Monday, March 29, 2021

A Small Cap Equity holding: NexPoint Residential Trust Inc. (NXRT, $45.99): “Residential Real Estate is Continuing to Succeed with the Covid Recovery” by: Garrett Gajewski, AIM Student at Marquette University

  NexPoint Residential Trust Inc. (NXRT, $45.99): “Residential Real Estate is Continuing to Succeed with the Covid Recovery”

By: Garrett Gajewski, 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 Inc. (NYSE: NXRT) is a residential REIT that focuses on the acquisition, asset management, and disposition of multifamily real estate properties. Most of these properties are middle-income housing in great locations.

• NXRT tends to buy value-add opportunities that are located in large cities throughout the Southeastern and Southwestern United States.

• The residential real estate market is expected to grow at a CAGR of 5.77% from 2020 to 2025. 

• In 2021, the company received four buy ratings and two hold ratings from analysts, with an average analyst target price of $48.66. NXRT has a Net Asset Value (NTM) of $43.16 and an implied cap rate of 4.99%. The company also has a consistently increasing FFO and AFFO.

• The overall trend of NXRT has been a steep uptrend over the past five years. 

Key points: NexPoint Residential Trust Inc. has performed very well over the past five years. Its earnings are expected to grow at 4.1% for 2021 and 9% for 2022. Over the next decade, inflation is supposed to grow at over 2% annually, with 2021 inflation expected to rise at 2.24%. This high inflation can hurt companies such as growth tech stocks that already have high valuations. However, inflation tends to help REITs because the value of properties and rental income tend to grow higher with an increase in inflation. 

Currently, NXRT has an ROE of 10.6%, which is significantly higher than the REIT industry average of 5%. In order to get a return of this magnitude, NXRT takes on significantly more debt than even many of its peers. NXRT has a Debt-to-Equity ratio of 3.38, which is a little concerning. NXRT offers an enjoyable dividend yield of 3.03%. With increasing interest rates in the coming months and years, this could impose an issue for NXRT to issue new debt or equity securities in the future. Currently, Zacks Investment Research has given NXRT a rating of a 2, which signals a buy.

Since the Covid low in March, unemployment rates have dropped from 14.8% to 6.2% and are continuing to decrease. This is a great sign for the residential real estate market, especially for NXRT, because they focus on middle-income housing. This has drastically helped NXRT and brought them back to their normal rent collection levels. Additionally, with Covid vaccinations becoming available to more of the general public, this should allow the United States to get back to normal in the coming months. This “normal” should have a significant benefit to all areas of real estate, especially retail, residential, and entertainment. 

NXRT has given a slight diversification benefit to the AIM fund and has helped reduce the overall risk of the portfolio. Additionally, the added tax benefits of REITs are a huge benefit. With the corporate tax rate likely getting increased from 21% to 28% under the Biden Administration, this makes REITs look much more intriguing, as they can avoid taxation at the fund level due to their over 90% payout ratios.

What has the stock done lately?

NXRT was pitched and added to the AIM Small Cap Fund at a cost of $26.04 per share in early 2018 and has performed very well since being bought. In the past month, NXRT is up 2% and has fluctuated in price between $41 and $46. The price of NXRT is currently sitting around $45.99, meaning that the stock is up 77% since being purchased.

Past Year Performance: NXRT is up roughly 76% during the last 52 weeks. During this same time period, the Russell 2000 is up 100%. NXRT has noticeably underperformed the benchmark; however, the company has managed to recover fairly well from its March lows. NXRT has still been unable to reclaim its all-time high above $50, that was reached on February 18, 2020.

Source: FactSet

My Takeaway

Overall, NexPoint Residential Trust has seen a strong recovery over the past 52-weeks. There are several big factors that could benefit NXRT greatly in the coming months and years. The company has been in the AIM portfolio for almost three years now and has continued to be one of the portfolios best performing REITs. It is recommended that the AIM portfolio continue holding NXRT so the fund can keep taking advantage of the above average returns. 

Source: FactSet