NexPoint Residential Trust, Inc. (NYSE:NXRT) is a publicly traded real estate investment trust (REIT) that specializes in acquiring, owning, and operating middle-income multifamily properties with value-add potential in large cities and suburban markets across the Southeastern and Southwestern United States. The company's strategic focus on these high-growth regions has enabled it to capitalize on the robust demand for rental housing and deliver consistent financial performance for its shareholders.

Business Overview and History

NexPoint Residential Trust was incorporated in Maryland on September 19, 2014, and elected to be taxed as a REIT, aligning its business model with the goal of generating stable and growing dividends for its investors. The company commenced operations in 2015 after completing a spin-off from its former parent, NexPoint Advisors, L.P., an affiliate of its external advisor, NexPoint Real Estate Advisors, L.P. At the time of its spin-off, NXRT acquired a portfolio of 22 multifamily properties that were contributed by its sponsor.

Substantially all of NXRT's business is conducted through its operating partnership, NexPoint Residential Trust Operating Partnership, L.P. Since its inception, NXRT has grown its portfolio through various acquisitions, while also selectively disposing of certain properties. In 2017, NXRT completed the BH Buyout, acquiring 100% of the joint venture interests owned by BH Equity in the properties in NXRT's portfolio. This transaction simplified NXRT's ownership structure and provided greater control over its properties.

The company faced some challenges in 2019 and 2020 related to the Highland Capital Management bankruptcy, which included related litigation and potential conflicts of interest. However, NXRT navigated these issues and continued to operate its business. In 2020, NXRT raised $57.7 million through a common stock offering, which provided additional capital to fund its growth initiatives.

As of September 30, 2024, NXRT has methodically built a diversified portfolio of 36 multifamily communities encompassing over 13,170 apartment units. The company's properties are primarily located in high-growth markets such as Texas, Florida, Georgia, and the Carolinas, which have experienced robust population and job growth in recent years. This strategic geographic focus has allowed NXRT to capitalize on the strong demand for middle-income rental housing in these regions.

NXRT's investment strategy is centered on acquiring well-located multifamily properties with value-add potential and then implementing targeted renovations and operational improvements to drive higher rents and occupancy levels. The company's value-add program has been a key driver of its financial performance, with NXRT completing over 8,316 full and partial unit upgrades since inception, achieving an average monthly rent premium of $175 and a 20.8% return on investment.

Financial Performance and Ratios

For the fiscal year ended December 31, 2023, NXRT reported total revenue of $277.53 million, net income of $44.26 million, and operating cash flow of $96.58 million. The company's free cash flow (FCF) for the same period was also $96.58 million. The dividend payout ratio, calculated as dividends paid divided by net income, stood at 101.2% for the year, reflecting its commitment to returning capital to shareholders.

In the most recent quarter (Q3 2024), NXRT reported revenue of $64.09 million, representing a year-over-year decrease of 8.7%. This decline was primarily attributed to the company's disposition activity in 2023 and 2024. The company reported a net loss of $8.89 million for Q3 2024, compared to a net income in the same quarter of the previous year. This shift was primarily due to a decrease in gain on sales of real estate. Operating cash flow and free cash flow for Q3 2024 both stood at $27.80 million.

NXRT's balance sheet remains solid, with a current ratio and quick ratio of 7.15 as of September 30, 2024, indicating ample liquidity to fund its operations and growth initiatives. The company's return on equity (ROE), a key metric for evaluating a REIT's profitability, was 9.0% for the year ended December 31, 2023, reflecting its ability to generate strong returns for its shareholders. NXRT's price-to-earnings (P/E) ratio, based on the latest reported earnings, stood at 25.45, slightly above the industry average, suggesting that the market recognizes the company's growth potential.

Liquidity

NXRT maintains a strong liquidity position to support its operations and growth initiatives. As of September 30, 2024, the company had $17.41 million in cash and cash equivalents, as well as $350 million available under its Corporate Credit Facility. This robust liquidity profile provides NXRT with the flexibility to pursue attractive acquisition opportunities and fund its value-add program.

Operational Highlights and Value-Add Program

NXRT's focus on value-add opportunities has been a hallmark of its investment strategy, driving strong same-store performance and unit-level returns. During the third quarter of 2024, the company completed 45 full and partial unit upgrades, achieving an average monthly rent premium of $253 and a 19.5% return on investment.

Since the inception of its value-add program, NXRT has completed 8,316 full and partial unit upgrades, 4,704 kitchen and laundry appliance installations, and 11,389 technology package installations across its portfolio. These upgrades have resulted in average monthly rental increases of $175, $48, and $43 per unit, respectively, and have generated a weighted average return on investment of 20.8%, 61.9%, and 37.2%.

The company's same-store performance has been solid, with same-store net operating income (NOI) increasing by 1.3% year-over-year for the nine months ended September 30, 2024. This was driven by a 2.7% increase in same-store rental revenue, partially offset by a 3.7% increase in same-store operating expenses.

Business Segments

NXRT operates primarily through two business segments: Operating Properties and Corporate.

The Operating Properties segment is the core business of NXRT, comprising the majority of its operations. This segment includes the company's portfolio of 36 multifamily properties primarily located in the Southeastern and Southwestern United States. As of September 30, 2024, the Operating Properties segment consisted of 13,170 apartment units across these 36 properties, with an occupancy rate of approximately 94.8%.

For the nine months ended September 30, 2024, the Operating Properties segment generated rental income of $190.29 million, a decrease of $12.93 million compared to the same period in 2023. This decrease was primarily driven by the company's disposition activity in 2023 and 2024. Property operating expenses for the segment were $43.25 million, down $0.83 million year-over-year. Net operating income (NOI) for the Operating Properties segment was $118.09 million for the first nine months of 2024, a decrease of $7.15 million compared to the prior year period.

The Corporate segment includes the company's general and administrative expenses, advisory and administrative fees paid to the external Adviser, as well as other corporate-level activities. For the nine months ended September 30, 2024, the Corporate segment incurred $14.52 million in general and administrative expenses, up from $12.90 million in the prior year period. Advisory and administrative fees paid to the Adviser were $5.18 million, down from $5.78 million in the same period of 2023, as the Adviser voluntarily waived a portion of these fees.

Guidance and Outlook

For the full year 2024, NXRT has updated its guidance as follows: - Earnings per diluted share: -$0.01 to $0.07 (midpoint of $0.03) - Core funds from operations (Core FFO) per diluted share: $2.74 to $2.82 (midpoint of $2.78), an increase from the prior guidance midpoint of $2.72 - Same-store revenue growth: 1.3% to 2.2% (midpoint of 1.7%) - Same-store expense growth: 3.0% to 4.4% (midpoint of 3.7%) - Same-store NOI growth: -0.6% to 1.6% (midpoint of 0.5%) - No acquisitions compared to the prior guidance of $50 million - Dispositions of $167 million compared to the prior guidance of $175 million

The company's strong operational performance, coupled with its value-add initiatives and strategic focus on high-growth markets, positions it well to navigate the current economic environment and continue delivering value to its shareholders.

Risks and Challenges

While NXRT's business model has proven to be resilient, the company faces several risks and challenges that investors should consider: - Exposure to macroeconomic conditions: As a REIT, NXRT's performance is closely tied to the overall health of the economy, and a downturn could impact rental demand and occupancy levels. - Competition from new supply: The multifamily sector has experienced a significant influx of new development, which could increase competition and put pressure on rents and occupancy. - Reliance on external management: NXRT is externally advised by NexPoint Real Estate Advisors, L.P., which could expose the company to potential conflicts of interest and operational risks. - Regulatory changes: Modifications to REIT regulations or tax laws could adversely impact NXRT's financial performance and ability to maintain its REIT status.

Conclusion

NexPoint Residential Trust has established itself as a leading player in the middle-income multifamily market, leveraging its strategic focus on high-growth Southeastern and Southwestern regions to drive consistent financial performance and shareholder returns. The company's value-add program, strong balance sheet, and experienced management team position it well to navigate the current economic landscape and continue capitalizing on the robust demand for rental housing. While NXRT faces certain risks, its disciplined investment approach and commitment to delivering value to shareholders make it an intriguing option for investors seeking exposure to the multifamily sector.