Real estate investment trusts have regained their footing after the calamitous period following the 2008 financial crisis and mortgage debt fiasco, and they are growing more rapidly than ever before. Despite the relative strength of the housing market in many areas of the country, many of these REITs are still operating almost solely in “A” markets on the coasts and in high value, core markets. Highland Capital Management and its affiliate NexPoint residential trust, under the guidance of President and co-founder James Dondero, has begun moving into so-called “B” markets in the Sun Belt area of the county, spanning from central Texas to Arizona.
The NexPoint residential trust has only been traded on the New York Stock Exchange since 2015, but it has already experienced a tremendous amount of success in the financial arena. Due to Highland’s presence in the Dallas area, Dondero and his associates are uniquely positioned to take advantage of the exploding real estate market in the fastest-growing segment of the U.S. population. More and more workers and retirees are chasing plentiful jobs and year-round sunshine to the Sun Belt region, and as of 2017, real estate investment trusts have been slow to catch on to the opportunities present in the ever-growing market.
NexPoint Real Estate Advisors LP, another subsidiary of Highland Capital Management, is the manager of the fund, and it has made the unorthodox decision to go after class B workforce housing rather than making inroads into the already-crowded luxury housing market. By focusing mainly on apartments and single-family dwellings in short-term markets, NexPoint is able to amass capital and transfer those funds to longer-term markets. Highland and Dondero correctly identified softness in coastal markets, and they realized that rent growth was still strong in interior regions: REITs just weren’t looking to expand their portfolios in those areas.
Thanks to the investment trust’s tremendous success over the past few years, other firms and trusts are following suit and following James Dondero into the Sun Belt. NexPoint finished its first full year of trading with a 79% trading return, which was the best result for the 2015-2016 fiscal year in its class. Investors are constantly looking for a leg up, and it appears that many have found a market inefficiency in the price and availability of Sun Belt class “B” housing.
The fact that Highland Capital Management and James Dondero were among the first to exploit this inefficiency should not come as a surprise to those who know Dondero’s reputation in the world of finance. A Certified Management Accountant (CMA) and Chartered Financial Analyst (CFA), Dondero’s career has taken him from the University of Virginia to American Express to Protective Life’s GIV subsidiary, where he helped handle and invest billions of dollars at each stop. Eventually, he formed Highland Capital Management in order to work more closely with institutional and retail investors. Highland currently has a portfolio of about $19 billion under management, and has subsidiaries in a number of different fields, including healthcare, residential trust, and strategies funds.
Dondero is based out of Dallas, where he continues to be on the cutting edge of financial innovation in all different types of markets.