Executive Summary / Key Takeaways

• NexPoint Residential Trust (NXRT) is a value-add multifamily REIT focused on middle-income properties in the Southeastern and Southwestern U.S., leveraging a disciplined renovation program and strategic financial management to drive growth.
• Recent performance reflects the impact of strategic dispositions in 2024 and ongoing supply pressures in certain markets, resulting in a Q1 2025 same-store NOI decrease of 3.8% year-over-year, though bad debt improved significantly.
• The company successfully refinanced substantially all of its debt in late 2024 at improved terms (SOFR + 109 bps spread), extending maturities to 2031 and providing a material annual Core FFO benefit, positioning the balance sheet for future growth and offsetting expiring swaps.
• Management forecasts 2025 as a "transition year" with a Core FFO midpoint of $2.75 per diluted share, anticipating a return to positive rent growth in the second half of the year and "outsized growth" in 2026-2027 driven by a dramatic projected decline in new supply deliveries in its core submarkets.
• NXRT's value-add program, including technology package installations, provides a competitive edge by driving rental premiums and resident satisfaction, while the company actively utilizes share buybacks at a significant discount to NAV to enhance shareholder value.

The Value-Add Engine in a Shifting Landscape

NexPoint Residential Trust, Inc. (NYSE: NXRT) operates as a focused real estate investment trust, specializing in the acquisition, ownership, and operation of well-located, middle-income multifamily properties across the burgeoning Southeastern and Southwestern United States. Since its inception in 2014, the company has pursued a clear value-add strategy, aiming to enhance property cash flow and value through targeted renovations and improved management. This approach is foundational to NXRT's investment thesis, seeking to capitalize on the affordability gap between Class A and Class B/C properties and the demographic tailwinds in its target markets.

NXRT's business is primarily conducted through its operating partnership, with the company externally managed by NexPoint Real Estate Advisors. This structure, while exposing the company to advisory fees, is intended to provide access to extensive real estate expertise and facilitate nimble market responses, such as the strategic dispositions and refinancings undertaken in recent periods.

A core differentiator for NXRT lies in its systematic value-add program. This isn't merely cosmetic; it involves significant investment per unit, typically ranging from $4,000 to $10,000 in the initial years of ownership, focused on both interior and exterior enhancements. Beyond traditional upgrades, NXRT integrates "technology packages" and, more recently, "bulk WiFi/fiber" services. These technological additions are designed to meet evolving resident demands, offering tangible benefits such as faster internet speeds (e.g., one gig fiber) and potentially contributing to resident satisfaction and retention. Quantifiable results from this program are compelling: inception-to-date figures show average monthly rental increases of $172 for full/partial upgrades (20.7% ROI), $50 for kitchen/laundry appliances (64.5% ROI), and $43 for technology packages (37.2% ROI). This ability to generate attractive returns on invested capital through physical and technological upgrades provides NXRT with a competitive edge, allowing it to drive revenue growth and improve property performance even in challenging market conditions.

In the broader multifamily landscape, NXRT competes with a range of players, from large national REITs like Equity Residential (EQR) and AvalonBay Communities (AVB) to regional peers like Essex Property Trust (ESS) and Mid-America Apartment Communities (MAA). While larger competitors may boast greater scale, higher profitability margins (e.g., EQR and AVB often have FFO margins 5-10 points higher than NXRT's 50-55% TTM range), and more extensive integrated operations, NXRT carves out its niche through its focused value-add strategy in middle-income suburban submarkets. Its regional agility and ability to execute renovations efficiently (e.g., aiming for quicker turnaround times than some peers) are key strengths. However, the external management structure can result in higher operating costs compared to internally managed peers, impacting net margins. The company's investment in technology, particularly bulk internet services, positions it to compete on resident experience, an increasingly important factor, though larger competitors like AVB may have more advanced, integrated proptech solutions.

Performance Amidst Transition and Strategic Financial Maneuvers

Recent financial performance reflects a period of strategic adjustment and market headwinds. For the first quarter of 2025, NXRT reported a net loss of $6.9 million, a significant shift from the $26.4 million net income in Q1 2024. This change was primarily attributable to the absence of large gains on real estate sales in Q1 2025 compared to the prior year period, highlighting the impact of strategic dispositions completed in 2024.

Operational performance, as measured by same-store NOI, saw a decrease of 3.8% year-over-year in Q1 2025. This was driven by a 0.8% decline in same-store rental revenue and a 1.0% decrease in total same-store revenue, coupled with a 3.7% increase in same-store operating expenses. The revenue pressure stemmed from a 1.3% decrease in weighted average monthly effective rent per occupied unit (to $1495 as of March 31, 2025) and a slight 0.3% decrease in occupancy (to 94.4%). Expense growth was primarily influenced by increases in repairs and maintenance, utilities, insurance, and property taxes. Despite these pressures, the company noted a significant improvement in bad debt, down almost 40% year-over-year in Q1 2025, indicating better collections and resident quality.

Looking back at the full year 2024, NXRT demonstrated resilience, achieving a 90 basis point increase in same-store NOI despite the impact of record new supply deliveries in its markets. The full year 2024 same-store NOI margin remained healthy at 61.61%. Operational efficiency efforts, such as moderating R&M expense growth and declining payroll costs in Q4 2024, contributed to expense control.

Financially, NXRT has taken decisive steps to strengthen its balance sheet and enhance liquidity. As of March 31, 2025, the company held $23.7 million in cash and had $100 million available on its corporate credit facility (reduced to $250 million available capacity on Feb 28, 2025, maturing June 30, 2025). A major undertaking in late 2024 involved refinancing approximately $1.466 billion of mortgage debt. This strategic move extended the weighted average debt maturity to approximately seven years and, crucially, reduced the weighted average interest rate spread by 48 basis points to SOFR + 109 basis points. Accounting for interest rate swaps, the adjusted weighted average interest rate was reduced from 3.64% to 2.96% as of December 31, 2024. As of March 31, 2025, aggregate mortgage debt stood at $1.50 billion with a weighted average rate of 5.40% (3.58% adjusted for swaps), with no meaningful maturities until 2028. The company actively manages interest rate risk through swaps ($0.80 billion notional as of Mar 31, 2025, at a 1.10% weighted average fixed rate) and caps ($2.40 billion notional as of Mar 31, 2025). A new $100 million SOFR swap was executed on April 3, 2025, at a fixed rate of 3.489%.

Capital allocation has also been strategic. In 2024, the company completed several dispositions, generating $92.4 million in net proceeds with strong levered IRRs (e.g., Old Farm at 20.2% IRR, 2.96x multiple). These proceeds were used, in part, to pay down debt and fund share repurchases. From April 1 through May 1, 2025, NXRT purchased 223,109 shares for $7.6 million at an average price of $34.29, representing a 33% discount to the current NAV midpoint of $51.20. This buyback activity, guided by the discount to NAV, is a key component of the company's strategy to enhance shareholder value.

Outlook: Positioning for the Supply Abatement Cycle

Management frames 2025 as a "transition year," acknowledging ongoing market dynamics while positioning for future growth. The revised 2025 guidance for Core FFO per diluted share is set at a midpoint of $2.75 (range $2.61 to $2.89). This guidance incorporates the impact of the share buyback program, the current interest rate environment, and plans to layer in additional swaps.

Despite a negative start to same-store NOI growth in Q1 2025, management anticipates an inflection point, expecting same-store NOI to inflect higher over the remainder of the year. This optimism is grounded in observed signs of strengthening demand and a projected dramatic improvement in the supply picture across NXRT's core submarkets. RealPage data forecasts a 22% decline in deliveries year-over-year in NXRT submarkets in 2025, followed by an additional 38% decline in 2026 and a staggering 82% drop in 2027. Management expects to reach peak supply in Charlotte, Phoenix, and South Florida by Q3 2025, anticipating a "fundamental shift in our favor" that should support sustained growth through 2027.

Operationally, the company is tactically pushing rate increases and accelerating interior renovations into the peak leasing season. While maintaining a defensive posture where new deliveries are still impactful, they are becoming "incrementally more constructive on rent growth" given the 12-month outlook. The value-add program is expected to accelerate in 2025, with a goal to return to a pace of 300-400 unit renovations per quarter, particularly in markets where rent premiums are achievable. Initial 2025 guidance assumptions included a forecast of 1.5% market rent growth and a 50 basis point top-line contribution from value-add activities.

The recent debt refinancing is a critical enabler of the future outlook. The forecasted $0.15-$0.20 annual Core FFO benefit from the improved spreads, coupled with extended maturities, is expected to offset the impact of expiring interest rate swaps in the coming years. Management believes they can maintain 2024 Core FFO performance throughout swap expirations by achieving at least 3% compounded annual NOI growth, a target they have historically exceeded.

While the outlook is increasingly positive, risks remain. Macroeconomic conditions, particularly the trajectory of interest rates and potential impacts from tariffs on construction costs, could affect performance. Supply pressure, while expected to abate, could persist longer than anticipated in specific submarkets. Litigation related to former affiliates, though not expected to materially impact NXRT's business, remains a potential distraction. The ability to access capital on favorable terms for future acquisitions or refinancings is also subject to market conditions.

Conclusion

NexPoint Residential Trust is navigating a dynamic multifamily market by leaning into its core value-add strategy and executing strategic financial maneuvers. While Q1 2025 results reflected the near-term impact of dispositions and supply pressures, the underlying operational trends, particularly the improvement in bad debt and the observed inflection towards positive rent growth in April, offer encouraging signs. The successful debt refinancing has significantly strengthened the balance sheet, providing financial flexibility and shoring up future Core FFO estimates, positioning the company to weather the expiration of existing hedges.

The investment thesis for NXRT is increasingly tied to the anticipated abatement of new supply deliveries in its key Sunbelt markets from late 2025 through 2027. This projected shift, coupled with the company's ability to drive internal growth through its value-add program and capitalize on the affordability gap, forms the basis for management's expectation of "outsized growth" in the coming years. Investors should monitor the pace of market rent growth acceleration, the execution of the value-add pipeline, and the continued trajectory of supply/demand balances in NXRT's specific submarkets as key indicators of the company's ability to realize its growth potential and narrow the discount between its share price and estimated NAV.