Residential real estate investment trusts (REITs) encompass several different types of housing, from high rise apartments to mobile home parks and single-family homes -- meaning real estate investors have a lot of options when it comes to choosing the right investment avenue for them.
Single-family rentals have historically proven to be a valuable investment. But as demand for this housing structure increases as more tenants look outside of high-density housing to rural or suburban housing. American Homes 4 Rent (NYSE: AMH), one of the industry-leading residential REITs that acquires and renovates or develops higher-end single-family homes, leasing over 53,000 homes in popular metro markets across 22 states, may look like an enticing buy right now. Let's take a look at where the company stands today and if the numbers support the claim to buy.
A few things going for the company
The company's tenant base is a large part of its success and minimal negative impact during the COVID-19 pandemic. Because its portfolio focuses on leasing higher-end rentals in desirable metro markets across the United States, most tenants are white-collar tenants with higher-paying jobs who were able to shift to remote work during the pandemic. This means the majority of their tenants didn't suffer from loss of income or a loss of job since the outbreak first began, and thus collection rates, occupancy rates, and new leases have remained strong.
As of Q2 2020, occupancy was at 95.6%, rental growth for new leases increased by 4.4%, and 96.5% of rent was collected. Occupancy continues to increase in Q3 as well with a 96.4% occupancy rate in July 2020.
The company remained flexible in Q2 2020, complying with national and jurisdiction ordinances halting evictions, waiving late fees, and maintaining the same rental rates for renewing leases. However, the company has resumed normal operations at the start of Q3 2020, including assessment of late fees, in jurisdictions where allowable, and slight increases in renewing leases. This will further increase revenues, which despite COVID-19 challenges, actually increased 0.4% in Q2 2020 when compared to Q2 2019.
A few things going against the company
While revenues have increased, COVID-19 increased certain expenses for the company in Q2 2020, including HVAC replacement due to heavy A/C uses during COVID-19 stay-at-home orders, increased cleaning and safety protocols, and uncollectible tenant utility reimbursements resulted in a decrease of $7.1 million in net income attributable to common shareholders from Q2 2019 to Q2 2020. Core net operating income (NOI) also decreased by 3.6% to $148.4 million in Q2 2020 when compared to the same quarter of the previous year.
Where the company stands today and moving forward
They also have a healthy balance of debt with a debt-to-EBITDA ratio of 5.0x and $32 million in cash on hand. Adjusted funds from operation (FFO) as of June 30 2020 was $0.23 per FFO. With the current dividend payout of $0.05, the company has a very conservative payout ratio of 21%, which is very low by REIT and stock standards -- hardly giving investors a reason to call home about. What really drives investors to American Homes 4 Rent is its growth potential. The company's stock price has grown 120% since February 2016 lows. The company's financials are strong, and it's clear demand is up for this asset class, giving a strong case for future growth for the company.
American Homes 4 Rent is definitely a buy for investors looking for a growth REIT backed by a strong asset class and proven track record, but buyers should be aware this REIT produces less than a 1% return, making it a hard sell for those looking for a balance of growth potential and dividend returns.