American Homes 4 Rent (NYSE: AMH) is the largest real estate investment trust (REIT) specializing in the acquisition, development, and management of high-quality single-family rentals in the United States. Since the company first went public in 2014, they've achieved steady growth in revenues and funds from operations (FFO) and increased their portfolio size substantially.
As tenant preferences shift and demand for suburban single-family rentals increases as a result of the current COVID-19 crisis, it's likely American Homes 4 Rent will have major room to grow over the next three years. Take a look at where American Homes 4 Rent could be in 2023.
American Homes 4 Rent Today
American Homes 4 Rent currently owns 53,000 single-family homes in 22 states and 35 submarkets across the United States. The company largely focuses on ground-up development of new, attractive, single-family-home rental communities in top-tier markets like Phoenix, Seattle, Las Vegas, Atlanta, Houston, and beyond in addition to acquiring and renovating existing homes or communities in their target markets.
Their high-income-earning tenant base, which has an average income of $100,000 or more for a dual-income household, has provided stability amid challenges and uncertainty in the residential housing market this year. Revenue, according to their latest earnings reports, is at $283.1 million, having 97% of their properties being occupied in August of 2020 and collection rate at 94% at month's end in July and August 2020.
Growth perspectives over the next three years
Growth has been and continues to be a priority for American Homes 4 Rent. Currently they have several programs and partnerships in place to help expand, develop, and acquire new communities and homes including a recent joint venture with JP Morgan Asset Management (NYSE: JPM) to build 2,500 new homes in the West and Southwest. Their in-house development program, called AMH Development, allows them to create their own built-for-rent communities. Since inception they've built 59 communities and counting. Additionally, they have partnerships with various nationwide developers, giving them access to new-construction homes at a slightly lower acquisition cost than on the traditional market.
While new development allows American Homes 4 Rent higher returns because of the lower cost to acquire and rent, it's not its only strategy. The company originally got its start in the wake of the Great Recession, when real estate values were down across the board. It bought thousands of homes during the recession and are prepared to do so again. Currently as of Q2 2020, American Homes 4 Rent has $32 million in cash or cash equivalents, and its August 2020 common stock offering helped raise $412 million for additional development projects. The company is well-positioned financially with a 4.3x net debt-to-EBITDAre and low payout ratio of 21.7%. Dividend returns aren't great, but investors looking at this stock are buying for the growth potential, which right now clearly appears to be there.
American Homes 4 Rent also realizes the opportunity for increased revenues by optimizing their current operations and properties under management. They are making both minor and major improvements that will deliver value and compete in the given marketplace.
Three-year outlook looks positive
American Homes 4 Rent has stated it expects to deliver between 1,000 and 1,200 new homes in 2020, even with COVID-19-related delays or complications. If it continues in that same trend, adjusting for the disposition of some homes, the following two years would place them at roughly 55,000 homes or more under management by 2023.
The past two years, the company achieved an average of 4% revenue growth, which, based on current projects underway, could likely be maintained over the next three years. At the end of Q2, American Homes 4 Rent has 4.5% new lease rental rate growth. There is a chance of flattened rental rates in certain markets, but being in their niche sector of suburban single-family homes, it's likely those that are fleeing other rental markets may favor this style of home, meaning that maintaining these rates, if not beating them, is not unfeasible.
There is still a major shortage of homes across the nation, both for buyers and renters. Even with developments underway, it will be quite sometime before the housing demand is met with adequate supply. This will likely lead to continued rent increases and opportunity for further expansion. If the market pulls back, and real estate values drop, American Homes 4 Rent is prepared to acquire homes in their target markets, renovate, and rent while continuing their development efforts. That doesn't mean there aren't potential risks and challenges the company may face over the next few years. Rent moratoriums and decreasing rents are two unknowns that could impact select markets moving forward, but at face value, I think it's safe to expect steady growth.