Stock Analysis & Ideas

Why NXRT Stock is Still Cheap despite Rising Interest Rates

Story Highlights

NexPoint has sustained incredible growth momentum powered by its unique value-added strategy. The company’s most recent results were robust, while management’s outlook remains very optimistic. In addition, the stock is likely attractively priced despite investor concerns over the rising-rates environment.

NexPoint Residential Trust (NXRT) has consistently been one of the fastest-growing residential real estate trusts over the past several years. However, investors have grown increasingly concerned regarding the company’s growth prospects, as rising rates could stress the residential real estate market. Still, with NexPoint’s growth trajectory remaining robust and management’s guidance appearing optimistic, I believe that the stock is cheaply valued against its future. I am bullish on the stock.

What Does NXRT Stock Do?

NexPoint Residential Trust specializes in acquiring, owning, and managing middle-income multifamily properties. The company secures these properties in areas that are excellent for families, mainly in the Southeastern and Southwestern United States. According to its most recent quarterly filings, NexPoint had stakes in 41 properties across 11 markets.

Particularly, NexPoint’s biggest location exposures were in Dallas/Fort Worth, Phoenix, and South Florida, each comprising 16.8%, 13.1%, and 12.7% of its portfolio’s apartment units, respectively.

Over the years, NexPoint has sustained incredible growth momentum. Its unique value-added strategy allows it to charge monthly rents with a premium compared to the more conventional residential industry peers.

Impressively, NexPoint has executed 6,834 full and partial upgrades, 4,728 kitchen and laundry appliances, and 9,624 technology packages since its inception. This has led to a $142, $48, and $43 average monthly rental gain per unit, and a 21.8%, 70.8%, and 33.5% ROI, respectively.

With working-class Americans constantly seeking safe, clean, and affordable housing in markets with great job growth prospects, NexPoint has all the tools to achieve above-average growth.

This, combined with the company’s serial acquisition strategy, has helped NexPoint to grow its adjusted funds from operations rather impressively. Particularly, the company features a 5-year AFFO/share CAGR of 15.4%, which is certainly impressive.

NXRT Stock Continues to See Strong Growth

NexPoint’s most recent results once again exhibited that the company’s growth momentum remains vigorous, with revenues growing 25.1% to $65.8 million. In fact, revenue accelerated from the previous quarter’s 17.4%. Revenue growth during the quarter was driven by same-store average effective rent, total revenue, and NOI increasing by 19.2%, 14.2%, and 16.4%, respectively.

This was the case despite occupancy falling 150 basis points year-over-year to 94.5% (though it remained stable quarter-over-quarter). As a result of a higher top line, AFFO rose to $22.7 million, or $0.89 per share, from $16.3 million, or $0.65 per share last year. This suggests growth of 39.2% and 36.9%, respectively.

The weaker growth on a per-share basis was due to a higher share count as a result of NexPoint’s share issuances utilized to finance its portfolio growth. Nevertheless, it’s evident that despite the share count expanding, the per-share growth in AFFO was barely influenced. This demonstrates management’s capability to create value at a below-average cost.

Overall, NexPoint’s per-share growth is truly phenomenal. Few companies have historically achieved so much of an accretive value this consistently.

NexPoint continued to execute on its value-added strategy during the quarter, completing 650 full and partial renovations, 22.4% more quarter-over-quarter. Further, it also leased 609 renovated units, booking an average rent bonus of $138 each month and an annualized 24.9% ROI.

With NexPoints results surpassing their previous expectations, management reiterated their previously shared optimistic outlook for Fiscal Year 2022. The outlook for the full-year targets an AFFO/share of $3.37 at the midpoint, indicating year-over-year growth of 19.5%.

It’s worth noting that this also indicates an acceleration in NexPoint’s AFFO/share growth rate against its five-year average. This is very encouraging during a rising rate environment that is presumed to disturb the residential real estate market.

Dividend Growth Remains Outstanding for NXRT Stock

NexPoint has grown its dividend annually since its first payment in 2015. The company now numbers six years of successive annual dividend hikes. The dividend growth CAGR over the past five years stands at 10.9%, while the most recent hike came in at a pleasing 11.3% to a quarterly amount of $0.38.

The company has already paid four $0.38 quarter dividends, meaning that investors are likely to celebrate another dividend increase with the next declaration. As mentioned, the company target an AFFO/share growth of 19.5% this year. Hence, it’s quite possible that the next dividend hike will once again be in the double digits.

Further, the midpoint of management’s guidance indicates a payout ratio of 45% according to the present DPS run-rate, further supporting the case for dividend growth to be sustained in the double digits.

Shares are Cheaply Valued Relative to NexPoint’s Growth

Due to NexPoint’s outstanding AFFO and DPS growth, the stock has traded at a premium over the years. With Mr. Market recently concerned regarding whether this growth can be sustained during a rising rates environment, NexPoint is currently trading more than 30% lower from its 52-week high.

According to the midpoint of management’s AFFO/share outlook of $3.37, the stock is presently trading at a P/AFFO of 19.3. While this multiple may appear pricy, it’s certainly lower than the stock’s historical average and can be easily justified based on the company’s underlying growth prospects.

I would argue that it, in fact, presents a discount, as even if NexPoint’s per-share growth metrics were to decelerate to the low teens, they still make for a satisfactory investment case.

Is NXRT Stock a Buy?

Turning to Wall Street, NexPoint Residential has a Moderate Buy consensus rating based on five Buys and three Holds assigned in the past three months. At $75.40, the average NexPoint Residential price target suggests 18.8% upside potential.

Takeaway – NXRT Stock’s Growth Rates Justify the Current Valuation

NexPoint is a truly special REIT, with its value-added growth strategy proven able to generate above-average growth rates. The company’s most recent results continued to demonstrate the benefits of this strategy, while management’s outlook remains very optimistic. While the stock’s P/AFFO of 19.3 may not appear cheap, NexPoint is likely to keep growing both its AFFO and dividend per share dividend at a double-digit pace annually.

Thus, the stock’s current price levels may actually present a discount. Accordingly, I am bullish on the stock.

Disclosure

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