NXRT - NexPoint Residential Trust: Strong Company In A Strong Market

2023-06-26 10:21:00 ET

Summary

• NexPoint Residential Trust, a growth-oriented REIT, has shown excellent investment potential in the multifamily housing sector, with a focus on class B properties in the Southwest and Southeast markets.
• The company has maintained a 94% occupancy rate, diversified its presence, and successfully refinanced its property-level mortgages, providing strategic flexibility and a resilient balance sheet.
• Despite market volatility and financing risks, NexPoint Residential Trust's Q1 2023 results demonstrate its ability to navigate challenges and capitalize on opportunities, making it a recommended buy.

Today, I will discuss another exciting stock, which has shown excellent investment potential, and will break it down for you. The stock I am analyzing today is NexPoint Residential Trust ( NXRT ). NexPoint Residential Trust is a growth-oriented REIT that has a solid track record of recent success. The company specializes in the multifamily housing sector by focusing its investment efforts primarily on acquiring, owning, and operating multifamily properties in the Southwest and Southeast Markets.

The multifamily market is expected to remain strong , especially in class B and class C. Class B- the slightly older properties, are NXRT's bread and butter. Class B properties offer affordability, lower competition, value-add potential, stability, and lower operating costs, making them attractive to real estate investors. They provide opportunities for acquiring assets at a lower price, attracting a wide range of tenants, and yielding potential returns on investment. The majority of Americans actually live in class B properties. This high demand makes Class B properties more resilient during market downturns and are likely to face better demand-supply dynamics, as Class A supply in the Sunbelt has increased significantly over the past couple of years. I believe NexPoint Residential Trust should be a must-have in your REIT portfolio, and here is why.

NexPoint has been quite busy this year. During the first quarter of 2023, they have maintained an impressive 94% occupancy rate amongst their 40 properties. They are on a treasure hunt for well-located middle-income multifamily properties which they classify as having "value-added" potential in the Southeastern and Southwestern United States. These moves diversified their presence across different markets.

In terms of disposals, the company is doing quite well, despite the broader investment market being nearly frozen. In particular, NXRT is about to enter a binding sales contract to sell Old Farm and Stone Creek at Old Farm for $135 million, expected to generate an estimated combined IRR of 24.8% and an equity multiple of 2.94x.

According to their Q1 2023 Conference Call , average rent per unit for the first quarter of 2023 across all markets ranged from $1,271 (Dallas/Fort Worth) to $2,013 (South Florida), with an average of $1,487.

The majority of the top-performing real estate markets this year are dispersed away from the coastal districts, in the quickly growing southern and western regions . Nashville takes the top spot among the metro areas once more, while Dallas/Fort Worth saw tremendous growth and climbed five spots to grab the second-place post. Notably, the Atlanta metro area showed impressive progress in this year's survey, leaping to the third-ranking spot from its previous position at number eight. The top ten markets are as follows, where you can clearly see why NexPoint Residential Trust is such a dominant force in the market

Covid made work from home the norm for many people, with significant companies retaining such remote or hybrid policies for middle-income professionals. This made Southern and Western markets cheap real estate and an attractive place for middle-income professionals to settle down. Major industries such as Tesla (TSLA) also shifted their headquarters to Texas, starting a trend to shift large area corporations to the plains of the South-West.

Now I will take a look at how the REIT pairs up to the highly completive Southwestern and Southeastern real estate market.

Unsurprisingly I see that due to its 70-year experience in the REIT market, it was able to capitalize during the volatile market situation in Covid, significantly outperforming its main competitors such as Mid-America Apartment Communities ( MAA ) and Camden Properties ( CPT ), who are also significant players.

In their earnings call, they mentioned Phoenix as a potential high potential area for their investment due to the increased demands in the supply chain and major companies identifying the space as a place for major factories and headquarters.

Now a look across the numbers to why NXRT is poised to continue to grow going forward. Their total revenue increased by 15% YoY to $69 million in Q1 2023 compared to $60 million in Q1 2022. These metrics are owed to the increase in rental income due to the large influx of migrations to their property-dense states. Looking at the net operating income also yields positive results as it increased from $36.7 million in Q1 2022 to $41.1 million in Q1 2023, while the portfolio grew by just one property.

NXRT has made impressive strides in refinancing its property-level mortgages, highlighting their commitment to financial optimization and strategic flexibility. Through successful collaborations with KeyBank and Freddie Mac, they have refinanced 21 mortgages, collectively accounting for approximately 52.7% of the company's total outstanding debt.

What's particularly noteworthy is that the REIT secured improved interest rate pricing on 19 of these mortgages, a highly favorable outcome that would be challenging to replicate in today's market. By utilizing approximately $278 million from the refinancing proceeds and the sale of Hollister Place, they have effectively reduced the outstanding principal balance of their costliest debt and the corporate credit facility.

In addition, NexPoint has exercised its 12-month extension option on the Revolving Credit Facility, extending its maturity to June 30, 2025. This refinancing activity has significantly extended the company's weighted average debt maturity schedule to approximately 6.4 years, compared to the previous duration of 3.3 years. As a result, only around 4.1% of their total debt is set to mature through 2024, down from the prior figure of approximately 44%. Remarkably, this means that NexPoint faces no significant debt maturities until June 2025.

The refinancing and extension of maturities on a significant portion of their first mortgage debt, coupled with favourable terms, have provided them with greater strategic flexibility, increased liquidity, and a more resilient balance sheet. These achievements position the company for continued growth and bolster their ability to deliver value in the multifamily housing sector.

In terms of valuation, the stock trades at a forward price to FFO of 13.10x, while recently it has traded closer to 17x. Compared to peers, the company seems undervalued as both MAA and CPT trade at 18x this year’s expected FFO.

In terms of cap rates, the market is pricing NXTR’s portfolio at an implied cap rate of 6.5% which is quite a way above the average cap rate of peers of 5.6%.

All of this suggests, that there’s significant upside to be had, if interest rates stabilize and the market sentiment around real estate improves.

Now I would also like to mention the risks as they are important when making a decision about an investment. In particular you may want to consider the following:

1. Market Volatility: The real estate market is subject to fluctuations driven by economic conditions, interest rates, and local market dynamics. Changes in demand and supply can impact rental rates, occupancy levels, and property valuations, affecting NXRT’s financial performance.

2. Financing Risks: The REIT relies on debt financing for property acquisitions and ongoing operations. Fluctuations in interest rates, credit availability, and refinancing risks, especially in this post Covid volatile market, can affect borrowing costs and the company's ability to access capital for growth and operational needs.

To sum up, NexPoint Residential Trust's first-quarter 2023 results were pretty good and confirm their ability to navigate challenges and capitalize on opportunities. They have outperformed their competition historically, and I believe they’re poised to do the same going forward, especially from these lower valuation levels. I rate the company a BUY here.

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