Value-add Programs Will Upgrade Units And Increase Tenant Satisfaction

Key Takeaways

• Focus on operational efficiency and resident satisfaction is aimed at enhancing margins and generating stable revenue through reduced turnover and higher occupancy.
  
• Refinancing efforts and strategic unit upgrades are set to decrease expenses and boost revenue, ensuring rent growth and increased shareholder value.
  
• Financial struggles marked by decreased income, declining profitability, and rising expenses could hinder future earnings and adversely affect net income.

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.

• The company is focusing on improving operational efficiency and expanding margins with a specific emphasis on increasing resident satisfaction and retention. This should positively impact net margins by reducing turnover costs and attracting more stable revenue streams through higher occupancy and rent.
  
• NexPoint's refinancing efforts have significantly extended their debt maturity schedule and reduced the average interest rate on their debt. This is expected to lower interest expenses and improve overall earnings and net margins in future periods.
  
• The strategic focus on upgrading units through their value-add programs is anticipated to drive rent growth and deliver substantial returns on investment. This strategy could enhance revenue by increasing rental income per unit.
  
• NexPoint is anticipating a supply-constrained market in the latter part of 2025, which could enhance their ability to increase rents and improve same-store revenue growth. This expected reduction in market supply should help increase occupancy and rental revenue.
  
• The company’s disciplined capital allocation strategy, including stock repurchases at a discount to NAV, suggests potential for increased shareholder value, which should positively impact earnings per share through reduced share count.

NexPoint Residential Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NexPoint Residential Trust's revenue will grow by 3.6% 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 0.4% to the average US Residential REITs industry of 15.2% in 3 years.
• If NexPoint Residential Trust's profit margin were to converge on the industry average, you could expect earnings to reach $44.0 million (and earnings per share of $1.83) by about March 2028, up from $1.1 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 32.1x on those 2028 earnings, down from 890.9x today. This future PE is lower than the current PE for the US Residential REITs industry at 46.0x.
• Analysts expect the number of shares outstanding to decline by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.81%, as per the Simply Wall St company report.

NexPoint Residential Trust Future Earnings Per Share Growth

Risks

• Net loss reported for Q4 2024 was $26.9 million compared to a net income of $18.4 million in Q4 2023, indicating financial struggles that could impact future earnings.
  
• The company's net operating income (NOI) decreased by 7.6% from the fourth quarter of 2023 to the same period in 2024, signaling potential headwinds for future net margins.
  
• Core FFO per diluted share decreased from $0.75 in Q4 2023 to $0.58 in Q4 2024, suggesting declining profitability and potential risks to future earnings.
  
• The company faces additional pressure from increasing same-store expenses (3.3% for the year), which could negatively affect net margins.
  
• The guidance for 2025 indicates a possible decline in same-store NOI growth, projecting a midpoint decrease of 1.5%, which can adversely impact net income.

Valuation

• The analysts have a consensus price target of $45.571 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 $288.8 million, earnings will come to $44.0 million, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 8.8%.
• Given the current share price of $38.83, the analyst price target of $45.57 is 14.8% higher.
• 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.