Supplementary Presentation Documents NexPoint's UDFI Investment and Recent Efforts to Improve Accountability
DALLAS, Dec. 22, 2020 /PRNewswire/ -- NexPoint Advisors, L.P. (together with its affiliates "NexPoint") issued an update today on United Development Funding IV ("UDFI" or the "Company") following the Company's response to an offer from the NexPoint Strategic Opportunities Fund ("NHF") to purchase any and all shares of beneficial interest ("Shares") of UDFI (the "Offer").
NHF announced the Offer on December 14, 2020. Through the Offer, NHF is seeking to increase its investment in UDFI and promote value creation over the long term, while providing immediate liquidity for shareholders interested in selling their Shares. In response to the Offer, UDFI issued a press release on December 17, 2020 recommending that shareholders reject the Offer. In the release, the Company made a number of baseless assertions about NexPoint, many of which NexPoint previously corrected.
Neither the Company nor its Board of Trustees (the "UDFI Board") has addressed recent concerns about the lack of transparency and accountability at UDFI; the Company has instead focused on making false claims. NexPoint believes this approach—especially in response to requests to uphold basic and fundamental obligations to shareholders—only augments concerns about the management and oversight of UDFI.
NexPoint is nevertheless committed to promoting long-term value at UDFI and thus provides the following update and accompanying presentation. The update includes: (1) corrections to the baseless assertions made in the December 17 press release issued by UDFI in response to the Offer; and (2) additional information on potential risks to UDFI's underlying business that, in the absence of basic information on the Company, are among the factors used by NexPoint to assess its investment and determine the best course of action to restore value at UDFI. This update is supported by the timeline of key events in the accompanying presentation.
1. Corrections to Baseless Assertions in UDFI's Response to the Offer:
In its response to the Offer, UDFI continues to make baseless assertions about NexPoint's purported role in the prior investment activities and ongoing legal matters involving Kyle Bass and Hayman Capital Management, L.P. ("Bass/Hayman") and the Company.
The "serious concerns" raised about NexPoint's purported connection to Bass/Hayman's trading and related commentary regarding UDFI have no merit. As previously stated, NexPoint and its affiliates were in no way involved in the alleged "short and distort scheme." Further, NexPoint clearly communicated to UDFI that it had no interest in interfering in the ongoing litigation between UDFI and Bass/Hayman. In a letter sent to the UDFI Board in July, NexPoint expressly stated that it was open to any proposals regarding the preservation of UDFI's claims against those participants.
UDFI falsely claims that both the Offer and NexPoint's books and records demand are only attempts to "divert attention and resources from [UDFI's] much more pressing concerns."
The Company has failed to provide any substantive financial information to shareholders since November 2015. After various requests for transparency were ignored, NexPoint submitted a books and records demand (the "Demand") to the UDFI Board in August 2020, seeking access to basic information that shareholders are entitled to receive in order to determine the financial condition of UDFI and the value of its Shares.
From Nasdaq delisting UDFI Shares in 2017, to the Securities and Exchange Commission ("SEC") deregistering all UDFI securities earlier this year, it has been challenging for UDFI shareholders to sell Shares. Recognizing these challenges, NHF commenced the Offer as a way to increase its ownership, while providing a liquidity option to shareholders interested in selling an otherwise illiquid security.
In all its efforts, NexPoint's intent has been to restore transparency and accountability at UDFI to promote value creation. NexPoint believes these matters should be the Company's most pressing concerns.
UDFI suggests the Offer undervalues its Shares, despite providing no indication of an appropriate valuation.
UDFI argues that the Offer price of $1.10 per Share undervalues the Company's Shares, but it provides no support for that statement, and indeed for years has failed to produce any information about its financial condition or results of operations that would enable a reasonable investor to make an informed valuation determination.
2. Additional Information on Potential Risks to UDFI's Underlying Business:
Recent events involving UDFI's largest borrower and the borrower's officers may represent significant risk to UDFI's underlying business.
As reported by D Magazine, on December 1, 2020 the FBI raided the home of Sean Terry, chief operating officer of residential developer Centurion American ("Centurion"), UDFI's largest borrower. Centurion and related borrowers represented 62% of UDFI loans as of September 30, 2015, with another 5% of exposure via loans originated by UDFI affiliates held in UDFI's portfolio. While the reports do not disclose the basis of the FBI's action, representatives from the federal law enforcement agency confirmed that agents were lawfully present and that they executed a search warrant and removed items from the location.
Additionally, there are major Centurion projects facing significant scrutiny, which also present concerns. These include a $1 billion development project in Farmers Branch, Texas that is substantially delayed. On July 28, 2020, the project was reviewed at a Farmers Branch City Council meeting during which Centurion representatives, including Mr. Terry, went before the council to explain the delays. The subsequent project review was highly contentious; in the public meeting, the Farmers Branch mayor accused a councilman of being "bought and sold" on the project. These allegations and the issues raised about the project suggest credit risk stemming from UDFI's largest borrower, which could expose UDFI to substantial risk of loss and be a serious threat to its underlying business.
The SEC's recent deregistration order further limits shareholders' ability to obtain information about the Company.
UDFI's ongoing failure to comply with reporting requirements eventually led the SEC to issue its August 12 deregistration order, which noted "substantial reason to doubt that [UDFI] will return to compliance and avoid delinquencies in the future."
In the absence of any public disclosure, UDFI shareholders have limited ability to obtain information on the Company. This supports NexPoint's submission of the Demand and ongoing efforts to access basic information about the Company.
There are several other instances of current and past legal affairs and enforcement actions that add to concerns about the management and oversight of UDFI.
UDFI reached a settlement with the SEC in 2018 following a multiyear investigation about the use of certain funds and related investor disclosures. The Company was subject to an SEC enforcement action, which resulted in the payment of a fine of more than $8 million. The settlement also included fines to individual executives who, according to the SEC, "knew or should have known that they had misled investors about the use of funds and the nature and status of loans made to developers."
Stemming from the same incident, the Public Company Accounting Oversight Board ("PCAOB") also imposed sanctions on Whitley Penn LLP ("WP"), UDFI's former auditor, in an order issued in March 2020. The order also imposed sanctions on certain WP employees involved in UDFI's audit, one of which was barred from being associated with a registered public accounting firm by the PCAOB.
UDFI continued its failure to comply with SEC reporting requirements for two years following its 2018 SEC settlement. The Company cited its inability to retain an auditor among the reasons for its reporting deficiencies.
The Company is involved in a lawsuit against federal employees that is currently pending. In a recent filing, the government responded that the Company is attempting to "interfere with legitimate law enforcement activity" in "a very active ongoing criminal investigation."
NexPoint has raised issues about the management and oversight of UDFI in an attempt to return the Company to a path toward value creation. These issues continue to grow, augmented by the Company's resistance to requests for transparency and the potential risks that continue to emerge around UDFI's underlying business. Still, NexPoint is committed to promoting long-term value, and thus plans to continue its efforts to obtain basic financial information and increase accountability. In the meantime, following an extended and ongoing period of uncertainty, the Offer from NHF provides shareholders with an immediate liquidity option, while allowing NHF to increase its ownership.
About NexPoint Advisors, L.P.
NexPoint Advisors, L.P. is an SEC-registered adviser on the NexPoint alternative investment platform. It serves as the adviser to a suite of funds and investment vehicles, including a closed-end fund, interval fund, business development company, and various real estate vehicles. For more information visit www.nexpointgroup.com
Risks and Disclosures
This document is for informational purposes only and is neither an offer to purchase nor a solicitation of an offer to sell any common shares of beneficial interest of UDFI or any other securities. The offer to purchase common shares of beneficial interest of UDFI will only be made pursuant to the Offer to Purchase, the Assignment Form and related documents. THE TENDER OFFER MATERIALS (INCLUDING THE OFFER TO PURCHASE, THE ASSIGNMENT FORM AND CERTAIN OTHER TENDER OFFER DOCUMENTS) CONTAIN IMPORTANT INFORMATION. SHAREHOLDERS OF UDFI ARE URGED TO READ THESE DOCUMENTS CAREFULLY BECAUSE THEY CONTAIN IMPORTANT INFORMATION THAT SUCH SHAREHOLDERS SHOULD CONSIDER BEFORE MAKING ANY DECISION REGARDING TENDERING THEIR SHARES. Investors and security holders may obtain a free copy of these statements by directing such requests to the Information Agent by calling toll-free at (800) 331-7543, or by visiting www.udfitenderoffer.com.
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SOURCE NexPoint Advisors, L.P.