UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant x☒
Filed by a Party other than the Registrant ¨☐
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Preliminary Proxy Statement |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Definitive Additional Materials |
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Soliciting Material Pursuant to § 240.14a-12 |
NexPoint Residential Trust, Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box)all boxes that apply):
☒ | No fee required. |
☐ | Fee paid previously with preliminary materials. |
☐ | Fee computed on table | |||
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April 11, 2024
April 29, 2016
Dear NXRT Stockholder:
You are cordially invited to attend the annual meeting of stockholders of NexPoint Residential Trust, Inc. The meeting will be held on Wednesday, June 15, 2016,Tuesday, May 7, 2024, beginning at 9:10:00 a.m. Central TimeTime. The annual meeting will be held exclusively through a virtual format. You will not be able to attend the annual meeting in person.
If your shares are held by a financial intermediary (such as a broker-dealer), and you want to participate in, but not vote at the Crescent Club locatedannual meeting, please email Equiniti Fund Solutions, LLC (“EQ”) at 200 Crescent Court, 17th Floor, Dallas, Texas 75201.attendameeting@equiniti.com, with “NXRT Meeting” in the subject line and provide your full name, address and proof of ownership as of April 1, 2024 from your financial intermediary. EQ will then email you the annual meeting registration link. Please be aware if your shares are held through a financial intermediary, and you wish to vote at the annual meeting, you must first obtain a legal proxy from your financial intermediary. You may forward an email from your financial intermediary containing the legal proxy or attach an image of the legal proxy via email to EQ at attendameeting@equiniti.com and put “NXRT Legal Proxy” in the subject line. EQ will then email you the registration link along with a proxy voting control number.
If you are a stockholder of record and wish to attend and vote at the annual meeting, please send an email to EQ at attendameeting@equiniti.com with “NXRT Meeting” in the subject line and provide your name and address in the body of the email. EQ will then email you the registration link for the annual meeting. If you would like to vote during the annual meeting, you may do so by entering the control number found on your proxy card.
Requests to attend the annual meeting must be received by EQ no later than 2:00 p.m. Central Time on May 6, 2024. On the date of the annual meeting, stockholders are encouraged to log on 15 minutes before the meeting start time. Please contact EQ at 1-800-581-3949 with any questions regarding accessing the annual meeting.
Information about the meeting, nominees for the election of directors and the other matters to be voted on at the meeting is presented in the following notice of annual meeting and proxy statement. We hope that you will plan to virtually attend the annual meeting.
It is important that your shares be represented. Whether or not you plan to virtually attend the meeting, please vote using the internet or telephone procedures described on the notice of internet availability of proxy materials or the proxy card or sign, date and promptly mail a proxy card in the provided pre-addressed,postage-paid postage‑paid envelope.
We look forward If you would like to seeingvote during the annual meeting, you atmay do so by entering the meetingcontrol number found on June 15th.
Sincerely,your proxy card.
Sincerely, James Dondero |
James Dondero
President and Chairman
NEXPOINT RESIDENTIAL TRUST, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on June 15, 2016May 7, 2024
The 20162024 annual meeting of stockholders of NexPoint Residential Trust, Inc., a Maryland corporation (the “Company”), will be held on June 15, 2016,May 7, 2024, beginning at 9:10:00 a.m. Central Time atTime. The annual meeting will be held exclusively through a virtual format. You will not be able to attend the Crescent Club located at 200 Crescent Court, 17th Floor, Dallas, Texas 75201.annual meeting in person. The meeting will be held for the following purposes:
1. to elect seven directors to serve until the 2025 annual meeting of stockholders;
2. to approve, on an advisory basis, the compensation of our named executive officers;
3. to ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2024; and
4. to transact such other business as may properly come before the meeting or any postponement or adjournment thereof.
Information concerning the matters to be voted upon at the meeting is set forth in the accompanying proxy statement. We have also provided you or made available to you the Company’s 20152023 annual report. Holders of record of the Company’s common stock as of the close of business on April 22, 20161, 2024 are entitled to notice of, and to vote at, the meeting.
While you will not be able to attend the annual meeting in person, we have structured our virtual annual meeting to provide stockholders the same rights as if the meeting were held in person, including the ability to vote shares electronically during the meeting and ask questions in accordance with the rules of conduct for the meeting. To promote fairness and efficient conduct of the meeting, we will respond to no more than two questions from any single stockholder.
If your shares of the Company are held by a financial intermediary (such as a broker-dealer), and you want to participate in, but not vote at the annual meeting, please email Equiniti Fund Solutions, LLC (“EQ”) at attendameeting@equiniti.com, with “NXRT Meeting” in the subject line and provide your full name, address and proof of ownership as of April 1, 2024 from your financial intermediary. EQ will then email you the annual meeting registration link. Please be aware if your shares are held through a financial intermediary, and you wish to vote at the annual meeting, you must first obtain a legal proxy from your financial intermediary. You may forward an email from your financial intermediary containing the legal proxy or attach an image of the legal proxy via email to EQ at attendameeting@equiniti.com and put “NXRT Legal Proxy” in the subject line. EQ will then email you the registration link along with a proxy voting control number.
If you are a stockholder of record of the Company and wish to attend and vote at the annual meeting, please send an email to EQ at attendameeting@equiniti.com with “NXRT Meeting” in the subject line and provide your name and address in the body of the email. EQ will then email you the registration link for the annual meeting. If you would like to vote during the annual meeting, you may do so by entering the control number found on your proxy card.
Requests to attend the annual meeting must be received by EQ no later than 2:00 p.m. Central Time on May 6, 2024. On the date of the annual meeting, stockholders are encouraged to log on 15 minutes before the meeting start time. Please contact EQ at 1-800-581-3949 with any questions regarding accessing the annual meeting.
Your vote is very important. Whether or not you plan to virtually attend the meeting, please vote using the internet or telephone procedures described on the proxy card or sign, date and promptly mail a proxy card in the provided pre-addressed, postage-paid envelope.
If you planwould like to attendvote during the annual meeting, and will need special assistance or accommodation due to a disability, please describeyou may do so by entering the control number found on your needs on the enclosed proxy card.
By Order of the Board of Directors, Chief Financial Officer, Executive VP-Finance, Secretary and Treasurer |
Dallas, Texas
April 11, 2024
Scott Ellington
General Counsel and Secretary
Dallas, Texas
April 29, 2016
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUALMEETING OF STOCKHOLDERS TO BE HELD ON MAY 7, 2024. The Company’s Notice of Annual Meeting, Proxy Statement and 2023 Annual Report to Stockholders are available on the internet at www.proxyonline.com. |
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 15, 2016.
The Company’s Notice of Annual Meeting, Proxy Statement and 2015 Annual Report to Stockholders are available on the internet at www.proxyvote.com.
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Proposal 2 – Advisory Vote to Approve the Compensation of Our Named Executive Officers | 6 | |||||
Proposal 3 – Ratification of Appointment of KPMG LLP as the Company’s Independent Registered Public Accounting Firm for | 7 | |||||
The Board, Its Committees and Its Compensation | 8 | |||||
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Executive Officers | 17 | |||||
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Compensation Committee Report | 18 | |||||
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Executive Compensation | 19 | |||||
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Securities Authorized for Issuance Under Equity Compensation Plans | 30 | |||||
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Certain Relationships and Related Party Transactions | 31 | |||||
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Security Ownership of Management and Certain Beneficial Holders | 45 | |||||
Audit Committee Report | 47 | |||||
Stockholder Proposals for the | 48 | |||||
Multiple Stockholders Sharing One Address | 49 | |||||
Other Matters | 50 |
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NexPoint Residential Trust, Inc.
300 Crescent Court, Suite 700
Dallas, Texas 75201
PROXY STATEMENT
This proxy statement provides information in connection with the solicitation of proxies by the board of directors (the “Board”) of NexPoint Residential Trust, Inc., a Maryland corporation (the “Company”), for use at the Company’s 20162024 annual meeting of stockholders or any postponement or adjournment thereof (the “Annual Meeting”). This proxy statement also provides information you will need in order to consider and act upon the matters specified in the accompanying notice of annual meeting. This proxy statement and proxy card are being mailed to stockholders on or about May 3, 2016.April 18, 2024.
Record holders of the Company’s common stock as of the close of business on April 22, 20161, 2024 are entitled to vote at the Annual Meeting. Each record holder of common stock on that date is entitled to one vote at the Annual Meeting for each share of common stock held. As of April 22, 2016,1, 2024, there were 21,293,82425,774,730 shares of common stock outstanding.
You cannot vote your shares unless you are present atvirtually attend the Annual Meeting or you have previously given your proxy. You can vote by proxy in one of three convenient ways:
● | by internet: visit the website shown on your proxy card and follow the instructions; |
● | by telephone: dial the toll-free number shown on your proxy card and follow the instructions; or |
● | in writing: sign, date, and return a proxy card in the provided pre-addressed, postage paid envelope. |
You may revoke your proxy at any time prior to the vote at the Annual Meeting by:
● | delivering a written notice revoking your proxy to the Company’s Secretary at the address above; |
● | delivering a new proxy bearing a date after the date of the proxy being revoked; or |
● | virtually attending the Annual Meeting and entering the control number found on your proxy card. |
Unless revoked as described above, all properly executed proxies will be voted at the Annual Meeting in accordance with your directions on the proxy. If you hold your shares through a broker, bank, trust or other nominee, please refer to the information forwarded by your broker, bank, trust or other nominee for procedures on revoking your proxy. If a properly executed proxy gives no specific instructions, the shares of common stock represented by your proxy will be voted:
● | FOR the election of the seven nominees to serve as directors until the 2025 annual meeting of stockholders; |
● | FOR the approval of the compensation of our named executive officers; |
● | FOR the ratification of the appointment of KPMG LLP (“KPMG”) as the Company’s independent registered public accounting firm for 2024; and |
● | at the discretion of the proxy holders with regard to any other matter that is properly presented at the Annual Meeting. |
If you own shares of common stock held in “street name” and you do not instruct your broker how to vote your shares using the instructions your broker provides you, your shares will be voted forin the ratification of the appointment of KPMG as the Company’s independent registered public accounting firm for 2016,2024, but not for any other proposal. To be sure your shares are voted in the manner you desire, you should instruct your broker on how to vote your shares.
Holders of a majority of the outstanding shares of the Company’s common stock must be present, either in person (virtually) or by proxy, to constitute a quorum necessary to conduct the Annual Meeting. Abstentions and broker non-votes are counted for purposes of determining the presence of a quorum.
The following table sets forth the voting requirements, whether broker discretionary voting is allowed and the treatment of abstentions and broker non-votes for each of the matters to be voted on at the Annual Meeting.
Proposal | Vote Necessary to | Broker | Treatment of | |||||
No. 1 – Election of directors | Plurality (that is, the largest number) of all the votes cast(1) (2) | No | Abstentions and broker non-votes are not considered votes cast and will have no effect | |||||
No. 2 – Advisory Vote to Approve the Compensation of Our Named Executive Officers | Affirmative vote of a majority of the votes cast | |||||||
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Abstentions and broker non-votes are not considered votes cast and will have no effect | ||||||||
No. | Affirmative vote of a
| Yes | Abstentions are not considered votes cast and |
(1) | Pursuant to our majority voting policy, any director nominee who receives a greater number of votes “withheld” than votes “for” such nominee in an uncontested election is required to tender his or her resignation to the |
(2) | Shareholders may vote “FOR” or “WITHHOLD” in the election of directors. Because directors need only be elected by a plurality of the vote, |
Additionally, Proposal 5 is conditioned upon the approval of Proposal 3 and Proposal 4. If Proposal 3 and Proposal 4 are not approved, Proposal 5 will not have any effect. Proposal 6 and Proposal 7 are conditioned upon the approval of Proposal 4. If Proposal 4 is not approved, Proposal 6 and Proposal 7 will not have any effect.
Attendance at the Annual Meeting will be limited to stockholders of record and beneficial owners who provide proof of beneficial ownership as of the record date (suchin the manner described in the accompanying notice of annual meeting.
While you will not be able to attend the Annual Meeting in person, we have structured our virtual Annual Meeting to provide stockholders the same rights as an account statement, a copyif the meeting were held in person, including the ability to vote shares electronically during the Annual Meeting and ask questions in accordance with the rules of conduct for the Annual Meeting. To promote fairness and efficient conduct of the voting instruction card provided by a broker, bank, trustee, or nominee, or other similar evidence of ownership).Annual Meeting, we will respond to no more than two questions from any single stockholder.
The Company pays the costs of soliciting proxies. We have engaged ASTEquiniti Fund Solutions, LLC (“AST”(our “Proxy Solicitor”) to serve as our proxy solicitor for the Annual Meeting. TheMeeting at a base fee for such proxy solicitation services will be approximately $25,000of $3,500 plus reimbursement of reasonable expenses. ASTOur Proxy Solicitor will provide advice relating to the content of solicitation materials, solicit banks, brokers, institutional investors, and hedge funds to determine voting instructions, monitor voting, and deliver executed proxies to our voting tabulator. The Company may request banks, brokers, and other custodians, nominees, and fiduciaries to forward copies of these proxy materials to the beneficial holders and to request instructions for the execution of proxies. The Company may reimburse these persons for their related expenses. Proxies are solicited to provide all record holders of the Company’s common stock an opportunity to vote on the matters to be presented at the Annual Meeting, even if they cannot attend the meeting in person.
The Annual Meeting will be held exclusively through a virtual format. Please see the other information herein, including the accompanying notice of annual meeting, about how to access the Annual Meeting. As always, we encourage you to vote your shares prior to the Annual Meeting.
ELECTION OF DIRECTORS
At the Annual Meeting, fiveseven directors will be elected to serve one-year terms expiring at our annual stockholders meeting in 20172025 and until their respective successors are duly elected and qualified. This section contains information relating to the fiveseven director nominees. The director nominees were selected by the Nominatingour nominating and Corporate Governance Committeecorporate governance committee and approved by the Board for submission to the stockholders. The nominees for election are Messrs. Dondero, Mitts, Constantino and Kavanaugh, Dr. Laffer, Dr. Swain and Laffer.Ms. Wood. All currently serve as directors.
The Board unanimously recommends a vote FOR the election of each of the nominees.
Nominees to be elected for terms expiring at the Annual Meeting in 20172025
James Dondero, age 53, is the chairman of the Board and61, has served as a memberour President and as chairman of the Board since May 2015. Mr. Dondero currently serveshas served as the Company’s President.President and chairman of the board of directors of NexPoint Real Estate Finance, Inc. (“NREF”), a publicly traded commercial mortgage real estate investment trust (“REIT”), since February 2020, and as chairman of the board of directors of VineBrook Homes Trust, Inc. (“VineBrook”), a single-family rental REIT, since August 2022. Mr. Dondero also previously served as President and a member of the board of directors of VineBrook from February 2019 to August 2021. Mr. Dondero also has served as President of NexPoint Diversified Real Estate Trust (“NXDT”), a publicly traded diversified REIT, since May 2015 and has served as chairman of the board of trustees of NXDT since July 2022 as well as a member of the board of directors of NexPoint Homes Trust, Inc. (“NXHT”), a single-family rental REIT, since June 2022. Mr. Dondero is also the co-founderalso: founder and president of NexPoint Advisors, L.P. (our “Sponsor”), an investment advisor registered with the Securities and Exchange Commission (the “SEC”); and chairman of NexBank (“NexBank”). Mr. Dondero co-founded Highland Capital Management, L.P. (“Highland”), founder and president of NexPoint Advisors, L.P. and chairman of NexBank, an affiliated bank that is majority owned by Mr. Dondero. Highland, NexPoint Advisors, L.P. and NexBank are all affiliates of the Company. Mr. Dondero co-founded Highland in 1993 with Mark Okada.Okada and served as President from 2004 to 2020. Mr. Dondero has over 30 years of experience investing in credit and equity markets and has helped pioneer credit asset classes. Highland and its affiliates currently manage approximately $18.3 billion in assets as of December 31, 2015. The Board believes that Mr. Dondero has also served as the Chief Executive Officer of NexPoint Hospitality Trust, Inc. (“NHT”), a publicly traded hospitality REIT listed on the TSX Venture Exchange, since December 2019. Mr. Dondero also served as a director of Jernigan Capital, Inc., a self-storage lending REIT, from August 2016 to November 2020. He also serves as president of NexPoint Capital, Inc. (“NexPoint Capital”) and NexPoint Real Estate Strategies Fund (“NRESF”), both of which are affiliates of NexPoint Real Estate Advisors, L.P. (our “Adviser”). NREF, VineBrook, NXDT, NXHT, our Sponsor, NexBank, NHT, NexPoint Capital and NRESF are all affiliates of the Company. On October 16, 2019, Highland filed for Chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware. On April 13, 2018, the Bankruptcy Court for the Northern District of Texas entered orders for relief placing Acis Capital Management, L.P. and Acis Capital Management GP, LLC in involuntary bankruptcy. Mr. Dondero served as President of Acis Capital Management GP, LLC, which is qualifiedthe general partner of Acis Capital Management, L.P. On January 31, 2019, the court confirmed Acis’s plan of reorganization. Mr. Dondero was selected to serve as oneon the Board because of our directors due to Mr. Dondero’shis prior service as a director and his experience as an executive officer.
Brian Mitts, age 45,53, has served as a member of the Board since September 2014. Mr. Mitts also currently serveshas served as our Chief Financial Officer, Executive VP-Finance and Treasurer since March 2015 and as Secretary since February 2019. From September 2014 to March 2015, Mr. Mitts served as our President and Treasurer. Mr. Mitts joinedco-founded our Adviser, as well as NXRT, NREF and other real estate businesses with Mr. McGraner and Mr. Dondero. Currently, Mr. Mitts leads our financial reporting and accounting teams and is integral in financing and capital allocation decisions. Prior to co-founding our Advisor, NXRT and NREF, Mr. Mitts was Chief Operations Officer of Highland in February 2007Funds Asset Manager, L.P., the external advisor of open-end and currentlyclosed-end funds where he managed the operations of these funds and helped develop new products. Mr. Mitts was also servesa co-founder of our Sponsor, the parent of NREA. He has worked for NREA or its affiliates since 2007. Mr. Mitts served as the Chief OperationsFinancial Officer, for Highland Capital Management Fund Advisors, L.P.Executive Vice President-Finance, Secretary and Treasurer of NREF, since February 2020 and as a member of the board of directors of NREF since June 2019. Mr. Mitts also served as President and Treasurer of NREF from June 2019 until February 2020. Mr. Mitts has also served as the Chief Financial Officer, Executive VP-Finance, Treasurer and Corporate Secretary of NHT since December 2018. In addition, he has served as a director of VineBrook since July 2018, as Chief Financial Officer, Treasurer and Assistant Secretary of VineBrook since November 2018, as President since February 2023 and assumed the title of Chief Executive Officer in addition to President in February 2024. From July 2018 to October 2018, Mr. Mitts served as President and Treasurer of VineBrook and from September 2021 to February 2023, Mr. Mitts served as Interim President of VineBrook. Since November 2020, Mr. Mitts has also served as Chief Financial Officer, Secretary and Treasurer of NexPoint Advisors, L.P.Storage Partners, Inc. (“NexPoint”NSP”), a self-storage REIT, and leads business development foras a member of the real estate team, developing new productsboard of directors of NSP since March 2023. In addition, Mr. Mitts has served as Chief Financial Officer, Executive VP-Finance, Treasurer and exploring new markets. HighlandAssistant Secretary and NexPointas a member of the board of trustees of NXDT since July 2022. Mr. Mitts has also served as President and Treasurer of NXHT since February 2022 and additionally as Chief Executive Officer, Chief Financial Officer, and Assistant Secretary and as a member of the board of directors of NXHT since June 2022. NREF, VineBrook, NXDT, NXHT, NSP and NHT are bothall affiliates of the Company. Mr. Mitts works closely with the real estate team and is integral in marketing real estate products for Highland and its affiliates. The Board believes that Mr. Mitts is qualifiedwas selected to serve as oneon the Board because of our directors due to Mr. Mitts’his prior service as a director and his experience as an executive officer.
Edward Constantino, age 69,77, has served as a member of the Board since March 2015. Mr. Constantino has served as a member of the board of directors of NREF since February 2020, as a member of the board of directors of VineBrook since February 2019, as a member of the board of trustees of NXDT since March 2020 and as a member of the board of directors of NXHT since June 2022. Mr. Constantino has over 40 years of audit, advisory and tax experience working for two major accounting firms, Arthur Andersen LLP and KPMG. Mr. Constantino retired from KPMG in late 2009, where he was an audit partner in charge of the firm’s real estate and asset management businesses. Mr. Constantino is, and since 2010 has been, a member of the Boardboard of Directorsdirectors of Patriot National Bankcorp and Patriot National Bank. He is also a member of the Board of Directors of ARC Property Trust,Bancorp, Inc. and a member of the Audit Committee of the New York City Housing Authority. Mr. Constantino has also servesserved as a consultant for the law firm Skadden, Arps, Slate, Meagher & Flom LLP. He is a licensed CPA, a member of the American Institute of Certified Public Accountants and a member of the New York State Society of Public Accountants. He is currently a member of the Boardboard of Trusteestrustees and part of the AuditFinance and Investment Committee Chairman of St. Francis College in Brooklyn Heights, New York. The Board believesHe is also a board member and audit committee chair of ARC Trust, Inc. and ARC Trust III, Inc. Mr. Constantino is qualifiedwas selected to serve on the Board because of his extensive accounting experience, particularly in the real estate field.
Scott Kavanaugh, age 56,63, has served as a member of the Board since March 2015. Mr. Kavanaugh has served as a member of the board of directors of NREF since February 2020, as a member of the board of directors of VineBrook since December 2018, as a member of the board of directors of NXHT since June 2022, and as a member of the board of trustees of NXDT since July 2022. Mr. Kavanaugh is, and since December 2009 has been, the CEO of First Foundation Inc. (“FFI”), a California based financial services company. From June 2007 until December 2009, he served as President and Chief Operating Officer of FFI. Mr. Kavanaugh has been the Vice-Chairman of FFI since June 2007. He also is, and since September 2007 has been, the Chairman and CEO of FFI’s wholly owned banking subsidiary, First Foundation Bank. Mr. Kavanaugh was a founding stockholder and served as an Executive Vice President and Chief Administrative Officer and a
member of the board of directors of Commercial Capital Bancorp, Inc., the parent holding company of Commercial Capital Bank, from 1999 until 2003. From 1998 until 2003, Mr. Kavanaugh served as the Executive Vice President and Chief Operating Officer and a director of Commercial Capital Mortgage. From 1993 to 1998, Mr. Kavanaugh was a partner and head of trading for fixed income and equity securities at Great Pacific Securities, Inc., a west coast-based regional securities firm. Mr. Kavanaugh is, and since 20082009 has been, a member of the board of directors of Colorado Federal Savings Bank and its parent holding company, Silver Queen Financial Services, Inc. Mr. Kavanaugh also is, and since December 2013 has been, a member of the boards of directors of NexBank SSB and its parent holding company, NexBank Capital, Inc., an affiliate of Highland. From January 2000 until June 2012, Mr. Kavanaugh served as Independent Trustee and Chairman of the Audit Committee, and from June 2012 until December 2013 served as Chairman, of Highland Mutual Funds, a mutual fund group managed by Highland. The Board believes Mr. Kavanaugh is qualifiedwas selected to serve on the Board because of his expertise in investment management and his experience as both an executive officer and a director of multiple companies.
Dr. Arthur Laffer, age 75,83, has served as a member of the Board since May 2015. Dr. Laffer has served as a member of the board of directors of NREF since February 2020, as a member of the board of directors of VineBrook since December 2018, as a member of the board of directors of NXHT since June 2022 and as a member of the board of trustees of NXDT since July 2022. Dr. Laffer is the founder and chairman of Laffer Associates, an economic research and consulting firm.firm and served as the chairman and director of Laffer Investments, a registered investment advisor, from 1999 to 2019. Dr. Laffer served as a director of GEE Group, Inc., a provider of specialized staffing solutions from 2014 to 2020. Dr. Laffer also served as a director of EVO Transportation and Energy Services Inc. from 2018 to 2019. A former member of President Reagan’s Economic Policy Advisory Board during the 1980s, Dr. Laffer’s economic acumen and influence have earned him the distinction in many publications as Thethe Father of Supply-Side Economics. He has served on several boards of directors of public and private companies, including staffing company MPS Group, Inc., which was sold to Adecco Group for $1.3 billion in 2009. Dr. Laffer has served as a director of VerifyMe, Inc. since 2019. Dr. Laffer was previously a consultant to Secretary of the Treasury William Simon, Secretary of Defense Donald Rumsfeld, and Secretary of the Treasury George Shultz. In the early 1970s, Dr. Laffer was the first to hold the title of Chief Economist at the Office of Management and Budget under Mr.Dr. Shultz. Additionally, Dr. Laffer was formerly the Distinguished University Professor at Pepperdine University and a member of the Pepperdine University board of directors. He also served as Charles B. Thornton Professor of Business Economics at the University of Southern California and as Associate Professor of Business Economics at the University of Chicago. The Board believes Dr. Laffer is qualifiedwas selected to serve on the Board because of his expertise in economics and his experience as a director of multiple companies.
Carol Swain, age 70, has served as a member of our Board since August 2022. In addition, she has served as a member of the board of directors of VineBrook, as a member of the board of directors of NREF, the board of trustees of NXDT and as a member of the board of directors of NXHT since August 2022. Dr. Swain is an author, speaker, political commentator and entrepreneur. She founded Unity Training Solutions LLC in November 2020 and founded Carol Swain Enterprises, LLC in October 2014. Dr. Swain previously was a professor at Vanderbilt University from August 1999 to 2017. Dr. Swain has also served on the Tennessee Advisory Committee to the U.S. Civil Rights Commission, the National Endowment for the Humanities, and the 1776 Commission. Dr. Swain received her Bachelor of Arts from Roanoke College, a master’s degree in political science from Virginia Tech, a Ph.D. in political science from the University of North Carolina at Chapel Hill and a Master of Legal Studies from Yale Law School. Dr. Swain was selected to serve on our Board because of her experience in the fields of political science, law and government.
Catherine Wood, age 68, has served as a member of the Board since July 2020. In addition, she has served as a member of the boards of directors of NREF and VineBrook since July 2020, as a member of the board of trustees of NXDT since August 2022 and as a member of the board of directors of NXHT since June 2022. Ms. Wood is currently Chief Executive Officer, Chief Investment Officer and a board member of ARK Investment Management LLC (“ARK”), an SEC-registered investment advisor, which she founded in January 2014. Ms. Wood is also currently Chief Executive Officer, Chief Investment Officer and a board member of ARK ETF Trust. Prior to ARK, Ms. Wood spent 12 years at AllianceBernstein as Chief Investment Officer of Global Thematic Strategies. Ms. Wood joined AllianceBernstein from Tupelo Capital Management, a hedge fund she co-founded. Prior to her tenure at Tupelo Capital Management, Ms. Wood worked for 18 years at Jennison Associates LLC as Chief Economic Officer and several other positions. Ms. Wood started her career in Los Angeles at The Capital Group as an Assistant Economist. Ms. Wood received her Bachelor of Science, summa cum laude, in Finance and Economics from the University of Southern California. Ms. Wood was selected to serve on the Board because of her experience as it relates to disruptive technologies, business models and processes, which provides an important perspective to the Board.
PROPOSAL 2–
ADVISORY VOTE TO APPROVE
THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
Pursuant to Section 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we are submitting the compensation of our named executive officers, as disclosed in this proxy statement, to our stockholders for an advisory vote.
As described below under the heading "Executive Compensation," we are externally managed by our Adviser through an agreement dated March 16, 2015, as amended, and renewed on February 26, 2024 (the “Advisory Agreement”) by and among the Company, NexPoint Residential Trust Operating Partnership, L.P. (the “OP”) and our Adviser. Our Adviser conducts substantially all of our operations and provides asset management services for our real estate investments. We expect we will only have accounting employees while the Advisory Agreement is in effect. Our named executive officers for fiscal year 2023 currently serve as officers of our Adviser and we only have three employees as of April 11, 2024. Because our Advisory Agreement provides that our Adviser is responsible for managing our affairs, our named executive officers for fiscal year 2023 do not currently receive any cash compensation from us or any of our subsidiaries for serving as our executive officers. Additionally, we do not have any agreements with any of our named executive officers with respect to their cash compensation and do not intend to directly pay any cash compensation to them. However, from time to time we may grant to our named executive officers and our Adviser equity-based awards pursuant to our equity incentive plans, which we believe serve to align the interests of our named executive officers and our Adviser with the interests of our stockholders.
We do not determine the cash compensation payable by the Adviser to our named executive officers. The Adviser and its affiliates determine the salaries, bonuses and other wages earned by our named executive officers from our Adviser and its affiliates. The Adviser and its affiliates also determine whether and to what extent our named executive officers will be provided with employee benefit plans.
In 2023, our stockholders approved the compensation of our named executive officers by 85% of the votes cast. The vote on this proposal is not intended to address any specific element of compensation. Rather, the vote relates to the overall compensation of our named executive officers, as described under the heading "Executive Compensation" in this proxy statement. We are asking our stockholders to approve the following advisory resolution at our Annual Meeting:
“RESOLVED, that the compensation of the Company's named executive officers, as disclosed pursuant to the rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.”
This vote is advisory and is not binding on the Company, our Board or the compensation committee. However, the compensation committee expects to consider the outcome of this advisory vote in evaluating whether any actions are appropriate with respect to our compensation programs for our executive officers. At the 2020 annual meeting of stockholders, a majority of the Company’s stockholders voted in favor of holding advisory votes on the Company’s executive compensation on an annual basis, and, in light of this vote, the Board adopted a policy of holding such advisory votes annually. Unless the Board determines otherwise, we will continue to hold advisory votes on the Company’s executive compensation on an annual basis, and the next advisory vote following this year’s vote will be held at the 2025 annual meeting of stockholders.
The Board unanimously recommends a vote FOR the approval of the compensation of our named executive officers.
PROPOSAL 3 –
RATIFICATION OF APPOINTMENT OF
KPMG LLP AS THE COMPANY’S INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR 2024
The audit committee has appointed KPMG as the Company’s independent registered public accounting firm for 2024. The Board is asking stockholders to ratify this appointment. SEC regulations and the New York Stock Exchange (“NYSE”) listing requirements require the Company’s independent registered public accounting firm to be engaged, retained and supervised by the audit committee. However, the Board considers the selection of an independent registered public accounting firm to be an important matter to stockholders. Accordingly, the Board considers a proposal for stockholders to ratify this appointment to be an opportunity for stockholders to provide input to the audit committee and the Board on a key corporate governance issue.
Representatives of KPMG are expected to virtually attend the Annual Meeting and will have the opportunity to make a statement. They will also be available to respond to appropriate questions.
Selection. KPMG served as the Company’s independent registered public accounting firm for 2023 and has been selected by the audit committee to serve as the Company’s independent registered public accounting firm for 2024.
Audit and Non-Audit Fees. The following table presents fees for audit services rendered by KPMG for the audit of the Company’s annual financial statements for 2023 and 2022, and fees billed for other services rendered by KPMG.
YEARS ENDED | ||||||||
DECEMBER 31, | DECEMBER 31, | |||||||
Audit Fees (1) | $ | 1,249,890 | $ | 1,245,500 | ||||
Tax Fees (2) | 269,000 | 251,200 | ||||||
Total | $ | 1,518,890 | $ | 1,496,700 |
(1) | Includes fees for audits of our annual financial statements, reviews of the related quarterly financial statements, and services that are normally provided by the independent accountants in connection with statutory and regulatory filings or engagements, including comfort letters and consents issued in connection with SEC filings and reviews of documents filed with the SEC. Also includes fees incurred for the audit of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. |
(2) | Tax fees relate to professional services rendered for tax compliance, tax return review and preparation and related tax advice. |
Pursuant to the charter of the audit committee, the audit committee is responsible for the oversight of our accounting, reporting and financial practices. The audit committee has the responsibility to select, appoint, engage, oversee, retain, evaluate and terminate our external auditors; pre-approve all audit and non-audit services to be provided, consistent with all applicable laws, to us by our external auditors; and establish the fees and other compensation to be paid to our external auditors.
The audit committee has adopted a policy to pre-approve all audit and permitted non-audit services provided by our principal independent accountants. All audit and non-audit services for 2023 were pre-approved by the audit committee.
The Board unanimously recommends a vote FOR the ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2024.
THE BOARD, ITS COMMITTEES AND ITS COMPENSATION
Board of Directors
The Board presently consists of fiveseven members, threefive of whom are non-management directors. Each director serves a one-year term expiring at each annual meeting of stockholders and lasting until his or her respective successor is duly elected and qualified.
Director Compensation
Directors who are officers of the Company do not receive compensation for their service as directors.
We provide the following compensation for non-management directors:
● | each non-management director receives an annual director’s fee payable in cash equal to $20,000 and an annual grant of restricted stock units; |
● | the chair of the audit committee receives an additional annual fee payable in cash equal to $15,000; |
● | the chair of the compensation committee receives an additional annual fee payable in cash equal to $7,500; |
● | the chair of the nominating and corporate governance committee receives an additional annual fee payable in cash equal to $7,500; and |
● | the lead independent director receives an additional annual fee payable in cash equal to $10,000. |
We also reimburse directors for all expenses incurred in attending boardBoard and committee meetings.
Director Compensation Table
The following table provides information regarding the compensation of our non-management directors for the year ended December 31, 2015.2023.
NAME | FEES EARNED OR PAID IN CASH | TOTAL | ||||||
James Dondero | $ | — | $ | — | ||||
Brian Mitts | — | — | ||||||
Edward Constantino | 45,000 | 45,000 | ||||||
Scott Kavanaugh | 46,875 | 46,875 | ||||||
Arthur Laffer | 33,979 | 33,979 |
NAME | FEES EARNED OR PAID IN CASH | STOCK AWARDS(1) | TOTAL | |||||||||
James Dondero | — | — | — | |||||||||
Brian Mitts | — | — | — | |||||||||
Edward Constantino | $ | 35,000 | $ | 110,754 | $ | 145,754 | ||||||
Scott Kavanaugh | $ | 37,500 | $ | 110,754 | $ | 148,254 | ||||||
Dr. Arthur Laffer | $ | 27,500 | $ | 110,754 | $ | 138,254 | ||||||
Dr. Carol Swain | $ | 20,000 | $ | 110,754 | $ | 130,754 | ||||||
Catherine Wood | $ | 20,000 | $ | 110,754 | $ | 130,754 |
(1) | Consists of restricted stock units granted on March 28, 2023. The restricted stock units that were granted on March 28, 2023 vested on March 28, 2024, the first anniversary of the grant date. The grant date fair value of each award was equal to the closing price of the Company's stock on the date of grant as calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 (“Topic 718”). Pursuant to the rules of the SEC, the amounts shown in this column exclude the impact of estimated forfeitures related to service-based vesting conditions. See Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding the assumptions made in determining these values. As of December 31, 2023, our non-management directors each held 2,794 restricted stock units. |
Director Independence
The Board will review at least annually the independence of each director. During these reviews, the Board will consider transactions and relationships between each director (and his or her immediate family and affiliates) and the Company and its management to determine whether any such transactions or relationships are inconsistent with a determination that the director is independent. This review will be based primarily on responses of the directors to questions in a directors’ and officers’ questionnaire regarding employment, business, familial, compensation and other relationships with the Company and our management. Our Board has determined that each of Edward Constantino, Scott Kavanaugh, andDr. Arthur Laffer, Dr. Carol Swain and Catherine Wood is independent for New York Stock Exchange (“NYSE”) purposes and would not constitute an “interested person” as defined in the 1940 Act.accordance with NYSE rules. As required by NYSE, our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.
Corporate Governance
We believe that good corporate governance is important to ensure that, as a public company, we will be managed for the long-term benefit of our stockholders. We and our Board have reviewed the corporate governance policies and practices of other public companies, as well as those suggested by various authorities in corporate governance. We have also considered the provisions of the Sarbanes-Oxley Act and the rules of the SecuritiesSEC and Exchange Commission (“SEC”) and NYSE.NYSE rules.
Based on this review, we have established and adopted charters for the audit committee, compensation committee and nominating and corporate governance committee, as well as corporate governance guidelines and a code of business conduct and ethics applicable to all of our directors, officers and employees.
Our committee charters, code of business conduct and ethics and corporate governance guidelines are available on our website (www.nexpointliving.com)(nxrt.nexpoint.com) in the Investor RelationsGovernance section. Copies of these documents are also available upon written request to our Corporate Secretary at c/o NexPoint Residential Trust, Inc., 300 Crescent Court, Suite 700 Dallas, Texas 75201, Attn: Corporate Secretary. We will post information regarding any amendment to, or waiver from, our code of business conduct and ethics on our website in the Investor RelationsGovernance section.
Furthermore, our insider trading policy, which is reasonably designed to promote compliance with insider trading laws, rules and regulations, (1) governs the purchase, sale and/or other disposition of the Company’s securities by directors, officers and employees of the Company, and (2) prohibits our directors and certain employees, including all of our executive officers, from engaging in hedging transactions with respect to our securities, including entering into options, warrants, puts, calls or similar instruments or selling our securities short.
The Board periodically reviews its corporate governance policies and practices. Based on these reviews, the Board may adopt changes to policies and practices that are in the best interest of our stockholders and as appropriate to comply with any new SEC or NYSE rules.
Majority Voting Policy
On February 13, 2019, the Board adopted a majority voting policy. The policy provides that any director nominee who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election in an uncontested election is expected to tender his or her resignation as a director of the Board promptly following the certification of the election results. The nominating and corporate governance committee will consider each resignation tendered under this policy and recommend to the Board whether to accept or reject it. The policy requires the Board to act on each tendered resignation, taking into account the nominating and corporate governance committee’s recommendation, within 90 days following the certification of the election results. The policy also requires the Board to promptly disclose (1) its decision whether to accept or reject the director’s tendered resignation and (2) if rejected, the reasons for rejecting the tendered resignation. Any director who tenders his or her resignation pursuant to the policy will not participate in the nominating and corporate governance committee recommendation or Board action regarding whether to accept or reject the tendered resignation.
Board Leadership Structure and Board’sBoard’s Role in Risk Oversight
James Dondero, our President, serves as Chairman of the Board. The Board believes that combining these positions is the most effective leadership structure for the Company at this time. As President, Mr. Dondero is involved in day-to-day operations and is familiar with the opportunities and challenges that the Company faces at any given time. With this insight, he is able to assist the Board in setting strategic priorities, lead the discussion of business and strategic issues and translate Board recommendations into Company operations and policies.
The Board has appointed Scott Kavanaugh as its lead independent director. His key responsibilities in this role include:
● | developing agendas for, and presiding over, the executive sessions of the non-management or independent directors; |
● | reporting the results of the executive sessions to the Chairman; |
● | providing feedback from executive sessions to the Chairman; |
● | serving as a liaison between the independent directors and the Chairman (provided that each director will also be afforded direct and complete access to the Chairman at any such time such director deems necessary or appropriate); |
● | presiding at all meetings of the Board at which the Chairman is not present; |
● | approving information sent to the Board; |
● | approving agendas for Board meetings; |
● | approving Board meeting schedules to ensure that there is sufficient time for discussion of all agenda items; |
● | calling meetings of the independent directors; and |
● | if requested by major stockholders, ensuring that he is available for consultation and direct communication. |
Risk is inherent with every business and we face a number of risks. Management is responsible for the day-to-day management of risks, while the Board, as a whole and through our audit committee, is responsible for overseeing our business and affairs, including overseeing its risk assessment and risk management functions. The
Board has delegated responsibility for reviewing our policies with respect to risk assessment and risk management to our audit committee through its charter. The Board has determined that this oversight responsibility can be most efficiently performed by our audit committee as part of its overall responsibility for providing independent, objective oversight with respect to our accounting and financial reporting functions, internal and external audit functions, and systems of internal controls over financial reporting and legal, ethical and regulatory compliance. Our board of directors has also delegated the oversight of risks related to cybersecurity to our audit committee willand risks related to environmental, social and governance matters to our nominating and corporate governance committee. Our audit and nominating and corporate governance committees regularly report to the Board with respect to its oversight of these areas.
YEARS ENDED | ||||||||
DECEMBER 31, | DECEMBER 31, | |||||||
Audit Fees (1) | $ | 1,249,890 | $ | 1,245,500 | ||||
Tax Fees (2) | 269,000 | 251,200 | ||||||
Total | $ | 1,518,890 | $ | 1,496,700 |
(1) | Includes fees for audits of our annual financial statements, reviews of the related quarterly financial statements, and services that are normally provided by the independent accountants in connection with statutory and regulatory filings or engagements, including comfort letters and consents issued in connection with SEC filings and reviews of documents filed with the SEC. Also includes fees incurred for the audit of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. |
(2) | Tax fees relate to professional services rendered for tax compliance, tax return review and preparation and related tax advice. |
Pursuant to the charter of the audit committee, the audit committee is responsible for the oversight of our accounting, reporting and financial practices. The audit committee has the responsibility to select, appoint, engage, oversee, retain, evaluate and terminate our external auditors; pre-approve all audit and non-audit services to be provided, consistent with all applicable laws, to us by our external auditors; and establish the fees and other compensation to be paid to our external auditors.
The audit committee has adopted a policy to pre-approve all audit and permitted non-audit services provided by our principal independent accountants. All audit and non-audit services for 2023 were pre-approved by the audit committee.
The Board unanimously recommends a vote FOR the ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2024.
THE BOARD, ITS COMMITTEES AND ITS COMPENSATION
Board Meetingsof Directors
The Board held four meetings during 2015.presently consists of seven members, five of whom are non-management directors. Each director serving on the Board in 2015, other than Mr. Dondero, attendedserves a one-year term expiring at least 75% of the total number of meetings of the Board and committees on which they served during the time they served on the Board. Only two Board meetings were held after Mr. Dondero was appointed to the Board, and Mr. Dondero missed only one of these meetings due to a prior commitment. Under our corporate governance guidelines, each director is expected to devote the time necessary to appropriately discharge his responsibilities and to rigorously prepare for, attend and participate in all Board meetings and meetings of committees on which he serves.
Annual Meetings of Stockholders
The Company’s directors are encouraged to attend our annual meeting of stockholders but weand lasting until his or her respective successor is duly elected and qualified.
Director Compensation
Directors who are officers of the Company do not currently havereceive compensation for their service as directors.
We provide the following compensation for non-management directors:
● | each non-management director receives an annual director’s fee payable in cash equal to $20,000 and an annual grant of restricted stock units; |
● | the chair of the audit committee receives an additional annual fee payable in cash equal to $15,000; |
● | the chair of the compensation committee receives an additional annual fee payable in cash equal to $7,500; |
● | the chair of the nominating and corporate governance committee receives an additional annual fee payable in cash equal to $7,500; and |
● | the lead independent director receives an additional annual fee payable in cash equal to $10,000. |
We also reimburse directors for all expenses incurred in attending Board and committee meetings.
Director Compensation Table
The following table provides information regarding the compensation of our non-management directors for the year ended December 31, 2023.
NAME | FEES EARNED OR PAID IN CASH | STOCK AWARDS(1) | TOTAL | |||||||||
James Dondero | — | — | — | |||||||||
Brian Mitts | — | — | — | |||||||||
Edward Constantino | $ | 35,000 | $ | 110,754 | $ | 145,754 | ||||||
Scott Kavanaugh | $ | 37,500 | $ | 110,754 | $ | 148,254 | ||||||
Dr. Arthur Laffer | $ | 27,500 | $ | 110,754 | $ | 138,254 | ||||||
Dr. Carol Swain | $ | 20,000 | $ | 110,754 | $ | 130,754 | ||||||
Catherine Wood | $ | 20,000 | $ | 110,754 | $ | 130,754 |
(1) | Consists of restricted stock units granted on March 28, 2023. The restricted stock units that were granted on March 28, 2023 vested on March 28, 2024, the first anniversary of the grant date. The grant date fair value of each award was equal to the closing price of the Company's stock on the date of grant as calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 (“Topic 718”). Pursuant to the rules of the SEC, the amounts shown in this column exclude the impact of estimated forfeitures related to service-based vesting conditions. See Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding the assumptions made in determining these values. As of December 31, 2023, our non-management directors each held 2,794 restricted stock units. |
Director Independence
The Board will review at least annually the independence of each director. During these reviews, the Board will consider transactions and relationships between each director (and his or her immediate family and affiliates) and the Company and its management to determine whether any such transactions or relationships are inconsistent with a policy relating to directors’ attendance at these meetings.determination that the director is independent. This review will be our first annual meeting of stockholders since we completed our spin-off from NexPoint Credit Strategies Fund (“NHF”) in March 2015 (the “Spin-Off”).
Board Committees
Our Board has four standing committees: an audit committee, a compensation committee, a nominating and corporate governance committee and a conflicts committee. The composition and responsibilities of each committee are described below. Members will servebased primarily on these committees until their resignation or until otherwise determined by the Board.
Audit Committee
Our audit committee consists of Mr. Constantino, Mr. Kavanaugh and Dr. Laffer, with Mr. Constantino serving as chairresponses of the committee. Thedirectors to questions in a directors’ and officers’ questionnaire regarding employment, business, familial, compensation and other relationships with the Company and our management. Our Board has determined that each of Mr.Edward Constantino, Mr.Scott Kavanaugh, Dr. Arthur Laffer, Dr. Carol Swain and Dr. Laffer qualifiesCatherine Wood is independent in accordance with NYSE rules. As required by NYSE, our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.
Corporate Governance
We believe that good corporate governance is important to ensure that, as an “audit committee financial expert”a public company, we will be managed for the long-term benefit of our stockholders. We and our Board have reviewed the corporate governance policies and practices of other public companies, as that term is definedwell as those suggested by various authorities in corporate governance. We have also considered the applicableprovisions of the Sarbanes-Oxley Act and SEC regulations and NYSE corporate governance listing standards. The Board has also determined that each of Mr. Constantino, Mr. Kavanaughrules.
Based on this review, we have established and Dr. Laffer is “financially literate” as that term is defined by the NYSE corporate governance listing standards and is independent as defined by NYSE rules and SEC requirements relating to the independence of audit committee members. The audit committee met four times during 2015. Our audit committee charter details the principal functions ofadopted charters for the audit committee, including oversight related to:
The audit committee is also responsible for engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm, including all audit and non-audit services, reviewing the independence of the independent registered public accounting firm, considering the range of audit and non-audit fees and reviewing the adequacy of our internal accounting controls. The audit committee also prepares the audit committee report required by SEC regulations to be included in our annual proxy statement. A copy of the audit committee charter is available under the Investor Relations section of the Company’s website at www.nexpointliving.com.
Compensation Committee
Our compensation committee consists of Dr. Laffer and Mr. Kavanaugh. The Board has determined that each of Dr. Laffer and Mr. Kavanaugh is independent as defined by NYSE rules and SEC requirements relating to the independence of compensation committee members. The compensation committee met two times during 2015. Our compensation committee charter details the principal functions of the compensation committee, including:
The compensation committee has the sole authority to retain and terminate compensation consultants to assist in the evaluation of our compensation and the sole authority to approve the fees and other retention terms of such compensation consultants. The committee is also able to retain independent counsel and other independent advisors to assist it in carrying out its responsibilities. A copy of the compensation committee charter is available under the Investor Relations section of the Company’s website at www.nexpointliving.com.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee, consists of Mr. Kavanaugh. The Board has determined that Mr. Kavanaugh is independent as defined by NYSE rules. The nominating and corporate governance committee met two times during 2015. Our nominating and corporate governance committee charter details the principal functions of the nominating and corporate governance committee, including:
The nominating and corporate governance committee has the sole authority to retain and terminate any search firm to assist in the identification of director candidates and the sole authority to set the fees and other retention terms of such search firms. The committee is also able to retain independent counsel and other independent advisors to assist it in carrying out its responsibilities. A copy of the nominating and corporate governance committee charter is available under the Investor Relations section of the Company’s website at www.nexpointliving.com.
Conflicts Committee
Our conflicts committee consists of all of the independent directors of the Board. The conflicts committee is responsible for:
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a member of the Board or compensation committee of any related entity that has one or more executive officers serving on our Board or compensation committee.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that appliesapplicable to all of our directors, officers and executive officers, who are employees of our Adviser. Among other matters, ouremployees.
Our committee charters, code of business conduct and ethics is designed to deter wrongdoing and to promote:
A copy of our code of business conduct and ethics is available under the Investor Relations section of the Company’s website at www.nexpointliving.com.
Qualifications for Director Nominees
The nominating and corporate governance committee is responsible for reviewing withguidelines are available on our website (nxrt.nexpoint.com) in the Board,Governance section. Copies of these documents are also available upon written request to our Corporate Secretary at least annually, the appropriate skills and experience required for members of the Board. This assessment includes factors such as judgment, skill, diversity, integrity, experience with businesses and other organizations of comparable size, the interplay of the candidate’s experience with the experience of other board members, and the extent to which the candidate would be a desirable addition to the Board and any committees of the Board.
Director Candidate Recommendations by Stockholders
The nominating and corporate governance committee will review and evaluate any director nominations submitted by stockholders, including reviewing the qualifications of, and making recommendations to the Board regarding, director nominations submitted by stockholders. See “Communications with the Board of Directors” below for additional information on how to submit a director nomination to the Board.
Communications with the Board of Directors
Any stockholder or other interested party who wishes to communicate directly with the Board or any of its members may do so by writing to: Board of Directors, c/o NexPoint Residential Trust, Inc., 300 Crescent Court, Suite 700 Dallas, Texas 75201, Attn: Corporate Secretary. The mailing envelope should clearly indicate whether the communication is intended for the Board as a group, the non-employee directors or a specific director.
The following sets forthWe will post information regarding any amendment to, or waiver from, our code of business conduct and ethics on our website in the executive officers of the Company as of April 22, 2016:Governance section.
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Information regarding Mr. Dondero and Mr. MittsFurthermore, our insider trading policy, which is included above under “Election of Directors.”
Matt McGraner has served as our Executive VP and Chief Investment Officer since March 2015. Mr. McGraner is also a Managing Director at Highland Capital Management, L.P., an affiliate of NXRT. Mr. McGraner joined Highland in May 2013. With over nine years of real estate, private equity and legal experience, his primary responsibilities arereasonably designed to lead the operations of the real estate platform at Highland, as well as source and execute investments, manage risk and develop potential business opportunities, including fundraising, private investments and joint ventures. Mr. McGraner is also a licensed attorney and was formerly an associate at Jones Day from 2011 to 2013, with a practice primarily focused on private equity, real estate and mergers and acquisitions. Prior to Jones Day, Mr. McGraner practiced law at Bryan Cave LLP from 2009 to 2011. Since 2008, Mr. McGraner has led the acquisition of over $1 billion of real estate and advised on $16.3 billion of M&A and private equity transactions. Mr. McGraner also co-founded several small businesses and real estate investment companies before starting his legal career, and served as the director of acquisitions and business development for a commercial real estate investment and development company during law school.
Matthew Goetz has served as our Senior VP-Investments and Asset Management since March 2015. Mr. Goetz is also a Senior Financial Analyst at Highland Capital Management, L.P., an affiliate of NXRT. With over eight years of real estate, private equity and equity trading experience, his primary responsibilities are to asset manage, source acquisitions, manage risk and develop potential business opportunities for Highland, including fundraising, private investments and joint ventures. Before joining Highland Capital Management, L.P. in June 2014, Mr. Goetz was a Senior Financial Analyst in CBRE’s Debt and Structured Finance group from May 2011 to June 2014 where he underwrote over $7 billion and more than 30 million square feet of multifamily, office, and retail commercial real estate. In his time at CBRE, Mr. Goetz and his team closed over $2.5 billion in debt and equity financing. Prior to joining CBRE’s Debt and Structured Finance group, he held roles as an Analyst and Senior Analyst for CBRE’s Recovery and Restructuring Services group from September 2009 to May 2011 where he assisted in the asset management and disposition of over 3,000 real estate owned assets valued at more than $750 million. He also provided commercial real estate consulting services to banks, special servicers, hedge funds, and private equity groups.
Scott Ellington has served as our General Counsel and Secretary since March 2015. Mr. Ellington is also Chief Legal Officer and General Counsel at Highland Capital Management, L.P., an affiliate of NXRT. Prior to joining Highland in May 2007, Mr. Ellington worked as a Real Estate Counsel for Wells Fargo Bank in its Commercial Real Estate Group. Mr. Ellington primarily focused on the due diligence and documentation of commercial real estate credits. Formerly, Mr. Ellington worked from 2002-2004 as Bankruptcy Counsel to Countrywide Financial Corporation.
We are externally managed by NexPoint Real Estate Advisors, L.P. (our “Adviser”), pursuant to an agreement dated March 16, 2015 (the “Advisory Agreement”), by and among the Company, NexPoint Residential Trust Operating Partnership, L.P. (the “OP”) and our Adviser. Because our Advisory Agreement provides that our Adviser is responsible for managing our affairs, our officers, who are employees of our Adviser, have not received, nor do we expect they will in the future receive, any cash compensation from us for their services as our officers. Instead, we pay our Adviser a management fee and an administrative fee based on a percentage of our real estate assets. We also reimburse our Adviser for operating expenses. The aggregate amount of management fees, administrative fees and operating expenses paid to our Adviser is capped at 1.5% of Average Real Estate Assets (as defined below). For the year ended December 31, 2015, we paid $4,288,063 in fees to our Adviser. For additional information regarding the fees we pay to our Adviser, see “Certain Relationships and Related Party Transactions – Our Advisory Agreement.”
We may, subject to stockholder approval of Proposals 4, 6 and 7, compensate our officers and individuals affiliated with our Adviser with equity and equity-based awards or other types of awards in accordance with our Long Term Incentive Plan. For additional information regarding our Long Term Incentive Plan, see “Proposal 6 –Approval of 2016 Long Term Incentive Plan.”
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a summary of transactions that occurred on or were in effect after January 1, 2015 to which we have been a party in which the amount involved exceeded $120,000 and in which any of our executive officers, directors or beneficial holders of more than 5% of our capital stock had or will have a direct or indirect material interest.
Our Advisory Agreement
We are externally managed by our Adviser pursuant to our Advisory Agreement. Our Adviser was organized on September 5, 2014 and is an affiliate of Highland. Below is a summary of the terms of our Advisory Agreement. Subject to stockholder approval, we intend to amend the terms of our Advisory Agreement after the Annual Meeting. For a description of the proposed amendment to our Advisory Agreement, see “Proposal 7 – Approval of Amendment to Advisory Agreement.”
Duties of Our Adviser
Our Advisory Agreement provides that our Adviser will manage our business and affairs in accordance with the policies and guidelines established by our Board and that our Adviser will be under the supervision of our Board. The agreement requires our Adviser to provide us with all services necessary or appropriate to conduct our business, including the following:
Our Adviser is required to obtain the prior approval of our Board in connection with:
For these purposes, “equity” means our cash on hand, exclusive of the proceeds of any debt financing incurred or to be incurred in connection with the relevant investment.
Our Adviser will be prohibited from taking any action that, in its sole judgment, or the sole judgment of our Board, made in good faith:
Management Fee
Our Advisory Agreement requires that we pay our Adviser an annual management fee of 1.00% of our Average Real Estate Assets.
“Average Real Estate Assets” means the average of the aggregate book value of real estate assets before reserves for depreciation or other non-cash reserves, computed by taking the average of the book value of real estate assets at the end of each month (or partial month) (a) for which any fee under the Advisory Agreement is calculated or (b) during the year for which any expense reimbursement under the Advisory Agreement is calculated. Real estate assets is defined broadly in the Advisory Agreement to include, among other things, investments in real estate-related securities and mortgages and reserves for capital expenditures.
In calculating the management fee, we will categorize our Average Real Estate Assets into either “Contributed Assets” or “New Assets.” The management fee on Contributed Assets may not exceed approximately $4.5 million in any calendar year. This cap is intended to limit the fees paid to our Adviser on the Contributed Assets following the Spin-Off to the fees that would have been paid by NHF to its adviser had the Spin-Off not occurred. The management fee on New Assets will not be subject to any maximum amount in any calendar year.
“Contributed Assets” means all of the real estate assets we owned upon the completion of the Spin-Off.
“New Assets” means all of the Average Real Estate Assets other than Contributed Assets.
The management fee will be payable monthly in arrears in cash, unless our Adviser elects, in its sole discretion, to receive all or a portion of such fee in shares of our common stock, subject to the limitations set forth below under “– Limitations on Receiving Shares.” The number of shares issued to our Adviser as payment for the management fee will be equal to the dollar amount of the portion of such fee that is payable in shares divided by the volume-weighted average closing price of shares of our common stock for the ten trading days prior to the end of the month for which such fee will be paid, which we refer to as the fee VWAP. Our Adviser will compute each installment of the management fee as promptly as possible after the end of the month with respect to which such installment is payable. The accrued fees will be payable monthly as promptly as possible after the end of each month during which the Advisory Agreement is in effect. A copy of the computations made by our Adviser to calculate such installment will thereafter, for informational purposes only, promptly be delivered to our Board.
Administrative Fee
Our Advisory Agreement requires that we pay our Adviser an annual administrative fee of 0.20% of the Average Real Estate Assets.
In calculating the administrative fee, we will categorize our Average Real Estate Assets into either Contributed Assets or New Assets. The Administrative Fee on Contributed Assets may not exceed approximately $890,000 in any calendar year. This cap is intended to limit the fees paid to our Adviser on the Contributed Assets following the Spin-Off to the fees that would have been paid by NHF to its adviser had the Spin-Off not occurred. The administrative fee on New Assets will not be subject to any maximum amount in any calendar year.
The administrative fee is payable monthly in arrears in cash, unless our Adviser elects, in its sole discretion, to receive all or a portion of such fee in shares of our common stock, subject to the limitations set forth below under “– Limitations on Receiving Shares.” The number of shares issued to our Adviser as payment for the administrative fee will be equal to the dollar amount of the portion of such fee that is payable in shares divided by the fee VWAP. Our Adviser will compute each installment of the administrative fee as promptly as possible after the end of each month with respect to which such installment is payable. The accrued fees will be payable monthly as promptly as possible after the end of each month during which the Advisory Agreement is in effect. A copy of the computations made by our Adviser to calculate such installment will thereafter, for informational purposes only, promptly be delivered to the Board.
Reimbursement of Expenses
Our Advisory Agreement requires that we reimburse our Adviser for all of its out-of-pocket expenses in performing its services, including legal, accounting, financial, due diligence and other services performed by the Adviser that outside professionals or outside consultants would otherwise perform and will also pay our pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of our Adviser required for our operations (“Adviser Operating Expenses”). Adviser Operating Expenses do not include expenses for the administrative services provided under the Advisory Agreement. We will also reimburse our Adviser for any and all expenses (other than underwriters’ discounts) in connection with an offering, including, without limitation, legal, accounting, printing, mailing and filing fees and other documented offering expenses.
Our Adviser will prepare a statement documenting all expenses incurred during each month, and will deliver such statement to us within 15 business days after the end of each month. Such expenses will be reimbursed by us no later than the 15th business day immediately following the date of delivery of such statement of expenses to us. All expenses payable by us or reimbursable to our Adviser pursuant to the agreement will not be in amounts greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s length basis.
Reimbursement of Adviser Operating Expenses under the Advisory Agreement, administrative fees and the management fees paid to our Adviser will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect). The cap does not limit the reimbursement by the Company of expenses related to securities offerings paid by the Adviser. The cap also does not apply to legal, accounting, financial, due diligence and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation or other events outside the Company’s ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets.
Term of the Advisory Agreement
The Advisory Agreement has a term of two years. After the initial two-year period, the Advisory Agreement shall continue in full force and effect so long as the Advisory Agreement is approved at least annually (a) by either the Board or by a “vote of a majority of the outstanding voting securities” (as defined in the 1940 Act)employees of the Company, and (b) in either event, by the vote of a majority of the directors who would not be “interested persons” (as defined in the 1940 Act) of the Adviser or the Company, cast in person at a meeting called for the purpose of voting on such approval, in accordance with Section 15 of the 1940 Act.
The Advisory Agreement may be terminated at any time, without payment of any penalty, by vote of the Board or by a “vote of a majority the outstanding voting securities” (as defined in the 1940 Act), or by the Adviser, in each case on not more than 60 days’ nor less than 30 days’ prior written notice to the other party. The Advisory Agreement shall automatically and immediately terminate in the event of its “assignment” (as defined in the 1940 Act).
Amendment
The Advisory Agreement may only be amended, waived, discharged or terminated in writing signed by the party against which enforcement of the amendment, waiver, discharge or termination is sought. Any amendment of the Advisory Agreement shall comply with and be approved in accordance with the requirements of Section 15 of the 1940 Act and any applicable rules thereunder, regardless of whether the 1940 Act is otherwise applicable to us.
Limitation on Receiving Shares
The ability of our Adviser to receive shares of our common stock as payment for all or a portion of the management fee and administrative fee due under the terms of our Advisory Agreement will be subject to the following limitations: (a) the ownership of shares of common stock by our Adviser may not violate the ownership limitations set forth in our charter, after giving effect to any exception from such ownership limitations that our Board may grant to our Adviser or its affiliates; and (b) compliance with all applicable restrictions under the U.S. federal securities laws and the NYSE rules. To the extent that payment of any fee in shares of our common stock would result in a violation of the ownership limits set forth in our charter (taking into account any applicable waiver or any restrictions imposed under the U.S. federal securities laws or NYSE rules), all or a portion of such fee payable to our Adviser will be payable in cash to the extent necessary to avoid such violation.
Registration Rights
We entered into a registration rights agreement with our Adviser with respect to any shares of our common stock that our Adviser receives as payment for any fees owed under our Advisory Agreement. These registration rights will require us to file a registration statement with respect to such shares. We agreed to pay all of the expenses relating to registering these securities. The costs associated with registering these securities will not be deducted from the compensation owed to our Adviser.
Liability and Indemnification of Adviser
Under the Advisory Agreement, we are also required to indemnify our Adviser and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding with respect to certain of our Adviser’s acts or omissions.
Other Activities of Adviser and its Affiliates
Our Adviser and its affiliates expect to engage in other business ventures, and as a result, their resources will not be dedicated exclusively to our business. However, pursuant to the Advisory Agreement, our Adviser is required to devote sufficient resources to our administration to discharge its obligations.
Separation and Distribution Agreement
To govern our relationship with NHF after the Spin-Off, the Company, NHF, Freedom REIT, LLC and the OP entered into a Separation and Distribution Agreement on March 11, 2015. The following discussion summarizes the material provisions of the Separation and Distribution Agreement.
Transfer of Assets and Assumption of Liabilities
The Separation and Distribution Agreement identified the assets transferred, liabilities assumed and contracts assigned to each of us and NHF as part of the Spin-Off. Except as expressly set forth in the Separation and Distribution Agreement or any other transaction agreements, all assets were transferred on an “as is,” “where is” basis and the respective transferees bear the economic and legal risks that (a) any conveyance will prove to be insufficient to vest in the transferee good title, free and clear of any security interest, and (b) any necessary consents or governmental approvals were not obtained or that any requirements of laws or judgments were not complied with.
The Distribution
The Separation and Distribution Agreement provided for the consummation of the Spin-Off through apro rata distribution to holders of NHF common shares of one share of our common stock per three common shares of NHF.
Tax Matters
The Separation and Distribution Agreement governs NHF’s and the Company’s respective rights, responsibilities and obligations with respect to taxes, including with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters.
Releases
Except as otherwise provided in the Separation and Distribution Agreement or any other transaction agreements, each party released and forever discharged the other party and its respective subsidiaries and affiliates from all liabilities existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the separation from NHF. The releases do not extend to or amend obligations or liabilities under any agreements between the parties that remain in effect following the separation.
Indemnification
In addition, the Separation and Distribution Agreement provided for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of NHF’s business with NHF. Specifically, each party will indemnify, defend and hold harmless the other party, its affiliates and subsidiaries and its officers, directors, employees and agents for any losses arising out of or otherwise in connection with the liabilities that each such party assumed or retained pursuant to the Separation and Distribution Agreement and the other transaction agreements.
Insurance
The Separation and Distribution Agreement provided for the allocation between the parties of rights and obligations under existing insurance policies with respect to occurrences prior to the distribution and sets forth procedures for the administration of insured claims. In addition, the Separation and Distribution Agreement allocated between the parties the right to proceeds and the obligation to incur certain deductibles under certain
insurance policies. The Separation and Distribution Agreement also provides that NHF will obtain, subject to the terms of the agreement, certain directors and officers insurance policies to apply against certain pre-separation claims, if any.
Dispute Resolution
The Separation and Distribution Agreement contained provisions that govern, except as otherwise provided in any ancillary agreement, the resolution of disputes, controversies or claims that may arise between NHF and us related to the Spin-Off. These provisions contemplated that efforts will be made to resolve disputes, controversies and claims by escalation of the matter to senior management or other mutually agreed representatives of and NHF and us. If such efforts are not successful, either we or NHF may submit the dispute, controversy or claim to binding alternative dispute resolution, subject to the provisions of the Separation and Distribution Agreement.
Other Matters
Other matters governed by the Separation and Distribution Agreement included access to financial and other information and confidentiality.
Indemnification Agreements
We have entered into indemnification agreements with each of(2) prohibits our directors and executive officers. Each indemnification agreement provides that, subject to limited exceptions, and among other things, we will indemnify the director or executive officer to the fullest extent permitted by law for claims arising in his or her capacity as our director or officer.
Relationships with NexBank and NexVantage Title Services
We do our normal banking with NexBank on market terms. We also use NexVantage Title Services in connection with our real estate purchases. NexBank and NexVantage Title Services are both affiliates of our Adviser. The fees we paid for each of these services in 2015 were less than $120,000.
Related Party Transactions Policy
The Board has adopted a Related Party Transaction Policy for the review, approval or ratification of any related person transaction. This policy provides that all related party transactions must be reviewed and approved by the disinterested members of the Audit Committee. The term “related party transaction” refers to any transaction, arrangement or relationship (including charitable contributions andcertain employees, including any series of similar transactions, arrangements or relationships) with the Company in which any Related Party (as defined below) has a direct or indirect material interest, other than: (a) transactions available to employees generally; (b) transactions involving less than $50,000 when aggregated with all related or similar transactions, except if receipt of any amount would result in a director no longer being considered independent under NYSE rules or would disqualify a director from serving as a member of a committee of the Board; (c) transactions involving compensation or indemnification of executive officers and directors duly authorized by the Board or an authorized Board committee; (d) transactions involving reimbursement for routine expenses in accordance with Company policy; and (e) purchases of any products on terms generally available to third parties.
For the purposes of our Related Party Transaction Policy, “Related Parties” include:
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain of our investment, financing and other policies. These policies have been determined by the Board and, in general, may be amended and revised from time to time at the discretion of the Board without notice to or a vote of our stockholders. We intend to disclose any changes in our investment policies in our next required periodic report.
If the Board determines that additional funding is required, we may raise such funds through additional offerings of equity or debt securities or the retention of cash flow (subject to provisions in the Code concerning distribution requirements and the taxability of undistributed REIT taxable income) or a combination of these methods. In the event that the Board determines to raise additional equity capital, it has the authority, without stockholder approval, to issue additional common stock or preferred stock in any manner and on such terms and for such consideration as it deems appropriate, at any time.
We may in the future offer equity or debt securities in exchange for property and repurchase or otherwise reacquire our shares. We intend to borrow money in the ordinary course of business to leverage our business model and acquire additional multifamily properties.
We may in the future, subject to gross income and asset tests necessary for REIT qualification, invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers. We may make such investments for the purpose of exercising control over such entities.
We will engage in the purchase and sale of investments.
We may in the future make loans to third parties in the ordinary course of business for investment purposes in connection with the sale of one or more of our properties.
We do not expect to underwrite the securities of other issuers.
We intend to make available to our stockholders our annual reports including our audited financial statements. We are subject to the information reporting requirements of the Exchange Act. Pursuant to those requirements, we are required to file annual and periodic reports, proxy statements and other information, including audited financial statement with the SEC.
Our Board may change any of these policies without prior notice to, or a vote of, our stockholders.
Investment Policies
We invest in real estate or interests in real estate.
We may in the future invest in real estate mortgages, securities of or interests in persons primarily engaged in real estate activities or investments in other securities.
Investments in Real Estate or Interests in Real Estate
We conduct all of our investment activities through the OP. Our investment objectives are to maximize the cash flow and value of our properties, acquire properties with cash flow growth potential, provide quarterly cash distributions and achieve long-term capital appreciation for our stockholders through increases in the value of our properties. Consistent with our policy to acquire assets for both income and capital gain, we intend to hold all or a majority interest in the properties in our portfolio for investment with a view to long-term appreciation, to engage in the business of directly or indirectly acquiring, owning, operating and selectively developing well-
located Class A and B multifamily properties in large cities and suburban submarkets of large cities primarily in the Southeastern and Southwestern United States and to make occasional sales of the properties consistent with our investment objectives. We have not established a specific policy regarding the relative priority of these investment objectives.
We currently invest primarily in multifamily properties. Future investment or development activities will not be limited to any geographic area, property type or to a specified percentage of our assets. While we may diversify in terms of property locations, size and market, we do not have any limit on the amount or percentage of our assets that may be invested in any one property or any one geographic area. We intend to engage in such future investment activities in a manner that is consistent with the maintenance of our status as a REIT for U.S. federal income tax purposes. Accordingly, certain investments we make may be made through a taxable REIT subsidiary. In addition, we may purchase or lease apartments or other types of properties for long-term investment, expand and improve the properties we presently hold all or a majority interest in or other acquired properties, or sell such properties, in whole or in part, when circumstances warrant.
We may also participate with third parties in property ownership, through joint ventures, funds or other types of co-ownership. We also may acquire real estate or interests in real estate in exchange for the issuance of common stock, units, preferred stock or options to purchase stock. These types of investments may permit us to own interests in larger assets without unduly restricting our diversification and, therefore, provide us with flexibility in structuring our portfolio. We will not, however, enter into a joint venture or other partnership arrangement to make an investment that would not otherwise meet our investment policies.
Equity investments in acquired properties may be subject to existing mortgage financing and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these properties. We will not have a limitation on the number or amount of mortgages which may be placed on any one piece of property. Investments are also subject to our policy not to fall within the definition of an “investment company” under the 1940 Act, by relying on the exclusion provided in Section 3(c)(5)(C) of the 1940 Act, which excludes a real estate program from the definition of an investment company if it is primarily engaged in “purchasing or acquiring … interests in real estate.”
Dispositions. We may dispose of some of our properties if, based upon management’s periodic review of our properties, the Board determines that such action would be in the best interests of us and our stockholders.
Financings and Leverage Policy. In the future, we anticipate using a number of different sources to finance our acquisitions, developments and operations, including, but not limited to, cash flows from operations, asset sales, seller financing, issuance of debt securities, private financings (such as bank credit facilities, which may or may not be secured by our assets), property-level mortgage debt, common or preferred equity issuances or any combination of these sources, to the extent available to us, or other sources that may become available from time to time. Any debt that we incur may be recourse or non-recourse and may be secured or unsecured. We also may take advantage of joint venture or other partnering opportunities as such opportunities arise in order to acquire properties that would otherwise be unavailable to us or if we believe joint ventures or other partnering structures are more favorable to us compared with owning the properties outright. We may use the proceeds of our borrowings to acquire assets, to refinance existing debt or for general corporate purposes.
Although we are not required to maintain any particular leverage ratio, we intend, when appropriate, to employ prudent amounts of leverage and to use debt as a means of providing additional funds to make investments, to refinance existing debt or for general corporate purposes. We expect to use leverage conservatively, assessing the appropriateness of new equity or debt capital based on market conditions, including prudent assumptions regarding future cash flow, the creditworthiness of residents and future rental rates. Our charter and bylaws do not limit the amount of debt that we may incur and there are no limits on the amount of leverage we may use. The Board has not adopted a policy limiting the total amount of debt that we may incur.
The Board will consider a number of factors in evaluating the amount of debt that we may incur. Our decision to use leverage in the future to finance our assets will be at our discretion and will not be subject to the approval of our stockholders, and we are not restricted by our governing documents or otherwise in the amount of leverage that we may use.
Lending Policies. We do not have a policy limiting our ability to make loans to other persons. We may consider offering purchase money financing in connection with the sale of properties where the provision of that financing will increase the value to be received by us for the property sold. We also may make loans to joint ventures in which we participate. Any loan we make will be consistent with maintaining our status as a REIT.
Equity Capital Policies. To the extent that the Board determines to obtain additional capital, we may issue debt or equity securities, including additional units or senior securities of our operating partnership, retain earnings (subject to provisions in the Code requiring distributions of income to maintain REIT qualification) or pursue a combination of these methods. As long as our operating partnership is in existence, we will generally contribute the proceeds of all equity capital raised by us to our operating partnership in exchange for additional interests in our operating partnership, which will dilute the ownership interests of the limited partners in our operating partnership.
Existing stockholders will have no preemptive rights to common or preferred stock or units issued in any securities offering by us, and any such offering might cause a dilution of a stockholder’s investment in us. Although we have no current plans to do so, we may in the future issue shares of common stock or units in connection with acquisitions of property.
We may, under certain circumstances and subject to there being funds legally available, purchase shares of our common stock or other securities in the open market or in private transactions with our stockholders, provided that those purchases are approved by the Board. Any repurchases of shares of our common stock or other securities would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualification as a REIT.
Real Estate-Related Debt and Securities
We may allocate up to approximately 30% of our portfolio to investments in real estate-related debt and securities with the potential for high current income or total returns. These allocations may include first and second mortgages, subordinated, bridge, mezzanine, construction and other loans, as well as debt securities related to or secured by real estate and common and preferred equity securities, which may include securities of other REITs or real estate companies. Subject to the provisions of our charter, some of these investments may be made in connection with other programs sponsored, managed or advised by our affiliates, including our Adviser.
Material Actual and Potential Conflicts of Interest
The following briefly summarizes the material potential and actual conflicts of interest which may arise from the overall investment activity of our Adviser, its clients and its affiliates, but is not intended to be an exhaustive list of all such conflicts. The scope of the activities of the affiliates of our Adviser and the funds and clients advised by affiliates of our Adviser may give rise to conflicts of interest or other restrictions and/or limitations that cannot be foreseen or mitigated at this time.
Advisory Agreement
Under our Advisory Agreement, our Adviser or its affiliates are entitled to fees that are structured in a manner intended to provide incentives to our Adviser to perform in our best interests and in the best interests of our stockholders. However, because our Adviser is entitled to receive substantial compensation regardless of performance, our Adviser’s interests are not wholly aligned with those of our stockholders. In that regard, our
Adviser could be motivated to recommend riskier or more speculative investments that would entitle our Adviser to the highest fees. For example, because management fees payable to our Adviser are based on the total assets of the Company, including any form of leverage, our Adviser may have an incentive to incur a high level of leverage or to acquire properties on less than favorable terms in order to increase the total amount of assets under management. In addition, our Adviser’s ability to receive higher fees and reimbursements depends on our continued investment in real properties. Therefore, the interest of our Adviser and its affiliates in receiving fees may conflict with the interest of our stockholders in earning income on their investment in our common stock.
Externally managed REITs may also have conflicts of interest with their advisers that are not common with self-managed REITs. These conflicts as they relate to us and our Adviser are discussed in the following sections. Our Adviser is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”). Accordingly our Adviser is required to update and disclose its conflicts of interest in filings with the SEC. If Proposal 7 is approved by our stockholders, we expect that our Adviser will not maintain its registration under the Advisers Act.
Other Accounts and Relationships
As part of their regular business, our Adviser, its affiliates and their respective officers, directors, trustees, stockholders, members, partners and employees and their respective funds and investment accounts (collectively, the “Related Parties”) hold, purchase, sell, trade or take other related actions both for their respective accounts and for the accounts of their respective clients, on a principal or agency basis, subject to applicable law including Section 206(3) of the Advisers Act, with respect to loans, securities and other investments and financial instruments of all types. The Related Parties also provide investment advisory services, among other services, and engage in private equity, real estate and capital markets-oriented investment activities. The Related Parties will not be restricted in their performance of any such services or in the types of debt, equity, real estate or other investments which they may make. The Related Parties may have economic interests in or other relationships with respect to investments made by us. In particular, the Related Parties may make and/or hold an investment, including investments in securities, that may compete with, be pari passu, senior or junior in ranking to an, investment, including investments in securities, made and/or held by us or in which partners, security holders, members, officers, directors, agents or employees of such Related Parties serve on boards of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result in restrictions on transactions by us and otherwise create conflicts of interest for us. In such instances, the Related Parties may in their discretion make investment recommendations and decisions that may be the same as or different from those made with respect to our investments. In connection with any such activities described above, the Related Parties may hold, purchase, sell, trade or take other related actions in securities or investments of a type that may be suitable for us. The Related Parties will not be required to offer such securities or investments to us or provide notice of such activities to us. In addition, in managing our portfolio, our Adviser may take into account its relationship or the relationships of its affiliates with obligors and their respective affiliates, which may create conflicts of interest. Furthermore, in connection with actions taken in the ordinary course of business of our Adviser in accordance with its fiduciary duties to its other clients, our Adviser may take, or be required to take, actions which adversely affect our interests.
The Related Parties have invested and may continue to invest in investments that would also be appropriate for us. Such investments may be different from those made on our behalf. Neither our Adviser nor any Related Party has any duty, in making or maintaining such investments, to act in a way that is favorable to us or to offer any such opportunity to us, subject to our Adviser’s allocation policy set forth below. The investment policies, fee arrangements and other circumstances applicable to such other parties may vary from those applicable to us. Our Adviser and/or any Related Party may also provide advisory or other services for a customary fee with respect to investments made or held by us, and neither we nor our stockholders shall have any right to such fees. Our Adviser and/or any Related Party may also have ongoing relationships with, render services to or engage in transactions with other clients, including NexPoint Multifamily Realty Trust, Inc. and other REITs, who make investments of a similar nature as we do, and with companies whose securities or properties are acquired by us and may own equity or debt securities issued by our joint ventures. In connection with the foregoing activities our Adviser and/or any Related Party may from time to time come into possession of material nonpublic
information that limits the ability of our Adviser to effect a transaction for us, and our investments may be constrained as a consequence of our Adviser’s inability to use such information for advisory purposes or otherwise to effect transactions that otherwise may have been initiated on behalf of its clients, including us. In addition, officers or affiliates of our Adviser and/or Related Parties may possess information relating to our joint ventures that is not known to the individuals at our Adviser responsible for monitoring our joint ventures and performing the other obligations under the Advisory Agreement.
The Related Parties currently provide services to NexPoint Multifamily Realty Trust, Inc. and may in the future provide services to other REITs or funds that compete with us for similar investments.
Although the professional staff of our Adviser will devote as much time to us as our Adviser deems appropriate to perform its duties in accordance with the Advisory Agreement and in accordance with reasonable commercial standards, the staff may have conflicts in allocating its time and services among us and our Adviser’s or any Related Parties’ other accounts. The Advisory Agreement places restrictions on our Adviser’s ability to buy and sell investments for us. Accordingly, during certain periods or in certain circumstances, our Adviser may be unable as a result of such restrictions to buy or sell investments or to take other actions that it might consider to be in the best interests of us and our stockholders.
The directors, officers, employees and agents of the Related Parties, and our Adviser may, subject to applicable law, serve as directors (whether supervisory or managing), officers, employees, partners, agents, nominees or signatories, and receive arm’s length fees in connection with such service, for us or any Related Party, or for any of our joint ventures or any affiliate thereof, and neither us nor our stockholders shall have the right to any such fees.
The Related Parties serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of other investment funds managed by our Adviser or its affiliates. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests or the best interests of our stockholders. We may compete with other entities managed by our Adviser and its affiliates for capital and investment opportunities.
There is no limitation or restriction on our Adviser or any of its Related Parties with regard to acting as investment manager (or in a similar role) to other parties or persons. This and other future activities of our Adviser and/or its Related Parties may give rise to additional conflicts of interest. Such conflicts may be related to obligations that our Adviser or its affiliates have to other clients.
Subject to prior approval of our Board, certain Related Parties, including NexBank SSB and Governance Re among others, may provide banking, agency, insurance and other services to us and our operating affiliates for customary fees, and neither us, nor our subsidiaries will have a right to any such fees.
Allocation of Investment Opportunities
In addition, the Related Parties may, from time to time, be presented with investment opportunities that fall within our investment objectives and the investment objectives of other clients, funds or other investment accounts managed by the Related Parties, and in such circumstances, the Related Parties expect to allocate such opportunities among us and such other clients, funds or other investment accounts on a basis that the Related Parties determine in good faith is appropriate taking into consideration such factors as the fiduciary duties owed to us and such other clients, funds or other investment accounts, our primary mandates and the primary mandates of such other clients, funds or other investment accounts, the capital available to us and such other clients, funds or other investment accounts, any restrictions on investment, the sourcing of the transaction, the size of the transaction, the amount of potential follow-on investing that may be required for such investment and our other investments and the other investments of such other clients, funds or other investment accounts, the relation of such opportunity to our investment strategy and the strategy of such other clients, funds or other investment
accounts, reasons of portfolio balance and any other considerations deemed relevant by the Related Parties in good faith. Our Adviser allocates investment opportunities across the entities for which such opportunities are appropriate, consistent with (1) its internal conflict of interest and allocation policies and (2) the requirements of the Advisers Act. Our Adviser seeks to allocate investment opportunities among such entities in a manner that is fair and equitable over time and consistent with its allocation policy. However, there is no assurance that such investment opportunities will be allocated to us fairly or equitably in the short-term or over time and there can be no assurance that we will be able to participate in all such investment opportunities that are suitable for us.
Cross Transactions and Principal Transactions
As further described below, our Adviser may effect client cross-transactions where our Adviser causes a transaction to be effected between us and another client advised by our Adviser or any of its affiliates. Our Adviser may engage in a client cross-transaction involving us any time that our Adviser believes such transaction to be fair to us and the other client of our Adviser or its affiliates in accordance with our Adviser’s internal written cross-transaction policies and procedures.
As further described below, our Adviser may effect principal transactions where we may make and/or hold an investment, including an investment in securities, in which our Adviser and/or its affiliates have a debt, equity or participation interest, in each case in accordance with applicable law and with our Adviser’s internal written policies and procedures for principal transactions, which may include our Adviser obtaining our consent and approval prior to engaging in any such principal transaction between us and our Adviser or its affiliates.
Our Adviser may direct us to acquire or dispose of investments in cross trades between us and other clients of our Adviser or its affiliates in accordance with applicable legal and regulatory requirements. In addition, we may make and/or hold an investment, including an investment in securities, in which our Adviser and/or its affiliates have a debt, equity or participation interest, and the holding and sale of such investments by us may enhance the profitability of our Adviser’s own investments in such companies. Moreover, we and our operating affiliates may invest in assets originated by, or enter into loans, borrowings and/or financings with our Adviser or its affiliates, including but not limited to NexBank, including in primary and secondary transactions with respect to which the Adviser or a Related Party may receive customary fees from the applicable issuer, and neither we nor our subsidiaries shall have the right to any such fees. In each such case, our Adviser and such affiliates may have a potentially conflicting division of loyalties and responsibilities with respect to us and the other parties to such investment. Under certain circumstances, our Adviser and its affiliates may determine that it is appropriate to avoid such conflicts by selling an investment at a fair value that has been calculated pursuant to our Adviser’s valuation procedures to another fund managed or advised by our Adviser or such affiliates. In addition, our Adviser may enter into agency cross-transactions where it or any of its affiliates acts as a broker for us and for the other party to the transaction, to the extent permitted under applicable law. Our Adviser may obtain our written consent as provided herein if any such transaction requires the consent of the Board, including a majority of independent directors, under Section 206(3) of the Advisers Act.
Participation in Creditor Committees, Underwriting and Other Activities
Our Adviser and/or its Related Parties may participate in creditors or other committees with respect to the bankruptcy, restructuring or workout of our joint ventures. In such circumstances, our Adviser may take positions on behalf of itself or Related Parties that are adverse to our interests.
Our Adviser and/or its Related Parties may act as an underwriter, arranger or placement agent, or otherwise participate in the origination, structuring, negotiation, syndication or offering of investments purchased by us. Such transactions are on an arm’s-length basis and may be subject to arm’s-length fees. There is no expectation for preferential access to transactions involving investments that are underwritten, originated, arranged or placed by our Adviser and/or its Related Parties and neither we nor our stockholders shall have the right to any such fees.
Material Non-Public Information
There are generally no ethical screens or information barriers among our Adviser and certain of its affiliates of the type that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. If our Adviser, any of its personnel or its affiliates were to receive material non-public information about an investment or issuer, or have an interest in causing us to acquire a particular investment, our Adviser may be prevented from causing us to purchase or sell such asset due to internal restrictions imposed on our Adviser. Notwithstanding the maintenance of certain internal controls relating to the management of material non-public information, it is possible that such controls could fail and result in our Adviser, or one of its investment professionals, buying or selling an asset while, at least constructively, in possession of material non-public information. Inadvertent trading on material non-public information could have adverse effects on our Adviser’s reputation, result in the imposition of regulatory or financial sanctions, and as a consequence, negatively impact our Adviser’s ability to perform its investment management services to us. In addition, while our Adviser and certain of its affiliates currently operate without information barriers on an integrated basis, such entities could be required by certain regulations, or decide that it is advisable, to establish information barriers. In such event, our Adviser’s ability to operate as an integrated platform could also be impaired, which would limit our Adviser’s access to personnel of its affiliates and potentially impair its ability to manage our investments.
Other Benefits to Our Adviser
In addition to the compensation provided to our Adviser by the Advisory Agreement and any long-term incentive plan that stockholders may adopt, our Adviser may also receive reputational benefits from the Spin-Off and our future growth through capital-raising transactions and acquisitions. Our Adviser also has an incentive to raise capital and cause us to acquire additional real estate assets, which would then contribute to the uncapped portion of the management fee and administrative fee. The reputational benefit to our Adviser from the successful Spin-Off and our future growth could assist our Adviser and its affiliates in pursuing other real estate investments. These investments could be made through other entities managed by our Adviser or its affiliates, and there can be no assurance that we will be able to participate in all such investment opportunities.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL HOLDERS
The tables below set forth the beneficial ownership information of our common stock as of April 22, 2016 for:
Unless otherwise noted below, the address of the persons and entities listed on the table is the address of our Adviser’s office, 300 Crescent Court, Suite 700, Dallas, Texas 75201. We have determined beneficial ownershipfrom engaging in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment powerhedging transactions with respect to all shares of common stock reflected as beneficially owned, subjectour securities, including entering into options, warrants, puts, calls or similar instruments or selling our securities short.
The Board periodically reviews its corporate governance policies and practices. Based on these reviews, the Board may adopt changes to applicable community property laws.
Beneficial ownershippolicies and percentage of beneficial ownership is based on 21,293,824practices that are in the best interest of our common stock outstanding at April 22, 2016. Sharesstockholders and as appropriate to comply with any new SEC or NYSE rules.
Majority Voting Policy
On February 13, 2019, the Board adopted a majority voting policy. The policy provides that any director nominee who receives a greater number of common stock subjectvotes “withheld” from his or her election than votes “for” his or her election in an uncontested election is expected to options currently exercisabletender his or exercisableher resignation as a director of the Board promptly following the certification of the election results. The nominating and corporate governance committee will consider each resignation tendered under this policy and recommend to the Board whether to accept or reject it. The policy requires the Board to act on each tendered resignation, taking into account the nominating and corporate governance committee’s recommendation, within 6090 days following the certification of April 22, 2016 are deemedthe election results. The policy also requires the Board to be outstandingpromptly disclose (1) its decision whether to accept or reject the director’s tendered resignation and beneficially owned by(2) if rejected, the person holdingreasons for rejecting the optionstendered resignation. Any director who tenders his or her resignation pursuant to the policy will not participate in the nominating and corporate governance committee recommendation or Board action regarding whether to accept or reject the tendered resignation.
Board Leadership Structure and Board’s Role in Risk Oversight
James Dondero, our President, serves as Chairman of the Board. The Board believes that combining these positions is the most effective leadership structure for the purpose of computing the percentage of beneficial ownership of that person and any group of which that person is a member, but are not deemed outstanding for the purpose of computing the percentage of beneficial ownership for any other person.
Directors and Named Executive Officers
NAME | BENEFICIALLY OWNED | PERCENT OF CLASS | ||||||
5% Stockholders: | ||||||||
Highland (1) | 3,490,321.37 | 16.4 | % | |||||
Executive Officers and Directors | ||||||||
James Dondero (1) | 3,490,321.37 | 16.4 | % | |||||
Brian Mitts | 8,159.16 | * | ||||||
Matt McGraner (2) | 23,534.173 | * | ||||||
Matthew Goetz | 6,180.44 | * | ||||||
Scott Ellington | 1,792 | * | ||||||
Edward Constantino | 7,360 | * | ||||||
Scott Kavanaugh | — | * | ||||||
Arthur Laffer | 15,000 | * | ||||||
All Directors and Executive Officers as a group (8 persons) (3) | 3,544,847.14 | 16.6 | % |
Name of Reporting Person | Sole Voting Power | Shared Voting Power | Sole Dispositive Power | Shared Dispositive Power | ||||||||||||
Highland Capital Management, L.P. | 472,761.05 | 1,121,139.39 | 472,761.05 | 1,121,139.39 | ||||||||||||
James D. Dondero | 23,742.02 | 3,490,321.37 | 23,742.02 | 3,490,321.37 | ||||||||||||
Nancy Marie Dondero | 1,816,977.91 | 7,500 | 1,816,977.91 | 7,500 |
The shares held by Highland are held both directly and indirectly through advised accounts.Company at this time. As President, Mr. Dondero is involved in day-to-day operations and is familiar with the Presidentopportunities and challenges that the directorCompany faces at any given time. With this insight, he is able to assist the Board in setting strategic priorities, lead the discussion of Strand Advisors, Inc., Highland’s general partner,business and may be deemed to be an indirect beneficial owner of the shares held by Highland. Mr. Dondero disclaims beneficial ownership of such shares. strategic issues and translate Board recommendations into Company operations and policies.
The shares held by Mr. Dondero are held both directly and indirectly through Highland (as describedBoard has appointed Scott Kavanaugh as its lead independent director. His key responsibilities in the previous sentence), an employee benefit plan and a trust. Also included are shares that Mr. Dondero has the right to acquire beneficial ownership of that are held by a trust for which he does not serve as trustee. The shares held by Ms. Dondero are held by a trust of which she is the trustee. Ms. Dondero is the sister of Mr. Dondero.this role include:
● | developing agendas for, and |
● | reporting the results of the executive sessions to |
● | providing feedback from executive sessions to |
● | serving as a liaison between the |
● | presiding at all meetings of the Board at which the Chairman is not present; |
● | approving information sent to the Board; |
● | approving agendas for Board meetings; |
● | approving Board meeting schedules to ensure that there is sufficient time for discussion of all agenda items; |
● | calling meetings of the independent directors; and |
● | if requested by |
TheRisk is inherent with every business and we face a number of risks. Management is responsible for the day-to-day management of risks, while the Board, as a whole and through our audit committee, reviewedis responsible for overseeing our business and discussedaffairs, including overseeing its risk assessment and risk management functions. The Board has delegated responsibility for reviewing our policies with bothrespect to risk assessment and risk management and the Company’s independent registered public accounting firm, KPMG, the audited financial statements of the Company for the year ended December 31, 2015 prior to their issuance. These reviews included discussion with the independent registered public accounting firm of matters required to be discussed by the Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T, as currently in effect. Theour audit committee also discussed withthrough its independent registered public accounting firm matters relating to its independence and received the written disclosures and letter from KPMG requiredcharter. The Board has determined that this oversight responsibility can be most efficiently performed by applicable requirements of the PCAOB regarding the independent accountant’s communications with theour audit committee concerning independence.
Taking allas part of these reviewsits overall responsibility for providing independent, objective oversight with respect to our accounting and discussions into account, allfinancial reporting functions, internal and external audit functions, systems of internal controls over financial reporting and legal, ethical and regulatory compliance. Our board of directors has also delegated the oversight of risks related to cybersecurity to our audit committee members, whose names are listed below, recommendedand risks related to environmental, social and governance matters to our nominating and corporate governance committee. Our audit and nominating and corporate governance committees regularly report to the Board that it approve the inclusionwith respect to its oversight of the Company’s audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for filing with the SEC.
Members of the Audit Committeethese areas.
|
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers and directors and persons who own more than 10% of a registered class of its equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the Company, the Company believes that during 2015, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% stockholders were in compliance with Section 16(a).
RATIFICATION OF APPOINTMENT OF
KPMG LLP AS THE COMPANY’S INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR 2016
The audit committee has appointed KPMG as the Company’s independent registered public accounting firm for 2016. The Board is asking stockholders to ratify this appointment. SEC regulations and the NYSE listing requirements require the Company’s independent registered public accounting firm to be engaged, retained and supervised by the audit committee. However, the Board considers the selection of an independent registered public accounting firm to be an important matter to stockholders. Accordingly, the Board considers a proposal for stockholders to ratify this appointment to be an opportunity for stockholders to provide input to the audit committee and the Board on a key corporate governance issue.
Representatives of KPMG are expected to be present at the Annual Meeting and will have the opportunity to make a statement. They will also be available to respond to appropriate questions.
Selection. KPMG served as the Company’s independent registered public accounting firm for 2015 and has been selected by the audit committee to serve as the Company’s independent registered public accounting firm for 2016.
Audit and Non-Audit Fees. The following table presents fees for audit services rendered by KPMG for the audit of the Company’s annual financial statements for 20152023 and 2014,2022, and fees billed for other services rendered by KPMG.
YEARS ENDED | YEARS ENDED | |||||||||||||||
DECEMBER 31, 2015 | DECEMBER 31, 2014 | DECEMBER 31, | DECEMBER 31, | |||||||||||||
Audit Fees (1) | $ | 720,000 | $ | 723,577 | $ | 1,249,890 | $ | 1,245,500 | ||||||||
Audit-Related Fees | 0 | 0 | ||||||||||||||
Tax Fees (2) | 64,000 | 0 | 269,000 | 251,200 | ||||||||||||
|
| |||||||||||||||
Total | $ | 803,000 | $ | 723,577 | $ | 1,518,890 | $ | 1,496,700 | ||||||||
|
|
(1) | Includes fees for audits of our annual financial statements, reviews of the related quarterly financial statements, and services that are normally provided by the independent accountants in connection with statutory and regulatory filings or engagements, including comfort letters and consents issued in connection with SEC filings and reviews of documents filed with the SEC. Also includes fees incurred for the audit of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. |
(2) | Tax fees relate to professional services rendered for tax compliance, tax return review and preparation and related tax advice. |
Pursuant to the charter of the audit committee, the audit committee is responsible for the oversight of our accounting, reporting and financial practices. The audit committee has the responsibility to select, appoint, engage, oversee, retain, evaluate and terminate our external auditors; pre-approve all audit and non-audit services to be provided, consistent with all applicable laws, to us by our external auditors; and establish the fees and other compensation to be paid to our external auditors.
The audit committee has adopted a policy to pre-approve all audit and permitted non-audit services provided by our principal independent accountants. All audit and non-audit services for 20152023 were pre-approved by the audit committee.
The Board unanimously recommends a vote FOR the ratification of the appointment of KPMG LLP as the Company’sCompany’s independent registered public accounting firm.firm for 2024.
PROPOSAL 3 –THE BOARD, ITS COMMITTEES AND ITS COMPENSATION
APPROVAL OF PROPOSED CHARTER AMENDMENT 1
OverviewBoard of Directors
The Board presently consists of seven members, five of whom are non-management directors. Each director serves a one-year term expiring at each annual meeting of stockholders and lasting until his or her respective successor is duly elected and qualified.
Director Compensation
Directors who are officers of the Company do not receive compensation for their service as directors.
We provide the following compensation for non-management directors:
● | each non-management director receives an annual director’s fee payable in cash equal to $20,000 and an annual grant of restricted stock units; |
● | the chair of the audit committee receives an additional annual fee payable in cash equal to $15,000; |
● | the chair of the compensation committee receives an additional annual fee payable in cash equal to $7,500; |
● | the chair of the nominating and corporate governance committee receives an additional annual fee payable in cash equal to $7,500; and |
● | the lead independent director receives an additional annual fee payable in cash equal to $10,000. |
We also reimburse directors for all expenses incurred in attending Board and committee meetings.
Director Compensation Table
The following table provides information regarding the compensation of our non-management directors for the year ended December 31, 2023.
NAME | FEES EARNED OR PAID IN CASH | STOCK AWARDS(1) | TOTAL | |||||||||
James Dondero | — | — | — | |||||||||
Brian Mitts | — | — | — | |||||||||
Edward Constantino | $ | 35,000 | $ | 110,754 | $ | 145,754 | ||||||
Scott Kavanaugh | $ | 37,500 | $ | 110,754 | $ | 148,254 | ||||||
Dr. Arthur Laffer | $ | 27,500 | $ | 110,754 | $ | 138,254 | ||||||
Dr. Carol Swain | $ | 20,000 | $ | 110,754 | $ | 130,754 | ||||||
Catherine Wood | $ | 20,000 | $ | 110,754 | $ | 130,754 |
(1) | Consists of restricted stock units granted on March 28, 2023. The restricted stock units that were granted on March 28, 2023 vested on March 28, 2024, the first anniversary of the grant date. The grant date fair value of each award was equal to the closing price of the Company's stock on the date of grant as calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 (“Topic 718”). Pursuant to the rules of the SEC, the amounts shown in this column exclude the impact of estimated forfeitures related to service-based vesting conditions. See Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding the assumptions made in determining these values. As of December 31, 2023, our non-management directors each held 2,794 restricted stock units. |
Director Independence
The Board will review at least annually the independence of each director. During these reviews, the Board will consider transactions and relationships between each director (and his or her immediate family and affiliates) and the Company and its management to determine whether any such transactions or relationships are askinginconsistent with a determination that the director is independent. This review will be based primarily on responses of the directors to questions in a directors’ and officers’ questionnaire regarding employment, business, familial, compensation and other relationships with the Company and our management. Our Board has determined that each of Edward Constantino, Scott Kavanaugh, Dr. Arthur Laffer, Dr. Carol Swain and Catherine Wood is independent in accordance with NYSE rules. As required by NYSE, our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.
Corporate Governance
We believe that good corporate governance is important to ensure that, as a public company, we will be managed for the long-term benefit of our stockholders. We and our Board have reviewed the corporate governance policies and practices of other public companies, as well as those suggested by various authorities in corporate governance. We have also considered the provisions of the Sarbanes-Oxley Act and SEC and NYSE rules.
Based on this review, we have established and adopted charters for the audit committee, compensation committee and nominating and corporate governance committee, as well as corporate governance guidelines and a code of business conduct and ethics applicable to all of our directors, officers and employees.
Our committee charters, code of business conduct and ethics and corporate governance guidelines are available on our website (nxrt.nexpoint.com) in the Governance section. Copies of these documents are also available upon written request to our Corporate Secretary at c/o NexPoint Residential Trust, Inc., 300 Crescent Court, Suite 700 Dallas, Texas 75201, Attn: Corporate Secretary. We will post information regarding any amendment to, or waiver from, our code of business conduct and ethics on our website in the Governance section.
Furthermore, our insider trading policy, which is reasonably designed to promote compliance with insider trading laws, rules and regulations, (1) governs the purchase, sale and/or other disposition of the Company’s securities by directors, officers and employees of the Company, and (2) prohibits our directors and certain employees, including all of our executive officers, from engaging in hedging transactions with respect to our securities, including entering into options, warrants, puts, calls or similar instruments or selling our securities short.
The Board periodically reviews its corporate governance policies and practices. Based on these reviews, the Board may adopt changes to policies and practices that are in the best interest of our stockholders to vote to approve an amendment to the Company’s Charter to remove a provision requiring the Companyand as appropriate to comply with certainany new SEC or NYSE rules.
Majority Voting Policy
On February 13, 2019, the Board adopted a majority voting policy. The policy provides that any director independence requirementsnominee who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election in an uncontested election is expected to tender his or her resignation as a director of the 1940 Act (“Proposed Charter Amendment 1”).Board promptly following the certification of the election results. The nominating and corporate governance committee will consider each resignation tendered under this policy and recommend to the Board whether to accept or reject it. The policy requires the Board to act on each tendered resignation, taking into account the nominating and corporate governance committee’s recommendation, within 90 days following the certification of the election results. The policy also requires the Board to promptly disclose (1) its decision whether to accept or reject the director’s tendered resignation and (2) if rejected, the reasons for rejecting the tendered resignation. Any director who tenders his or her resignation pursuant to the policy will not participate in the nominating and corporate governance committee recommendation or Board action regarding whether to accept or reject the tendered resignation.
Board Leadership Structure and Board’s Role in Risk Oversight
James Dondero, our President, serves as Chairman of the Board. The Board believes that combining these positions is the most effective leadership structure for the Company at this time. As President, Mr. Dondero is involved in day-to-day operations and is familiar with the opportunities and challenges that the Company faces at any given time. With this insight, he is able to assist the Board in setting strategic priorities, lead the discussion of business and strategic issues and translate Board recommendations into Company operations and policies.
The Board has appointed Scott Kavanaugh as its lead independent director. His key responsibilities in this role include:
● | developing agendas for, and presiding over, the executive sessions of the non-management or independent directors; |
● | reporting the results of the executive sessions to the Chairman; |
● | providing feedback from executive sessions to the Chairman; |
● | serving as a liaison between the independent directors and the Chairman (provided that each director will also be afforded direct and complete access to the Chairman at any such time such director deems necessary or appropriate); |
● | presiding at all meetings of the Board at which the Chairman is not present; |
● | approving information sent to the Board; |
● | approving agendas for Board meetings; |
● | approving Board meeting schedules to ensure that there is sufficient time for discussion of all agenda items; |
● | calling meetings of the independent directors; and |
● | if requested by major stockholders, ensuring that he is available for consultation and direct communication. |
Risk is inherent with every business and we face a number of risks. Management is responsible for the day-to-day management of risks, while the Board, as a whole and through our audit committee, is responsible for overseeing our business and affairs, including overseeing its risk assessment and risk management functions. The Board has delegated responsibility for reviewing our policies with respect to risk assessment and risk management to our audit committee through its charter. The Board has determined that this oversight responsibility can be most efficiently performed by our audit committee as part of its overall responsibility for providing independent, objective oversight with respect to our accounting and financial reporting functions, internal and external audit functions, systems of internal controls over financial reporting and legal, ethical and regulatory compliance. Our board of directors has also delegated the oversight of risks related to cybersecurity to our audit committee and risks related to environmental, social and governance matters to our nominating and corporate governance committee. Our audit and nominating and corporate governance committees regularly report to the Board with respect to its oversight of these areas.
Board Meetings
The Board held six meetings during the fiscal year ended December 31, 2023. Each director serving on the Board in 2023 attended at least 75% of the total number of meetings of the Board and the total number of meetings of the committees on which he or she served during the time they served on the Board. Under our corporate governance guidelines, each director is expected to devote the time necessary to appropriately discharge his or her responsibilities and to prepare for and, to the extent possible, attend and participate in all meetings of the Board and Board committees on which he or she serves.
Director Attendance at Annual Meetings of Stockholders
Under our corporate governance guidelines, each director is expected to attend the annual meeting of stockholders. All but one of the Company’s directors at the time of the 2023 annual meeting of stockholders attended the annual meeting.
Board Committees
Our Board has an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by the Board.
Audit Committee
Our audit committee consists of Mr. Constantino, Mr. Kavanaugh, Dr. Laffer, Dr. Swain and Ms. Wood, with Mr. Constantino serving as chair of the committee. The Board has determined that each of Mr. Constantino, Mr. Kavanaugh, Dr. Laffer and Dr. Swain qualify as an “audit committee financial expert” as that term is defined by the applicable SEC regulations. The Board has also determined that each of Mr. Constantino, Mr. Kavanaugh, Dr. Laffer, Dr. Swain and Ms. Wood is “financially literate” as required by the NYSE rules and is independent as defined by NYSE rules and SEC requirements relating to the independence of audit committee members. Our Board has determined that Mr. Constantino’s, Mr. Kavanaugh’s, Dr. Laffer’s, Dr. Swain’s and Ms. Wood’s simultaneous service on the audit committees of more than three public companies would not impair his or her ability to effectively serve on our audit committee. The audit committee met five times during the fiscal year ended December 31, 2023. Our audit committee charter details the principal functions of the audit committee, including oversight related to:
● | our accounting and financial reporting processes; |
● | the integrity of our consolidated financial statements; |
● | our systems of disclosure controls and procedures and internal control over financial reporting; |
● | our compliance with financial, legal and regulatory requirements; |
● | the performance of our internal audit function; |
● | our overall risk assessment and management; and |
● | our process for assessing, identifying and managing risks from cybersecurity threats as well as any material effects, or reasonably likely material effects, of risks from cybersecurity threats and previous cybersecurity incidents |
The audit committee is also responsible for engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm, including all audit and non-audit services, reviewing the independence of the independent registered public accounting firm, considering the range of audit and non-audit fees and reviewing the adequacy of our internal accounting controls. The audit committee also prepares the audit committee report required by SEC regulations to be included in our annual proxy statement. A copy of the audit committee charter is available under the Governance section of the Company’s website at nxrt.nexpoint.com.
Compensation Committee
Our compensation committee consists of Dr. Laffer, Mr. Kavanaugh, Mr. Constantino, Dr. Swain and Ms. Wood, with Dr. Laffer serving as chair of the committee. The Board has determined that each of Dr. Laffer, Mr. Kavanaugh, Mr. Constantino, Dr. Swain and Ms. Wood is independent as defined by NYSE rules and SEC requirements relating to the independence of compensation committee members. The compensation committee met five times during the fiscal year ended December 31, 2023. Our compensation committee charter details the principal functions of the compensation committee, including:
● | reviewing our compensation policies and plans; |
● | implementing and administering a long-term incentive plan; |
● | evaluating the terms of the Advisory Agreement and the performance of the Adviser; |
● | assisting management in complying with our proxy statement and annual report disclosure requirements; |
● | producing a report on compensation to be included in our annual proxy statement, as required; and |
● | reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors. |
The compensation committee has the sole authority to retain and terminate compensation consultants to assist in the evaluation of our compensation and the sole authority to approve the fees and other retention terms of such compensation consultants. The committee may, in its discretion, delegate specific duties and responsibilities to a subcommittee or an individual committee member, to the extent permitted by applicable law. The committee is also able to retain independent counsel and other independent advisors to assist it in carrying out its responsibilities. A copy of the compensation committee charter is available under the Governance section of the Company’s website at nxrt.nexpoint.com.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Mr. Kavanaugh, Mr. Constantino, Dr. Laffer, Dr. Swain and Ms. Wood, with Mr. Kavanaugh serving as chair of the committee. The Board has determined that each of Mr. Kavanaugh, Mr. Constantino, Dr. Laffer, Dr. Swain and Ms. Wood is independent as defined by NYSE rules. The nominating and corporate governance committee met fivetimes during the fiscal year ended December 31, 2023. Our nominating and corporate governance committee charter details the principal functions of the nominating and corporate governance committee, including:
● | reviewing the characteristics of current Board members, including diversity characteristics and determining if any characteristics are lacking and using these measures in identifying and recommending to the full Board qualified candidates for election as directors; |
● | developing and recommending to the Board corporate governance guidelines and implementing and monitoring such guidelines; |
● | reviewing and making recommendations on matters involving the general operation of the Board, including board size and composition, and committee composition and structure; |
● | recommending to the Board nominees for each committee of the Board; |
● | annually facilitating the assessment of the Board’s performance, as required by applicable law, regulations and the NYSE corporate governance listing standards; |
● | annually reviewing and making recommendations to the Board regarding revisions to the corporate governance guidelines and the code of business conduct and ethics; |
● | overseeing succession planning; and |
● | overseeing the Company’s strategy, initiatives, risks, opportunities and reporting on material environmental, social and governance matters. |
The nominating and corporate governance committee has the sole authority to retain and terminate any search firm to assist in the identification of director candidates and the sole authority to set the fees and other retention terms of such search firms. The committee is also able to retain independent counsel and other independent advisors to assist it in carrying out its responsibilities. A copy of the nominating and corporate governance committee charter is available under the Governance section of the Company’s website at nxrt.nexpoint.com.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2023, Dr. Laffer, Mr. Constantino, Mr. Kavanaugh, Dr. Swain and Ms. Wood served on our compensation committee. During the fiscal year ended December 31, 2023:
● | none of the members of our compensation committee is, or has ever been, one of our officers or employees; |
● | none of the members of our compensation committee had any relationships with the us requiring disclosure under “Certain Relationships and Related Party Transactions”; |
● | none of our executive officers served as a member of the compensation committee of another entity, one of whose executive officers served on our compensation committee; |
● | none of our executive officers served as a director of another entity, one of whose executive officers served on our compensation committee; and |
● | none of our executive officers served as a member of the compensation committee of another entity, one of whose executive officers served as one of our directors. |
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our directors and executive officers, who are employees of our Adviser. Among other matters, our code of business conduct and ethics is designed to deter wrongdoing and to promote:
● | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
● | full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications; |
● | compliance with laws, rules and regulations; |
● | prompt internal reporting of violations of the code to appropriate persons identified in the code; and |
● | accountability for adherence to the code of business conduct and ethics. |
A copy of our code of business conduct and ethics is available under the Governance section of the Company’s website at nxrt.nexpoint.com. We will post information regarding any amendment to, or waiver from, our code of business conduct and ethics on our website under the Governance section.
Qualifications for Director Nominees
The nominating and corporate governance committee is responsible for reviewing with the Board, at least annually, the appropriate skills and experience required for members of the Board. This assessment includes factors such as judgment, skill, diversity, integrity, experience with businesses and other organizations of comparable size, the interplay of the candidate’s experience with the experience of other Board members, and the extent to which the candidate would be a desirable addition to the Board and any committees of the Board.
In March of 2015, we completedconnection with this assessment, the Spin-Off from NHFnominating and corporate governance committee will identify individuals believed to be qualified to become a separate public company. NHF,Board members and recommend candidates to the Board to fill new or vacant positions. The nominating and corporate governance committee will also review the qualifications of, and make recommendations to the Board regarding, director nominations submitted to the Company by stockholders in accordance with the Company’s bylaws or otherwise using the same assessment process described above. In addition, the nominating and corporate governance committee will evaluate whether an incumbent director should be nominated for re-election to the Board as part of its annual review and selection process. The nominating and corporate governance committee will use the same factors established for new director candidates to make its evaluation and will also take into account the incumbent director’s performance as a registered closed-end investment company,Board member.
Board Diversity
The nominating and corporate governance committee does not have a formal policy regarding the consideration of diversity for director candidates. The nominating and corporate governance committee does, however, consider diversity as part of its overall selection strategy. The nominating and corporate governance committee considers diversity in its broadest sense, including diversity in professional and life experiences, education, skills, perspectives and leadership, as well as other individual qualities and attributes that contribute to Board heterogeneity, such as race, ethnicity, sexual orientation, gender and national origin. Importantly, the nominating and corporate governance committee focuses on how the experiences and skill sets of each director nominee complements those of fellow directors and director nominees to create a balanced Board with diverse viewpoints and deep expertise. The Company believes that the inclusion of diversity as one of many factors considered in selecting director nominees is governedconsistent with the Company's goal of creating a board of directors that best serves our needs and those of our stockholders.
The Company added diversity-related questions to its director and officer questionnaires in 2022 to help the nominating and corporate governance committee identify whether there are areas, including with respect to diversity of thought, background, experience, gender, race and age, the nominating and corporate governance committee should consider in connection with its review of board composition and board refreshment.
Below is a summary of the experience and skills, gender, age and tenure of our directors and whether the directors are racially or ethnically diverse.
Mr. Dondero | Mr. Mitts | Mr. Constantino | Mr. Kavanaugh | Dr. Laffer | Dr. Swain | Ms. Wood | |
Executive Leadership | X | X | X | X | X | X | |
Real Estate/REIT Experience | X | X | X | X | X | X | X |
Business Operations | X | X | X | X | X | X | |
Strategic Development/Planning | X | X | X | X | X | X | |
Corporate Governance | X | X | X | X | X | X | X |
Financial and Accounting | X | X | X | X | X | X | X |
Risk Management | X | X | X | X | X | X | X |
Capital Markets/Financial Services | X | X | X | X | X | X | |
Technology, Information Security and Innovation | X | X | X | X | X | ||
Cybersecurity | X | X | X | X | X | ||
Environmental Issues, Including Climate Change | X | X | X | X | X | ||
Social Issues, Including Diversity and Inclusion | X | X | X | X | X | ||
Human Capital | X | X | X | X | X | ||
Mr. Dondero | Mr. Mitts | Mr. Constantino | Mr. Kavanaugh | Dr. Laffer | Dr. Swain | Ms. Wood | |
Independent | |||||||
Independent | X | X | X | X | X | ||
Diversity | |||||||
Gender | M | M | M | M | M | F | F |
Racially or Ethnically Diverse† | W | W | W | W | W | B | W |
Age Range | |||||||
59 and under | X | ||||||
60-64 | X | X | |||||
65-69 | X | ||||||
70 and older | X | X | X | ||||
Tenure on Board | |||||||
0-5 years | X | X | |||||
6-10 years | X | X | X | X | X | ||
11 years or more |
†
B = Black/African American
W=White
The composition of our Board also reflects our belief that multiple and varied points of view facilitate more balanced, wide-ranging discussion in the boardroom, and contribute to a more effective decision-making process.
Director Candidate Recommendations by Stockholders
The nominating and corporate governance committee will review and evaluate any director nominations submitted by stockholders, including reviewing the 1940 Act,qualifications of, and making recommendations to the Board regarding, director nominations submitted by stockholders in the same manner as described under “Qualifications for Director Nominees”. See “Communications with the Board of Directors” below for additional information on how to submit a director nomination to the Board.
Communications with the Board of Directors
Any stockholder or other interested party who wishes to communicate directly with the Board or any of its members may do so by writing to: Board of Directors, c/o NexPoint Residential Trust, Inc., 300 Crescent Court, Suite 700, Dallas, Texas 75201, Attn: Corporate Secretary. The mailing envelope should clearly indicate whether the communication is intended for the Board as a group, the non-management directors or a specific director.
Stockholder Nominations
The Company’s bylaws provide that, with respect to an annual meeting of our stockholders, nominations of individuals for election to the Board may be made only (a) pursuant to our notice of the meeting, (b) by or at the direction of the Board or (c) by any stockholder who was a stockholder of record both at the time of giving the notice required by our bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of such nominee and has provided notice to us within the time period, and containing the information, certifications and other materials, specified in the advance notice provisions of our bylaws and who has complied with the other procedural requirements set forth in our bylaws.
With respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting. Nominations of individuals for election to the Board may be made only (a) by or at the direction of the Board or (b) if the meeting has been called for the purpose of electing directors, by any stockholder who was a stockholder of record both at the time of giving the notice required by our bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of such nominee and who has provided notice to us within the time period, and containing the information, certifications and other materials, specified in the advance notice provisions of our bylaws and who has complied with the other procedural requirements set forth in our bylaws. See “Stockholder Proposals for the 2025 Annual Meeting of Stockholders” below for how to submit a timely notice.
EXECUTIVE OFFICERS
The following sets forth information regarding the executive officers of the Company as of April 11, 2024:
NAME | AGE | POSITIONS | ||
James Dondero | 61 | President and Chairman of the Board | ||
Brian Mitts | 53 | Chief Financial Officer, Executive VP-Finance, Secretary, Treasurer and Director | ||
Matt McGraner | 40 | Executive VP and Chief Investment Officer | ||
Dennis Charles Sauter, Jr. | 49 | General Counsel |
Information regarding Mr. Dondero and Mr. Mitts is included above under “Election of Directors.”
Matt McGraner has served as our Executive VP and Chief Investment Officer since March 2015 and served as our Secretary from September 2014 to March 2015. Mr. McGraner co-founded our Adviser, an affiliate of the Company, as well as NXRT, NREF and other real estate businesses with Mr. Mitts and Mr. Dondero. Mr. McGraner has also served as the Executive VP and Chief Investment Officer of NREF since January 2020 and as Secretary of NREF from June 2019 to February 2020. Mr. McGraner has also served as Executive VP, Chief Investment Officer and Secretary of VineBrook since February 2019 and as a conditionmember of obtaining exemptive reliefthe board of directors and President of NSP since November 2020. Mr. McGraner has also served as Executive Vice President, Chief Investment Officer and Secretary of NXDT since July 2022. From October 2018 to February 2019, Mr. McGraner also served as Chief Executive Officer, President and Secretary of VineBrook. Mr. McGraner has also served as Chief Investment Officer of NHT since December 2019 and as a Managing Director at our Sponsor since 2016. In addition, Mr. McGraner has served as Executive VP, Chief Investment Officer and Secretary of NXDT since July 2022 and as Chief Investment Officer and Secretary of NXHT since June 2022. NREF, VineBrook, NXDT, NXHT, NSP, NHT and our Sponsor are all affiliates of the Company. With over ten years of real estate, private equity and legal experience, his primary responsibilities are to lead the operations of the real estate platform at our Sponsor, as well as source and execute investments, manage risk and develop potential business opportunities, including fundraising, private investments and joint ventures. Mr. McGraner is also a licensed attorney and was formerly an associate at Jones Day from 2011 to 2013, with a practice primarily focused on private equity, real estate and mergers and acquisitions. While at Jones Day, Mr. McGraner led the acquisition and financing of over $200 million of real estate investments and advised on $16.3 billion of M&A and private equity transactions. Since 2013 through April 11, 2024, Mr. McGraner has led the acquisition and financing of over $19.9 billion of real estate investments.
Dennis Charles “D.C.” Sauter, Jr. has served as our General Counsel since February 2020. Mr. Sauter has also served as the General Counsel of NREF since February 2020, General Counsel of our Sponsor since April 2021 and the General Counsel of NXDT since July 2022. Previously, Mr. Sauter was a partner in the real estate section of Wick Phillips Gould & Martin, LLP in Dallas, Texas from January 2014 until joining our Sponsor in February 2020, where he specialized in acquisitions, construction, financing, joint ventures and complex leasing for REITs, private developers, and institutional investors. NREF, NXDT and our Sponsor are all affiliates of the Company. Mr. Sauter’s primary responsibility is to manage our legal matters, including corporate governance, real estate transactions and capital markets transactions. He received his Bachelor of Arts degree from the SEC to permit the Spin-Off, we agreed to adopt provisions in our Charter that required us to comply with Section 15University of Texas at Austin and his Juris Doctor from Southern Methodist University Dedman School of Law. He has been a licensed attorney and member of the 1940 Act as if we were an investment company registered underState Bar of Texas since 2001.
COMPENSATION COMMITTEE REPORT
Our compensation committee has reviewed and discussed the 1940 Act. Now that the Spin-Off is complete, the Board, including a majority“Compensation Discussion and Analysis” required by Item 402(b) of directors who are “Independent Directors” as defined in the Charter, believe it is advisable and in the best interests of the Company to remove these provisions. This will allow our governance and management to more closely resemble that of other externally-managed REITs, which are not subject to similar investment company restrictions.
Description of Proposed Charter Amendment 1
Proposed Charter Amendment 1 deletes the third paragraph of Section 5.1 of the Charter, which reads: “The Corporation’s Board of Directors will be comprised by a majority of Independent Directors. The definition of ‘Independent Director’ will include any director who would not be an ‘interested person’ of the Corporation as defined in the Investment Company Act of 1940, as amended (the ‘1940 Act’).”
This will have the effect of removing the requirement that a majority of the Board satisfy the independence standards of the 1940 Act.
Since, as a result of the Spin-Off, we are no longer governed by the 1940 Act, we believe the requirements of the third paragraph of Section 5.1 are unnecessary. Further, we believe this change is advisable because the Board is subject to the independence requirementsRegulation S-K of the Exchange Act with management.
Based on such review and NYSE rules.discussions, our compensation committee recommended to our board that the “Compensation Discussion and Analysis” be included in this proxy statement.
Members of the Compensation Committee
Dr. Arthur Laffer (Chair) | Scott Kavanaugh | Edward Constantino | Catherine Wood | Dr. Carol Swain |
The general description of Proposed Charter Amendment 1 set forth abovecompensation committee has furnished the following report. The information contained in this “Compensation Committee Report” is qualified in its entiretynot to be deemed “soliciting material” or “filed” with the SEC, nor is such information to be incorporated by reference into any future filings under the Securities Act of 1933 or the Exchange Act except to the text of the proposed Articles of Amendmentextent that we specifically incorporate it by reference into such filings.
EXECUTIVE COMPENSATION
Compensation Discussion and Restatement (the “Revised Charter”), a copy of which is attached hereto asAppendix A. The Revised Charter attached hereto asAppendix A is marked to show the modifications to the current Charter proposed to be made by Proposal 3, Proposal 4Analysis
Our Compensation Discussion and Proposal 5.Analysis describes our compensation program, objectives and policies for our named executive officers for fiscal year 2023. Our named executive officers for fiscal year 2023 were James Dondero, President; Brian Mitts, Chief Financial Officer, Executive VP-Finance, Secretary and Treasurer; Matt McGraner, Executive VP and Chief Investment Officer; D.C. Sauter, General Counsel; and Matthew Goetz, Former Senior VP-Investments and Asset Management.
If this proposal is approved, we plan to effect the amendment through an amendment and restatement of the Charter pursuant to Maryland law.
The Board, including a majorityOverview of the directors who are “Independent Directors” as defined in the Charter, recommends a vote FOR the approval of Proposed Charter Amendment 1.Compensation Program and Philosophy
APPROVAL OF PROPOSED CHARTER AMENDMENT 2
Overview
We are askingexternally managed by our stockholders to vote to approve an amendment toAdviser through the Company’s Charter to remove a provision requiring that any advisory agreement we enter into comply with certain requirements of the 1940 Act (“Proposed Charter Amendment 2”).
In March of 2015, we completed the Spin-Off from NHF to become a separate public company. NHF, as a registered closed-end investment company, is governed by the 1940 Act, and as a condition of obtaining exemptive relief from the SEC to permit the Spin-Off, we agreed to adopt provisions in our Charter that required us to comply with Section 15 of the 1940 Act as if we were an investment company registered under the 1940 Act. Now that the Spin-Off is complete, the Board, including a majority of directors who are “Independent Directors” as defined in the Charter, believe it is advisable and in the best interests of the Company to remove these provisions. This will allow our governance and management to more closely resemble that of other externally-managed REITs, which are not subject to similar investment company restrictions.
Description of Proposed Charter Amendment 2
Proposed Charter Amendment 2 deletes Section 5.9.2. of the Charter, which reads: “Stockholder Approval. The Corporation may not enter into an investment advisory agreement unless that agreement complies with, and has been approved in compliance with, Section 15 of the 1940 Act, and any applicable rules thereunder or published guidance of the Securities and Exchange Commission or its staff. Any investment advisory agreement will have an initial term of up to two years, and will continue thereafter only if such continuance is approved in accordance with Section 15 of the 1940 Act.”
This will have the effect of removing the requirement that any investment advisory agreement that we enter into comply and be adopted in accordance with Section 15 of the 1940 Act.
We believe this change is advisable because it will allow us a greater degree of flexibility in negotiating the termsAdvisory Agreement. Our Adviser conducts substantially all of our relationship withoperations and provides asset management services for our Adviser. Additionally, thisreal estate investments. We expect we will allow us to makeonly have accounting employees while the Advisory Agreement is in effect. Our named executive officers for fiscal year 2023 currently serve as officers of our Adviser or served as an officer of our Adviser during fiscal year 2023 and we only have three employees as of April 11, 2024.
Because our Advisory Agreement provides that our Adviser is responsible for managing our affairs, our named executive officers, who are employees of our Adviser eligible to participate in the Long Term Incentive Plan, aligning their interests more closely with thoseor were employees of our stockholders.
The general description of Proposed Charter Amendment 2 set forth above is qualified in its entirety by reference to the text of the Revised Charter attached heretoAdviser when they served asAppendix A. The Revised Charter attached hereto asAppendix A is marked to show the modifications to the current Charter proposed to be made by Proposal 3, Proposal 4 and Proposal 5.
If this proposal is approved, we plan to effect the amendment through an amendment and restatement of the Charter pursuant to Maryland law.
The Board, including a majority of the directors who are “Independent Directors” as defined in the Charter, recommends a vote FOR the approval of Proposed Charter Amendment 2.
APPROVAL OF PROPOSED CHARTER AMENDMENT 3
Overview
We are asking our stockholders to vote to approve an amendment to the Company’s Charter to remove a provision requiring that certain future amendments to our Charter be approved in accordance with the 1940 Act (“Proposed Charter Amendment 3”).
In March of 2015, we completed the Spin-Off from NHF to become a separate public company. NHF, as a registered closed-end investment company, is governed by the 1940 Act, and as a condition of obtaining exemptive relief from the SEC to permit the Spin-Off, we agreed to adopt provisions in our Charter that required us to comply with Section 15 of the 1940 Act as if we were an investment company registered under the 1940 Act. Now that the Spin-Off is complete, the Board, including a majority of directors who are “Independent Directors” as defined in the Charter, believe it is advisable and in the best interestsofficer of the Company, have not received, nor do we expect they will in the future receive, any cash compensation from us for their services as our named executive officers. Similarly, we do not provide our named executive officers with pension benefits, perquisites, or other personal benefits. Instead, we pay our Adviser the fees described below under “Certain Relationships and Related Party Transactions – Our Advisory Agreement.” For the year ended December 31, 2023, we paid approximately $7.65 million in fees to remove these provisions. This will allow our governanceAdviser. In addition, for the year ended December 31, 2023, our Adviser elected to voluntarily waive $21.7 million in advisory and managementadministrative fees. Such previously waived fees are considered to more closely resemble thatbe permanently waived.
Additionally, our Advisory Agreement does not require our named executive officers to dedicate a specific amount of time fulfilling our Adviser’s obligations to us under the Advisory Agreement and does not require a specific percentage or amount of the fees paid to the Adviser to be allocated to the compensation of our named executive officers. Our Adviser does not compensate our named executive officers specifically for their services performed for us as they also serve as officers of other externally-managed REITs, whichinvestment vehicles that are not subjectsponsored, managed or advised by affiliates of our Adviser. For these reasons, our Adviser cannot identify the portion of compensation awarded to similar investment company restrictions.
Description of Proposed Charter Amendment 3
Proposed Charter Amendment 3 deletes the fifth and sixth sentences of Article VIIIour named executive officers for services rendered solely in their capacity as officers of the Charter,Company. Accordingly, we are unable to provide complete compensation information for any of our named executive officers as the total compensation of our named executive officers reflects the performance of all the investment vehicles for which read: “Any amendment to Section 5.9,these individuals provide or provided services. However, for context (excluding Mr. Goetz who resigned during fiscal year 2023) our Advisor and/or its affiliates paid our named executive officers aggregate base salary and cash incentive bonuses totaling $3.8 million for the third paragraph of Section 5.1 or to this sentenceyear ended December 31, 2023. This represents approximately 50% of the Charter shall be valid only$7.6 million in fees paid to our Adviser by us for the year ended December 31, 2023. However, if declared advisable and approved by a majorityportion of the Boardaggregate base salary and cash incentive bonuses paid to our named executive officers (excluding Mr. Goetz who resigned during fiscal year 2023) is allocated to us based on the advisory fees paid to our Adviser by us as a percentage of Directorsthe total advisory fees earned by our Adviser and its affiliates1, the aggregate base salary and cash incentive bonuses allocated to us for our named executive officers (excluding Mr. Goetz who resigned during fiscal year 2023) are approximately 6.4% of the fees paid to our Adviser by us for the year ended December 31, 2023. The cash compensation paid to our named executive officers (excluding Mr. Goetz who resigned during fiscal year 2023) is approximately 31% fixed pay and 69% variable/incentive pay. Total compensation paid to our named executive officers (excluding Mr. Goetz who resigned during fiscal year 2023) in the aggregate for the year ended December 31, 2023, including fixed and variable/incentive cash compensation, as well as by a majoritytime-based restricted stock units, or RSUs, of the Independent DirectorsCompany and approvedother affiliates of our Adviser that vested during the year, totaled approximately $9.5 million. This represents base salaries of approximately $1.2 million or 12%, cash incentive bonuses of $2.6 million or 28% and time-based RSU compensation of $5.7 million or 60%. The compensation paid by our Advisor and its affiliates to each of our named executive officers is based upon a robust review process (which includes self-evaluation and peer-review) that takes into consideration the named executive officer’s projected goals for the given year and the named executive officer’s performance relative to those goals. Our Adviser and its affiliates measure performance based on a number of metrics/measurements, including as applicable, the growth of assets under management of our Sponsor’s investment vehicles, new investment vehicles launched, deals sourced, deals closed, relative performance of the named executive officer’s underlying investments measured against peers and versus applicable investment benchmarks, as well as the accomplishment of additional firm and team goals. However, our Sponsor measures its success by the affirmative votesuccess of holdersits investors, and thus the performance of a majority of the outstanding voting securities. For purposes of the preceding sentence, ‘a majority of the outstanding voting securities’ means (a) 67% or more of the voting securities present atinvestments managed by the applicable meeting ifnamed executive officer is a primary consideration in determining variable/incentive compensation payable to our named executive officers.
1 Advisory fees are exclusive of one-time fees earned such as acquisition or other fees earned by affiliates of our Adviser.
We have no arrangements to make cash payments to our named executive officers upon their termination from service as our officers. In addition, we currently do not have any equity ownership requirements or guidelines for our named executive officers. While we do not pay our named executive officers any cash compensation, the holderscompensation committee may grant our named executive officers equity-based awards intended to align their interests with the interests of a majorityour stockholders. In establishing award levels, the compensation committee currently does not plan to engage in any benchmarking of the outstanding voting securities of the Corporation are present or represented by proxy or (b) a majority of the outstanding voting securities of the Corporation, whicheveraward levels/opportunities, believing that there is lessinsufficient information regarding incentive awards in the case of (a)externally-managed REITs.
Role of Compensation Committee
We expect we will only have accounting employees while the Advisory Agreement is in effect. As of April 11, 2024, we only have three employees and (b).” In addition, referencesour executive officers do not receive any cash compensation from us or any of our subsidiaries for serving as executive officers. We do not have agreements with any of our executive officers regarding their cash compensation, nor do we or our compensation committee make any decisions regarding their cash compensation, employee benefits, or other types of compensation paid to our executive officers by our Adviser or its affiliates. Our compensation committee only reviews and approves the equity-based awards to be paid or made by us to our named executive officers based on recommendations from our President.
Role of Executive Officers
The compensation committee is responsible for approving any equity-based awards to be paid or made by us to our named executive officers. Our President annually reviews the financial performance of the Company, current market conditions and the performance of each executive officer of the Company and based on these reviews, provides a recommendation regarding the appropriate equity-based grants, if any, to be presented to the third paragraph of Section 5.1compensation committee for approval.
Cash and Section 5.9 in Article VIIIOther Compensation
As described above, our officers are employed by our Adviser or were employed by our Adviser when they served as an officer of the Charter will also be deleted as partCompany. As such, we did not provide any of Proposed Charter Amendment 3.our officers with any cash compensation, pension benefits or nonqualified deferred compensation plans. We have reported the advisory and administrative fees that we pay to our Adviser under “—Overview of Compensation Program and Philosophy” above.
This will have the effect of removing the requirement that certain amendments to the Charter be approved by directors satisfying the independence standards of the 1940 Act and by a “majority of the outstanding voting securities” as defined in the 1940 Act.
We believe this change is advisable because the deletion of Section 5.9.2 and the third paragraph of Section 5.1, as contemplated by Proposal 3 and Proposal 4, respectively, renders this provision of the Charter unnecessary. In certain circumstances, the “majority of the outstanding voting securities” requirement could also conflict with the minimum vote required for charter amendments under Maryland law.Equity Compensation
The general description of Proposed Charter Amendment 3 set forth above is qualified in its entirety by referencecompensation committee may from time to the text of the Revised Charter attached hereto asAppendix A. The Revised Charter attached hereto asAppendix A is marked to show the modifications to the current Charter proposed to be made by Proposal 3, Proposal 4 and Proposal 5.
If this proposal is approved, we plan to effect the amendment through an amendment and restatement of the Chartertime pursuant to Maryland law.
Condition for Effectiveness of Proposal 5
This Proposal 5 is conditioned upon the approval of Proposal 3 and Proposal 4. If Proposal 3 and Proposal 4 are not approved, this Proposal 5 will not have any effect.
The Board, including a majority of the directors who are “Independent Directors” as defined in the Charter, recommends a vote FOR the approval of Proposed Charter Amendment 3.
PROPOSAL 6 – APPROVAL OF THE 2016 LONG TERM INCENTIVE PLAN
Overview
We are asking our stockholders to approve the NexPoint Residential Trust, Inc. 2016 Long Term Incentive Plan which we refer(“2016 LTIP”) grant our named executive officers equity-based awards, including options to as the 2016 LTIP. On March 7, 2016, upon recommendation by the Compensation Committee, the Board unanimously approved and adopted, subject to the approval of the Company’s stockholders at the Annual Meeting, the 2016 LTIP.
The Board is recommending that the Company’s stockholders vote in favor of the 2016 LTIP. The 2016 LTIP affords the Compensation Committee the ability to design compensatory awards that are responsive to the Company’s needs and includes authorization for a variety of awards designed to advance the interests and long-term success of the Company by encouraging stock ownership among officers, other key employees and non-employee directors of the Company, as well as among certain non-employees who provide employee-type services, including employees of our Adviser.
If the 2016 LTIP is approved by stockholders, it will be effective as of the day of the Annual Meeting. If the 2016 LTIP is not approved by our stockholders, no awards will be made under the 2016 LTIP.
Our principal reason for adopting the 2016 LTIP is to obtain stockholder approval of thepurchase shares of our common stock, par value $0.01 per share, available forstock appreciation rights, restricted stock, restricted stock units, performance awards under the 2016 LTIP. Stockholder approval of the 2016 LTIP is alsoand other equity-based awards relating to our common stock. These awards are intended to constitute approvalalign the recipients’ interests with those of our stockholders by allowing the material termsrecipient to share in the creation of value for “qualified performance-based compensation” underour stockholders through capital appreciation and dividends.
These equity awards are generally subject to vesting requirements over a number of years, and are designed to promote the 2016 LTIPretention of management and achievement of strong performance for purposes of Section 162(m) of the Code. As longCompany. These awards provide a further benefit to us by enabling our Adviser to attract, motivate and retain talented individuals to serve as our executive officers are employed byofficers. The compensation committee does not use a specific formula to calculate the number of equity awards and other rights awarded to our Advisor, we will not make any awards that satisfy the requirements of Section 162(m). If we employ ournamed executive officers however,under our 2016 LTIP. In addition, the termscompensation committee does not explicitly set future award levels/opportunities on the basis of our awards would likely change. Section 162(m) ofwhat the Code generally disallows a deduction for certain compensation paid to our President and certain othernamed executive officers in a taxable year to the extent that compensation to a covered employee exceeds $1 million for such year. However, some types of compensation, including “qualified performance-based compensation” under Section 162(m) of the Code, are not subject to the deduction limit ifearned from prior awards. Rather, the compensation satisfiescommittee takes into account a variety of factors, including the requirements of Section 162(m) of the Code. The deduction limit does not apply to compensation paid under a stockholder approved plan that meets certain requirements for “qualified performance-based compensation” under Section 162(m) of the Code. While we believe it is in the best interestsfinancial performance of the Company andduring the prior fiscal year, current market conditions, the performance of each named executive officer, the desire to continue to align the interests of each of our named executive officers with our stockholders, general market practices of our peers and similarly sized companies, as well as the recommendations of our President, in determining the specific amounts to be granted to an individual, if any.
We believe our compensation policies are particularly appropriate since we are an externally managed REIT. REIT regulations require us to pay at least 90% of our REIT taxable income to stockholders as dividends. As a result, we believe that our common stockholders are principally interested in receiving attractive risk-adjusted dividends and growth in dividends and market capitalization. Accordingly, we want to provide an incentive to our named executive officers that rewards success in achieving these goals. Since we generally do not have the ability to potentiallyretain earnings, we believe that equity-based awards serve to align the interests of our named executive officers with the interests of our stockholders. Additionally, we believe that equity-based awards are consistent with our stockholders’ interest in market capitalization growth as these individuals will be incentivized to grow our market capitalization for stockholders over time. We believe that this alignment of interests provides an incentive to our named executive officers to implement strategies that will enhance our overall performance and promote growth in dividends and growth in our market capitalization.
For the fiscal year 2023, our compensation committee made one grant “qualified performance-based compensation” under Section 162(m) of the Code underrestricted stock units to each of our named executive officers pursuant to the 2016 LTIP, we may decide to grant compensation to covered employees that will not qualify as “qualified performance-based compensation” for purposes of Section 162(m) of the Code. Moreover, even if we intend to grant compensation that qualifies as “qualified performance-based compensation” for purposes of Section 162(m) of the Code under the 2016 LTIP, we cannot guarantee that such compensation will so qualify or ultimately will be deductible by us.
Generally, compensation attributable to stock options, appreciation rights and other performance-based awards may be deemed to qualify as “qualified performance-based compensation” under Section 162(m) of the Code if: (a) the grant is made by a committee of outside directors for purposes of Section 162(m) of the Code; (b) the plan under which the award is granted states the maximum number of sharesvest ratably in five annual installments (other than with respect to which share-based awards andMr. Goetz, who had a portion of the maximum amountrestricted stock units of cash awards that may be granted to any individual during a specified period of time; and (c) the amount of compensation an individual may receive under the awards is based solelysuch grant immediately vest on the achievement of one or more pre-established performance goals which incorporate business criteria approved by stockholders (or, inSeparation Date (as defined below) and forfeited the case of stock options or appreciation rights, the increase in the valueremaining portion of the shares afterrestricted stock units of such grant on the dateSeparation Date pursuant to the Separation Agreement (as defined below)). For each named executive officer other than Mr. Goetz, the award vested one-fifth on March 28, 2024. These grants are described in more detail below under “–Grants of grant)Plan Based Awards in 2023”. Stockholder approval of this Proposal 6 is intended to satisfy the stockholder approval requirements under Section 162(m) of the Code.
Pension Benefits
We are seeking stockholder approvaldo not provide any of our officers with pension benefits.
Nonqualified Deferred Compensation
We do not provide any of our officers with any nonqualified deferred compensation plans.
Summary Compensation Table
The following table sets forth the material termscompensation paid to or accrued by those named executive officers for “qualified performance-based compensation” under the 2016 LTIP, including the performance measures and applicable individual grant limits under the 2016
LTIP, as well as the individuals eligible to receive awards under the 2016 LTIP, to have the flexibility to potentially grant awards under the 2016 LTIP that may be fully deductible for federal income tax purposes. If our stockholders approve the material terms for “qualified performance-based compensation” under the 2016 LTIP, assuming that all other Section 162(m) requirementswhom we are met, we may be able to obtain tax deductions with respectquantify such compensation for services the named executive officer rendered to awards issued underus during the 2016 LTIPfiscal years presented.
NAME AND PRINCIPAL POSITION | YEAR | SALARY ($)(1) | BONUS ($)(1) | STOCK AWARDS ($)(2) | NON-EQUITY INCENTIVE PLAN COMPENSATION ($) | NON-QUALIFIED DEFERRED COMPENSATION EARNINGS ($) | ALL OTHER COMPENSATION ($) | TOTAL ($) | |||||||||||
James Dondero | 2023 | — | — | $ | 3,271,489 | — | — | — | $ | 3,271,489 | |||||||||
President and | 2022 | — | — | $ | 3,694,998 | — | — | — | $ | 3,694,998 | |||||||||
Chairman | 2021 | — | — | $ | 2,473,496 | — | — | — | $ | 2,473,496 | |||||||||
Brian Mitts | 2023 | — | — | $ | 739,365 | — | — | — | $ | 739,365 | |||||||||
Chief Financial Officer, Executive VP-Finance, Secretary and Treasurer and Director | 2022 | — | — | $ | 834,354 | $ | 834,354 | ||||||||||||
2021 | — | — | $ | 458,961 | $ | 458,961 | |||||||||||||
Matt McGraner | 2023 | — | — | $ | 3,145,434 | — | — | — | $ | 3,145,434 | |||||||||
Executive VP and Chief Investment Officer | 2022 | — | — | $ | 3,694,998 | — | — | — | $ | 3,694,998 | |||||||||
2021 | — | — | $ | 3,144,992 | — | — | — | $ | 3,144,992 | ||||||||||
D. C. Sauter | 2023 | — | — | $ | 410,789 | — | — | — | $ | 410,789 | |||||||||
General Counsel | 2022 | — | — | $ | 417,219 | — | — | — | $ | 417,219 | |||||||||
2021 | — | — | $ | 297,467 | — | — | — | $ | 297,467 | ||||||||||
Matthew Goetz | 2023 | — | — | $ | 515,298 | — | — | — | $ | 515,298 | |||||||||
Former Senior VP-Investments and Asset Management | 2022 | — | — | $ | 321,848 | — | — | — | $ | 321,848 | |||||||||
2021 | — | — | $ | 212,494 | — | — | — | $ | 212,494 |
(1) | The named executive officers are employees of our Adviser or its affiliates and are not paid cash compensation by us. |
(2) | The amounts reported in the “Stock Awards” column represent the aggregate grant date fair value of restricted stock units, calculated in accordance with FASB ASC Topic 718. Pursuant to SEC rules, the amounts shown in this column exclude the impact of estimated forfeitures related to service-based vesting conditions. See Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding the assumptions made in determining these values. The amount shown in this column for Mr. Goetz also includes the incremental fair value, calculated in accordance with paragraph 55-116 of FASB ACS Topic 718, for 11,452 restricted stock units, the vesting of which accelerated on November 9, 2023 pursuant to the Separation Agreement. |
Grants of Plan Based Awards in 2023
The following table contains information regarding grants of plan-based awards to our Section 162(m)named executive officers without regard toduring the limitations of Section 162(m) through the 2021 Annual Meeting of Stockholders (in other words, for five years).year ended December 31, 2023.
The actual text of the 2016 LTIP is attached to this proxy statement asAppendix B. The following description of the 2016 LTIP is only a summary of its principal terms and provisions and is qualified by reference to the actual text as set forth inAppendix B.
NAME | COMMITTEE ACTION DATE | GRANT DATE | ALL OTHER STOCK AWARDS: NUMBER OF SHARES OF STOCK (#) | GRANT DATE FAIR VALUE OF STOCK AWARDS ($)(1) |
James Dondero | 3/28/2023 | 3/28/2023 | 82,530 | 3,271,489 |
Brian Mitts | 3/28/2023 | 3/28/2023 | 18,652 | 739,365 |
Matt McGraner | 3/28/2023 | 3/28/2023 | 79,350 | 3,145,434 |
D.C. Sauter | 3/28/2023 | 3/28/2023 | 10,363 | 410,789 |
Matthew Goetz | 3/28/2023 | 3/28/2023 | 6,795 | 515,298 |
Why We Recommend That You Vote for Proposal 6
(1) | Represents the aggregate grant date fair value, calculated in accordance with FASB ASC Topic 718. Pursuant to SEC rules, the amounts shown in this column exclude the impact of estimated forfeitures related to service-based vesting conditions. See Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for information regarding the assumptions made in determining these values. The amount shown in this column for Mr. Goetz also includes the incremental fair value, calculated in accordance with paragraph 55-116 of FASB ACS Topic 718, for 11,452 restricted stock units, the vesting of which accelerated on November 9, 2023 pursuant to the Separation Agreement. |
The 2016 LTIP authorizes the Compensation Committeecompensation committee of our Board to provide equity-based compensation in the form of stock options, appreciation rights, (“SARs”), restricted shares, restricted stock units, (“RSUs”), performance shares, performance units dividend equivalents and certain other awards denominated or payable in, or otherwise based on, shares of ourthe Company’s common stock or factors that may influence the value of our shares, limited partnership interests in the OP, andCompany’s common stock, plus cash incentive awards, for the purpose of providing our officers, and other key employees, and those of our subsidiaries, our non-employeenon-management directors, and potentially certain non-employees who perform employee-type functions, including employees of our Adviser, incentives and rewards for performance. Some of the key features of the 2016 LTIP that reflect our commitment to effective management of equity and incentive compensation are set forth below.
We believe our future success depends in part on our ability to attract, motivate and retain high quality employees, non-employee service providers and directors and that the ability to provide equity-based and incentive-based awards under the 2016 LTIP is critical to achieving this success. We believe we would be at a competitive disadvantage if we could not use share-based awards to recruit and compensate our employees, non-employee service providers and directors.
The use of shares of our common stock will also be important to our continued success because equity-based awards link compensation with long-term stockholder value creation and reward participants based on the Company’s performance. Because our equity awards will generally vest over multiple years, the value ultimately realized from these awards depends on the long-term value of shares of our common stock. Our equity compensation program also will help us to attract and retain talent in a highly competitive market, targeting individuals who are motivated by pay-for-performance.
HIGHLIGHTS OF OUR 2016 EQUITY AND INCENTIVE COMPENSATION PLAN
Outstanding Equity Awards at Fiscal Year-End
The following includestable contains information regarding the potential overhang and dilution that would result if our proposed share pool under the 2016 LTIP is approved. As of April 22, 2016, there were 21,293,824 shares of our common stock outstanding.
We propose that 2,100,000 shares of our common stock be available for awards under the 2016 LTIP, which represents about ten percent of the outstanding shares of our common stock. This percentage reflects the simple dilution of our stockholders that would occur if the 2016 LTIP is approved.
Based on the closing price on the New York Stock Exchange for shares of our common stock on April 22, 2016 of $13.99 per share, the aggregate market value as of April 22, 2016 of the new 2,100,000 shares of our common stock requested under the 2016 LTIP was $29,379,000.
In determining the number of shares to request for approval under the 2016 LTIP, our management team worked with the Compensation Committee to evaluate a number of factors including criteria expected to be utilized by institutional proxy advisory firms in evaluating our proposal for the 2016 LTIP.
If the 2016 LTIP is approved, we intend to utilize the shares authorized under the 2016 LTIP to incentivize key individuals through equity grants. We currently anticipate that the shares requested in connection with the approval of the 2016 LTIP will last for about ten years, based on our expected grant rates and the approximate current share price, but could last for a shorter period of time if actual practice does not match our expected rates or our share price changes materially. As noted in “Summary of Other Material Terms of the 2016 LTIP” below, our Compensation Committee would retain full discretion under the 2016 LTIP to determine the number and amount of awards to be granted under the 2016 LTIP, subject to the terms of the 2016 LTIP, and future benefits that may be received by participants under the 2016 LTIP are not determinable at this time, except with respect to certain grants that are expected to be made immediately following the Annual Meeting (as described below).
We recognize that equity compensation awards dilute stockholder equity, so we have carefully planned for our equity incentive compensation program. Our equity compensation practices are intended to be competitive and consistent with market practices.
In evaluating this Proposal 6, stockholders should consider all of the information in this Proposal 6.
2016 LTIP Highlights
Administration. The 2016 LTIP will generally be administered by the Compensation Committee.
Reasonable 2016 LTIP Limits. Subject to adjustment as described in the 2016 LTIP, total awards under the 2016 LTIP are limited to 2,100,000 shares, plus any shares added into or recycled under the 2016 LTIP as described below.
The 2016 LTIP also provides that, subject to adjustment as described in the 2016 LTIP:
A “Qualified Performance-Based Award” is any cash incentive award or award of performance shares, performance units, restricted shares, restricted stock units, or Other Awards (as defined below), granted to certain “covered employees” (as defined in Section 162(m) of the Code) that is intended to satisfy the requirements for “qualified performance-based compensation” under Section 162(m) of the Code. “Covered Employees” for this purpose will not include employees of our Adviser.
Allowances for Conversion Awards and Assumed Plans. Shares of our common stock issued or transferred under awards granted under the 2016 LTIP in substitution for or conversion of, or in connection with an assumption of, stock options, SARs, restricted shares, RSUs or other stock or stock-based awards held by awardeesour named executive officers as of an entity engaging in a corporate acquisition or merger transaction with us or any of our subsidiaries will not count against (or be added back to) the aggregate share limit or other 2016 LTIP limits described above. Additionally, shares available under certain plans that we or our subsidiaries may assume in connection with corporate transactions from another entity may be available for certain awards under the 2016 LTIP, under circumstances further described in the 2016 LTIP, but will not count against the aggregate share limit or other 2016 LTIP limits described above.
Limited Share Recycling Provisions. If any award granted under the 2016 LTIP is cancelled or forfeited, expires or is settled for cash (in whole or in part), the shares of our common stock subject to such award will, to the extent of such cancellation, forfeiture, expiration, or cash settlement, again be available for issuance under the 2016 LTIP. The following shares of our common stock will not be added (or added back, as applicable) to the aggregate share limit under the 2016 LTIP: (a) shares withheld by us in payment of the exercise price of an option; (b) shares tendered or otherwise used in payment of an option’s exercise price; (c) shares withheld by us or tendered or otherwise used to satisfy tax withholding obligations; and (d) shares that are repurchased by us with stock option proceeds. If a participant elects to give up the right to receive compensation in exchange for shares of our common stock based on fair market value, such shares of our common stock will not count against the aggregate number of shares available under the 2016 LTIP.
Minimum Vesting Periods/Double-Trigger Change in Control. The 2016 LTIP provides that, except for awards under which up to an aggregate of 5% of the maximum number of shares of our common stock available under the 2016 LTIP may be granted:December 31, 2023.
STOCK AWARDS | ||||||||
NAME | NUMBER OF SHARES OF STOCK THAT HAVE NOT VESTED (#) | MARKET VALUE OF SHARES THAT HAVE NOT VESTED ($)(1) | ||||||
James Dondero | 195,566 | (2) | $ | 6,733,337 | ||||
Brian Mitts | 41,942 | (3) | $ | 1,444,063 | ||||
Matt McGraner | 215,388 | (4) | $ | 7,415,809 | ||||
D.C. Sauter | 20,358 | (5) | $ | 700,926 | ||||
Matthew Goetz | 0 | (6) | $ | 0 |
Time-based restrictions on stock options, SARs, restricted shares, RSUs and other share-based awards may not lapse solely by the passage of time sooner than after one year, unless the Compensation Committee specifically provides for those restrictions to lapse sooner, including (a) by virtue of the
(1) |
|
(2) | Consists of |
(3) | Consists of restricted stock units granted on February 21, 2019, February 20, 2020, May 11, 2020, February 18, 2021, February 17, 2022 and March 28, 2023. With respect to the restricted stock units granted on February 21, 2019, as of December 31, 2023, there were 3,472 restricted stock units not vested, which vested on February 21, 2024. With respect to the restricted stock units granted on February 20, 2020, as of December 31, 2023, there were 3,195 restricted stock units not vested, which vested one-half on February 20, 2024 and which will vest one-half on February 20, 2025. With respect to the restricted stock units granted on May 11, 2020, as of December 31, 2023, there were 2,020 restricted stock units not vested, which will vest one-half on May 11, 2024 and one-half on May 11, 2025. With respect to the restricted stock units granted on February 18, 2021, as of December 31, 2023, there were 6,646 restricted stock units not vested, which vested one-third on February 18, 2024, and which will vest one-third on February 18, 2025 and one-third on February 18, 2026. With respect to the restricted stock units granted on February 17, 2022, as of December 31, 2023, there were 7,957 restricted stock units not vested, which vested one-fourth on February 17, 2024, and which will vest one-fourth on February 17, 2025, one-fourth on February 17, 2026 and one-fourth on February 17, 2027. With respect to the restricted stock units granted on March 28, 2023, as of December 31, 2023, there were 18,652 restricted stock units not vested, which vested one-fifth on March 28, 2024, and which will vest one-fifth on March 28, 2025, one-fifth on March 28, 2026, one-fifth on March 28, 2027 and one-fifth on March 28, 2028. |
(4) | Consists of restricted stock units granted on February 21, 2019, February 20, 2020, May 11, 2020, February 18, 2021, February 17, 2022 and March 28, 2023. With respect to the restricted stock units granted on February 21, 2019, as of December 31, 2023, there were 13,067 restricted stock units not vested, which vested on February 21, 2024. With respect to the restricted stock units granted on February 20, 2020, as of December 31, 2023, there were 24,891 restricted stock units not vested, which vested one-half on February 20, 2024 and which will vest one-half on February 20, 2025. With respect to the restricted stock units granted on May 11, 2020, as of December 31, 2023, there were 17,294 restricted stock units not vested, which will vest one-half on May 11, 2024 and one-half on May 11, 2025. With respect to the restricted stock units granted on February 18, 2021, as of December 31, 2023, there were 45,546 restricted stock units not vested, which vested one-third on February 18, 2024, and which will vest one-third on February 18, 2025 and one-third on February 18, 2026. With respect to the restricted stock units granted on February 17, 2022, as of December 31, 2023, there were 35,240 restricted stock units not vested, which vested one-fourth on February 17, 2024, and which will vest one-fourth on February 17, 2025, one-fourth on February 17, 2026 and one-fourth on February 17, 2027. With respect to the restricted stock units granted on March 28, 2023, as of December 31, 2023, there were 79,350 restricted stock units, which vested one-fifth on March 28, 2024, and which will vest one-fifth on March 28, 2025, one-fifth on March 28, 2026, one-fifth on March 28, 2027 and one-fifth on March 28, 2028. |
(5) | Consists of restricted stock units granted on February 20, 2020, May 11, 2020, February 18, 2021, February 17, 2022 and March 28, 2023. With respect to the restricted stock units granted on February 20, 2020, as of December 31, 2023, there were 1,008 restricted stock units not vested, which vested one-half on February 20, 2024, and which will vest one-half on February 20, 2025. With respect to the restricted stock units granted on May 11, 2020, as of December 31, 2023, there were 700 restricted stock units not vested, which will vest one-half on May 11, 2024 and one-half on May 11, 2025. With respect to the restricted stock units granted on February 18, 2021, as of December 31, 2023, there 4,308 restricted stock units not vested, which vested one-third on February 18, 2024, and which will vest one-third February 18, 2025 and one-third February 18, 2026. With respect to the restricted stock units granted on February 17, 2022, as of December 31, 2023, there were 3,979 restricted stock units not vested, which vested one-fourth on February 17, 2024, and which will vest one-fourth on February 17, 2025, one-fourth on February 17, 2026 and one-fourth on February 17, 2027. With respect to the restricted stock units granted on March 28, 2023, as of December 31, 2023, there were 10,363 restricted stock units, which vested one-fifth on March 28, 2024, and which will vest one-fifth on March 28, 2025, one-fifth on March 28, 2026, one-fifth on March 28, 2027 and one-fifth on March 28, 2028. |
(6) | Mr. Goetz resigned from the Company on November 9, 2023, at which time 11,452 restricted stock units immediately vested and 7,476 restricted stock units were forfeited pursuant to the Separation Agreement. |
Options Exercised and other share-based awards that lapse upon the achievement of management objectives may not lapse sooner than after one year, and the performance period for performance shares and performance units must be at least one year, unless the Compensation Committee specifically provides for earlier lapse or modification, including by virtue of the retirement, death or disability of a participant or a double-trigger change in control.
No Repricing Without Stockholder Approval. The repricing of options and SARs (outside of certain corporate transactions or adjustment events described in the 2016 LTIP) granted under the 2016 LTIP is prohibited without stockholder approval.
Change in Control Definition. The 2016 LTIP includes a definition of “change in control,” which is set forth below.
Other Features.Stock Vested
Section 162(m)
As discussed above, one reason for submitting this Proposal 6 to stockholders is to obtain stockholder approval of the material terms for “qualified performance-based compensation” under the 2016 LTIP for purposes of Section 162(m) of the Code. Such stockholder approval is expected to enable us to structure certain awards so that they may be able to qualify as “qualified performance-based compensation” under Section 162(m) of the Code.
In particular, the 2016 LTIP includes a list of performance measures upon which the Compensation Committee must condition a grant or vesting of a Qualified Performance-Based Award pursuant to the 2016 LTIP, which measures are as follows (including relative or growth achievement regarding such metrics):
In addition to the performance measures, the 2016 LTIP also includes individual grant limits for equity or incentive awards that can be granted pursuant to the 2016 LTIP, as further described above under the heading “2016 LTIP Highlights.”
Section 162(m) of the Code will not apply to awards granted under the 2016 LTIP to employees of our Adviser, and thus we do not expect to grant Qualified Performance-Based Awards to our executive officers at this time. However, if the Company’s management team is internalized at a future date, Qualified Performance-Based Awards may be granted under the 2016 LTIP to our management team members at that time.
Summary of Other Material Terms of the 2016 LTIP
Administration. The 2016 LTIP will generally be administered by the Compensation Committee (or its successor), or any other committee of the Board designated by the Board to administer the 2016 LTIP. References to the “Committee” in this Proposal 6 refer to the Compensation Committee or such other committee designated by the Board, as applicable. The Committee may from time to time delegate all or any part of its authority under the 2016 LTIP to any subcommittee thereof. Any interpretation, construction and determination by the Committee of any provision of the 2016 LTIP, or of any agreement, notification or document evidencing the grant of awards under the 2016 LTIP, will be final and conclusive. To the maximum extent permitted by applicable law, the Committee may delegate to one or more of its members or to one or more officers, or to one or more agents or advisors of the Company, such administrative duties or powers as it deems advisable. In addition, the Committee may by resolution, subject to certain restrictions set forth in the 2016 LTIP, authorize one or more officers of the Company to (a) designate employees to be recipients of awards under the 2016 LTIP, and (b) determine the size of such awards. However, the Committee may not delegate such responsibilities to officers for awards granted to certain employees who are subject to the reporting requirements of Section 16 of the Exchange Act or subject to Section 162(m) of the Code.
Eligibility. Any person who is selected by the Committee to receive awards under the 2016 LTIP and who is at that time an officer, service provider or other employee of the Company or any of its subsidiaries (including a person who has agreed to commence serving in such capacity within 90 days of the date of grant) or director is eligible to participate in the 2016 LTIP. In addition, certain persons who provide services to the Company or any of its subsidiaries that are equivalent to those typically provided by an employee (provided that such persons satisfy the Form S-8 definition of “employee”), including employees of our Adviser, and non-employee directors of the Company, may also be selected to participate in the 2016 LTIP. As of April 22, 2016, there were approximately five employees of our Adviser and three directors expected to participate in the 2016 LTIP.
Shares Available for Awards under the 2016 LTIP. Subject to adjustment as described in the 2016 LTIP, the number of shares of our common stock available under the 2016 LTIP for awards of:
shall be, in the aggregate, 2,100,000 shares of our common stock plus any shares of our common stock that become available under the 2016 LTIP as a result of forfeiture, cancellation, expiration, or cash settlement of awards (which we refer to as the “Available Shares”).
Other Share Limits Under the 2016 LTIP. The 2016 LTIP also includes certain other share limits, as described above under “2016 LTIP Highlights.”
Up to 5% of the maximum number of shares of our common stock available for awards under the 2016 LTIP, as may be adjusted pursuant to the 2016 LTIP, may be used for awards that do not comply with the applicable one-year minimum vesting requirements for such awards at grant.
Share Counting. The aggregate number of shares of our common stock available for under the 2016 LTIP will be reduced by one share for every one share subject to an award granted under the 2016 LTIP. If any award granted under the 2016 LTIP is cancelled or forfeited, expires or is settled for cash (in whole or in part), the shares of our common stock subject to the award will, to the extent of such cancellation, forfeiture, expiration or cash settlement, again be available under the 2016 LTIP.
The 2016 LTIP further provides that the following shares of our common stock will not be added (or added back, as applicable) to the aggregate number of shares of our common stock available under the 2016 LTIP: (a) shares of our common stock withheld, tendered or otherwise used by us in payment of the exercise price of a stock option granted under the 2016 LTIP; (b) shares of our common stock withheld by us or tendered or otherwise used to satisfy a tax withholding obligation, (c) shares of our common stock subject to a SAR that are not actually issued in connection with the settlement of the SAR upon exercise; and (d) shares of our common stock reacquired by the Company on the open market or otherwise using cash proceeds from the exercise of stock options granted under the 2016 LTIP. In addition, if under the 2016 LTIP a participant has elected to give up the right to receive compensation in exchange for shares of our common stock based on fair market value, such shares of our common stock will not count against the aggregate number of shares of our common stock available under the 2016 LTIP.
Shares of our common stock issued or transferred pursuant to awards granted under the 2016 LTIP in substitution for or in conversion of, or in connection with the assumption of, awards held by awardees of an entity engaging in a corporate acquisition or merger with us or any of our subsidiaries will not count against the share limits under the 2016 LTIP. Additionally, shares available under certain plans that we or our subsidiaries may assume in connection with corporate transactions from another entity may be available for certain awards under the 2016 LTIP, but will not count against the share limits under the 2016 LTIP.
Types of Awards Under the 2016 LTIP. Pursuant to the 2016 LTIP, the Company may grant stock options (including “incentive stock options” as defined in Section 422 of the Code (or “ISOs”)), SARs, restricted shares, restricted stock units, performance shares, performance units, cash incentive awards, and certain other awards based on or related to shares of our common stock.
Each grant of an award under the 2016 LTIP will be evidenced by an award agreement or agreements which will contain such terms and provisions as the Committee may determine, consistent with the 2016 LTIP. A brief description of the types of awards which may be granted under the 2016 LTIP is set forth below.
Stock Options. A stock option is a right to purchase shares of our common stock upon exercise of the stock option. Stock options granted under the 2016 LTIP may consist of either an ISO, a non-qualified stock option that does not comply with the requirements applicable to an ISO,were exercised or a combination of both. Incentive Stock Options may only be granted to employees of the Company or certain of our related corporations and thus may not be granted to our executive officers who are employed by our Adviser. Except with respect to awards issued in substitution for, in conversion of, or in connection with an assumption of stock options held by awardees of an entity engaging in a corporate acquisition or merger with us or any of our subsidiaries, Incentive Stock Options
and non-qualified stock options must have an exercise price per share that is not less than the fair market value of a share on the date of grant.outstanding. The term of a stock option may not extend more than ten years after the date of grant.
Each grant of a stock option will specify the applicable terms of the stock option, including the number of shares of our common stock subject to the stock option and the applicable vesting and forfeiture provisions. However, no grant of stock options may become exercisable sooner than after one year. A grant of stock options may provide for the earlier exercise of the stock options, including in the event of retirement, death or disability of the participant or in the event of a double-trigger change in control of the Company (as described below).
Any grant of stock options may specify management objectives that must be achieved as a condition to the exercise of the stock options. In addition, each grant will specify the form of consideration to be paid in satisfaction of the exercise price, which may include: (a) cash or check acceptable to the Company, or wire transfer of immediately available funds; (b) the actual or constructive transfer to the Company of shares of our common stock owned by the participant (or certain other consideration permitted under the 2016 LTIP) with a value at the time of exercise that is equal to the total exercise price; (c) subject to any conditions or limitations established by the Committee, by a net exercise arrangement pursuant to which the Company will withhold shares of our common stock otherwise issuable upon exercise of a stock option; (d) by a combination of the foregoing methods; and (e) such other methods as may be approved by the Committee. To the extent permitted by law, any grant may provide for deferred payment of the exercise price from the proceeds of a sale through a bank or broker of some or all of the shares to which the exercise relates. Stock options granted under the 2016 LTIP may not provide for dividends or dividend equivalents.
SARs. The 2016 LTIP provides for the grant of SARs. A SAR is a right to receive from us an amount equal to 100%, or such lesser percentage as the Committee may determine, of the spread between the base price and the value of our shares of our common stock on the date of exercise.
Each grant of a SAR will be evidenced by an award agreement which specifies the applicable terms and conditions of such award, including any vesting and forfeiture provisions. However, no grant of SARs may be exercisable sooner than after one year. A grant of SARs may provide for earlier exercise, including in the case of retirement, death or disability of the participant or upon a double-trigger change in control of the Company (as described below). Any grant of SARs may specify management objectives that must be achieved as a condition of the exercise of such SARs. A SAR may be paid in cash, shares of our common stock or any combination thereof. Except with respect to awards issued in substitution for, in conversion of, or in connection with an assumption of SARs held by awardees of an entity engaging in a corporate acquisition or merger with us or any of our subsidiaries, the base price of a SAR may not be less than the fair market value of a share of our common stock on the date of grant. The term of a SAR may not extend more than ten years from the date of grant.
SARs granted under the 2016 LTIP may not provide for dividends or dividend equivalents.
Restricted Shares. Restricted shares constitute an immediate transfer of the ownership of shares of our common stock to the participant in consideration of the performance of services, entitling such participant to dividend, voting and other ownership rights, subject to the substantial risk of forfeiture and restrictions on transfer determined by the Committee for a period of time determined by the Committee or until certain management objectives specified by the Committee are achieved. Each such grant or sale of restricted shares may be made without additional consideration or in consideration of a payment by the participant that is less than the fair market value per share of our common stock on the date of grant. If the elimination of the restrictions is based solely on the passage of time, the period of time will be no shorter than one year.
Any grant of restricted shares may specify management objectives that, if achieved, will result in termination or early termination of the restrictions applicable to the restricted shares, but restrictions that vest upon the achievement of management objectives may not terminate sooner than after one year. Any grant of
restricted shares may require that any or all dividends or distributions paid on restricted shares that remain subject to a substantial risk of forfeiture be automatically deferred and reinvested in additional restricted shares, which may be subject to the same restrictions as the underlying restricted shares. However, dividends or other distributions on restricted shares with restrictions that lapse as a result of the achievement of management objectives will be deferred until and paid contingent upon the achievement of the applicable management objectives. Each grant of restricted shares will be evidenced by an award agreement which specifies the applicable terms and conditions of such award, including any vesting and forfeiture provisions.
Any grant or sale of restricted shares may provide for the earlier termination of restrictions on such restricted shares, including in the event of retirement, death or disability of the participant or upon a double-trigger change in control of the Company (as described below), except in the case of a Qualified Performance-Based Award (other than in connection with the death or disability of the participant or a change in control of the Company) where such early termination would cause the award to fail to so qualify.
Restricted Stock Units. Restricted stock units awarded under the 2016 LTIP constitute an agreement by the Company to deliver shares of our common stock, cash, or a combination thereof, to the participant in the future in consideration of the performance of services, but subject to the fulfillment of such conditions (which may include the achievement of management objectives) during the restriction period as the Committee may specify. Each grant or sale of restricted stock units may be made without additional consideration or in consideration of a payment by the participant that is less than the fair market value of shares of our common stock on the date of grant. During the restriction period applicable to restricted stock units, the participant will have no right to transfer any rights under the award and will have no rights of ownership in the shares of our common stock underlyingfollowing table contains information regarding the restricted stock units and no right to vote them. Rights to dividend equivalents may be extended to and made partthat vested during the year-ended December 31, 2023:
STOCK AWARDS | ||||||||
NAME | NUMBER OF SHARES ACQUIRED ON VESTING (#) | VALUE REALIZED ON VESTING ($)(1) | ||||||
James Dondero | 46,191 | $ | 2,211,321 | |||||
Brian Mitts | 10,286 | $ | 497,336 | |||||
Matt McGraner | 58,152 | $ | 2,785,285 | |||||
D.C. Sauter | 3,285 | $ | 157,412 | |||||
Matthew Goetz | 17,807 | $ | 644,984 |
(1) | Value realized is calculated based on the closing price of our common stock on the vesting date multiplied by the number of shares vested. |
Potential Payments Upon Termination of Employment or Change in Control
In the event any restricted stock unit award at the discretion of and on the terms determinedofficer’s employment with our Adviser is terminated involuntarily by the Committee, on a current, deferred or contingent basis, either in cash or in additional shares of our common stock, but dividend equivalents or other distributions on shares of our common stock under the restricted stock units with restrictions that lapse as a result of the achievement of management objectives will be deferred until and paid contingent upon the achievement of the applicable management objectives. Each grant of a restricted stock unit award will be evidenced by an award agreement which specifies the applicable terms and conditions of such award, including any vesting and forfeiture provisions. Each grant of restricted stock units will specify that the amount payable with respect to such restricted stock units will be paid in cash, shares of our common stock, or a combination of the two.
The restriction period applicable to any grant of restricted stock units may not terminate sooner than after one year. Any grant or sale of restricted stock units may provide for the earlier lapse or other modification of the restriction period, including in the event of retirement, death or disability of the participant or upon a double-trigger change in control of the Company (as described below), except in the case of a Qualified Performance-Based Award (other than in connection with the death or disability of the participant or a change in control of the Company) where such early lapse or modification would cause the award to fail to so qualify.
Cash Incentive Awards, Performance Shares, and Performance Units. Performance shares, performance units and cash incentive awards may also be granted to participants under the 2016 LTIP. A performance share is a bookkeeping entry that records the equivalent of one share of our common stock, and a performance unit is a bookkeeping entry that records a unit equivalent to $1.00 or such other value as determined by the Committee. Each grant will specify the number or amount of performance shares or performance units, or the amount payable with respect to cash incentive awards, being awarded, which number or amount may be subject to adjustment to reflect changes in compensation or other factors. However, no such adjustment will be made in the case of a Qualified Performance-Based Award (other than in connection with the death or disability of the participant or a change in control of the Company) where it would result in the loss of the otherwise available exemption under Section 162(m) of the Code.
These awards, when granted under the 2016 LTIP, become payable to participants upon the achievement of specified management objectives and upon such terms and conditions as the Committee determines at the time of
grant. Each grant may specify with respect to the management objectives a minimum acceptable level of achievement and may set forth a formula for determining the number of performance shares or performance units, or the amount payable with respect to cash incentive awards, that will be earned if performance is at or above the minimum or threshold level, or is at or above the target level but falls short of maximum achievement. Each grant will specify the time and manner of payment of cash incentive awards, performance shares or performance units that have been earned, and any grant may further specify that any such amount may be paid or settled by the Company in cash, shares of our common stock, restricted shares, restricted stock units or any combination thereof. Any grant of performance shares may provide for the payment of dividend equivalents in cash or in additional shares of our common stock, subject to deferral and payment on a contingent basis based on the participant’s earning of the performance shares with respect to which such dividend equivalents are paid. Each grant of performance shares, performance units or cash incentive awards will be evidenced by an award agreement which specifies the applicable terms and conditions of such award, including any vesting and forfeiture provisions.
The performance period with respect to a cash incentive award, performance share, or performance unit will be a period of time (in the case of a performance share or performance unit, not less than one year) determined by the Committee on the grant date. The performance period may be subject to earlier lapse or modification, including in the event of retirement, death or disability of the participant or upon a double trigger change in control of the Company (as described below), except in the case of a Qualified Performance-Based Award (other than in connection with the death or disability of the participant or a change in control of the Company) where it would result in the loss of the otherwise available exemption under Section 162(m) of the Code.
Other Awards. The Committee may grant such other awards (“Other Awards”) that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, shares of our common stock, factors that may influence the value of such shares of our common stock, or limited partnership interests in the OP, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of our common stock, purchase rights for shares of our common stock, awards with value and payment contingent upon performance of the Company or specified subsidiaries, affiliates or other business units or any other factors designated by the Committee, awards valued by reference to the book value of shares of our common stock or the value of securities of, or the performance of the subsidiaries, affiliates or other business units of the Company, and awards that are membership interests in a subsidiary. The terms and conditions of any such awards will be determined by the Committee. Shares of our common stock delivered under an award in the nature of a purchase right granted under the 2016 LTIP will be purchased for such consideration, paid for at such time, by such methods, and in such forms, including, without limitation, shares of our common stock, other awards, notes or other property, as the Committee determines.
In addition, the Committee may grant cash awards, as an element of or supplement to any other awards granted under the 2016 LTIP. The Committee may also grant shares of our common stock as a bonus, or may grant other awards in lieu of obligations of the Company or a subsidiary to pay cash or deliver other property under the 2016 LTIP or under other plans or compensatory arrangements, subject to terms determined by the Committee in a manner that complies with Section 409A of the Code.
If the earning or vesting of, or elimination of restrictions applicable to, Other Awards is based only on the passage of time rather than the achievement of management objectives, the period of time will be no shorter than one year. If the earning or vesting of, or elimination of restrictions applicable to, Other Awards is based on the achievement of management objectives, the earning, vesting or restriction period may not terminate sooner than after one year. Any grant of an Other Award may provided for the earning or vesting of, or earlier elimination of restrictions applicable to, such award, including in the event of the retirement, death, or disability of the participant or upon certain qualifying events following a change in control of the Company (as described below), except in the case of a Qualified Performance-Based Award (other than in connection with the death or disability of the participant or a change in control of the Company) where it would result in the loss of the otherwise available exemption under Section 162(m) of the Code.
“Double-Trigger” Accelerated Vesting upon Change in Control. The 2016 LTIP includes “double-trigger” acceleration provisions with respect to the vesting of awards in connection with a change in control of the Company. Under the 2016 LTIP, the vesting of awards will accelerate in connection with a change in control only where either (a) within a specified period the participant’s service is involuntarily terminatedAdviser for reasons other than for cause, orby the participant terminates his or her employment or serviceofficer for good reason, or (b)otherwise due to such officer’s death, disability or retirement, all outstanding restricted stock units granted that have not previously vested or been forfeited, will vest. If a change in control occurs and the award is not assumed or converted into a replacement award in a manner described in the award agreement.agreement, all outstanding awards held by our officers that have not previously vested or been forfeited, will vest. See “—Outstanding Equity Awards at Fiscal Year-End” above for the market value of outstanding equity awards as of December 31, 2023 that would have vested if any of the events described above occurred on December 31, 2023.
The 2016 LTIP includes a definition of “change in control.”
In general, except as may be otherwise prescribed by the Committeecompensation committee in any award agreement, the 2016 LTIP provides that a change of control will be deemed to have occurred if: (a) individuals who constitute the Board on the effective date of the 2016 LTIP cease for any reason to constitute at least a majority of the Board, unless their replacements are approved as described in the 2016 LTIP (subject to certain exceptions described in the 2016 LTIP); (b) a person or group becomes the beneficial owner of 35% or more of the then-outstanding shares of our common stock or the combined voting power of our then-outstanding securities entitled to vote generally in the election of directors, subject to certain exceptions; (c) the Company closes a reorganization, merger, consolidation, significant sale or purchase of assets or other similar transaction resulting in a substantial change in its ownership or leadership, in each case which causes the persons or groups who are the beneficial owners of 35% or more of the then-outstanding shares of our common stock or the combined voting power of our then-outstanding securities entitled to vote generally in the election of directors to cease to be such beneficial owners of the entity resulting from such transaction, in substantially the same proportions of ownership as immediately prior to such transaction, as further described in the 2016 LTIP; (d) the Company’s stockholders approve its complete liquidation or dissolution; or (e) the Adviser is terminated.
Separation Agreement
Mr. Goetz resigned from his position as Senior VP-Investments and Asset Management Objectives; Qualified Performance Based Awards. The 2016 LTIP permitsof the Company on November 9, 2023 (the “Separation Date”). In connection with his resignation, Mr. Goetz and the Company, the Adviser, the Sponsor. NREF, NexPoint Real Estate Advisors VII, L.P., NXDT, NexPoint Real Estate Advisors X, L.P., VineBrook and NexPoint Real Estate Advisors V, L.P. entered into a separation agreement, dated November 9, 2023 (the “Separation Agreement”). Pursuant to grantthe Separation Agreement, the Sponsor will subsidize Mr. Goetz's COBRA premium for a period of twelve months and 11,452 restricted stock units granted to Mr. Goetz by the Company immediately vested as of the Separation Date and will settle on the original scheduled vesting dates, subject to Mr. Goetz’s continued compliance with existing restrictive covenants. In addition, pursuant to the Separation Agreement, 72,675 restricted stock units granted to Mr. Goetz by NREF, 11,300 restricted share units granted to Mr. Goetz by NXDT and 4,279 restricted stock units granted to Mr. Goetz by VineBrook immediately vested as of the Separation Date and will settle on the original scheduled vesting dates, subject to Mr. Goetz’s continued compliance with existing restrictive covenants. The approximate value of the restricted stock units of the Company that vested on the Separation Date is $412,000 and the approximate value of the aggregate restricted stock units of the Company, NREF, NXDT and VineBrook that vested on the Separation Date is $2 million.
The Severance Agreement additionally contains, among other things, mutual non-disparagement provisions and a mutual release of claims by Mr. Goetz and the Company.
In connection with the Separation Agreement, Mr. Goetz, the Company, NREF, NXDT and VineBrook entered into a vesting agreement pursuant to which, among other things, the award agreements between Mr. Goetz and the Company relating to his restricted stock unit grants were amended to account for his separation and accelerated vesting of a portion of his outstanding restricted stock unit grants pursuant to the Separation Agreement.
Pay Ratio Disclosure
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the median annual total compensation of our employees and the annual total compensation of Mr. Dondero, our President:
For 2023, our last completed fiscal year:
● | the median of the annual total compensation of all our employees (other than our President) was $196,667, and |
● | the annual total compensation of our President, as reported in the Summary Compensation Table included in this Proxy Statement, was $3,271,489. |
Based on this information, for 2023 the ratio of the annual total compensation of our President to the median of the annual total compensation of all employees was 17to 1.
Because our employee population only consists of three individuals, we have decided to determine the median employee each year as we can do so in a reasonably efficient and economical manner. To identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of our median employee and our President, we took the following steps:
1. | We determined that, as of December 31, 2023, our employee population consisted of three salaried individuals, each of whom is located in the United States. This population consisted of only full-time employees. In determining whether our workers are employees, we applied widely recognized employment and tax laws. |
2. | To identify the median employee, we compared the total cash compensation of our employees as reflected in our payroll records for 2023. |
3. | Once we identified our median employee, we combined all of the elements of such employee’s compensation for 2023 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $196,667. |
This pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our payroll and employment records and the methodology described above. The SEC rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices. Therefore, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.
Pay Versus Performance
As required by Item 402(v) of Regulation S-K, we are providing the following information regarding the relationship between executive compensation and our financial performance for each of the last four completed calendar years. In determining the “compensation actually paid” to our named executive officers (“NEOs”), we are required to make various adjustments to amounts that have been previously reported in the Summary Compensation Table in previous years, as the SEC’s valuation methods for this section differ from those required in the Summary Compensation Table. The table below summarizes compensation values both Qualified Performance-Based Awardspreviously reported in our Summary Compensation Table, as well as the adjusted values required in this section for the 2020, 2021, 2022 and awards2023 calendar years. Note that for our NEOs other than our principal executive officer (the “PEO”), compensation and any applicable adjustments are reported as averages. The compensation committee does not use compensation actually paid as a basis for making compensation decisions. Further, the Company does not use financial performance measures to link compensation actually paid to the NEOs to Company performance.
Year | Summary | Compensation |
Average
| Average | Value of initial fixed $100 investment based on: | Net income (in thousands) | |
Total | Peer group | ||||||
2023 | $3,271,489 | $2,015,100 | $1,202,722 | $680,484 | $84 | $109 | $44,433 |
2022 | $3,694,998 | $(2,791,675) | $1,318,641 | $(1,329,308) | $102 | $96 | $(9,291) |
2021 | $2,473,496 | $9,578,593 | $1,028,479 | $4,166,501 | $191 | $127 | $23,106 |
2020 | $3,516,187 | $3,250,562 | $1,382,590 | $1,223,886 | $94 | $89 | $44,150 |
(1) Mr. Dondero was our PEO for all four reporting years. The following are the adjustments made during each year to arrive at the compensation actually paid to our PEO during each year.
Adjustments | 2023 | 2022 | 2021 | 2020 |
Amounts reported under “Stock Awards” in Summary Compensation Table | $(3,271,489) | $(3,694,988) | $(2,437,496) | $(3,516,187) |
Fair Value of Awards Granted in Year that Remain Unvested as of Year-End | $2,841,508 | $1,917,100 | $5,004,903 | $3,498,064 |
Change in Fair Value from Prior Year-End to Current Year-End of Awards Granted Prior to Year that were Outstanding and Unvested as of Year-End | $(1,027,498) | $(4,642,704) | $4,538,011 | $(184,270) |
Change in Fair Value from Prior Year-End to Vesting Date of Awards Granted Prior to Year that Vested During Year | $201,089 | $(66,071) | $35,679 | $(63,232) |
Total Adjustments | $(1,256,389) | $(2,791,675) | $9,578,593 | $3,250,562 |
(2) The Non-PEO NEOs in all four reporting years are: Brian Mitts, Matt McGraner, D.C. Sauter and Matthew Goetz. The following are the adjustments made during each year to arrive at the average compensation actually paid to our Non-PEO NEOs during each year.
Adjustments | 2023 | 2022 | 2021 | 2020 |
Amounts reported under “Stock Awards” in Summary Compensation Table | $(1,202,722 | $(1,318,641) | $(1,028,479) | $(1,382,590) |
Fair Value of Awards Granted in Year that Remain Unvested as of Year-End | $991,240 | $683,656 | $2,081,038 | $1,374,028 |
Change in Fair Value from Prior Year-End to Current Year-End of Awards Granted Prior to Year that were Outstanding and Unvested as of Year-End | $(384,787) | $(1,982,467) | $2,072,118 | $(102,258) |
Fair Value of Awards that are Granted and Vest in the Same Year as of the Vesting Date | 18,129 | |||
Change in Fair Value from Prior Year-End to Vesting Date of Awards Granted Prior to Year that Vested During Year | $55,902 | $(30,488) | $13,345 | $(47,884) |
Total Adjustments | $(522,238) | $(1,329,308) | $4,166,501 | $1,223,886 |
(3) The peer group is the MSCI U.S. REIT Index (^RMZ).
Relationship between Compensation Paid and Performance Measures
The following charts set forth the relationship between the Compensation Actually Paid to the PEO and the Average Compensation Actually Paid to the NEOs other than the PEO in fiscal 2020, 2021, 2022 and 2023 (collectively, “NEO Compensation Actually Paid”) to each of (1) Net income and (2) total shareholder return (“TSR”).
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides certain information as of the end of our most recently completed fiscal year with respect to compensation plans (including any individual compensation arrangements, of which there are none) under which our equity securities are authorized for issuance, aggregated as follows:
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities issuable upon exercise of outstanding options, warrants and rights) | |||
Equity compensation plans approved by securityholders | ||||||
2016 LTIP | 620,137 shares of the Company’s common stock (1) | N/A | 497,479 shares of the Company’s common stock | |||
Equity compensation plans not approved by security holders | ||||||
None | — | N/A | — | |||
Total | 620,137 shares of the Company’s common stock | N/A | 497,479 shares of the Company’s common stock |
(1) Represents restricted stock units issued under our 2016 LTIP.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a summary of transactions that occurred on or were in effect after January 1, 2023 to which we have been a party in which the amount involved exceeded $120,000 and in which any of our executive officers, directors or beneficial holders of more than 5% of our capital stock had or will have a direct or indirect material interest.
The Fiber Internet Agreements
On July 30, 2021, three of our property-owning subsidiaries entered into agreements with NLMF Holdco, LLC, an entity under common control with our Adviser and in which we own a 10% equity interest. As of December 31, 2023, the Company has funded approximately $0.3 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company. For the year ended December 31, 2023, the Company incurred expenses of $2.9 million for fiber internet service which is included in property operating expenses on the consolidated statement of operations and comprehensive income. Additionally, on July 30, 2021, we entered into agreements with NLMF Leaseco, LLC, which is controlled by Matt McGraner, one of our officers. The Company entered into the Fiber Internet Agreements to provide faster, more reliable and lower cost internet to our residents. The Audit Committee approved the Fiber Internet Agreements pursuant to our Related Party Transaction Policy.
Our Advisory Agreement
We are externally managed by our Adviser pursuant to our Advisory Agreement. Our Adviser was organized on September 5, 2014 and is an affiliate of our Sponsor. Below is a summary of the terms of our Advisory Agreement.
Duties of Our Adviser
Our Advisory Agreement provides that our Adviser will manage our business and affairs in accordance with the policies and guidelines established by our Board and that our Adviser will be under the supervision of our Board. The agreement requires our Adviser to provide us with all services necessary or appropriate to conduct our business, including the following:
● | locating, presenting and recommending to us real estate investment opportunities consistent with our investment policies, acquisition strategy and objectives, including our conflicts of interest policies; |
● | structuring the terms and conditions of transactions pursuant to which acquisitions and dispositions of properties are made; |
● | acquiring properties on our behalf in compliance with our investment objectives, strategies and applicable tax regulations; |
● | arranging for the financing and refinancing of properties; |
● | administering our bookkeeping and accounting functions; |
● | serving as our consultant in connection with policy decisions made by our Board, managing our properties or causing our properties to be managed by another party; |
● | monitoring our compliance with regulatory requirements, including the Securities Act of 1933 and the Exchange Act and the rules and regulations promulgated thereunder, NYSE rules and regulations of the Internal Revenue Code (the “Code”) to maintain our status as a REIT; |
● | performing administrative services; and |
● | rendering other services as our Board deems appropriate. |
Our Adviser is required to obtain the prior approval of our Board in connection with:
● | any investment for which the portion of the consideration paid out of our equity equals or exceeds $50,000,000; |
● | any investment that is inconsistent with the publicly disclosed investment guidelines as in effect from time to time, or, if none are then publicly disclosed, as otherwise adopted by the Board from time to time; or |
● | any engagement of affiliated service providers on behalf of us or the OP, which engagement terms will be negotiated on an arm’s length basis. |
For these purposes, “equity” means the purchase price of the investment, exclusive of the proceeds of any debt financing incurred or to be incurred in connection with the relevant investment and anticipated closing and other acquisition costs.
Our Adviser will be prohibited from taking any action, in its sole judgment, or the sole judgment of our Board, that:
● | would adversely affect our qualification as a REIT under the Code, unless the Board has determined that REIT qualification is not in the best interest of us and our stockholders; |
● | would subject us to regulation under the Investment Company Act of 1940, as amended (the “1940 Act”), except to the extent that we and our Adviser have undertaken in the Advisory Agreement and our charter to comply with Section 15 of the 1940 Act in connection with the entry into, continuation of, or amendment of the Advisory Agreement or any advisory agreement; |
● | is contrary to or inconsistent with our investment guidelines; or |
● | would violate any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction over us or our shares of common stock, or otherwise not be permitted by our charter or bylaws. |
Advisory Fee
Our Advisory Agreement requires that we pay our Adviser an annual advisory fee of 1.00% of our Average Real Estate Assets.
“Average Real Estate Assets” means the average of the aggregate book value of Real Estate Assets (see below) before reserves for depreciation or other non-cash reserves, computed by taking the average of the book value of real estate assets at the end of each month (a) for which any fee under the Advisory Agreement is calculated or (b) during the year for which any expense reimbursement under the Advisory Agreement is calculated. “Real Estate Assets” is defined broadly in the Advisory Agreement to include, among other things, investments in real estate-related securities and mortgages and reserves for capital expenditures.
In calculating the advisory fee, we categorize our Average Real Estate Assets into either “Contributed Assets” or “New Assets.” The advisory fee on Contributed Assets may not exceed $4.5 million in any calendar year. This cap is intended to be Qualified Performance-Based Awards, and provideslimit the fees paid to our Adviser on the Contributed Assets following our spin-off (the “Spin-Off”) from NXDT to the fees that any ofwould have been paid by NXDT to its adviser had the awards set forth above may be grantedSpin-Off not occurred. The advisory fee on New Assets is not subject to this limitation but is subject to the achievementexpense cap discussed below.
“Contributed Assets” means all of specified management objectives.the real estate assets we owned upon the completion of the Spin-Off and is not reduced for dispositions of such assets subsequent to the Spin-Off.
Management objectives are defined
“New Assets” means all of the Average Real Estate Assets other than Contributed Assets. New Assets includes proceeds from the sale of a Contributed Asset that is used to purchase a new investment.
The advisory fee is payable monthly in arrears in cash, unless our Adviser elects, in its sole discretion, to receive all or a portion of such fee in shares of our common stock, subject to the limitations set forth below under “—Limitations on Receiving Shares.” The number of shares issued to our Adviser as payment for the advisory fee will be equal to the dollar amount of the portion of such fee that is payable in shares divided by the volume-weighted average closing price of shares of our common stock for the ten trading days prior to the end of the month for which such fee will be paid, which we refer to as the measurable performance objective or objectives established pursuant to the 2016 LTIP for participants who have received grants of performance shares, performance units or cash incentive awards or, when so determined by the Committee, stock options, appreciation rights, restricted shares, restricted stock units, dividend equivalents or Other Awards. Management objectives may be described in terms of company-wide objectives or objectives that are related to the performancefee VWAP. Our Adviser computes each installment of the individual participant or of one or moreadvisory fee as promptly as possible after the end of the subsidiaries, divisions, departments, regions, functions or other organizational units within the Company or its subsidiaries. The management objectives may be made relative to the performance of other companies or subsidiaries, divisions, departments, regions, functions or other organizational units within such other companies, and may be made relative to an index or one or more of the performance objectives themselves.
The Committee may grant awards subject to management objectives that are either Qualified Performance-Based Awards or are not Qualified Performance-Based Awards. Under the 2016 LTIP, the management objectives applicable to any Qualified Performance-Based Award to a covered employee must be based on one or more, or a combination, of the metrics set forth above under the heading “Section 162(m).”
Additionally, in the case of a Qualified Performance-Based Award, each such management objective must be objectively determinable to the extent required under Section 162(m) of the Code, and, unless otherwise determined by the Committee and to the extent consistent with Section 162(m) of the Code, will exclude the effects of certain designated items identified at the time of grant. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the management objectives unsuitable, the Committee may in its discretion modify such management objectives or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable, except in the case of a Qualified Performance-Based Award (other than in connection with a change in control of the Company) where
such action would result in the loss of the otherwise available exemption of the award under Section 162(m) of the Code. In such case, the Committee will not make any modification of the management objectives or minimum acceptable level of achievementmonth with respect to which such covered employee.installment is payable. The accrued fees are payable monthly as promptly as possible after the end of each month during which the Advisory Agreement is in effect. A copy of the computations made by our Adviser to calculate such installment is, for informational purposes only, delivered to our Board.
For the year ended December 31, 2023, we paid approximately $7.6 million in fees to our Adviser.
TransferabilityAdministrative Fee
Our Advisory Agreement requires that we pay our Adviser an annual administrative fee of Awards. Except0.20% of the Average Real Estate Assets.
In calculating the administrative fee, we categorize our Average Real Estate Assets into either Contributed Assets or New Assets. The administrative fee on Contributed Assets may not exceed $890,000 in any calendar year. This cap is intended to limit the fees paid to our Adviser on the Contributed Assets following the Spin-Off to the fees that would have been paid by NXDT to its adviser had the Spin-Off not occurred. The administrative fee on New Assets is not subject to this limitation but is subject to the expense cap discussed below.
The administrative fee is payable monthly in arrears in cash, unless our Adviser elects, in its sole discretion, to receive all or a portion of such fee in shares of our common stock, subject to the limitations set forth below under “—Limitations on Receiving Shares.” The number of shares issued to our Adviser as otherwise providedpayment for the administrative fee will be equal to the dollar amount of the portion of such fee that is payable in shares divided by the Committee, no stock option, appreciation right, restricted share, restricted stock unit, performance share, performance unit, cash incentive award, Other Award or dividend equivalents paidfee VWAP. Our Adviser computes each installment of the administrative fee as promptly as possible after the end of each month with respect to awardswhich such installment is payable. The accrued fees are payable monthly as promptly as possible after the end of each month during which the Advisory Agreement is in effect. A copy of the computations made by our Adviser to calculate such installment is, for informational purposes only, delivered to the Board.
Reimbursement of Expenses
Our Advisory Agreement requires that we reimburse our Adviser for all of its out-of-pocket expenses in performing its services, including legal, accounting, financial, due diligence and other services performed by our Adviser that outside professionals or outside consultants would otherwise perform, compensation expenses under the 2016 LTIP and our pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of our Adviser required for our operations (“Adviser Operating Expenses”). Adviser Operating Expenses do not include expenses for the advisory and administrative services provided under the Advisory Agreement. We will also reimburse our Adviser for any and all expenses (other than underwriters’ discounts) in connection with an offering, including, without limitation, legal, accounting, printing, mailing and filing fees and other documented offering expenses.
When applicable, our Adviser prepares a statement documenting all expenses incurred during each month, and delivers such statement to us within 15 business days after the end of each month. When submitted for reimbursement, such expenses are reimbursed by us no later than the 15th business day immediately following the date of delivery of such statement of expenses to us. All expenses payable by us or reimbursable to our Adviser pursuant to the agreement will not be in amounts greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s length basis. Our Adviser may, be transferred by a participant except by will orat its discretion and at any time, waive its right to reimbursement for eligible out-of-pocket expenses paid on our behalf. Once waived, these expenses are considered permanently waived and become non-recoupable in the lawsfuture.
Expense Cap
Reimbursement of descentAdviser Operating Expenses under the Advisory Agreement, advisory and distribution. In no event will anyadministrative fees paid to our Adviser and corporate general and administrative expenses such award grantedas audit, legal, listing and Board fees and equity-based compensation expense recognized under the 2016 LTIP be transferred for value. Except as otherwise determinedwill not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect (the “Expense Cap”)). The Expense Cap does not limit the reimbursement by the Committee, stock optionsCompany of expenses related to securities offerings paid by our Adviser. The Expense Cap also does not apply to legal, accounting, financial, due diligence and appreciation rights willother service fees incurred in connection with mergers and acquisitions, extraordinary litigation or other events outside the Company’s ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets.
Term of the Advisory Agreement
The Advisory Agreement has a one-year term. The Advisory Agreement shall continue in full force and effect so long as the Advisory Agreement is approved at least annually by our Board or our stockholders. On February 26, 2024, our Board, including the independent directors, unanimously approved the renewal of the Advisory Agreement with the Adviser.
The Advisory Agreement may be exercisable duringterminated at any time, without payment of any penalty, by vote of the participant’s lifetime onlyBoard or by hima vote of the Company’s stockholders, or her or,by the Adviser, in each case on not more than 60 days’ nor less than 30 days’ prior written notice to the other party. The Advisory Agreement shall automatically and immediately terminate in the event of its “assignment” (as defined in the participant’s legal incapacity to do so,1940 Act).
Amendment
The Advisory Agreement may only be amended, waived, discharged or terminated in writing signed by his or her guardian or legal representative acting on behalfthe party against which enforcement of the participantamendment, waiver, discharge or termination is sought. Any amendment of the Advisory Agreement shall be approved by either (a) the Board or (b) a vote of the Company’s stockholders.
Limitation on Receiving Shares
The ability of our Adviser to receive shares of our common stock as payment for all or a portion of the management fee and administrative fee due under the terms of our Advisory Agreement will be subject to the following limitations: (a) the ownership of shares of common stock by our Adviser may not violate the ownership limitations set forth in our charter, after giving effect to any exception from such ownership limitations that our Board may grant to our Adviser or its affiliates; and (b) compliance with all applicable restrictions under the U.S. federal securities laws and the NYSE rules. To the extent that payment of any fee in shares of our common stock would result in a fiduciary capacityviolation of the ownership limits set forth in our charter (taking into account any applicable waiver or any restrictions imposed under state lawthe U.S. federal securities laws or court supervision.
The Committee may specify at the grant date thatNYSE rules), all or parta portion of such fee payable to our Adviser will be payable in cash to the extent necessary to avoid such violation.
Registration Rights
We entered into a registration rights agreement with our Adviser with respect to any shares of our common stock that our Adviser receives as payment for any fees owed under our Advisory Agreement. These registration rights will require us to file a registration statement with respect to such shares. We agreed to pay all of the expenses relating to registering these securities. The costs associated with registering these securities will not be deducted from the compensation owed to our Adviser.
Liability and Indemnification of Adviser
Under the Advisory Agreement, we are also required to indemnify our Adviser and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding with respect to certain of our Adviser’s acts or omissions.
Other Activities of Adviser and its Affiliates
Our Adviser and its affiliates expect to engage in other business ventures, and as a result, their resources will not be dedicated exclusively to our business. However, pursuant to the Advisory Agreement, our Adviser is required to devote sufficient resources to our administration to discharge its obligations.
Separation and Distribution Agreement
To govern our relationship with NXDT after the Spin-Off, the Company, NXDT, NexPoint Real Estate Opportunities, LLC (f/k/a Freedom REIT, LLC) and the OP entered into a Separation and Distribution Agreement on March 11, 2015. The following discussion summarizes the material provisions of the Separation and Distribution Agreement.
Transfer of Assets and Assumption of Liabilities
The Separation and Distribution Agreement identified the assets transferred, liabilities assumed and contracts assigned to each of us and NXDT as part of the Spin-Off. Except as expressly set forth in the Separation and Distribution Agreement or any other transaction agreements, all assets were transferred on an “as is,” “where is” basis and the respective transferees bear the economic and legal risks that (a) any conveyance will prove to be insufficient to vest in the transferee good title, free and clear of any security interest, and (b) any necessary consents or governmental approvals were not obtained or that any requirements of laws or judgments were not complied with.
Tax Matters
The Separation and Distribution Agreement governs NXDT’s and the Company’s respective rights, responsibilities and obligations with respect to taxes, including with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters.
Releases
Except as otherwise provided in the Separation and Distribution Agreement or any other transaction agreements, each party released and forever discharged the other party and its respective subsidiaries and affiliates from all liabilities existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the separation from NXDT. The releases do not extend to or amend obligations or liabilities under any agreements between the parties that remain in effect following the separation.
Indemnification
In addition, the Separation and Distribution Agreement provided for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of NXDT’s business with NXDT. Specifically, each party will indemnify, defend and hold harmless the other party, its affiliates and subsidiaries and its officers, directors, employees and agents for any losses arising out of or otherwise in connection with the liabilities that each such party assumed or retained pursuant to the Separation and Distribution Agreement and the other transaction agreements.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. Each indemnification agreement provides that, subject to awards underlimited exceptions, and among other things, we will indemnify the director or executive officer to the fullest extent permitted by law for claims arising in his or her capacity as our director or officer.
Share Repurchase Program
On June 15, 2016, LTIP will be subjectthe Board authorized us to further restrictions on transfer.
Adjustments; Corporate Transactions. The Committee will make or provide for such adjustments in the: (a) numbers ofrepurchase up to $30.0 million shares of our common stock, coveredpar value $0.01 per share, during a two-year period that was set to expire on June 15, 2018 (the “Share Repurchase Program”). On April 30, 2018, the Board increased the Share Repurchase Program from $30.0 million to up to $40.0 million and extended it by outstanding stock options, appreciation rights, restricted shares, restricted stock units, performance sharesan additional two years to June 15, 2020. On March 13, 2020, the Board further increased the Share Repurchase Program from $40.0 million to up to $100.0 million and performance units granted underextended it to March 12, 2023. In connection with the 2016 LTIP; (b) if applicable,Share Repurchase Program and in accordance with our Related Party Transaction Policy (described below), the Board approved in advance that we may enter into repurchase transactions with certain related parties. On October 24, 2022, the Board authorized us to repurchase an indeterminate number of shares of our common stock covered by Other Awards granted pursuantat an aggregate market value of up to $100.0 million during a two-year period that will expire on October 24, 2024. This authorization replaced the 2016 LTIP; (c) exercise price or base price provided in outstanding stock options and appreciation rights; (d) kind of shares covered thereby; (e) cash incentive awards; and (f) other award terms, as the Committee in its sole discretion in good faith determines to be equitably required in order to prevent dilution or enlargementBoard’s prior authorization of the rightsShare Repurchase Program.
We may utilize various methods to effect the repurchases, and the timing and extent of participantsthe repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, including whether our common stock is trading at a significant discount to net asset value per share.
Relationship with NexBank
We do our normal banking with NexBank, an affiliate of our Adviser, on market terms. We did not pay any fees for banking services in 2023.
Relationship with NexBank Title, Inc.
We utilize the services of NexBank Title, Inc., an affiliate of our Adviser through common beneficial ownership, for title insurance and work related to providing title insurance on properties in connection with acquisitions, dispositions and refinancing transactions, on market terms. The fees we paid for these services in 2023 were approximately $58,611.30.
Sale of Old Farm
On August 16, 2023, the Company entered into a purchase agreement with NexBank, an affiliate of our adviser through common beneficial ownership, for the sale of Old Farm for $103.0 million.
Related Party Transaction Policy
The Board has adopted a written Related Party Transaction Policy for the review, approval or ratification of any related person transaction. This policy provides that otherwiseall related party transactions must be reviewed and approved by the disinterested members of the audit committee. The term “related party transaction” refers to any transaction, arrangement or relationship (including charitable contributions and including any series of similar transactions, arrangements or relationships) with the Company in which any Related Party (as defined below) has a direct or indirect material interest, other than: (a) transactions available to employees generally; (b) transactions involving less than $50,000 when aggregated with all related or similar transactions, except if receipt of any amount would result in a director no longer being considered independent under NYSE rules or would disqualify a director from (a)serving as a member of a committee of the Board; (c) transactions involving compensation or indemnification of executive officers and directors duly authorized by the Board or an authorized Board committee; (d) transactions involving reimbursement for routine expenses in accordance with Company policy; and (e) purchases of any stock dividend, stock split,products on terms generally available to third parties.
For the purposes of our Related Party Transaction Policy, “Related Parties” include:
● | directors (and nominees for director) and executive officers of the Company; |
● | immediate family members of such directors, nominees for director and executive officers, including an individual’s spouse, parents, step-parents, children, step-children, siblings, mothers- and fathers-in law, sons- and daughters-in law, brothers- and sisters-in law and other persons (except tenants or employees) who share such individual’s household; |
● | our Adviser; |
● | a stockholder owning in excess of five percent of the Company’s voting securities or an immediate family member of such a stockholder; or |
● | an entity which is owned or controlled by any of the above persons. |
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain of our investment, financing and other policies. These policies have been determined by the Board and, in general, may be amended and revised from time to time at the discretion of the Board without notice to or a vote of our stockholders. We intend to disclose any changes in our investment policies in our next required periodic report.
If the Board determines that additional funding is required, we may raise such funds through additional offerings of equity or debt securities or the retention of cash flow (subject to provisions in the Code concerning distribution requirements and the taxability of undistributed REIT taxable income) or a combination of shares, recapitalization or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities or (c) any other corporate transaction or event having an effect similar to any of the foregoing.
these methods. In the event ofthat the Board determines to raise additional equity capital, it has the authority, without stockholder approval, to issue additional common stock or preferred stock in any manner and on such transaction or event, orterms and for such consideration as it deems appropriate, at any time.
We may in the eventfuture offer equity or debt securities in exchange for property and repurchase or otherwise reacquire our shares. We intend to borrow money in the ordinary course of a changebusiness to leverage our business model and acquire additional multifamily properties.
We may in the future, subject to gross income and asset tests necessary for REIT qualification, invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers. We may make such investments for the purpose of exercising control over such entities.
We will engage in the purchase and sale of investments.
We may in the future make loans to third parties in the ordinary course of business for investment purposes in connection with the sale of one or more of our properties.
We do not expect to underwrite the securities of other issuers.
We intend to make available to our stockholders our annual reports including our audited financial statements. We are subject to the information reporting requirements of the Company,Exchange Act. Pursuant to those requirements, we are required to file annual and periodic reports, proxy statements and other information, including audited financial statements with the Committee will provideSEC.
Our Board may change any of these policies without prior notice to, or a vote of, our stockholders.
Investment Policies
We invest in substitution for anyreal estate or all outstanding awards under the 2016 LTIP such alternative consideration (including cash), if any, as itinterests in real estate.
We may in good faith determinethe future invest in real estate mortgages, securities of or interests in persons primarily engaged in real estate activities or investments in other securities.
Investments in Real Estate or Interests in Real Estate
We conduct all of our investment activities through the OP. Our investment objectives are to maximize the cash flow and value of our properties, acquire properties with cash flow growth potential, provide quarterly cash distributions and achieve long-term capital appreciation for our stockholders through targeted management and increases in the value of our properties. Consistent with our policy to acquire assets for both income and capital gain, we intend to hold at least a majority interest in the properties in our portfolio for investment with a view to long-term appreciation and to engage in the business of directly or indirectly acquiring, owning and operating well-located multifamily properties in large cities and suburban submarkets of large cities primarily in the Southeastern and Southwestern United States consistent with our investment objectives. Economic and market conditions may influence us to hold properties for different periods of time. From time to time, we may sell a property if, among other deciding factors, the sale would be equitable underin the circumstancesbest interest of our stockholders.
We currently invest primarily in Class B multifamily properties. Future investment or development activities will not be limited to any geographic area, property type or to a specified percentage of our assets. While we may diversify in terms of property locations, size and will requiremarket, we do not have any limit on the amount or percentage of our assets that may be invested in connection therewith the surrender of all awards so replacedany one property or any one geographic area. We intend to engage in such future investment activities in a manner that compliesis consistent with Section 409Athe maintenance of the Code.our status as a REIT for U.S. federal income tax purposes. Accordingly, certain investments we make may be made through a taxable REIT subsidiary. In addition, we may purchase or lease apartments or other types of properties for eachlong-term investment, expand and improve the properties we presently hold all or a majority interest in or other acquired properties, or sell such properties, in whole or in part, when circumstances warrant.
We may also participate with third parties in property ownership, through joint ventures, funds or other types of co-ownership. We also may acquire real estate or interests in real estate in exchange for the issuance of common stock, optionunits, preferred stock or appreciation rightoptions to purchase stock. These types of investments may permit us to own interests in larger assets without unduly restricting our diversification and, therefore, provide us with flexibility in structuring our portfolio. We will not, however, enter into a joint venture or other partnership arrangement to make an exercise price greater than the consideration offeredinvestment that would not otherwise meet our investment policies.
Equity investments in acquired properties may be subject to existing mortgage financing and other indebtedness or to new indebtedness which may be incurred in connection with acquiring or refinancing these properties. We will not have a limitation on the number or amount of mortgages which may be placed on any such transaction or event or changeone piece of property. Investments are also subject to our policy not to fall within the definition of an “investment company” under the 1940 Act, by relying on the exclusion provided in controlSection 3(c)(5)(C) of the Company,1940 Act, which excludes a real estate program from the Committeedefinition of an investment company if it is primarily engaged in “purchasing or acquiring … interests in real estate.”
Dispositions. We may dispose of some of our properties if, based upon management’s periodic review of our properties, the Board determines that such action would be in its discretion electthe best interest of us and our stockholders.
Financings and Leverage Policy. In the future, we anticipate using a number of different sources to cancel such stock optionfinance our acquisitions, developments and operations, including, but not limited to, cash flows from operations, asset sales, seller financing, issuance of debt securities, private financings (such as bank credit facilities, which may or appreciation right withoutmay not be secured by our assets), property-level mortgage debt, common or preferred equity issuances or any paymentcombination of these sources, to the person holdingextent available to us, or other sources that may become available from time to time. Any debt that we incur may be recourse or non-recourse and may be secured or unsecured. We also may take advantage of joint venture or other partnering opportunities as such stock optionopportunities arise in order to acquire properties that would otherwise be unavailable to us or appreciation right.if we believe joint ventures or other partnering structures are more favorable to us compared with owning the properties outright. We may use the proceeds of our borrowings to acquire assets, to refinance existing debt or for general corporate purposes.
Although we are not required to maintain any particular leverage ratio, we intend, when appropriate, to employ prudent amounts of leverage and to use debt as a means of providing additional funds to make investments, to refinance existing debt or for general corporate purposes. We expect to use leverage conservatively, assessing the appropriateness of new equity or debt capital based on market conditions, including prudent assumptions regarding future cash flow, the creditworthiness of residents and future rental rates. Our charter and bylaws do not limit the amount of debt that we may incur and there are no limits on the amount of leverage we may use. The CommitteeBoard has not adopted a policy limiting the total amount of debt that we may incur.
The Board will make or provide for such adjustmentsconsider a number of factors in evaluating the amount of debt that we may incur. Our decision to use leverage in the future to finance our assets will be at our discretion and will not be subject to the numbersapproval of our stockholders, and kindwe are not restricted by our governing documents or otherwise in the amount of shares available for issuance under the 2016 LTIP and the share limits of the 2016 LTIP as the Committee in its sole discretionleverage that we may in good faith determineuse.
Lending Policies. We do not have a policy limiting our ability to be appropriatemake loans to other persons. We may consider offering purchase money financing in connection with such transactionthe sale of properties where the provision of that financing will increase the value to be received by us for the property sold. We also may make loans to joint ventures in which we participate. Any loan we make will be consistent with maintaining our status as a REIT.
Equity Capital Policies. To the extent that the Board determines to obtain additional capital, we may issue equity securities, including additional units or event. However, any adjustmentsenior securities of the OP, retain earnings (subject to provisions in the Code requiring distributions of income to maintain REIT qualification) or pursue a combination of these methods. As long as the OP is in existence, we will generally contribute the proceeds of all equity capital raised by us to the limit onOP in exchange for additional interests in the numberOP, which will dilute the ownership interests of the limited partners in the OP.
Existing stockholders will have no preemptive rights to common or preferred stock or units issued in any securities offering by us, and any such offering might cause a dilution of a stockholder’s investment in us. We may in the future issue shares of common stock or units in connection with acquisitions of property.
We may, under certain circumstances and subject to there being funds legally available, purchase shares of our common stock or other securities in the open market or in private transactions with our stockholders, provided that those purchases are approved by the Board. Any repurchases of shares of our common stock thator other securities would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualification as a REIT.
Real Estate-Related Debt and Securities
We may allocate up to approximately 30% of our portfolio to investments in real estate-related debt and securities with the potential for high current income or total returns. These allocations may include first and second mortgages, subordinated, bridge, mezzanine, construction and other loans, as well as debt securities related to or secured by real estate and common and preferred equity securities, which may include securities of other REITs or real estate companies. Subject to the provisions of our charter, some of these investments may be issued upon exercise of Incentive Stock Options will be made only if and to the extent such adjustment would not cause any option intended to qualify as an Incentive Stock Option to fail to so qualify.
Prohibition on Repricing.Except in connection with certain corporate transactionsother programs sponsored, managed or changes in the capital structure of the Company, the terms of outstanding awards may not be amended to (a) reduce the exercise price or base price of outstanding stock options or appreciation rights, or (b) cancel outstanding stock options or appreciation rights in exchange for cash, Other Awards or stock options or appreciation rights with an exercise price or base price, as applicable, that is less than the exercise price or base price of the original stock options or appreciation rights, as applicable, without stockholder approval. The 2016 LTIP specifically provides that this provision is intended to prohibit the repricing of “underwater” stock options and appreciation rights and that it may not be amended without approvaladvised by our stockholders.
Detrimental ActivityMaterial Actual and Recapture. Any award agreement may provide for the cancellation or forfeiture and repayment to usPotential Conflicts of any award or gain related to an award, or other provisions intended to have a similar effect, upon such terms and conditions as may be determined by the Committee from time to time, if any participant, either during employment or other service with us or a subsidiary or within a specified period after such employment or service engages in any detrimental activity. In addition, any award agreement may provide for cancellation or forfeiture of an award or the forfeiture and repayment of any gain related to an award, or other provisions intended to have a similar effect, upon such terms and conditions as may be required by the Committee or under Section 10D of the Exchange Act and any applicable rules and regulations promulgated by the SEC or any national securities exchange or national securities association on which shares of our common stock may be traded.Interest
Withholding. To the extent the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a participant or other person under the 2016 LTIP, and the amounts available to us for such withholding are insufficient, it will be a condition to the receipt of such payment or the realization of such benefit that the participant or such other person make arrangements satisfactory to the Company for payment of the balance of such taxes required to be withheld, which arrangements, in the discretion of the Committee, may include relinquishment of a portion of such benefit. If a participant’s benefit is to be received in the form of shares of our common stock, and such participant fails to make arrangements for the payment of tax, then, unless otherwise determined by the Committee, we will withhold shares of our common stock having a value equal to the amount required to be withheld. When a participant is required to pay the Company an amount required to be withheld under applicable income and employment tax laws, the participant may elect, unless otherwise determined by the Committee, to satisfy the obligation, in whole or in part, by having withheld, from the shares required to be delivered to the participant, shares of our common stock having a value equal to the amount required to be withheld or by delivering to us other shares of our common stock held by such participant. The shares used for tax withholding will be valued at an amount equal to the market value of such shares of our common stock on the date the benefit is to be included in the participant’s income. In no event will the market value of the shares of our common stock to be withheld and delivered pursuant to the 2016 LTIP to satisfy applicable withholding taxes in connection with the benefit exceed the minimum amount of taxes required to be withheld. Participants will also make such arrangements as the Company may require for the payment of any withholding tax obligation that may arise in connection with the disposition of shares of our common stock acquired upon the exercise of stock options.
No Right to Continued Employment. The 2016 LTIP does not confer upon any participant any right with respect to continuance of employment or service with the Company or any of its subsidiaries.
Effective Date of the 2016 LTIP. The 2016 LTIP will become effective on the date it is approved by the Company’s stockholders.
Amendment and Termination of the 2016 LTIP. The Board generally may amend the 2016 LTIP from time to time in whole or in part. However, if any amendment (a) would materially increase the benefits accruing to participants under the 2016 LTIP, (b) would materially increase the number of shares which may be issued under the 2016 LTIP, (c) would materially modify the requirements for participation in the 2016 LTIP, or (d) must otherwise be approved by our stockholders in order to comply with applicable law or the rules of the NYSE, then such amendment will be subject to stockholder approval and will not be effective unless and until such approval has been obtained.
Further, subject to the 2016 LTIP’s prohibition on repricing, the Committee generally may amend the terms of any award prospectively or retroactively (except in the case of Qualified Performance-Based Award (other than in connection with the participant’s death or disability or a change in control of the Company) where such action would result in the loss of the otherwise available exemption under Section 162(m) of the Code). Except in the case of certain adjustments permitted under the 2016 LTIP, no such amendment may be made that would impair the rights of any participant without his or her consent. If permitted by Section 409A of the Code and
Section 162(m) of Code and subject to certain other limitations set forth in the 2016 LTIP (and notwithstanding the 2016 LTIP’s minimum vesting requirements), including in the case of termination of employment due to death, disability or retirement, in the case of unforeseeable emergency or other special circumstances, or in the event of a change in control of the Company, the Committee may accelerate the vesting of certain awards granted under the 2016 LTIP (except that with respect to Qualified Performance-Based Awards, no such action may be taken if it would result in the loss of the otherwise available exemption of such award under Section 162(m) of the Code).
The Board may, in its discretion, terminate the 2016 LTIP at any time. Termination of the 2016 LTIP will not affect the rights of participants or their successors under any awards outstanding and not exercised in full on the date of termination. No grant will be made under the 2016 LTIP more than ten years after the effective date of the 2016 LTIP, but all grants made on or prior to such date shall continue in effect thereafter subject to the terms of the 2016 LTIP.
New Plan Benefits
It is not possible to determine the specific amounts and types of awards that may be awarded in the future under the 2016 LTIP because the grant and actual pay-out of awards under the 2016 LTIP are subject to the discretion of the Committee.
Federal Income Tax Consequences
The following is a brief summarybriefly summarizes the material potential and actual conflicts of certaininterest which may arise from the overall investment activity of the Federal income tax consequences of certain transactions under the 2016 LTIP based on Federal income tax laws. This summary, which is presented for the information of stockholders considering how to vote on this proposalour Adviser, its clients and not for 2016 LTIP participants,its affiliates, but is not intended to be completean exhaustive list of all such conflicts. The scope of the activities of the affiliates of our Adviser and does not describe Federal taxesthe funds and clients advised by affiliates of our Adviser may give rise to conflicts of interest or other than income taxes (such as Medicare and Social Security taxes), restrictions and/or state, locallimitations that cannot be foreseen or foreign tax consequences.mitigated at this time.
Tax Consequences to ParticipantsAdvisory Agreement
Restricted Shares. The recipient of restricted shares generally will be subject
Under our Advisory Agreement, our Adviser or its affiliates are entitled to tax at ordinary income rates on the fair market value of the restricted shares (reduced by any amount paid by the recipient for such restricted shares) at such time as the shares are no longer subject to forfeiture or restrictions on transfer for purposes of Section 83 of the Code (“Restrictions”). However, a recipient who so elects under Section 83(b) of the Code within 30 days of the date of transfer of the shares will have taxable ordinary income on the date of transfer of the shares equal to the excess of the fair market value of such shares (determined without regard to the Restrictions) over the purchase price, if any, of such restricted shares. If a Section 83(b) election has not been made, any dividends received with respect to restricted sharesfees that are subjectstructured in a manner intended to the Restrictions generally will be treated as compensation that is taxable as ordinary incomeprovide incentives to the recipient.
Performance Shares and Performance Units. No income generally will be recognized upon the grant of performance shares or performance units. Upon payment in respect of the settlement of performance shares or performance units, the recipient generally will be requiredour Adviser to include as taxable ordinary income in the year of receipt an amount equal to the amount of cash received and the fair market value of any nonrestricted shares of our common stock received.
Nonqualified Stock Options. In general, no income will be recognized by an optionee at the time a non-qualified stock option is granted. At the time of exercise of a non-qualified stock option, ordinary income will be recognized by the optionee in an amount equal to the difference between the exercise price paid for the shares and the fair market value of the shares, if unrestricted, on the date of exercise. And, at the time of sale of shares acquired pursuant to the exercise of a non-qualified stock option, appreciation (or depreciation) in value of the shares after the date of exercise will be treated as either short-term or long-term capital gain (or loss) depending on how long the shares have been held.
Incentive Stock Options. No income generally will be recognized by an optionee upon the grant or exercise of an Incentive Stock Option. The exercise of an Incentive Stock Option, however, may result in alternative minimum tax liability. If shares of our common stock are issued to the optionee pursuant to the exercise of an Incentive Stock Option, and if no disqualifying disposition of such shares is made by such optionee within two years after the date of grant or within one year after the transfer of such shares to the optionee, then upon sale of such shares, any amount realized in excess of the option price will be taxed to the optionee as a long-term capital gain and any loss sustained will be a long-term capital loss.
If shares of our common stock acquired upon the exercise of an Incentive Stock Option are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of such shares at the time of exercise (or, if less, the amount realized on the disposition of such shares if a sale or exchange) over the exercise price paid for such shares. Any further gain (or loss) realized by the participant generally will be taxed as short-term or long-term capital gain (or loss) depending on the holding period.
Appreciation Rights. No income will be recognized by a participant in connection with the grant of an appreciation right. When the appreciation right is exercised, the participant normally will be required to include as taxable ordinary income in the year of exercise an amount equal to the amount of cash received and the fair market value of any unrestricted shares of our common stock received on the exercise.
Restricted Stock Units. No income generally will be recognized upon the award of restricted stock units. The recipient of a restricted stock unit award generally will be subject to tax at ordinary income rates on the fair market value of unrestricted shares of our common stock on the date that such shares are transferred to the participant under the award (reduced by any amount paid by the participant for such restricted stock units), and the capital gains/loss holding period for such shares will also commence on such date.
Tax Consequences to the Company or its Subsidiaries
To the extent that a participant recognizes ordinary income in the circumstances described above, the Company or the subsidiary for which the participant performs services will be entitled to a corresponding deduction provided that, among other things, the income meets the test of reasonableness, is an ordinary and necessary business expense, is not an “excess parachute payment” within the meaning of Section 280G of the Code and is not disallowed by the $1 million limitation on certain executive compensation under Section 162(m) of the Code. In this regard, certain types of awards under the 2016 LTIP, such as time-vested restricted shares and restricted stock units, cannot qualify as performance-based awards under Section 162(m) of the Code, and in other cases awards may fail to qualify if all requirements for qualification are not met in connection with such awards.
Registration with the SEC
We intend to file a Registration Statement on Form S-8 relating to the issuance of shares of our common stock under the 2016 LTIP with the SEC pursuant to the Securities Act of 1933, as amended, as soon as practicable after approval of the 2016 LTIP by our stockholders.
Condition for Effectiveness of Proposal 6
This Proposal 6 is conditioned upon the approval of Proposal 4. If Proposal 4 is not approved, this Proposal 6 will not have any effect.
The Board recommends a vote FOR the approval of the Company’s 2016 Long Term Incentive Plan.
APPROVAL OF AMENDMENT TO
ADVISORY AGREEMENT
Overview
We are asking our stockholders to vote to approve an amendment to the Company’s Advisory Agreement (the “Proposed Advisory Agreement Amendment”) to (a) revise the definition of “Independent Directors” to conform to that of the NYSE rules rather than the 1940 Act, (b) revise the definition of “Operating Expenses” to include compensation expenses under the 2016 LTIP, (c) remove the requirement that renewal, amendment or termination of the Advisory Agreement comply with Section 15 of the 1940 Act and (d) remove a reference to requirements of the 1940 Act which, assuming Proposal 3, Proposal 4 and Proposal 5 are approved, will no longer be applicable.
Our Charter requires us to comply with certain requirements of the 1940 Act. One of the requirementsperform in our Charter is that any advisory agreement that the Company enters into must comply with Section 15 of the 1940 Act. As discussed under “Proposal 3,” “Proposal 4”best interest and “Proposal 5” above, the Board believes that it is in the best interest of our stockholders. However, because our Adviser is entitled to receive substantial compensation regardless of performance, our Adviser’s interests are not wholly aligned with those of our stockholders. In that regard, our Adviser could be motivated to recommend riskier or more speculative investments that would entitle our Adviser to the highest fees. For example, because advisory and administrative fees payable to our Adviser are based on the total real estate assets of the Company, including any form of leverage, our Adviser may have an incentive to removeincur a high level of leverage or to acquire properties on less than favorable terms in order to increase the total amount of real estate assets under management. In addition, our Adviser’s ability to receive higher fees and reimbursements depends on our continued investment in real properties. Therefore, the interest of our Adviser and its affiliates in receiving fees may conflict with the interest of our stockholders in earning income on their investment in our common stock.
Externally managed REITs may also have conflicts of interest with their advisers that are not common with self-managed REITs. These conflicts as they relate to us and our Adviser are discussed in the following sections.
Other Accounts and Relationships
As part of their regular business, our Adviser, its affiliates and their respective officers, directors, trustees, stockholders, members, partners and employees and their respective funds and investment accounts (collectively, the “Related Parties”) hold, purchase, sell, trade or take other related actions both for their respective accounts and for the accounts of their respective clients, on a principal or agency basis, subject to applicable law including Section 206(3) of the Investment Advisers Act of 1940 Act compliance provisions from our Charter. For(the “Advisers Act”), with respect to loans, securities and other investments and financial instruments of all types. The Related Parties also provide investment advisory services, among other services, and engage in private equity, real estate and capital markets-oriented investment activities. The Related Parties will not be restricted in their performance of any such services or in the types of debt, equity, real estate or other investments which they may make. The Related Parties may have economic interests in or other relationships with respect to investments made by us. In particular, the Related Parties may make and/or hold an investment, including investments in securities, that may compete with, be pari passu, senior or junior in ranking to, an investment, including investments in securities, made and/or held by us or in which partners, security holders, members, officers, directors, agents or employees of such Related Parties serve on boards of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result in restrictions on transactions by us and otherwise create conflicts of interest for us. In such instances, the Related Parties may in their discretion make investment recommendations and decisions that may be the same as or different from those made with respect to our investments. In connection with any such activities described above, the Related Parties may hold, purchase, sell, trade or take other related actions in securities or investments of a type that may be suitable for us. The Related Parties will not be required to offer such securities or investments to us or provide notice of such activities to us. In addition, in managing our portfolio, our Adviser may take into account its relationship or the relationships of its affiliates with obligors and their respective affiliates, which may create conflicts of interest. Furthermore, in connection with actions taken in the ordinary course of business of our Adviser in accordance with its fiduciary duties to its other clients, our Adviser may take, or be required to take, actions which adversely affect our interests.
The Related Parties have invested and may continue to invest in investments that would also be appropriate for us. Such investments may be different from those made on our behalf. Neither our Adviser nor any Related Party is necessarily prohibited from making or maintaining such investments even if they are not favorable to us, subject to their fiduciary duties and disclosure obligations, and subject to our Adviser’s allocation policy set forth below. The investment policies, fee arrangements and other circumstances applicable to such other parties may vary from those applicable to us. Our Adviser and/or any Related Party may also provide advisory or other services for a customary fee with respect to investments made or held by us, and neither we nor our stockholders shall have any right to such fees.
Our Adviser and/or any Related Party may also have ongoing relationships with, render services to or engage in transactions with other clients, including: NREF, a publicly traded commercial mortgage REIT listed on the NYSE; NHT, a publicly traded hospitality REIT listed on the TSXV; VineBrook, a single-family rental REIT; NXDT, a diversified REIT listed on the NYSE; NXHT, a single-family rental REIT; NSP, a self-storage REIT; REITs that are wholly owned subsidiaries of registered investment companies advised by our Sponsor and its affiliates; and other REITs, who make investments of a similar nature as we do, Delaware Statutory Trusts and with companies whose securities or properties are acquired by us and may own equity or debt securities issued by our joint ventures. In connection with the foregoing activities our Adviser and/or any Related Party may from time to time come into possession of material nonpublic information that limits the ability of our Adviser to effect a transaction for us, and our investments may be constrained as a consequence of our Adviser’s inability to use such information for advisory purposes or otherwise to effect transactions that otherwise may have been initiated on behalf of its clients, including us. In addition, officers or affiliates of our Adviser and/or Related Parties may possess information relating to our joint ventures that is not known to the individuals at our Adviser responsible for monitoring our joint ventures and performing the other obligations under the Advisory Agreement.
The Related Parties currently provide services to NREF, VineBrook, NXDT, NXHT, NSP, Delaware Statutory Trusts and REITs that are wholly owned subsidiaries of registered investment companies advised by our Sponsor and its affiliates, and may in the future provide services to other REITs, funds or other entities that compete with us for similar investments.
Although the professional staff of our Adviser will devote as much time to us as our Adviser deems appropriate to perform its duties in accordance with the Advisory Agreement and in accordance with reasonable commercial standards, the staff may have conflicts in allocating its time and services among us and our Adviser’s or any Related Parties’ other accounts. The Advisory Agreement places restrictions on our Adviser’s ability to buy and sell investments for us. Accordingly, during certain periods or in certain circumstances, our Adviser may be unable as a result of such restrictions to buy or sell investments or to take other actions that it might consider to be in the best interest of us and our stockholders.
The directors, officers, employees and agents of the Related Parties, and our Adviser may, subject to applicable law, serve as directors (whether supervisory or managing), officers, employees, partners, agents, nominees or signatories, and receive arm’s length fees in connection with such service, for us or any Related Party, or for any of our joint ventures or any affiliate thereof, and neither us nor our stockholders shall have the right to any such fees.
The Related Parties serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of other investment funds managed by our Adviser or its affiliates. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interest or the best interest of our stockholders. We may compete with other entities managed by our Adviser and its affiliates for capital and investment opportunities.
There is no limitation or restriction on our Adviser or any of its Related Parties with regard to acting as investment manager (or in a similar role) to other parties or persons. This and other future activities of our Adviser and/or its Related Parties may give rise to additional conflicts of interest. Such conflicts may be related to obligations that our Adviser or its affiliates have to other clients.
Subject to prior approval of our Board, certain Related Parties, including NexBank and Governance Re, Ltd. among others, may provide banking, agency, insurance and other services to us and our operating affiliates for customary fees, and neither us, nor our subsidiaries will have a right to any such fees.
Allocation of Investment Opportunities
In addition, the Related Parties may, from time to time, be presented with investment opportunities that fall within our investment objectives and the investment objectives of other clients, funds or other investment accounts managed by the Related Parties, and in such circumstances, the Related Parties expect to allocate such opportunities among us and such other clients, funds or other investment accounts on a basis that the Related Parties determine in good faith is appropriate taking into consideration such factors as the fiduciary duties owed to us and such other clients, funds or other investment accounts, our primary mandates and the primary mandates of such other clients, funds or other investment accounts, the capital available to us and such other clients, funds or other investment accounts, any restrictions on investment, the sourcing of the transaction, the size of the transaction, the amount of potential follow-on investing that may be required for such investment and our other investments and the other investments of such other clients, funds or other investment accounts, the relation of such opportunity to our investment strategy and the strategy of such other clients, funds or other investment accounts, reasons of portfolio balance and any other considerations deemed relevant by the Related Parties in good faith. Our Adviser allocates investment opportunities across the entities for which such opportunities are appropriate, consistent with (1) its internal conflict of interest and allocation policies and (2) the requirements of the Advisers Act. Our Adviser seeks to allocate investment opportunities among such entities in a manner that is fair and equitable over time and consistent with its allocation policy. However, there is no assurance that such investment opportunities will be allocated to us fairly or equitably in the short-term or over time, and there can be no assurance that we will be able to participate in all such investment opportunities that are suitable for us.
Cross Transactions and Principal Transactions
As further described below, our Adviser may effect client cross-transactions where our Adviser causes a transaction to be effected between us and another client advised by our Adviser or any of its affiliates. Our Adviser may engage in a client cross-transaction involving us any time that our Adviser believes such transaction to be fair to us and the other client of our Adviser or its affiliates in accordance with our Adviser’s internal written cross-transaction policies and procedures.
As further described below, our Adviser may effect principal transactions where we may make and/or hold an investment, including an investment in securities, in which our Adviser and/or its affiliates have a debt, equity or participation interest, in each case in accordance with applicable law and with our Adviser’s internal written policies and procedures for principal transactions, which may include our Adviser obtaining our consent and approval prior to engaging in any such principal transaction between us and our Adviser or its affiliates.
Our Adviser may direct us to acquire or dispose of investments in cross trades between us and other clients of our Adviser or its affiliates in accordance with applicable legal and regulatory requirements. In addition, we may make and/or hold an investment, including an investment in securities, in which our Adviser and/or its affiliates have a debt, equity or participation interest, and the holding and sale of such investments by us may enhance the profitability of our Adviser’s own investments in such companies. Moreover, we and principals and persons or entities controlling, controlled by or under common control with the Adviser may invest in assets originated by, or enter into loans, borrowings and/or financings with our Adviser or its affiliates, including but not limited to NexBank, including in primary and secondary transactions with respect to which the Adviser or a Related Party may receive customary fees from the applicable issuer, and neither we nor our subsidiaries shall have the right to any such fees. In each such case, our Adviser and principals and persons or entities controlling, controlled by or under common control with the Adviser may have a potentially conflicting division of loyalties and responsibilities with respect to us and the other parties to such investment. Under certain circumstances, our Adviser and its affiliates may determine that it is appropriate to avoid such conflicts by selling an investment at a fair value that has been calculated pursuant to our Adviser’s valuation procedures to another fund managed or advised by our Adviser or principals and persons or entities controlling, controlled by or under common control with the Adviser. In addition, our Adviser may enter into agency cross-transactions where it or any of its affiliates acts as a broker for us and for the other party to the transaction, to the extent permitted under applicable law. Our Adviser may obtain our written consent as provided herein if any such transaction requires the consent of the Board, including a majority of independent directors, whounder Section 206(3) of the Advisers Act.
Participation in Creditor Committees, Underwriting and Other Activities
Our Adviser and/or its Related Parties may participate in creditors or other committees with respect to the bankruptcy, restructuring or workout of our joint ventures. In such circumstances, our Adviser may take positions on behalf of itself or Related Parties that are “Independent Directors”adverse to our interests.
Our Adviser and/or its Related Parties may act as definedan underwriter, arranger or placement agent, or otherwise participate in the Charter, also believeorigination, structuring, negotiation, syndication or offering of investments purchased by us. Such transactions are on an arm’s-length basis and may be subject to arm’s-length fees. There is no expectation for preferential access to transactions involving investments that are underwritten, originated, arranged or placed by our Adviser and/or its Related Parties and neither we nor our stockholders shall have the right to any such fees.
Material Non-Public Information
There are generally no ethical screens or information barriers among our Adviser and certain of its affiliates of the type that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. If our Adviser, any of its personnel or its affiliates were to receive material non-public information about an investment or issuer, or have an interest in causing us to acquire a particular investment, our Adviser may be prevented from causing us to purchase or sell such asset due to internal restrictions imposed on our Adviser. Notwithstanding the maintenance of certain internal controls relating to the management of material non-public information, it is possible that such controls could fail and result in our Adviser, or one of its investment professionals, buying or selling an asset while, at least constructively, in possession of material non-public information. Inadvertent trading on material non-public information could have adverse effects on our Adviser’s reputation, result in the imposition of regulatory or financial sanctions, and as a consequence, negatively impact our Adviser’s ability to perform its investment management services to us. In addition, while our Adviser and certain of its affiliates currently operate without information barriers on an integrated basis, such entities could be required by certain regulations, or decide that it is advisable, to establish information barriers. In such event, our Adviser’s ability to operate as an integrated platform could also be impaired, which would limit our Adviser’s access to personnel of its affiliates and potentially impair its ability to manage our investments.
Other Benefits to Our Adviser
In addition to the compensation provided to our Adviser by the Advisory Agreement and any long-term incentive plan awards, our Adviser may also receive reputational benefits from our growth through capital-raising transactions and acquisitions. Our Adviser also has an incentive to raise capital and cause us to acquire additional real estate assets, which would then contribute to the uncapped portion of the advisory and administrative fees. The reputational benefit to our Adviser from our growth could assist our Adviser and its affiliates in pursuing other real estate investments. These investments could be made through other entities managed by our Adviser or its affiliates, and there can be no assurance that we will be able to participate in all such investment opportunities.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The tables below set forth the beneficial ownership information of our common stock as of February 27, 2024 for:
● | each person known to us to be the beneficial owner of more than 5% of our shares of common stock; |
● | each of our named executive officers; |
● | each of our directors; and |
● | all of our executive officers and directors as a group. |
Unless otherwise noted below, the address of the persons and entities listed on the table is the address of our Adviser’s office, 300 Crescent Court, Suite 700, Dallas, Texas 75201. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the besttable below have sole voting and investment power with respect to all shares of common stock reflected as beneficially owned, subject to applicable community property laws.
Beneficial ownership and percentage of beneficial ownership is based on 25,774,730shares of our common stock outstanding at February 27, 2024. Shares of common stock that a person has the right to acquire within 60 days of February 27, 2024 upon the vesting of restricted stock units are deemed to be outstanding and beneficially owned by the person for the purpose of computing the percentage of beneficial ownership of that person and any group of which that person is a member, but are not deemed outstanding for the purpose of computing the percentage of beneficial ownership for any other person.
NAME | BENEFICIALLY OWNED | PERCENT OF CLASS |
5% Stockholders: | ||
BlackRock (1) | 4,930,453 | 19.13% |
James Dondero (2) | 2,990,482 | 11.6% |
Vanguard Group (3) | 2,690,700 | 10.44% |
State Street Group (4) | 1,509,987 | 5.9% |
Executive Officers and Directors | ||
James Dondero (2) | 2,990,482 | 11.6% |
Brian Mitts (5) | 91,118 | * |
Matt McGraner (6) | 387,404 | 1.5% |
Matthew Goetz | 114,747 | * |
D.C. Sauter (7) | 12,174 | * |
Edward Constantino (8) | 44,269 | * |
Scott Kavanaugh (9) | 26,246 | * |
Dr. Arthur Laffer (9) | 50,839 | * |
Dr. Carol Swain (9) | 2,794 | * |
Catherine Wood (9) | 9,357 | * |
All Directors and Executive Officers as a group (10 persons) (10) | 3,342,026 | 12.96% |
* | Indicates ownership of less than 1% |
(1) | According to a Schedule 13G/A filed on January 19, 2024 by BlackRock, Inc., BlackRock, Inc. has sole dispositive power with respect to 4,930,453 shares of our common stock and has sole voting power with respect to 4,749,136 shares of our common stock. The address of BlackRock, Inc. is 50 Hudson Yards, New York, NY 10001. |
(2) | James D. Dondero, our Sponsor, NexPoint Asset Management, L.P. and Nancy Marie Dondero have sole voting power, shared voting power, sole dispositive power and shared dispositive power as follows: |
Name of Reporting Person | Sole Voting | Shared Voting | Sole | Shared | ||||||||||||
James D. Dondero |
|
| 392,242.35 | 2,626,867.90 | 393,242.35 | 2,626,867.90 | ||||||||||
NexPoint Advisors, L.P. | 0 | 153,037.00 | 0 | 153,037.00 | ||||||||||||
NexPoint Asset Management, L.P. | 0 | 373,137.00 | 0 | 373,137.00 | ||||||||||||
Nancy Marie Dondero | 2,081,063.1 | 95,122.00 | 2,081,063.1 | 95,122.00 |
The shares held by Mr. Dondero are held both directly and indirectly through NexPoint and HCMFA (as described below), accounts advised by other affiliated investment advisors, an employee benefit plan and a trust. Also included are shares that Mr. Dondero has the right to acquire beneficial ownership of that are held by a trust for which he does not serve as trustee and 16,506 shares issuable upon vesting of restricted stock units within 60 days after February 27, 2024. The shares held by NexPoint and HCMFA are held indirectly through advised accounts. Mr. Dondero is the sole member of the general partner of NexPoint and may be deemed to be an indirect beneficial owner of shares held by NexPoint. Mr. Dondero is also the sole stockholder and director of the general partner of HCMFA and may be deemed to be an indirect beneficial owner of shares held by HCMFA. Mr. Dondero disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. The shares held by Ms. Dondero are held by a trust of which she is the trustee and through direct ownership in a shared account. Ms. Dondero is the sister of Mr. Dondero and disclaims beneficial ownership of such shares. On July 1, 2019 and August 14, 2019, the trust pledged 570,567 shares and 255,292 shares, respectively, as collateral in connection with a credit agreement and a revolving line of credit promissory note with CrossFirst Bank. On December 17, 2019, the trust pledged an additional 1,334,605 shares as collateral in connection with a securities based line of credit agreement with Raymond James Bank, N.A.As of April 11, 2024, 730,595 shares held by the trust are pledged as collateral to CrossFirst Bank, 1,219,070 shares are pledged as collateral to Raymond James Bank, N.A. and 349,475 shares are pledged as collateral to American National Bank.
(3) | According to a Schedule 13G/A filed on February 13, 2024 by Vanguard Group, Inc., Vanguard Group, Inc. has sole dispositive power with respect 2,629,850 shares of our common stock, shared dispositive power with respect to 60,850 shares of our common stock and shared voting power with respect 40,512 shares of our common stock. The address of Vanguard Group, Inc. is 100 Vanguard Blvd., Malvern, PA 19355. |
(4) | According to a Schedule 13G filed on January 30, 2024 by State Street Corporation, State Street Corporation has shared dispositive power with respect 1,507,787 shares of our common stock and shared voting power with respect 1,225,466 shares of our common stock. The address of State Street Corporation is State Street Financial Center, One Congress Street, Suite 1, Boston, MA 02114. |
(5) | Includes 3,730 shares issuable upon vesting of restricted stock units within 60 days after February 27, 2024 and 65,373 shares held in a margin account with J.P. Morgan Chase. |
(6) | Includes 15,870 shares issuable upon vesting of restricted stock units within 60 days after February 27, 2024. Mr. McGraner has sole voting and dispositive power with respect to 370,418 shares of our common stock and shared voting and shared dispositive power with respect to 16,986 shares of our common stock held by a limited liability company in which Mr. McGraner owns an indirect minority interest. Mr. McGraner disclaims beneficial ownership of such shares over which he has shared voting and shared dispositive power, except to the extent of his pecuniary interest therein. Mr. McGraner pledged 100,000 shares of our common stock as collateral in connection with a personal loan from NexBank. |
(7) | Includes 2,073 shares issuable upon vesting of restricted stock units within 60 days after February 27, 2024. |
(8) | Includes 1,397 shares issuable upon vesting of restricted stock units within 60 days after February 27, 2024. |
(9) | Includes 2,794 shares issuable upon vesting of restricted stock units within 60 days after February 27, 2024. |
(10) | Includes 49,355 shares issuable upon vesting of restricted stock units within 60 days after February 27, 2024. In computing the aggregate number of shares beneficially owned and the aggregate percentage ownership by all directors and executive officers as a group, 16,986 shares deemed to be beneficially owned by both Mr. Dondero and Mr. McGraner have not been counted more than once. |
AUDIT COMMITTEE REPORT
The audit committee reviewed and discussed with both the Company’s management and independent registered public accounting firm, KPMG LLP, the audited financial statements of the Company for the year ended December 31, 2023 prior to remove such provisions fromtheir issuance. These reviews included discussion with the Advisory Agreement.
Additionally, the Advisory Agreement did not initially contemplate compensation pursuant to an equity plan such as the 2016 LTIP, and any expenses incurred in connection with such a plan are not categorized in the Advisory Agreement. The Board, including a majority of directors who are “Independent Directors” as defined in the Charter, therefore believes it is advisable and in the best interestindependent registered public accounting firm of the Company to amend the Advisory Agreement to explicitly provide that compensation expenses under the 2016 LTIP will be categorized as “Operating Expenses” and will be subject to the 1.5% cap for operating expenses, administrative fees and management fees.
Description of the Proposed Advisory Agreement Amendment
The terms of our Advisory Agreement are described above under “Certain Relationships and Related Party Transactions – Our Advisory Agreement.” The Proposed Advisory Agreement Amendment makes the following changes to the Advisory Agreement:
Based on all of these reviews and discussions, all of the audit committee members, whose names are listed below, recommended to the Board that it approve the inclusion of the Company’s audited financial statements in the 1940 Act.
We believe these changes are advisable because they will allow us a greater degree of flexibility in negotiatingCompany’s Annual Report on Form 10-K for the terms of our relationshipyear ended December 31, 2023 for filing with our Adviser. Additionally, if Proposal 3 is approved, the Board will
no longer be required to have members that satisfy the independence standardsMembers of the 1940 Act. Finally, the change to the definition of “Operating Expenses” will provide certainty as to the categorization of compensation expenses if the 2016 LTIP is approved.Audit Committee
The general description of the Proposed Advisory Agreement Amendment set forth above is qualified in its entirety by reference to the text of the Proposed Advisory Agreement Amendment, which is attached asAppendix C to this proxy statement. Additionally, a marked version of the Advisory Agreement showing the changes contemplated by the Proposed Advisory Agreement Amendment is attached asAppendix D to this proxy statement.
Edward Constantino (Chair) | Scott Kavanaugh | Dr. Arthur Laffer | Cathie Wood | Dr. Carol Swain |
Condition for Effectiveness of Proposal 7
This Proposal 7 is conditioned upon the approval of Proposal 4. If Proposal 4 is not approved, this Proposal 7 will not have any effect.
The Board, including a majority of the directors who are “Independent Directors” as defined in the Charter, recommends a vote FOR the approval of the amendment to the Advisory Agreement.
SHAREHOLDERSTOCKHOLDER PROPOSALS FOR THE 20172025 ANNUAL MEETING OF STOCKHOLDERS
In order to be included in the Company’s proxy materials for the 20172025 annual meeting of stockholders, a stockholder proposal must be received in writing by the Company at 300 Crescent Court, Suite 700, Dallas, Texas 75201 by January 3, 2017December 19, 2024 and otherwise comply with all requirements of the SEC for stockholder proposals.
In addition, the Company’s Bylawsbylaws provide that any stockholder who desires to make a director nomination or a proposal of other business at an annual meeting without including the nomination or proposal in the Company’s proxy materials must give timely written notice of the proposal to the Company’s Secretary. To be timely, the notice must be delivered to the above address not less than 120 nor more than 150 calendar days prior to the first anniversary of the date of the proxy statement for the preceding year’s annual meeting. In the event the annual meeting is advanced or delayed by 30 calendar days of the date of the anniversary of the preceding year’s annual meeting, the notice must be received not earlier than 150 calendar days prior to the date of the annual meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120th calendar day prior to such annual meeting and the tenth calendar day following the day on which public announcement of the date of the annual meeting is first made. To be timely, a notice must be received no earlier than December 4, 2015November 19, 2024 and no later than January 3, 2017.December 19, 2024. The notice must also describe the stockholder proposal in reasonable detail and provide certain other information required by the Company’s Bylaws.bylaws. A copy of the Company’s Bylawsbylaws is available upon request from the Company’s Secretary.
In addition to satisfying the foregoing requirements under our bylaws, to comply with the universal proxy rules, stockholders who intend to solicit proxies in support of director nominees other than the Company’s nominees must provide notice that sets forth the information required by Rule 14a-19 under the Exchange Act no later than March 8, 2025 and comply with the disclosure and procedural requirements in connection with stockholder nominations of directors in our bylaws.
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS
In accordance with Rule 14a-3(e)(1) under the Exchange Act, one set of proxy materials will be delivered to two or more stockholders who share an address, unless the Company has received contrary instructions from one or more of the stockholders. The Company will deliver promptly upon written or oral request a separate copy of the proxy materials to a stockholder at a shared address to which a single copy of the proxy materials was delivered. Requests for additional copies of the proxy materials, and requests that in the future separate proxy materials be sent to stockholders who share an address, should be directed by writing to Investor Relations at c/o NexPoint Residential Trust, Inc., 300 Crescent Court, Suite 700, Dallas, Texas 75201, Attn: Investor Relations or by calling (214) 276-6300. In addition, stockholders who share a single address but receive multiple copies of the proxy materials may request that in the future they receive a single copy by contacting the Company at the address and phone number set forth in the prior sentence.
OTHER MATTERS
The Board does not know of any other matters that are to be presented for action at the Annual Meeting. If any other matters properly come before the Annual Meeting or any adjournment or postponement thereof, it is intended that the enclosed proxy will be voted in the discretion of the persons voting the proxy.
By Order of the Board of Directors,
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