Executive Summary / Key Takeaways

• NexPoint Residential Trust (NXRT) is a value-add multifamily REIT strategically positioned in high-growth Sun Belt markets, leveraging its renovation program and operational efficiencies to drive internal growth.
• The company's proactive debt refinancing and hedging strategies have significantly reduced interest rate exposure, extending maturities and improving financial flexibility.
• NXRT's innovative use of centralized platforms and AI technology is enhancing operational efficiency, leading to notable reductions in payroll and bad debt expenses.
• Despite recent supply pressures impacting near-term revenue, an anticipated sharp decline in new multifamily deliveries from Q3 2025 onwards positions NXRT for accelerating fundamentals and outsized growth in 2026 and 2027.
• The company's consistent dividend growth, supported by strong Core FFO coverage and strategic share repurchases below Net Asset Value (NAV), underscores its commitment to shareholder returns.

A Differentiated Approach in the Multifamily Landscape

NexPoint Residential Trust, Inc. (NYSE: NXRT) operates as a specialized real estate investment trust, carving out a distinct niche in the multifamily sector. Since its inception in September 2014, NXRT has focused on acquiring, owning, and operating well-located, middle-income multifamily properties with significant "value-add" potential, primarily across the dynamic Southeastern and Southwestern United States. This strategy aims to maximize cash flow and property value through targeted renovations and active management, ultimately delivering long-term capital appreciation and consistent quarterly distributions to stockholders.

NXRT's operational backbone is its external management structure, with NexPoint Real Estate Advisors, L.P. overseeing daily operations and asset management. A pivotal move in June 2017, the BH Buyout, consolidated 100% of joint venture interests, streamlining operations and integrating property management more closely with the company's core objectives. This foundational structure, combined with a disciplined investment philosophy, allows NXRT to identify and execute on opportunities that might be overlooked by larger, more diversified REITs.

Technological Edge and Operational Excellence

NXRT's competitive advantage is increasingly rooted in its innovative application of technology to enhance operational efficiency and resident experience. The company has strategically implemented centralized platforms for renewals, tenant screening, and call centers. These platforms are complemented by AI applications deployed across various aspects of the resident experience. This technological integration is driving tangible benefits, enabling reductions in off-site staffing, particularly within leasing offices, and optimizing maintenance operations.

The impact of these technological differentiators is evident in the company's expense management. In Q2 2025, same-store operating expenses increased by a modest 1.5% year-over-year, with marketing and payroll declining by 4.7% and 2.8% respectively. Total controllable expenses were up only 0.5% for the quarter. This efficiency directly contributes to stronger Net Operating Income (NOI) margins and supports the company's profitability. The focus on optimizing maintenance operations through technology is expected to yield further efficiencies, potentially driving down payroll spend in the coming quarters.

Financial Performance and Strategic Capital Management

NXRT's financial performance in the first half of 2025 reflects a dynamic operating environment, marked by strategic adjustments and a focus on long-term value creation. For the three months ended June 30, 2025, the company reported a net loss of $7.0 million, compared to net income of $10.6 million in the prior year period. This shift was primarily due to the absence of significant gains from real estate dispositions in Q2 2025, unlike Q2 2024 which benefited from a substantial gain on sales of real estate. Total revenues for Q2 2025 were $63.1 million, a slight decrease from $64.2 million in Q2 2024, primarily due to portfolio disposition activity in 2024.

Despite the revenue headwinds, NXRT demonstrated strong expense control. Property operating expenses decreased by $1.3 million in Q2 2025, largely due to a reduction in casualty-related expenses. Corporate general and administrative expenses also saw a decrease, driven by lower professional fees and stock compensation. Interest expense, however, increased to $15.2 million in Q2 2025 from $14.0 million in Q2 2024, primarily due to higher effective interest rate swap expense and amortization of deferred financing costs, partially offset by a decrease in interest on debt.

The company's proactive approach to capital management is a cornerstone of its financial health. In Q4 2024, NXRT completed a significant refinancing of $1.466 billion, covering 97.7% of its total outstanding debt. This strategic move reduced the weighted average interest rate by 48 basis points and extended the debt maturity schedule to approximately seven years, with no meaningful maturities until 2027.

Further enhancing its liquidity, NXRT secured a new $200 million corporate revolving credit facility in July 2025, with an improved spread of 15 basis points compared to the prior facility. The company also entered into a new five-year $100 million SOFR swap in April 2025 at a fixed rate of 3.489%, with plans to layer in additional swaps to manage interest rate risk.

NXRT's commitment to shareholder value is evident in its consistent dividend growth and share repurchase program. The Board approved a quarterly dividend of $0.51 per share in July 2025, representing a 10.3% increase from the prior dividend and a 147.6% increase since inception. This dividend is well-covered, with a 1.39x Core FFO coverage and a 72.2% payout ratio in Q2 2025. The company also actively repurchases its common stock, having bought back 223,109 shares for approximately $7.7 million at an average price of $34.29 per share in the first half of 2025. This strategy aims to capitalize on the discount to the company's Net Asset Value (NAV), which stood at a midpoint of $50.31 per share as of Q2 2025.

Competitive Positioning and Market Dynamics

NXRT operates in a highly competitive multifamily real estate market, facing both direct and indirect rivals. Direct competitors include large, established REITs like Equity Residential (EQR), AvalonBay Communities (AVB), Essex Property Trust (ESS), and Camden Property Trust (CPT). While these larger players often focus on higher-end urban markets (EQR, AVB) or specific coastal regions (ESS), NXRT differentiates itself by targeting middle-income, value-add opportunities primarily in the Sun Belt. This focus allows NXRT to capture demand from affordability-driven renters and execute on property enhancements that yield attractive returns.

NXRT's value-add program is a key competitive advantage. Since inception, the company has completed over 9,113 full and partial upgrades, yielding an average monthly rental increase of $165 per unit and a 20.8% ROI. The installation of 4,870 kitchen and laundry appliances (64.2% ROI) and 11,199 tech packages (37.2% ROI) further underscores its ability to generate significant rental premiums through targeted investments. This contrasts with competitors who might rely more on market appreciation or broad-scale development. While direct quantitative comparisons of profitability margins across all competitors are challenging to ascertain, NXRT's Gross Profit Margin (TTM) of 84.84% and Operating Profit Margin (TTM) of 12.75% demonstrate its ability to generate strong top-line profitability, though its Net Profit Margin (TTM) of -19.55% reflects the impact of non-operating expenses, particularly interest. For context, EQR's Gross Profit Margin is 63% and Operating Profit Margin is 29%, while AVB's are 63% and 31% respectively. This indicates NXRT's operational efficiency at the property level, but also highlights the higher interest expense burden it has faced.

The multifamily market is currently experiencing a period of significant new supply, particularly in NXRT's key markets like Phoenix, Dallas, Charlotte, and South Florida. This has led to increased concession utilization and some pressure on occupancy and rent growth. For instance, Q2 2025 same-store occupancy for NXRT decreased by 0.8% year-over-year. However, RealPage data indicates that Q2 2025 marked the first quarterly drop in inventory growth in over 15 years, with new deliveries tapering after peaking in late 2024. This suggests that the supply picture is improving, with the national delivery outlook expected to contract significantly after Q3 2025 to GFC-level output, supporting accelerating fundamentals in 2026 and 2027.

NXRT's strategic positioning in submarkets less directly impacted by Class A new construction, coupled with its value-add capabilities, allows it to remain competitive. While Phoenix has seen increased concession utilization due to supply, markets like Raleigh and Atlanta demonstrated strong NOI growth in Q2 2025, at 6.8% and 4.4% respectively. The company's proactive expense management, including a notable reduction in bad debt to 50 basis points in Q2 2025 (down from 1.3% for full year 2024), further strengthens its operational resilience.

Outlook and Forward Trajectory

NXRT's management views 2025 as a "transition year" that will pave the way for "outsized growth in 2026 and 2027." This optimistic long-term outlook is firmly grounded in the anticipated moderation of new multifamily supply. After Q3 2025, the national delivery outlook is projected to contract sharply, creating a more favorable supply-demand dynamic for existing properties. This fundamental shift is expected to sustain stronger performance for NXRT through 2027.

For the full year 2025, NXRT has tightened its guidance ranges, affirming its Core FFO per diluted share midpoint at $2.75. The company expects earnings loss per diluted share to be in the range of $1.22 (high) to $1.40 (low), with a midpoint of $1.31. Same-store NOI guidance is affirmed at a midpoint of negative 1.5%, reflecting management's expectation that efficient expense management will largely offset slightly softer revenue growth in the second half of the year.

Key assumptions underpinning this guidance include a continued focus on internal growth through the value-add program, with management aiming to accelerate renovation output. While new lease growth slowed modestly in late June and July due to economic uncertainty, the company expects renewal rent growth to remain strong. Bad debt is anticipated to stabilize between 50 and 75 basis points for the remainder of 2025, returning to pre-COVID run rates in 2026. Markets like Tampa, Dallas, Charlotte, and Las Vegas are expected to exceed revenue expectations in the second half of 2025, while South Florida, Orlando, and Atlanta may be modestly weaker due to concentrated new supply, which is expected to stabilize by late 2025.

The company's strategic financial moves, including the recent debt refinancings and interest rate swaps, are expected to provide a material annual earnings benefit, further supporting the Core FFO outlook. The new $200 million corporate revolving credit facility provides ample liquidity and flexibility for future operations and opportunistic capital recycling.

Risks and Considerations

Despite the compelling investment thesis, several risks warrant investor attention. The macroeconomic environment, characterized by high interest rates and potential inflation, could impact financing costs and consumer sentiment, affecting rental demand. While tariffs have had a muted impact so far, potential increases in construction material costs could affect value-add program expenses.

Geographic concentration in the Southeastern and Southwestern U.S. exposes NXRT to adverse regional developments. The value-add strategy, while offering high returns, inherently carries more risk than conservative investment approaches. Furthermore, the ongoing legal proceedings related to the Highland Capital Management, L.P. bankruptcy, though not expected to materially affect NXRT's business, introduce an element of uncertainty. Finally, continued new supply in certain submarkets could exert pressure on occupancy and rent growth in the near term, requiring diligent management of concessions and operational efficiencies.

Conclusion

NexPoint Residential Trust presents a compelling investment case, rooted in its specialized value-add strategy within resilient Sun Belt multifamily markets. The company's proactive financial management, highlighted by strategic debt refinancings and interest rate hedging, has significantly de-risked its balance sheet and enhanced its earnings profile. Coupled with its technological advancements in operational efficiency, NXRT is well-equipped to navigate the current market dynamics.

While 2025 is poised to be a transitional year marked by lingering supply pressures, the anticipated sharp decline in new deliveries from late 2025 onwards sets the stage for a fundamental shift in market fundamentals, promising outsized growth in 2026 and 2027. NXRT's consistent dividend growth, underpinned by strong Core FFO coverage and a disciplined share repurchase program, reinforces its commitment to delivering shareholder value. For investors seeking exposure to a well-managed, internally growing REIT poised to capitalize on an improving supply-demand landscape, NXRT offers a strategic opportunity.