2023-09-16 00:38:31 ET
Summary
- American Homes 4 Rent is a strong option for those looking to invest in rental properties without the hassle of managing them.
- AMH has a portfolio of 48,000 single-family homes in 22 states, with a high occupancy rate and strong financials.
- The company is well-positioned to benefit from rising rents and the trend of people choosing to rent rather than buy homes.
Preamble
It goes without saying, that many people are in the fortunate position of having property that they can rent out to get an income in their twilight years. There is also the positive benefit of capital appreciation through rising property prices. For those who'd rather forgo the problems associated with any drama associated with arranging an agent, plumbing emergencies or troublesome tenants, American Homes 4 Rent Inc (AMH) appears to be an excellent option to consider, without the headaches.
Recently, the well-known stock picking gurus, Hedgeye, have recommended the company to their subscribers. And, as far as I can figure out, for good reason. The company has a proven track record, a strong financial position and exposure to states where both property prices and rents are increasing.
The business
At the heart of the resilient American real estate sector sits AMH, which began business in 2012, and is headquartered in Las Vegas, Nevada.
One may ask; what sets this REIT apart from the rest? A portfolio of homes that is an enviable cash cow given that the current occupancy rate is 96.2%, according to the company's most recent Form 10-Q filing. As of the end of the second quarter 2023, the company boasted 48,000 single family homes located in over 22 states, primarily within the Sun Belt.
AMH's business model, in short, includes acquiring and refurbishing run-down properties, then either selling or renting them out for the benefit of stockholders. The neglected abodes are renovated to a high standard and kitted out with a host of mod cons making them very attractive for would be renters. In addition, the homes have fenced yards, making them doubly appealing for families.
AMH's financials are strong. With a debt-to-equity ratio of a relatively low 5.2x, meaning AMH stands above many of its REIT cousins. To finance continued growth and weather the frequently forecasted economic turbulence, the company has over $2 billion in cash and equivalents. Top of Form
According to the stock price action, it would seem that many investors have already warmed to the attractions of AMH. Year-to-date, the stock price is up around 22% at time of writing. And given the tailwinds and attractive financials, I believe that the stock will continue heading upwards.
Tailwinds
According to a report by the U.S. Census Bureau , the states where people are leaving the most in 2023 are: Illinois, New York, California, West Virginia and Ohio. Whilst the company does have around 1,000 properties in Illinois, the exposure to California is very low (Approximately 730).
According to a recent article , the states with the highest rent increases in July 2023 were: Florida, Arizona, Colorado, Nevada and Texas. Since American Homes 4 Rent has a significant presence in these states, AMH is well-positioned to gain from the trend of rising rents.
Needless to say, the rising cost of homeownership is making it more difficult for people to afford to buy a home and therefore choose the rental option.
Financials
Listed are some positive signals given in the last quarterly report for AMH:
Strong occupancy rate: AMH's occupancy rate for the second quarter of 2023 was 96.2%, which is within the company's stated target range of 96% to 97%. Without a doubt, this is a positive sign, as it means that the company is able to keep its properties rented.
Increasing same-store NOI: Same store NOI stands for "same store net operating income". It is a non-GAAP financial measure that is used to compare the operating performance of a company's properties over time. Net operating income is calculated by taking a property's gross income (rents) and subtracting operating expenses (such as property taxes, maintenance, and repairs). Clearly, investors want to see an increase in this metric. And, according to the Form 10-Q; "Core NOI (Excludes non-recurring expenses) from our total portfolio increased 9.0% to $223.5 million for the second quarter of 2023. This growth was driven by a 9.7% increase in core revenues resulting from a larger number of occupied properties and higher rental rates."
Continued growth in new home deliveries: AMH delivered 928 homes in the second quarter of 2023, bringing its total portfolio to over 48,000 homes. This continued growth in new home deliveries is a positive sign for investors and increases the likelihood that dividend cheques will continue landing on doormats.
Dividend increase: Back in 2018, the company paid a dividend of $0.20 per share, whereas the 2022 annual report declares $0.72. This rise represents a staggering 260% increase over this short time period. Furthermore, the dividend for 2023 is expected to be in the region of $0.80.
Positive rent growth: AMH's average rent growth for the second quarter of 2023 was 14.2%, which is above the company's target range of 12% to 14%. This suggests that the company is able to raise rents to cover its rising operating expenses.
Further considerations
The oft quoted Warren Buffett has said that bad leaders are the biggest dangers to a business , which is not the case with AMH. The management team at AMH are strong and have a proven track record of success. The team is very experienced and has a deep understanding of the single-family rental market and it is clearly evident that they have been able to execute on their growth strategy.
The company's growth prospects are excellent and is targeting to grow its portfolio by 10% to 15% per year. The company has a number of growth drivers, including acquisitions, new home deliveries, and rent growth.
Comparison with Invitation Homes
Invitation Homes (INVH) is a close competitor to AMH. It is fair to say that both companies reported strong results in their latest quarterly reports, but there are some key differences between the two.
AMH currently has a P/E ratio of 36.9, while INVH has a P/E ratio of 29.6. This means that AMH is trading at a higher valuation than INVH.
INVH's Same Store Core NOI increased 5.3% year over year on "5.9% Same Store Core Revenues growth." Both these figures are lower than those of AMH; not a good sign.
AMH has a debt-to-equity ratio of 58.24%, while INVH has a debt-to-equity ratio of 75.68%. This means that INVH has a higher level of debt than AMH.
AMH has a dividend yield of 2.4%, while INVH has a dividend yield of 2.9%.
Invitation Homes has a portfolio of 82,837 single-family homes for rent across the United States, 19% of which are located in California. Although, it has to be said that a high proportion of their homes are located in Texas and Florida.
Risk Factors
Investors may note that investing in REITs like AMH comes with its own set of risks, including interest rate sensitivity, market volatility, and the potential for changes in tax laws affecting REITs.
Increased debt levels: AMH's debt-to-equity ratio increased to 5.2x at the end of the second quarter of 2023, from 4.8x at the end of the first quarter of 2023. This is a concerning sign, as it means that the company is taking on more debt to finance its growth.
If, as has been widely and often forecast, the economy weakens, it could lead to job losses and make it more difficult for people to afford to buy / rent homes.
Valuation
From the various news outlets, it would appear that rents and the cost of purchasing a home are continuing to rise. This being so, the valuation is fair in my view. However, I will continue to monitor the housing market and be ready to jump ship if the situation changes to any drastic degree.
Note
I have a long position in AMH, and so, as always, the above does not constitute advice and investors ought to carry out their own due diligence.
For further details see:
American Homes 4 Rent: The Future Looks Rosy