2023-04-06 13:37:08 ET
Summary
- American Homes 4 Rent is a company in the real estate industry that has managed to position itself as one of the leaders in the service, sale, or rental of houses.
- Management knows well how to find successful locations and real estate assets that receive demand from clients.
- I assumed that American Homes will continue to use internalized property management functions, which, in my opinion, will help management integrate costs and build reputation.
American Homes 4 Rent ( AMH ) delivered beneficial guidance for 2023 and optimistic commentaries about demand for its real estate assets. I believe that the current successful leasing information and the property acquisition strategy clearly indicate that the business model from AMH is quite robust and profitable. I believe that even considering operational risks from negotiations with clients or failed forecasts about the market, AMH is currently undervalued.
American Homes: The Product Finds Significant Demand From Families
With operations in more than 21 districts of the country and a number of properties retained by the company estimated at more than 58,000 homes, American Homes is a company in the real estate industry that has managed to position itself as one of the benchmarks in the service, sale, or rental of houses for families.
The company's activities consist of attracting homes, their development, management, repair, maintenance, and renovation of the facilities, and the future offer for rent to different clients throughout the country. In addition, the company has a series of services related to residential home management. All these operations are grouped into a single business segment, since the asset is always the same, and all efforts are concentrated on the same activity.
I believe that having a quick look at the company could be recommended considering the success of the assets run by American Homes. Investors may keep in mind that by the end of last year, almost 95% of its properties were occupied. In my view, management knows well how to find successful locations and real estate assets that receive demand from clients.
Source: Annual Report
This type of operation is always intended to acquire properties ready or almost ready to be used as rental housing, and includes a long search, negotiation, and management program not only to acquire new properties but also to put them in shape.
The company through its employees and agents offers the properties to clients who are mainly families looking for a home for more than three people. These rents are subject to monthly income contracts, which vary according to the legislation in each district, and their details change according to the regulations in this regard.
Management Expects Strong Demand Into The Start Of 2023
The company reported beneficial Q4 2022 figures , and mentioned that it expects strong demand into the start of 2023. It is also worth noting that management believes that American Homes is well positioned for 2023. Among the commentaries, I found information about the future of American Homes.
We closed out 2022 with another strong year of impressive operating results and continue to experience strong demand into the start of 2023. Source: Quarterly Report
Our new simplified name represents a commitment to continued innovation, which has been the driving force behind our technology-focused operating platform, flexible balance sheet and one-of-a-kind internal development program. As we head into 2023, the newly rebranded AMH platform is well positioned for both resiliency during these uncertain economic times and long-term consistent value creation. Source: Quarterly Report
I also believe that having a look at the guidance will help investors learn more about American Homes. The company expected core revenue growth of close to 5%-7% and investments of more than $1-$1.2 billion. In my view, the numbers are overall quite optimistic considering the current credit market and macroeconomic reality.
Source: Quarterly Report
Impressive Increase In The Total Amount Of Assets, And Total Liabilities Do Not Increase That Much
I believe that American Homes reported a better balance sheet in 2022 than that in 2021. The total amount of assets increased with more single-family properties under development and more real estate assets. The total amount of assets also increased at a larger rate than the total amount of liabilities, which, in my view, indicates that the business model is working pretty well. I believe that the company is funding properties that are worth a bit more once they are for sale.
As of December 31, 2022, American Homes reported land worth $2.197 billion and buildings and improvements worth $1.0127 billion. Single-family properties in operation stand at $9.938 billion with single-family properties under development and development land of $1187.221 million. Finally, total real estate assets are equal to $11.324 billion, with cash and cash equivalents of $69 million.
Rent and other receivables are equal to $47.752 million with escrow deposits, prepaid expenses, and other assets of close to $331 million as well as investments in unconsolidated joint ventures of $107.347 million. Finally, with goodwill worth $120 million, total assets are equal to $12.175 billion, more than 2x the total amount of liabilities.
I believe that the balance sheet stands in a good position with many buildings and real estate assets. With that, I wonder which were the valuation methods the company used to assess the value of its real estate assets. If the real estate is valued at more than what the real estate market would pay, I believe that the total amount of assets may be a bit lower than reported.
Source: Annual Report
Liabilities included asset-backed securities worth $1.89 billion, unsecured senior notes of $2.49 billion, and total liabilities of $5 billion.
Source: Annual Report
Assumptions In My Model
Under my financial model, I assumed that the property acquisition strategy established by American Homes will continue to be successful. It is also worth noting that there is a significant number of properties that respond to the characteristics that American Homes describes. With this in mind, if the renovation costs are correctly assessed, I believe that the revenue potential is quite substantial.
We focus on homes with a number of key property characteristics, including: construction after the year 2000; three or more bedrooms; two or more bathrooms; a range of $250,000 estimated minimum valuation to $600,000 maximum bid price; and estimated renovation costs in line with our targeted program parameters. Our target areas have above average median household incomes, well-regarded school districts and access to desirable lifestyle amenities. We believe that homes in these areas will attract tenants with strong credit profiles, produce high occupancy and rental rates and generate long-term property appreciation. Source: Annual Report
With that said about the target market of American Homes, I am also expecting investments in other markets or other regions. In my view, further diversification will likely make the portfolio more resistant to potential credit crises or financial crises of specific regions or markets. American Homes discussed these options in detail.
We monitor and manage the diversification of our portfolio in order to reduce the risks associated with adverse developments affecting a particular market. We currently are focusing on developing and acquiring single-family homes in select submarkets of MSAs. We continually evaluate potential new markets where we may invest and establish operations as opportunities emerge. Source: Annual Report
Finally, I assumed that American Homes will continue to use internalized property management functions, which, in my opinion, will help management integrate costs and build reputation. With other competitors trying to outsource many services, I believe that investors will appreciate this fact about American Homes.
Our property management functions are 100% internalized, which we believe provides us with consistency of service, control and branding in the operation of our properties. Source: Annual Report
My Financial Model Indicated A Fair Price Of $36.35 Per Share
My expectations from now to 2033 include net income growth, D&A growth, increase in changes from prepaid expenses, and an increase in accounts payables. I do not believe that my numbers are more optimistic than that of other analysts out there.
Some of my figures from the discounted cash flow ("DCF") model that is shown below include 2033 net income close to $505.5 million, depreciation and amortization around $392.5 million, 2033 non cash amortization of deferred financing costs of $9.055 million, and 2033 share-based compensation of $19.05 million.
Also, with changes in rent and other receivables of $19.05 million, changes in prepaid expenses and other assets of -$67.55 million, and accounts payable and accrued expenses of close to $175.5 million, the 2033 CFO would stand at $987.5 million. Finally, with capex close to -$170 million, the free cash flow ("FCF") would be around $820 million.
If we assume a cost of capital of 9.05%, the implied enterprise value would be close to $15.705 billion. Besides, if we add cash and cash equivalents of $69.5 million, revolving credit facility of $130 million, and unsecured senior notes of $2495 million, the equity valuation would be close to $1.31515 billion, and the fair price would be $36.35 per share.
Many Competitors And Several Risks
Competition for American Homes comes from various sectors. Historically, this competition is concentrated in small investment groups with similar activities, other financial entities that are looking for properties or land for future construction, and different activities in the real estate market. When it comes to price, competition also varies by interest rate situations and mortgage conditions in the general market as well as the regional markets. In recent years, the number of apartments and homes rented through internet platforms, such as Airbnb, Inc. (ABNB), has grown systematically. Although the type of product they offer is not exactly the same, this type of new business directly alters the residential rental market.
By having fixed and appraised prices according to contracts, in some cases, it may be difficult for American Homes to maintain its cost structure. I believe that the company has sufficient expertise in the market to make correct forecasts. However, the company may project certain prices, which may not deliver profitable operations because the costs may be too elevated.
American Homes may also suffer from dependence on external factors such as demand for residences, inflation costs, and price variations according to economic stability. In this sense, American Homes operates with short-term contracts. Hence, in the future, clients may try to renegotiate the terms included in the contracts, which may lead to lower FCF margins.
There are also risk factors in relation to the large number of regulations in this market. American Homes may correctly adapt to the corresponding legal markets in each region, however future regulatory changes could eventually create complications for its natural flow of operations. If management has to increase its capital expenditures, or demand lowers because of regulations, future free cash flow expectations may decline. As a result, I believe that we could see a decline in the stock price.
Conclusion
American Homes 4 Rent delivered beneficial guidance and optimistic commentaries about the year 2023. Considering how successful the leasing program reported and the well-defined property acquisition strategy reported, in my view, the business model appears quite robust. Even considering potential risks from regulatory changes, lack of demand, or negotiations with clients, in my view, future FCF would imply higher price marks than the current American Homes 4 Rent market price.
For further details see:
American Homes: Significant Demand, Beneficial 2023 Guidance, And Not Expensive