Nexpoint ups the ante in fight over UDF IV

Nexpoint Real Estate Opportunities fired its latest salvo in its battle with the board at United Development Funding IV by submitting a competing proposal to acquire the company.

However, UDF IV's board unanimously rejected the "unsolicited, non-binding and conditional proposal," it announced in a press release issued late Friday.

UDF IV has an agreement in place to be purchased by Ready Capital in a transaction valued at as much as $181 million. That agreement is supposed to be voted on at a March 4 special meeting.

Meanwhile, Nexpoint was conducting a proxy battle, offering up four candidates for the UDF IV board at a court-ordered meeting, the first in eight years, in December. But Nexpoint elected not to vote its proxies and as a result, that meeting was cancelled for lack of a quorum.

Statements from both sides seem to be in agreement that the UDF IV nominees would have been reelected, but the size of that victory was in dispute.

On Feb. 18, a letter was sent to certain UDF IV shareholders, urging them to vote at the March meeting; a copy was posted on the Securities and Exchange Commission's Edgar website using Ready Capital's registration. UDF IV's own Exchange Act registration has been revoked, a notice on Edgar said.

"If the merger is not approved and cannot close, you may continue to face liquidity challenges with respect to your UDF IV investment," the letter said.

Nexpoint said its "confidential proposal" mirrors many of the terms of the Ready agreement but gives UDF IV shareholders what it called "superior economic terms, including enhanced balance sheet distributions, full entitlement to Contingent Value Rights loan proceeds and potentially large indemnification reimbursements," its press release said.

The Ready transaction has a value of $5.89 per UDF IV share. While the Nexpoint announcement did not provide a price, its comments on the agreement back in December said that valuation "is significantly below the $9.47 per share book value that UDF IV provided in its latest financials."

In particular, Nexpoint said its proposal would give shareholders 100% of the CVR recovery, whereas with Ready Capital, it would get the first $13.3 million on a net basis, and after that, shareholders would get only 60% of any additional net recoveries.

The UDF IV statement noted after consultation with external advisors, a special committee of the board as well as the full board reviewed the proposal. After weighing it against the existing deal with Ready Capital, the special committee recommended rejecting Nexpoint's offer, the statement said.

Among the reasons cited in the statement for the rejection: "execution risk; the limited liquidity of the NXDT stock consideration proposed by Nexpoint as compared to the Ready Capital common stock to be issued in the Ready Capital merger; and the anticipated time to diligence and negotiate a possible transaction with Nexpoint and obtain required approvals (which the Trust expects would require a minimum of three to four months) as compared to the anticipated closing of the Ready Capital merger shortly after the March 4, 2025 Special Meeting of Trust shareholders."

Those conditions do not make the Nexpoint offer superior to the existing deal, UDF IV continued, declaring "As a result, the board determined that, based on the terms of the Ready Capital Merger Agreement, it is not permitted to engage with Nexpoint regarding its proposal."

Nexpoint plans to carry out the same strategy on March 4 it used at the December annual meeting, which is not to vote its shares.

"We implore UDF IV to postpone the meeting by one month to properly evaluate our superior proposal, which offers a better economic outcome for shareholders and would finally end the litany of governance failures at UDF IV, including fraud, disclosure violations, poor performance and persistent illiquidity," Nexpoint's statement included in the press release said.

"We urge the UDF IV Board to give our proposal full consideration consistent with its fiduciary duty, and we hope to engage in meaningful discussions expeditiously."

Nexpoint then urged other UDF IV shareholders "to take no voting action" and that those who have already voted can rescind it via reaching out to their broker.

Back in 2020, Nexpoint had made overtures to the UDF IV board about a combination. But UDF IV turned that down, citing in its letter, Nexpoint's connections to Kyle Bass, an investor who predicted the subprime crisis, and his Hayman Capital and a 2016 police raid on its affiliate United Mortgage Trust.