NexPoint A Buy With 'Middle-America' Holdings

NexPoint Residential Trust Inc NXRT is poised for solid NOI and FFO growth in the near and medium terms, on account of its value-creating renovation strategy, Canaccord Genuity’s Ryan Meliker said in a report. He initiated coverage of the company with a Buy rating and a price target of $20.

Value-Creating Strategy

NexPoint has the “right strategy in the right markets,” analyst Ryan Meliker commented, adding that it creates value while also fueling “outsized growth.” The company purchases B-quality multifamily in Southeastern and Southwestern markets across the US and has a renovation strategy that increases rents and lowers exit cap rates.

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Meliker expects the strategy to generate robust same-store NOI and FFO growth versus peers. He estimated 2016 same-store NOI growth at 15.4 percent versus the guidance across the multifamily REIT sub-sector of 6.3 percent. The 2015-2018 CAGR is estimated at 14 percent versus consensus expectations across the multifamily REIT sub-sector of 5 percent.

Stock Upside

“We estimate the remaining renovations left to be completed will increase NAV by $7.37 (in present value), highlighting our view that, even maintaining the current valuation discount, NXRT's value creation could drive just over 40% upside to the stock,” the analyst wrote.

While NexPoint’s shares trade at a discount to peers, this gap is expected to continue to narrow, “driven by outsized growth, coupled with a better understanding of the investor alignment in NXRT's external management structure,” Meliker added.