Description

I strongly recommend a position in NXRT as I believe the stock has 30% upside (trading at ~$60 per share and worth ~$80 per share) and because I expect the market will begin to more closely reflect its private market value especially as rent growth continues to accelerate in the 2H of 2021.  Further, I believe the Company will continue to compound capital over time (consistent with its market-beating performance since its spinoff in March 2015).

Simply stated, the stock is the best public way to invest in affordable housing and is best geographically positioned to benefit from the continuing net migration into the Sunbelt.  The Company employs a value-add strategy that is very different than the core and development focused strategy of most of the public multifamily REITs.  And finally, with the ability to mark rents to market yearly, multifamily in particular, represents a great hedge against inflation.

NexPoint Residential Trust is primarily focused on acquiring, owning, and operating well-located middle-income multifamily properties with "value-add" potential in large cities, primarily in the Southeastern and Southwestern United States. NXRT is externally advised by NexPoint Real Estate Advisors, L.P., which is an affiliate of NexPoint Advisors, L.P., an SEC-registered investment adviser.

The Company pursues investments in multifamily real property, typically with a value- add component, where they can invest capital to provide "lifestyle" amenities to "workforce" and middle-income housing.  As of June 30, 2021, NXRT owned 14,709 units across the U.S. in Texas, Arizona, Georgia, Tennessee, Florida, Nevada, and North Carolina.  The weighted average effective monthly rent per unit across all 39 properties as of 06/30/21 was $1,159, while physical occupancy was 96.1%.

NXRT is the only pure-play, publicly-traded REIT focused on value-add multifamily real property. The company is focused on acquiring, owning, and operating well-located middle-income multifamily properties with "value-add" potential in large cities, primarily in the Southeastern and Southwestern United States.   

NexPoint has an attractive Sunbelt focus with ~18% of its portfolio (as measured by units) in Dallas/Fort Worth, ~13% in South Florida, ~13% in Nashville, ~11% in Phoenix, ~10% in Atlanta, ~8% in Houston, ~8% in Orlando, 8.0% in Las Vegas, ~7% in Charlotte, and ~4% in Tampa.  Renters are fleeing higher rents and increasing housing prices in gateway and coastal markets and migrating to the Sunbelt in, what I believe is a permanent move.

NXRT targets markets that they believe have the following characteristics:

·        Attractive job growth and household formation fundamentals

·        High costs of homeownership or class A multifamily rental

·        Elevated or increasing construction or replacement costs for multifamily real property

Since inception, for the properties currently in their Portfolio, they have completed 5,784 full and partial upgrades, 4,459 kitchen and laundry appliances, and 9,782 technology packages, resulting in a $132, $48, and $43 average monthly rental increase per unit and a 21.4%, 74.0%, and 33.8% ROI, respectively.

Since its spinoff in March 2015, NXRT has appreciated from ~14.00 per share to ~60.00 per share or more than quadrupled while its closest peer IRT has only doubled within that same period of time.  Simply stated, NXRT has dramatically outperformed its closet peer and the average return of the larger multifamily peer set even more dramatically.

I think that outperformance is set to continue and that NXRT carries an undemanding valuation and trades significantly below private market value.  

By way of background, the stock is trading at ~$60 per share or at a ~4.2% cap rate based on the midpoint of the Company’s 2021 Pro Forma NOI Guidance of $126.1 mm and close the midpoint of the indicative range of a 4.0% to 4.3% cap rate that they use to calculate their estimate of the Company’s NAV which is $55.66 to $66.62 per share.

That being said, I think cap rates for value-add workforce housing in growth markets like the Sunbelt or Mountain West range from 3.25% to 4.25% and I say as someone who is intimately familiar with private market values in that asset class as I have >50% of my investable capital invested in more than 25 multifamily syndications and funds with a workforce focus.  Bridge Investment Group, which recently went public, and is a top-quartile multifamily investor, recently said “in our highly attractive target markets we see cap rates ranging from 3.25% to 4.25%.”  And finally, NXRT on its 2Q 2021 conference call said, “one interesting data point that informs our NAV table is that a large $1.2 billion portfolio is expected to trade in Q3. It's over 4,000 units, has comparable property types and has an average vintage of 1993.  Reports are that this portfolio will trade at a 3.5% cap rate on in-place numbers.”

Myself, I value NXRT based on the midpoint of the Company’s 2021 Pro Forma NOI Guidance of $126.3 and based on 2022 NOI up +5% to $132.6 mm at a 3.75% cap rate. I think a +5% NOI growth rate in 2022 is reasonably conservative since same-store NOI growth was 6.7% in 2019 and 3.2% even in pandemic -impacted 2020!  Using those NOI estimates and the 3.75% cap rate yields at net asset value per share of ~$74 per share using 2021 NOI and ~$80 per share using 2022 NOI. 

I think valuing NXT on approximately a one year forward basis is the most appropriate valuation method for the stock and as such my 1-year price target is $80 a share which translates into >30% upside versus its current price of ~$60 per share.

While I think it is unlikely the Company is acquired for various reasons, the Company is easily digestible and would be an attractive take private candidate.  Multifamily investors like Blackstone, Starwood, and Bridge (just to name a few) would likely find NXRT’s portfolio highly attractive and complementary to their existing multifamily assets.

The net migration into the Company’s target markets continues unabated.  While the acquisition environment is highly competitive the Company has the ability to significantly increase value through its organic rehab program.  They have been able to historically generate ~20% returns on unit renovations and in the process increase the rents of renovated units significantly.

The Company spoke eloquently about the shortage of affordable housing and the favorable fundamental backdrop against which they’re investing:

“The ongoing and widening shortage of affordable houses in the U.S., which is more acute in our Sunbelt markets and getting worse as new household formation outpaces new housing deliveries gives us plenty of runway to continue implementing our value-add strategy across our existing portfolio and new acquisitions.  The increased net migration, coupled with the shortage of housing has led our portfolio to achieve all-time high occupancy and sets us up to aggressively push rates for the remainder of the year as we did in Q2.”

July was another record-breaking month for multifamily according to Yardi the industry’s largest data provider.   Multifamily asking rents increased by an extraordinary 8.3% year-over-year in July, another record increase.  Since the beginning of the year, rents have jumped 8.0%.  Of the 140 metros that Yardi Matrix covers, 50 had double-digit YoY rent growth in July. Almost all, 129 out of 140, had positive YoY growth.

Multifamily, and real estate in general, has always served as a hedge against inflation. Asking rents for multifamily are rising at their fastest rate in decades, while the single-family rental market is experiencing the same rapid price appreciation.  The surge in rents does not seem likely to fade any time soon as there is a significant undersupply of multifamily housing in most metros, creating robust demand.

Finally, I evaluate management favorably notwithstanding the external management.  They have been active buyers of the stock when it has traded below NAV and conversely issuers of stock when it trades materially above NAV.    

For illustrative purposes, I have inserted below a table that shows the stock price’s sensitivity to changes in NOI estimates and a reasonable range of cap rates that could be used to value the stock.

Catalyst

I expect the market will begin to more closely reflect its private market value especially as rent growth continues to accelerate in the 2H of 2021.