NexPoint Residential Trust: Attractive Valuation Despite The Risks

seekingalpha05-02

NexPoint Residential Trust reported Core FFO and NOI growth in the mid-single digits in Q1 2024.The full-year outlook remains more cautious, driven by expected elevated home deliveries in the ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nNexPoint Residential Trust: Attractive Valuation Despite The Risks\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-02 00:09 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4688008-nexpoint-residential-trust-attractive-valuation-despite-the-risks><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>NexPoint Residential Trust reported Core FFO and NOI growth in the mid-single digits in Q1 2024.The full-year outlook remains more cautious, driven by expected elevated home deliveries in the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4688008-nexpoint-residential-trust-attractive-valuation-despite-the-risks\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"VNQ","symbol_name":"不动产信托指数ETF-Vanguard","start_time":0,"source_url":"https://seekingalpha.com/article/4688008-nexpoint-residential-trust-attractive-valuation-despite-the-risks","article_id":"2432450000","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1352484202/image_1352484202.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2432450000","pubTimestamp":1714579744,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"NexPoint Residential Trust reported Core FFO and NOI growth in the mid-single digits in Q1 2024.The full-year outlook remains more cautious, driven by expected elevated home deliveries in the remainde","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"VNQ":"不动产信托指数ETF-Vanguard","BK4215":"住宅房地产投资信托","BK4585":"ETF&股票定投概念","CFA.SI":"NikkoAM-STC Asia REIT","NXRT":"NexPoint Residential Trust Inc","BK4588":"碎股"},"translate_title":"NexPoint住宅信托：尽管存在风险，但仍有吸引力的估值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"NXRT":1,"VNQ":1,"CFA.SI":0.9},"content_text":"NexPoint Residential Trust reported Core FFO and NOI growth in the mid-single digits in Q1 2024.The full-year outlook remains more cautious, driven by expected elevated home deliveries in the remainder of the year.Management signals over 50% upside to their NAV estimate using cap rates of 5.5-6% and initiated a $25 million share buyback to help bridge the gap.I estimate a still attractive market cap rate of 6.9%, notwithstanding elevated administrative spending, partially justified by strong returns on renovations.NexPoint's occupancy of just 94.7% and high leverage are red flags, especially given the lack of stable fixed rate long term funding.   Thomas BarwickIntroduction NexPoint Residential Trust (NYSE:NXRT) has strongly outperformed the Vanguard Real Estate Index Fund ETF (VNQ) so far in 2024, with the stock little changed from the beginning of the year:   NXRT vs VNQ in 2024 (Seeking Alpha)Looking ahead, I expect the shares to continue outperforming, helped by an attractive valuation and value-creative capex spending, notwithstanding high leverage and red flags surrounding the company's occupancy. Overall, I reckon the company can deliver a high single-digit return to enterprise value, driven by a market cap rate of about 6.9% and low single-digit rent growth. Shareholders could potentially make more if the share price reaches management's NAV estimates. Company Overview You can access all company results here. NexPoint Residential is a residential REIT focused on middle-income multifamily properties with value-add potential, primarily in the Sunbelt region, with Phoenix (15% of total units), South Florida (14.6%), and Dallas/Fort Worth (14.5%) the largest single markets for the company:   Portfolio composition by market (NexPoint Residential Q1 2024 earnings supplement)Operational Overview NexPoint reported Q1 2024 Core FFO of $0.75/share, up 5.6% Y/Y, helped by lower interest expenses. Same store NOI increased 4% Y/Y in Q1 2024, while same store occupancy stood at 94.7% at the end of Q1, up 0.3% Y/Y. During the quarter, the company also booked a $31.7 million gain on asset disposals (22.1% levered IRR on the sale), with an additional sale at 19.3% levered IRR completed in Q2 2024. 2024 Outlook The company also confirmed its initial guidance originally released with year-end 2023 results, with Core FFO projected at about $2.72/share, down 2.9% relative to 2023, with Same Store NOI expected to be flat relative to the prior year:   2024 Guidance (NexPoint Residential Q1 2024 earnings supplement)The outlook shows management remains cautious despite the strong start of the year, with elevated residential deliveries in the company's core markets later in the year potentially weighing on results in the remaining quarters of 2024. Debt position NexPoint ended Q1 2024 with a net debt of $1.4 billion (excluding sold properties), implying that debt accounts for about 62% of the company's enterprise value. The REIT has chosen to rely largely on floating rate debt coupled with interest rate caps, allowing it to fix its cost of debt. As of March 31, 2024, NexPoint had a weighted average interest rate of 3.39%, with unhedged floating rate debt accounting for just 20% of the company's debt. A cumulative 21% of interest rate caps are expiring through 2024, generally at rates below the current 5.9% interest rate cap average, implying some upside pressure on interest rates as the company renews these cap agreements:   Overview of interest rate caps expiring in 2024 (NexPoint Residential Q1 2024 earnings supplement)NAV and market cap rate NexPoint provides quite detailed NAV assumptions in its Q1 2024 results supplement (Page 8 here). Using cap rates of 5.5%-6% for its portfolio, the company estimates an NAV of between $45.91-$58.97/share, or roughly 50% upside to the company's current share price. To help bridge the gap, management initiated a $25 million share buyback. For 2024, the company expects a net operating income of about $157 million, which against the current enterprise value of circa $2.3 billion represents a market cap rate of roughly 6.9%. As a headline number, 6.9% is quite attractive for a residential REIT. However, NexPoint incurs quite substantial corporate general and administrative expenses, at $17.1 million in 2023, up 16% Y/Y in 2023, with Q1 2024 expenses of $4.9 million, up a stunning 46% year-over-year. If we factor in the 2023 expenses, even before the increase in 2024, we would land at a market cap rate of about 6.1%, which is not as attractive. Capex spending The company spends extensively to refurbish and modernize its portfolio, with $37.2 million in rehabilitation expenditures in 2023 alone:   Overview of rehabilitation spending, 2023-2021 (NexPoint 10-K report for 2023)The money appears well spent, with NexPoint reporting internal rates of return on its modernization spending in the low double digits. In Q1 2024, the company spent $6.9 million on capex, with results highlighted on the Q1 2024 conference call: During the first quarter, the properties in our portfolio, we completed 59 full and partial upgrades, at least 59 upgraded units, achieving an average monthly rent premium of $240 and a 21.8% return on investment. Risks The main risk I see facing the company is its elevated debt position, accounting for 62% of enterprise value. The good news is that smart, although short-term, hedging has allowed the company to lock in a weighted average interest rate of just 3.39%, although some 21% of interest rate caps expire in 2024, putting pressure on the company's operations. As such, delays in the pace of Federal Reserve interest rate cuts will negatively affect the company's cash flow metrics, given the lack of stable fixed-rate interest rate debt. From an operational perspective, despite operating in robust Sunbelt markets, the company reports an occupancy of just 94.7%, a lackluster result for a residential REIT, indicating some structural issues in its portfolio, or alternatively, aggressive rent pricing relative to the market average. This is also evident from the 2.3% midpoint of the 2024 rent increase outlook, running below headline inflation. Conclusion NexPoint operates in lucrative Sunbelt markets and is attractively priced by the market, offering a high single-digit return on enterprise value with moderate but still elevated leverage. While the current cost of debt is quite low, the company faces significant interest rate headwinds given the lack of stable fixed-rate debt, with a substantial amount of interest rate caps expiring in 2024. The good news is that the Federal Reserve is widely expected to start cutting rates in 2024 (current market pricing has pushed back the first cut to September), helping ease the strain from refinancing. The key to unlocking the 50% gap between management's NAV estimates and the share price is continuing to deliver robust performance on rehabilitation spending while keeping general and administrative expenses in check.  Thank you for reading.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432450000"}