Tao Value recently released its Q1 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -12.96% for the quarter, outperforming their benchmark, the MSCI All Country World Index (ACWI) which returned -21.05% in the same quarter.
In the said letter, Tao Value highlighted a few stocks and Nexpoint Residential Trust Inc. (NYSE:NXRT) is one of them. Nexpoint Residential Trust is a REIT primarily focused on the acquisition, management, and disposition of multifamily assets. Year-to-date, NXRT stock lost 33.7% and on May 5th it had a closing price of $29.58. Its market cap is of $755.4 million. Here is what Tao Value said:
“NexPoint Residential Trust (ticker: NXRT) low class residential real estate markets will be impacted similarly due to financial deterioration of lower income classes. More importantly, the changed capital market landscape would invalidate their flipping strategy, as they will have trouble sell its assets at a desirable valuation. I decided to trim it on the day CEO & Chairman James Dondero disclosed sales of $5.6 million of shares (4% of his ownership). Since NXRT’s management has been very committed to insider holding (basically no insider sales for years) and from time to time bought when price is undervalued, I have laid out my exiting strategy clearly in my 2017 Q4 letter – “If Dondero starts to unload like something Sam Zell did in 2007, I will know it’s time for me to act accordingly.”
The company on the next day (3/23/2020) made a public release specifically explaining that it was liquidation sales by new owner of Highland Capital Management (HCM), which was helmed by Dondero but went through bankruptcy recently. Since HCM held NXRT shares with Dondero as beneficiary, the sale, even though decided by new owner, has to be filed under Dondero’s name. This liquidation program subsequently dumped another $33 million worth of shares in following week. While I find the reason plausible, I prefer to see what they do rather than listen to what they say. Until Dondero started buying materially, I see such insider sales suspicious and will position ourselves accordingly.”
In Q3 2019, the number of bullish hedge fund positions on NXRT stock remained unchanged from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.