American Homes 4 Rent is a
Malibu, California based real estate investment trust (REIT). The company
invests in single-family homes that provide an un-levered, mid-to-high single
digit net yield with potential for moderate capital appreciation. To bolster its
cash flow return, AMH invests in markets where it can quickly acquire a
meaningful asset base, stabilize properties, and maintain high occupancy. As of
September 30, 2013, the company owned 21,267 single-family properties in
selected sub-markets in 22 states.
In the long-term, management
structure, portfolio quality, operating acumen, and scale are the four key
differentiators that will emerge in the single family rental space. I will
cover all these factors in this report and explain how AMH is at an advantage
compared to its peers. AMH is a high quality operator and the largest publicly
traded single-family REIT. The company is buying homes at more than 25% below
prior peaks and replacement cost. Analysts at Morgan Stanley estimate the
institutional buy-to-rent business to grow over $100 billion (from ~$17
billion) over the next few years. Institutional buy-to-rent is a sustainable
business with attractive total returns and growth potential. The rise of
rentership in the U.S. is a secular phenomenon, and continued declines in
home-ownership and an abundant supply of distressed homes could allow
institutional buy-to-rent businesses to grow significantly over time. The
buy-to-rent space also has the potential to expand into new markets, and some
parts of Florida and Midwest have emerged as attractive markets to buy in.
AMH has an intensive,
systematized acquisition process to enable it to determine appropriate prices
for homes that are available for sale via auctions, mini-bulk purchases, and
real estate owned sales. The company acquires distressed assets through trustee
sales and bulk purchases, which allows the company to buy properties at a
discount to current market value during a low point in the real estate cycle.
Home prices, which fell by roughly 35% nationwide from July 2006 to March 2012,
have recovered to some extent in the last few quarters. However, they are still
more than 20% below the pre-recession peak. Going forward, prices should
continue to rise as affordability is at record highs, momentum in the housing
activity is strong, demand is improving while supply remains tight, and homes
continue to look cheap on metrics such as price/rent and price/income.
The single family homes
market has a key advantage over multifamily and that is the lack of new supply.
After the end of the recession, multifamily was the first real estate
sub-sector to commence new supply in earnest. This resulted in multifamily
supply returning to pre-recession levels in 2013. On the other hand, single
family new construction still remains well below pre-recession levels, with
2013 completions coming in at about one third of pre-recession levels. The
single family rental market has less of a supply threat, which means there is
more upside potential for pricing than multifamily.
While there is less of a
supply threat, demand is also expected to improve as the prime renter starts a
family. According to Haver Analytics, year-on-year population growth of the
35-49 year-olds, the age group most likely to have families with children at
home, began to decline in 2007, reaching its peak decline in 2011. However, the
rate of decline in this group has been decreasing, and is projected to turn
positive in 2016. This group historically tends to be prime home buyers, but
going forward this could also be a key driver for single family rental demand.
This demographic is particularly important for AMH given the company’s focus on
three-bedroom units.
Scale is the key to property
management, as many of the other property operating costs including property
taxes, insurance, maintenance, and turnover are tied to the properties. AMH, as
one of the largest owners of single family homes in the United States, benefits
from economies of scale. Having a large portfolio in a region benefits margins as
economies of scale drive down per home costs (i.e., synergies are created as
the management platform is spread across a greater number of homes). In
addition, upfront renovation costs also benefit from scale as AMH can negotiate
bulk purchase discounts with suppliers and contractors.
AMH’s internally advised
structure also provides it with a competitive advantage over its competitors,
which rely on an external management team. While AMH’s management does not have
as much single family rental experience as its publicly traded peers, they do
have a strong track record as real estate pioneers, including founding Public
Storage in what was at the time an emerging institutional self-storage
industry.
Single Family REITs, such as
AMH, are also well positioned to acquire assets from private investors who wish
to sell single-family homes. American Homes 4 Rent, in particular, can exchange
operating partnership units with these private investors for portfolios of
single family homes. These operating partnership units can be exchanged on a
one-for-one basis with common shares. While this exchange allows the seller to
defer capital gains taxes, at the same time it enables AMH, due to its REIT
status, to obtain assets at a lower cost basis than non-REIT owners.
Conclusion
AMH is the largest public
REIT focused on the single family rental industry. It is a high quality
operator in an emerging sub-sector levered towards one of the more compelling
investment themes in today’s market. AMH is a very attractive growth story. The
company is buying homes at significant discounts (more than 25% below prior
peaks and replacement cost) and expects 6% annual home price appreciation. The
company also benefits from favorable scale and preferred structure. It is
internally managed and the management team has strong real estate experience.
Moreover, there is also significant ownership (more than 25%) by management.
AMH also has a diversified and higher quality portfolio compared to its peers.
For more information on
American Homes 4 Rent please visit http://www.americanhomes4rent.com
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