Study of NXRT and other multifamily REIT
11/25/2020 – is it a good time to invest in NXRT and other multifamily REITs? worth to spend time to study
NexPoint Residential Trust: Ignore America’s Best REIT At Your Peril
- NXRT is very low-covered stock, despite having massively outperformed the multifamily REIT industry over the past five years.
- Value-add, capital allocation, and strong market location are all drivers for growth going forward.
- COVID has accelerated positive trends that NXRT has benefited from in the past, and will continue to benefit from in the future.
- Valuation is mostly consistent with their multifamily REIT peers.
- Main concern is high pricing in many of NXRT’s markets. It is a much less attractive acquisitions market than it was when NXRT went public.
Recent earnings reports have demonstrated this trend and how it’s impacted multifamily REITs based on geographic location. REITs concentrating in the sunbelt region, with low population density, have experienced much greater portfolio stability than those heavily invested in the nation’s urban core.
| Company | Market Location | Average rents | Average HH per square mile | Median HH per square mile | Q3 SS Revenue growth | Q2 SS NOI growth |
| NXRT | Sunbelt | $1,100 | 1,579* | 1,438* | 3.30% | 4.50% |
| IRT | Sunbelt, Midwest | $1,100 | 711 | 832 | 3.00% | 0.50% |
| IRET | Midwest | $1,100 | 746 | 1,215 | 1.10% | -1.30% |
| MAA | Sunbelt | $1,300 | 954 | 1,298 | 2.10% | -1.10% |
| CPT | Sunbelt | $1,600 | 1,425 | 2,334 | 0.80% | -1.30% |
| AVB | Urban coasts | $2,600 | 1,772 | 4,332 | -6.10% | -10.10% |
| EQR | Urban coasts | $2,800 | 3,180 | 7,556 | -5% | -8.40% |
| AIV | Urban coasts | $2,300 | 2,335 | 8,755 | -4.90% | -6.30% |
| ESS | West coast | $2,400 | 1,959 | 3,414 | -6.70% | -10.80% |
* Represents author calculations
Sources- Hoya Capital and REIT Data Market
Management teams for the REITs located in the urban core also widely noted they expect the deterioration in performance to continue over the next several quarters. Suburban apartments in the sunbelt should be beneficiaries of the urban cores continued underperformance over the course of the next several quarters.
NXRT confirmed in its most recent conference call that the trend of in-migration from high-cost, densely populated states has been taking place with its properties.
| State | % New leases from out of state markets |
| California | 19 |
| New York | 9 |
| Illinois | 7 |
35% of out-of-state applications came from California, New York, and Illinois for the most recent quarter, as residents flee the Los Angeles, San Francisco, New York City, and Chicago urban regions for much more affordable options elsewhere.
Valuation
NXRT’s superior growth and strong portfolio position are not reflected in a premium valuation. Rather, they continue to trade in the average range of much of the multifamily REIT industry. The chart below annualizes each company’s AFFO per share from the first nine months.
| Stock | AFFO per share | P/AFFO |
| NXRT | 2.04 | 21.18 |
| IRT | 0.71 | 18.28 |
| AVB | 8.63 | 19.92 |
| MAA | 5.69 | 22.18 |
| ESS | 11.92 | 21.32 |
| IRET | 2.83 | 25.31 |
There are two important things to note. Some of these companies’ AFFO per share may appear lower than reported. However, I accounted for recurring capital expenditures and subtracted that from many of their CFFO per share.
Q1 and Q2 were much less disastrous for urban core REITs. If just Q3 earnings were annualized, their results would be much worse, and their P/AFFO would be much higher. Sunbelt REITs would also have a slightly higher valuation in that case, but not nearly as high as their coastal multifamily REIT peer companies.
One last thing to note is that the large-cap multifamily REITs carry much less debt than the small-caps. Consequently, they carry less risk. However, given the strong performance and stability of sunbelt multifamily real estate, there is low risk of their asset values declining. With NOI around pre-COVID levels, sunbelt multifamily has been among the most stable asset classes in real estate.
