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On Monday, Citizens JMP analysts downgraded NexPoint Residential Trust (NYSE:NXRT) from Market Outperform to Market Perform, citing increasing concerns over the company’s balance sheet risk. NexPoint, known for its performance in the residential real estate investment trust (REIT) sector and its 10-year streak of consecutive dividend increases, recently exceeded first quarter 2025 core funds from operations (FFO) expectations, posting $0.75 per share against the $0.63 forecast by Citizens and the consensus estimate of $0.65 per share. According to InvestingPro data, the company currently offers a 5.5% dividend yield, though analysts expect net income to decline this year. This strong performance prompted NexPoint management to raise their full-year 2025 core FFO guidance, moving the midpoint from $1.70 to $1.75 per share.
The company is benefiting from favorable supply and demand trends, as the rate of new apartment development is declining in areas with rapid population growth and high home ownership costs. Despite these positive trends, Citizens JMP has raised concerns over NexPoint’s leverage, which is one of the highest in the public Residential REIT space. The firm noted that the company’s interest rates have been kept low due to swaps that are scheduled to expire in the second half of 2026 and early 2027.
If market conditions remain unchanged once these interest rate swaps end, Citizens JMP anticipates a potential dilution of FFO by approximately $1.15 per share, which could mean a 40% earnings deterioration for NexPoint. While organic growth and lower interest rates could potentially mitigate this risk, Citizens JMP prefers to steer clear of this uncertainty.
As a result of these concerns, the analysts believe that NexPoint’s current stock valuation is fair, particularly since the stock is trading at a 30% net asset value (NAV) discount compared to the apartment REIT group average of 15%. The downgrade reflects a cautious stance on the company’s financial outlook in light of its leverage and the looming expiration of beneficial interest rate swaps. InvestingPro’s Fair Value analysis suggests the stock is currently fairly valued, with additional insights available in the comprehensive Pro Research Report, which provides deep-dive analysis of over 1,400 US stocks.
In other recent news, NexPoint Residential Trust reported its first-quarter earnings for 2025, showing a net loss of $6.9 million, or $0.27 per diluted share, which was slightly better than the anticipated loss of $0.30 per share. The company’s revenue came in at $63.2 million, just below the expected $63.35 million. Despite this minor revenue miss, NexPoint announced a new share buyback program, reflecting its strategic focus on enhancing shareholder value. The company also reported a net operating income of $37.8 million, a decrease from $41.1 million in the same quarter last year. NexPoint’s quarterly dividend remained strong at $0.51 per share, maintaining a dividend coverage ratio of 1.4 times. Additionally, the company has entered into a $100 million interest rate swap at 3.489%, aiming to manage its financial exposure effectively. The announcement of a share buyback program and strategic financial maneuvers indicate NexPoint’s proactive approach in navigating market challenges.
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