One of the hottest investment asset classes these days has been single-family rental properties. The attractiveness of the asset class is obvious: The inventory of available-for-sale homes is at record lows, and home price appreciation is in the double digits. This is attracting more competitors into the market. What does this mean for single-family real estate investment trust (REIT) American Homes 4 Rent (NYSE:AMH)?
Returns in single-family rentals are quite attractive
Once a strictly “mom-and-pop” affair, the single-family rental business has become a focus for institutional investors. Historically, it was a highly fragmented industry, and since economies of scale seemed limited, it didn’t easily lend itself to professionally managed money.
Then came the housing crash of 2008, along with more sophisticated management of data, which created the opportunity. Institutions bought foreclosed homes from the government, and then rented them out. This “REO-to-Rental” trade was the birth of the current single-family rental business.
Goldman Sachs recently made a strategic investment in Fundrise, which allows small investors to invest in single-family rentals with as little as $500. Homebuilders like D.R. Horton are increasing their focus on build-to-rent as well. It is easy to see the appeal of the investment.
Residential real estate capitalization rates have historically been in the mid-single digits, which is an attractive enough return in the current interest rate environment. In addition, home price appreciation is rocketing; the latest CoreLogic Home Price Index reported a 13% increase year-over-year in April. Add the two up, and you have a pretty great return.
While more and more professionally managed money is entering the space, the business is ripe for consolidation, and that has always been part of American Homes 4 Rent’s story. American Homes 4 Rent owns 53,984 single family homes as of March 31. There are approximately 42 million rental units in the United States, so the professionally managed single-family rental space is still ripe for consolidation. It is hardly crowded.
The company’s book value ignores recent growth in real estate prices
Here is a quick look at the property portfolio. American Homes 4 Rent has 53,348 properties in operation. The average gross book value (which should be an approximation for what they paid for the property) is $190,498. The average year purchased or delivered was 2015. The Case-Shiller Home Price Index is up about 44% since then, so the book value of the company is much higher than the balance sheet would imply.
Even though American Homes 4 Rent is a REIT, it can’t really be looked at as an income stock. The $0.10 quarterly dividend gives the stock a yield of about 1%, which is on the low side for a REIT. This yield reflects the fact that American Homes 4 Rent is reinvesting cash flow back into the business, by buying and developing property.
The company guided for funds from operations (FFO) to come in between $1.24 and $1.30 per share on its earnings conference call. Funds from operations is the best profitability metric for property-based companies because depreciation makes net income understate cash flow. At Friday’s prices, American Homes 4 Rent is trading at a little under 31 times expected 2021 FFO per share. This is expensive for a REIT, but American Homes 4 Rent is a much faster grower than the typical REIT, and probably deserves a premium multiple.
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