. You said Jackson still remains your favorite past spinoff. There's probably about eight spinoffs in the works right now. maybe a little bit more of all the spinoffs you're working. I know you start tracking and following them before. What's kind of the one not tradable today? It hasn't spinoff yet, but what's the one you're most excited for?

Are we kind of getting ready to track? Yeah, so I mean, the cool thing about spinoffs is like you don't have to buy them all. You can wait for indiscriminate selling pressure. You can buy them before the spinoff takes place. You can buy them after. You can buy the parent or the spinoff. Like, you know, you don't have to buy the spinoff. But I think one that looks actually really interesting is bouch and loam.

So this is it's the it's the most popular event that's great name right now. As somebody who traffics in events, I can tell you that everyone is talking Boisian Lome right now. So that makes me a little scared. Maybe that's a con maybe that's, you know, maybe maybe it's not as good of an idea as I think. But the reason why I think it's so interesting is the thesis in a nutshell is that Bouchon Lome is basically going to be spinning. But Bouchon, I forget what the company is, BHC is going to be spinning off Bouchon loam. And Bouchon Lome is a contact, pure play comp for Alcon that makes eye care products, contact

solution, contacts, consumables, other I care products. And the great thing about that business is it's very durable. It's pretty defensive. Alcon trades that are really, really nice, high multiple. And so the thesis in a nutshell is that, you know, the EBIDA, the revenue that's going to be generated by Bouchin loan, the spinoff is going to be, is going to re-rate and trade at a higher enterprise value. So, and then the remaining company is going to be kind of like a specialty pharma company with very high margins, lower growth, but a lot of free cash flow. And the reason why I was, if you run the math and you just try to figure out how much. enterprise value is going to this how much enterprise value creation this transaction is going to take

place it's not it's not that much it's not like the enterprise values is going to double or anything like that maybe it's going to increase by you know 10% or 15% or 20% but the most interesting aspect of of the way that this they're setting up this transaction is they are basically leaving the vast majority of the debt with the parent company so they're going to leave 6.8 turns of debt with the parent company. And in the bouch and loan, the spinoff, is only going to have, I think, two and a half turns of debt. And so Alcon, I think, trades it about 20, 21 times EBITA. So the vast majority of a bouchon loam is going to be, of its enterprise values, is going to be equity. And one concern that I had for the Remainco, for the parent company, was that if you

look at Viatris or Organon, these are all recent spinoffs that are slow growth. farmer companies that are trading at ridiculously low valuations, five, six times EBIDA. But by leaving so much debt, six and a half turns of debt on this parent company, the market is going to is forced to value it at at least six and a half times, six and a half times EBDA. So maybe you get a half a turn for equity. So it's the market is going to be forced to value it at seven times on an EV to EBIT basis. And if you just run the map and you assume that Bausch and Loam trades it call it 20, times, 20 times EBEDA, I think I get to like a $16 billion enterprise value or something

close to. Then you subtract about $2 billion of debt, get you to $14 billion of equity value. And equity value for obstruction law right now, I think it's like eight. So presumably there's a ton of upside if they can, if this transaction takes place, it's a big if. And one thing that I'm digging into is are the creditors going to basically sign off on it? So that's kind of the big F for my perspective. Just to add to this, because I have not done crazy amounts of work, but I've had a pitch,

and you just laid out a super compelling, super interesting thesis, just to add to it. For those who don't know, Balsh Health, BHC is the ticker we're talking about. This is the former Valiant. And one of the angles that a lot of event people have gotten into is exactly what you're saying, hey, are the creditors going to let them spend this out or not? And a lot of people say, well, almost all of the debt comes from back in the Valiant heydays where, you know, Valiant was a high flying stock backed by Bill Ackman, $200 per share, was going to take over the world and revolutionized the pharma business. So a lot of debt was

issued back in the high flying days. And guess what? High Flyers get really good covenants on their debt. So a lot of the event guys have been like, hey, go dig through the debt. And you could drive a truck through all the loopholes in the debt. So they're kind of saying like, look, they're going to be able to spend this out and exactly what you're saying. You spin this out. you're going to, all the current share price and more is going to be in the Bausch and Loan business, which they've spun out. Yeah, the Stub Co. I mean, there's just probably option value there, but it doesn't matter because the stock is

25. I think you get $30 on the Bauschen Loam side. All the debt gets stuck at the current side. And, you know, maybe there's a dollar or two for share or more if things work out on the specialty pharma code. But that's a really attractive trade if they can get the spun out, which is why the event people love it and they love to do work on and everything. but this is great. Rich, this has been great. I think we've run overtime, which, you know,

sometimes asset plays can kind of go quick. So this has been great. I've had so much fun. Looking forward to falling up on NXDT, you know, stock spinoffinvesting.com. I'm going to include a link to the show notes. I'll include a link to Rich's Twitter account so you can go give them follow. Shoot them DMs if you want to follow up on any of the questions we talked about here. And again, we've got eight or ten spinoffs in the work. So I'm looking forward to having you on later this year to talk about the next one. Richel, thanks so much. Yeah, thanks so much, Andrew. This is great. Perfect.