Navigating NexPoint's High-Yield Preferred: Sustainable Income or Risky Reward?

The search for high-yield investments has led many to NexPoint Diversified Real Estate Trust's (NXDT) preferred stock, where a 9.8% yield is cited—though the reality is nuanced. While the Series A Cumulative Preferred (NXDT-PA) currently offers an 8.73% yield due to its discounted trading price, the structural features and risks of these securities demand careful scrutiny. This analysis explores whether the high yield is sustainable and whether the preferred stock holds strategic advantages in today's market.

Understanding the Preferred Stock Structure

NexPoint's preferred shares come in two series:
- Series A (NXDT-PA/NXDT.PRA):
- Dividend Rate: 5.5% annually ($0.34375 quarterly).
- Liquidation Preference: $25 per share, but trading at $15.75 (a -37% discount as of July 2025).
- Call Feature: Redeemable since December 2023 at $25 + accrued dividends.

• Series B Preferred:
• Dividend Rate: 9.0% annually, but lacks a public trading market.

The 8.73% yield on Series A arises from its deep discount to liquidation value, not a higher dividend rate. Investors must reconcile this gap: Is the discount justified by risks, or is it an opportunity?

Sustainability of the High Yield

Dividend Coverage and Real Estate Exposure

The dividend's sustainability hinges on NexPoint's ability to generate cash from its real estate operations. Key considerations:

1. Cash Flow Dependency:
   Dividends are paid from distributions from NexPoint's operating partnership. If occupancy rates decline or rental income stagnates—particularly in sectors like hospitality or office space—the trust may struggle to fund payouts.

2. Call Risk:
   While the Series A can be called at $25 starting in 2023, NexPoint has not yet exercised this option. If it does, investors face forced redemption at a price below current market value, locking in losses.

3. Interest Rate Sensitivity:
   Preferred stocks with fixed dividends are vulnerable to rising rates. However, the current discount to liquidation value acts as a buffer. A chart would clarify this dynamic.

Market Conditions

The real estate sector faces headwinds, including elevated vacancy rates in some asset classes and inflationary pressures. Yet NexPoint's diversified portfolio—spanning industrial, multifamily, and storage—offers resilience.

Strategic Advantages

1. High Yield in a Low-Rate Environment:
   With Treasury yields near historic lows, the 8.73% yield on Series A attracts income seekers, even with risks.

2. Cumulative Dividends:
   Missed payments accrue, providing eventual compensation if the trust rebounds.

3. Perpetual Structure:
   No maturity date means investors can hold indefinitely unless called—a benefit in uncertain markets.

Key Risks to Consider

• Liquidity Constraints:
  Series B has no trading market, and Series A's low liquidity (as a small-cap preferred) may lead to wide bid-ask spreads.

• Redemption Uncertainty:
  NexPoint's call option creates reinvestment risk. A could confirm reliability.

• NAV Discount:
  The common shares (NXDT) often trade below net asset value (NAV), compounding the preferred's risks.

Investment Thesis and Advice

For Whom?
- Income investors with a high-risk tolerance seeking yields above 8% may find Series A attractive.
- Speculators could bet on a rebound to liquidation value, though this requires patience.

Avoid If:
- You need liquidity or cannot stomach losses from a potential redemption.
- You're risk-averse, as real estate downturns could cut dividends.

Actionable Steps:
1. Monitor Q2 2025 earnings (July 31) for updates on occupancy, rents, and dividend sustainability.
2. Track redemption announcements—if NexPoint calls Series A, prepare to reinvest proceeds.
3. Compare yields with similar REIT preferreds to assess relative value.

Conclusion

NexPoint's preferred stock offers a compelling yield, but its sustainability depends on real estate market resilience and management's decisions. Investors must weigh the income potential against liquidity and call risks. While not without pitfalls, Series A's discounted price creates an asymmetric opportunity—for those willing to bet on NexPoint's rebound. Proceed with caution, and keep a close watch on the real estate cycle.

would further illuminate this landscape.