Saturday, April 4, 2020

A Current AIM Small Cap Equity Holding: Nexpoint Residential Trust (NXRT, $24.97): “Pointing in the Right Direction”

 Nexpoint Residential Trust (NXRT, $24.97):
“Pointing in the Right Direction”
By: Christian Musbach, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
       Nexpoint Residential Trust (NYSE: NXRT) is a real estate investment trust (REIT) that focuses on the acquisition, asset management, and disposition of multifamily assets. They primarily focus on acquiring in the Southeastern and Southwestern United States in high-growth cities. NXRT is able to capture a large market share due to their estimations that around 67.9% of Americans can afford to live in their communities. The company is headquartered in Dallas, TX and was founded in 2014.
       The first driver for the pitch of NXRT in April of 2018 was their focus on consistently upgrading their facilities which they have stayed consistent with.
       The second driver in the original pitch for NXRT was its strategic acquisitions. They continue to find multifamily acquisitions in high-growth areas. The focus on Class B properties allows them to deploy their value-add program to increase property value.
       The negative impacts of COVID-19 on the stock price for NXRT has been significant due to an overall lack of liquidity within the REIT industry.  
Key points:
The first driver for the original pitch of NXRT was their focus on upgrading their facilities. These upgrades were supposed to increase rent prices and produce net profits. I believe this is still a major driver for them because of the returns that they have produced. Since their inception, they have completed 6,927 rehabs that have returned around 24.5%. This has increased the rent they collect by around 11.0%. Looking forward, they are planning on deploying around $21.9M to stay on track with their value-add program. This program is focused on improving exteriors and interiors at their properties.  
NXRT strategically acquires properties in high-growth areas where there is a high demand for affordable housing. This was the second driver for the original pitch, and I believe this is still a focal point for the success of NXRT. From December of 2018 to 2019, 30% of all jobs added in the United States were in NXRT MSAs. Three of the top five cities with the highest job growth are in NXRT MSAs which consist of Dallas, Houston, and Phoenix. Going forward, they plan to focus on Class B multifamily properties that are discounted. This will allow them to capture high capitalization rates in high-growth areas.
The effects of COVID-19 have negatively affected NXRT. This is due to a general lack of liquidity which is troublesome during an economic downturn. However, management touched on this in a recent presentation. They are making efforts to increase liquidity and set a goal to have $60M - $75M of unrestricted cash reserves by March 31, 2020. This will be driven by strategic dispositions of assets that will pad their balance sheet. In terms of their outstanding debt, 82% of it does not mature until after 2024. Despite the material impacts of COVID-19 on NXRT’s stock price, I believe they will rebound due to the strategic approach they are taking.
What has the stock done lately?
NXRT had strong revenue growth with a 24.5% increase for 2019 and an increase of 27.20% in funds from operations (FFO). Also, net operating income (NOI) increased by 27.9% in the same period. However, the stock price has taken a massive hit in the past month due to COVID-19. In the past month, the stock is down 46.24%.
Past Year Performance:
Over the past year (March 2019 – March 2020), NXRT is down 43.46% and down 46.24% just in the past month alone. The current P/B ratio is at 1.48x which is well below the five-year average of 2.2x. Despite the rapid downturn due to COVID-19, NXRT is in a good position to grow.

1 Year Stock Chart vs. Benchmark
Source: FactSet
My Takeaway:
NXRT should remain in the AIM small-cap portfolio. Since the stock was pitched in April of 2018, the stock is down 2.58%. However, before the recent economic downturn, the stock returned 102.89% at the 52-week high on February 14, 2020. I believe that NXRT will be well-positioned to capture the need for affordable housing, especially during the current economic situation. The demand for affordable housing will also be driven by the general trends of declining homeownership and increasing student debt. The two major drivers for NXRT are still driving the company roughly two years since it was pitched. With the combination of bolstering the balance sheet and taking a pro-active approach to COVID-19, NXRT will fight through this and remain strong for the foreseeable future.

1 Month Stock Chart
Source: FactSet