Refinancing May Lower Interest Costs, But Profitability Challenges Will Persist

Key Takeaways

• Refinancing activities have reduced debt interest rates and increased maturity, enhancing net margins and financial flexibility for future investments.
  
• Plans for more value-add renovations and favorable market conditions are expected to boost revenue growth through higher rental income and occupancy rates.
  
• Operational challenges and increased expenses are pressuring profitability and margins, with revenue growth struggling amid significant debt and potential economic risk factors.

Catalysts

NexPoint Residential Trust is a publicly traded REIT, with its shares listed on the New York Stock Exchange under the symbol "NXRT," primarily focused on acquiring, owning and operating well-located middle-income multifamily properties with "value-add" potential in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States.

• NXRT's refinancing activities have improved its interest rate terms, reducing the weighted average interest rate on total debt and extending debt maturity. This is expected to enhance future net margins by decreasing interest expenses.
  
• The company plans to increase the volume of value-add renovations, which have historically delivered significant rental premiums. This strategic plan should bolster future revenue growth by generating higher rental income.
  
• With most of NXRT’s markets expected to experience lower supply growth and higher occupancy rates over the next 12 months, the company anticipates a positive shift in its favor, potentially leading to increased revenue as a result of higher rental rates and occupancy.
  
• NXRT's ability to refinance and extend debt maturities provides the company with greater financial flexibility, allowing it to potentially enhance earnings by deploying capital for accretive investments or reducing floating rate interest risk.
  
• The dividend increase, which was approved due to expected core earnings benefits from refinancing activities, suggests confidence in sustainable earnings growth, potentially leading to an increase in earnings per share.

NexPoint Residential Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NexPoint Residential Trust's revenue will grow by 2.3% annually over the next 3 years.
• Analysts are not forecasting that NexPoint Residential Trust will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate NexPoint Residential Trust's profit margin will increase from 17.5% to the average US Residential REITs industry of 15.9% in 3 years.
• If NexPoint Residential Trust's profit margin were to converge on the industry average, you could expect earnings to reach $45.1 million (and earnings per share of $1.88) by about February 2028, down from $46.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.0x on those 2028 earnings, up from 21.8x today. This future PE is lower than the current PE for the US Residential REITs industry at 36.4x.
• Analysts expect the number of shares outstanding to decline by 1.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

NexPoint Residential Trust Future Earnings Per Share Growth

Risks

• NexPoint Residential Trust reported a net loss for the third quarter of 2024, compared to net income the previous year, indicating potential challenges in maintaining profitability which could impact earnings.
  
• The company’s NOI and same-store NOI decreased compared to the previous year, partly due to increased operating expenses, which could pressure net margins.
  
• A decrease in same-store rent and average monthly rent reduction may suggest difficulties in maintaining or increasing revenue.
  
• The company’s guidance reflects only modest increases in revenue and incorporates a negative low-end projection for same-store NOI, signaling potential struggles in generating revenue growth.
  
• The refinancing and debt adjustments, while aimed at reducing interest expense, reflect significant outstanding debt that could pose risks if economic conditions change, potentially impacting net margins.

Valuation

• The analysts have a consensus price target of $45.875 for NexPoint Residential Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $283.4 million, earnings will come to $45.1 million, and it would be trading on a PE ratio of 31.0x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $39.76, the analyst price target of $45.88 is 13.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.