Many residential real estate investment trusts (REITs) focus solely on the commercial side of residential housing, developing, owning, and leasing apartments. But American Homes 4 Rent (NYSE: AMH) takes a different approach to the residential rental business, developing, renovating, and leasing upscale single-family homes in select markets across the United States.
American Homes 4 Rent is expanding rapidly, making them a leader among single-family rental REITs. If you're considering investing in this growing company, here's what you need to know.
American Homes 4 Rent company profile
American Homes 4 Rent has grown tremendously since it first got its start back in 2012 in the wake of the Great Recession and is building a sizable portfolio of 53,000 single-family rental homes in select markets across 22 states. Markets include Denver, Phoenix, Tampa, Orlando, and Las Vegas. The company targets single-family rental opportunities in prime markets that have high rental demand and lots of job opportunities.
American Homes 4 Rent has now developed 55 communities from the ground up with its own development program and is working with select national homebuilders through its National Builder Program. These communities consist of high-quality, built-for-rent homes in desirable neighborhoods near retail centers, job hubs, and/or public transportation.
Additionally, the company also acquires and renovates older homes in certain markets, making updates to meet its quality standards for rental housing. Its tenant base is largely made up of those who earn $100,000 or more per household and are considered white-collar workers.
All this worked to its advantage during the global pandemic, as the majority of its tenants were able to work from home and were unaffected by a loss of income. The second quarter of 2020 saw a 96.5% rent collection rate by quarter's end. Additionally, the collection rate was 86% in the first five days of September. Its homes currently are at 97% occupancy, a record high for the company.
American Homes 4 Rent has also been a proponent for technology, using "Let Yourself In" technology for showing since 2013. Having systems in place in line with safety and health protocols as a result of the pandemic has given the company an advantage.
American Homes 4 Rent news
American Homes 4 Rent had a solid Q2 2020 despite the economic challenges and uncertainty in the market. Revenues increased slightly by 0.4% year over year, and adjusted funds from operations (AFFO) per share decreased from $0.28 in 2019 to $0.27 in Q2 2020.
Considering the company waived late fees, halted evictions from late payments, and saw a large uptick in expenses largely related to utilities and higher use of large appliances, including HVAC, from more time at home, maintaining a positive net operating income during this past quarter is a positive sign.
In February 2016, the company completed a merger with American Residential Properties valued at $1.5 billion. This merger resulted in a number of legacy joint ventures on properties American Homes 4 Rent has slowly been liquidating, which has also increased expenses because of noncash write-downs year to date.
The company's debt-to-adjusted EBITDAre as of September 2020 is 4.3 times, which means the company is relatively well-positioned when looking at its debt to earnings. It also has $55.7 million in cash or cash equivalents. Its EBITDAre is the highest among single-family competitors, trailing earnings that typically only larger multifamily REITs achieve.
Development activity has been high over the past year. Since June 2020, the company has completed or is in development of nine new communities. It has 123 homes under construction in a new community outside of San Antonio set to complete over the next year.
Right now, the biggest challenge facing the company is continued acquisitions of real estate and risks of increased costs for construction long term. However, construction costs are down for the first time in over a decade. Eviction moratoriums may also eat into its bottom line, limiting its ability to release units from nonpaying tenants.
There has been a recent shift in tenant preferences as a result of COVID-19. With more people working from home, there is increased demand for more space and rental homes that provide more privacy and safety, such as a single-family home. American Homes 4 Rent has seen a 50% increase in applications year over year, while turnover rates have decreased by 6%. With their tenant base and leasing process, it should be able to withstand many challenges the rental market is facing right now.
American Homes 4 Rent stock price
The company's stock price has risen steadily over the past five years, growing over 112% and reaching its peak just before the March 2020 crash related to the pandemic. Share prices have recovered back to February 2020 highs, largely in part from its strong financials and positive Q2 results.
American Homes 4 Rent's continued opportunity for expansion is clear, especially with record high demand for rental properties, but the company's dividend has remained flat despite its growth and strong performance. Currently, its dividend payment is $0.05 and has been for the past six years, providing a return of less than 1% at the time of writing. Its payout ratio of 22% is extremely low for the quality of its portfolio and when compared to other REITs.
There is plenty of room for a dividend increase, but based on its payout history, there are no signs indicating the company is poised to do so, at least not anytime soon. I imagine share prices will slowly rise as they have for the past seven years, but I believe the lack of dividend growth over time will keep prices from rising too fast or too high.
The bottom line
American Homes 4 Rent boasts a top-notch portfolio that has proven to show economic resiliency and growth potential. The fact it maintained such high occupancy and rental collections during today's unique circumstances proves the growing demand and strength of its tenant base and markets. I wouldn't be surprised to see a large increase in its number of holdings over the next few years, especially as other rental owners who may not have the scale or liquidity to maintain their smaller rental portfolios during these challenging times are driven to sell.
Ultimately, I think this stock is a great growth REIT with a lot of potential and solid financials. But investors must be willing to accept a low return and be comfortable with knowing dividends may not increase for some time.