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NexPoint Residential: Excessive Fees And High Leverage Muddy The Story


  • NXRT has grown cash flows at a double-digit clip yet trades at a discount to peers based on FFO.
  • NXRT is externally managed and pays sizable fees to its managers.
  • NXRT maintains a leverage profile with twice as much debt as peers.
  • I am neutral on NXRT as the valuation is not materially cheaper than peers when adjusted for debt.
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NexPoint Residential (NYSE:NXRT) is an apartment REIT that appears to trade at a discount to peers. While NXRT has shown strong FFO and dividend growth in recent years, investors may be overlooking the large debt load and the bloated expenses as compared to peers. Adjusted for debt, NXRT doesn’t trade at such an exaggerated discount, and thus shares do not seem to be pricing in the potential conflict of interest from external management. I hesitate to turn bearish on shares due to the resilience of apartment real estate, but readers are best advised to avoid shares.

Relative Discount In Attractive Space?

NXRT owns 39 apartment properties spread across 7 states:

(2020 March Presentation)

NXRT has been able to steadily increase its average rent per unit to a modest $1,100 per month:

(2019 Q4 Supplemental)

NXRT’s investment strategy is to focus on more affordable housing. We can see below that NXRT’s average rent per unit ranks among the lowest among peers, while its properties also rank among the highest in discounts to cost to own:

(2020 March Presentation)

NXRT believes that this gives it the best of both worlds: affordable housing as well as compelling motivation to rent versus own.

NXRT has no near-term debt maturities:

(2020 March Presentation)

In 2019, NXRT grew FFO by 19% to $1.93 per share and raised its dividend 11% to $1.138 per share, as SS NOI grew 6.7%. Most peers struggle to manage even 5-7% FFO growth, thus NXRT’s aggressive growth rate is well noted. Strangely enough, NXRT seems to trade at a discount to peers using traditional metrics. This isn’t so obvious when looking at dividend yield, but even here we can see below that NXRT’s dividend yield is slightly higher than peers:

(Chart by Best of Breed)

The apparent discount appears more obvious

25 Stocks I Like More Than NXRT

NXRT didn't make the cut - the Best of Breed portfolio features over 25 stocks rated strong buy or even conviction buy.

Some investors start by looking at valuation with a stock screener, and from these cheap companies try to find any that they can justify buying. I instead start with an assessment of quality, and only from the highest quality companies do I begin to search for value. My goal is to not only beat the market but to also do so with a high success rate.

Become a Best of Breed investor today

This article was written by

Julian Lin profile picture

Julian Lin is a financial analyst. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.

Julian is the leader of the investing group Best Of Breed Growth Stocks where he only shares positions in stocks which have a large probability of delivering large alpha relative to the S&P 500. He also combines growth-oriented principles with strict valuation hurdles to add an additional layer to the conventional margin of safety. Features include: exclusive access to Julian's highest conviction picks, full stock research reports, real-time trade alerts, macro market analysis, individual industry reports, a filtered watchlist, and community chat with access to Julian 24/7. Learn more.

Analyst’s Disclosure: I am/we are long EQR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

DISCLAIMER: Julian Lin is not a Registered Investment Advisor or Financial Planner. While the information in his articles and his comments on SeekingAlpha.com or elsewhere may seem like financial advice, it is not, and it is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (13)

@Julian Lin wow great research. Seems pretty dodgy.
Julian Lin profile picture
@Buyside Guy, CFA

The stock still crushed the market since this was written. Perhaps my concerns were unnecessary after all.
Great article. Thanks Julian
tonor profile picture
I see apartment REITs doing 2 years of 5% revenue declines. For a 5 -year hold, I'd go with ESS - I'm a West Coast bull.

Wouldn't buy NXRT. I don't trust those guys.
Julian Lin profile picture
2 years of 5% revenue declines?! That's very bearish!
tonor profile picture
If I'm wrong, I'm too optimistic. 2 years of -5% happened in early 2000s and again in great recession. This economy is far worse, though landlords appear willing to work with tenants to get some rent and prevent too much occupancy loss. My math is 2% occupancy decline and 3% rent decline each year. That isn't draconian.

The reality today - in all types of real estate - is tenants can stop paying for months and not be kicked out. What the lease or law says doesn't matter as much now.
Julian Lin profile picture
Not Kicked out doesn’t mean rent won’t eventually be collected
Visual Capital profile picture
@Julian Lin Thanks for raising the alarm on NXRT. I notice your long EQR and have written previously on other apartments REIT. Which do you see as being the best steward of investor capital?
Julian Lin profile picture
I like EQR, CPT, MAA, AVB, and UDR
Thank you Julian, I agree with you, management is skimming investors profits, EQR much better quality. Also own AIV and UDR. They are gone from my watch list.
Julian Lin profile picture
Thanks for commenting!
Which one is the best quality or value among three?
EQR, AIV, UDR in that order of quality IMHO
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