15%-Yield NexPoint Real Estate Finance Stock Has 43% Upside

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NREF Stock a Source of Stable, Defensive Returns

Real estate investment trusts (REITs) have been some of the hardest-hit businesses in the high-interest-rate environment. That’s because high interest rates drive up their borrowing costs and cut into their margins, which leads to reduced profits and free cash flow (FCF).

Interest rate cuts are imminent, although the exact timing of the Federal Reserve’s first cut is open for debate. Initially, many analysts thought the first interest rate cut would come in June or July, but there’s a growing consensus that the Fed won’t start lowering its rates until September.

The share prices of many REIT stocks have made moves to the upside in anticipation of midyear rate cuts, but those moves may be a little premature.

Then there are REITs like NexPoint Real Estate Finance Inc (NYSE:NREF). Stock traders haven’t jumped on the bandwagon yet, which is actually a good thing.

NexPoint is a mortgage REIT (mREIT) that focuses on multifamily, single-family rental, self-storage, life science, and hospitality properties that are predominantly located in the top 50 metropolitan statistical areas. (Source: “1Q 2024 Financial Supplement,” NexPoint Real Estate Finance Inc, May 2, 2024.)

The company focuses on properties that are stabilized or require limited deferred funding to support leasing or the ramping up of operations—for which most capital expenditures are for value-added improvements.

The mREIT’s portfolio has minimal exposure to construction loans, makes no heavy transitional loans, and makes no for-sale loans.

As of March 31, the company’s outstanding total portfolio comprised 90 investments worth $1.2 billion. The portfolio is geographically diverse, with a bias toward the Southeast and the Southwest.

Multifamily, single-family rental, life sciences, and self-storage properties represent 64.6%, 21.9%, 11.4% and 2.1%, respectively, of the company’s debt portfolio.

Typically, a high-interest-rate environment is great for lenders. After all, the majority of their investments have floating interest rates.

The biggest concern is the possibility of commercial mortgage defaults. Fortunately, the impact of defaults has been overstated. That doesn’t mean mREITs haven’t been facing headwinds. Interest rates can only go so high before they begin to have negative impacts on borrowers’ businesses.

As of May 1, there were no loans in forbearance in NexPoint’s portfolio.

NexPoint Real Estate Finance Inc Reported Solid Q1 Results

In the first quarter of 2024, the NexPoint’s cash available for distribution increased to $14.9 million, or $0.60 per diluted share, from $12.4 million, or $0.55 per share, in the same prior-year period. (Source: “NREF Announces First Quarter 2024 Results, Provides Second Quarter 2024 Guidance,” NexPoint Real Estate Finance Inc, May 2, 2024.)

“Cash available for distribution” is the amount of money a company has available to pay dividends, so it’s an important metric for REITs.

NexPoint reported a first-quarter net loss of $14.6 million, or $0.83 per diluted share, compared to net income of $6.6 million, or $0.37 per diluted share, in the first quarter of 2023.

Commenting on the company’s first-quarter performance, Matthew McGraner, NexPoint’s chief investment officer, said, “Amid challenging conditions in the commercial real estate market, NREF’s portfolio remains a reliable source of stable and defensive returns.” (Source: Ibid.)

He added, “NREF is actively leveraging its core operating platforms to capitalize on market dislocation.”

Looking ahead to the second quarter, NexPoint expects to report earnings per diluted share at the midpoint of $0.39 and cash available for distribution per diluted share at the midpoint of $0.40.

Management Maintains Quarterly Dividend of $0.50

On May 2, NexPoint declared a quarterly dividend of $0.50 per share, to be paid on June 28. (Source: “NexPoint Real Estate Finance, Inc. Announces Quarterly Dividend,” NexPoint Real Estate Finance Inc, May 2, 2024.)

This works out to a yield of 14.96% (as of this writing).

Its quarterly dividend paid in March was also $0.50 per share.

When the company has a really good quarter, it can also pay a special dividend. For instance, in October 2023, it declared a regular dividend of $0.50 per share and a special dividend of $0.185 per share. Both dividends were paid in December. (Source: “NexPoint Real Estate Finance, Inc. Announces Quarterly and Special Dividends,” NexPoint Real Estate Finance Inc, October 31, 2023.)

NexPoint Stock Down 13% in 2024 but Has Potential 43% Upside

NREF stock’s share-price performance hasn’t been entirely consistent lately.

From the beginning of November 2023 through late December, investor optimism sent NexPoint stock 17.2% higher. Like many REIT stocks, NREF stock got a boost in early November when the Fed announced it was holding its key lending rate at 5.0%. In December, the Fed stayed the course but said rate cuts were on the table.

It’s been a slightly different story in 2024, with mREITs under pressure due to uncertainty around exactly when the Fed will announce its first interest rate cut. As of this writing, NexPoint stock is up by 15% on an annual basis but down by 13% since the start of 2024.

For technical traders, NREF stock is trading near a support level it held in late October 2023, which was just before the Fed said it was keeping its overnight lending rate unchanged. NexPoint stock has basically been trading near that support level since the beginning of April.

Chart courtesy of StockCharts.com

Although NexPoint stock has essentially erased all of its gains since November 1, 2023, the outlook for the stock is solid. Wall Street analysts have provided a 12-month average share-price estimate of $15.00 and a high estimate of $19.00. This points to potential gains of 17% to 43%.

The Lowdown on NexPoint Real Estate Finance Inc

NexPoint is an mREIT with a geographically diverse portfolio that’s primarily made up of multifamily properties and single-family rental properties.

Despite challenging conditions in the commercial real estate market, NexPoint Real Estate Finance Inc was able to generate cash available for distribution of $0.60 per share in the first quarter, which was more than enough to cover its quarterly distribution of $0.50 per share.

As of March 31, the company’s average remaining loan term was 5.3 years, its weighted average loan-to-value ratio was 68.5%, and its average debt service coverage ratio was 1.74 times. Moreover, 86.6% of the company’s portfolio was stabilized.

Thanks to the weighted average remaining term, NexPoint’s portfolio will enjoy a stable and transparent earnings stream for the next five-plus years.