American Homes 4 Rent: Leasing The American Dream (NYSE:AMH) (2024)

American Homes 4 Rent (NYSE:AMH) is, in my opinion, the premier single-family rental ("SFR") REIT.

It boasts multiple growth channels, including acquisitions, home rehabs, and its own internal, ground-up development platform. AMH is a top 40 homebuilder in the US, delivering 2,000+ new, high-quality rental homes into its portfolio annually. With home prices continuing to creep up while construction costs have flattened out, AMH's development margins and stabilized NOI yields are improving.

AMH's ability to continually refresh its portfolio by selling older properties at gains while reinvesting into higher-yielding build-to-rent ("BTR") properties is a fantastic business model, in my estimation. No other REIT or public company of which I am aware can boast both a top 5 SFR portfolio in the country and a substantial, in-house BTR platform. The benefits of this vertical integration, I would argue, are numerous.

Plus, AMH enjoys a very strong balance sheet with BBB/Baa2 credit ratings and a net debt & preferred stock to EBITDA ratio of 5.4x as of Q3 2023. That is basically the same as its primary SFR peer Invitation Homes' (INVH) 5.5x net debt to EBITDA as of Q4 2023.

There are several other reasons to be bullish on AMH, including:

• Little to no exposure to tenant-friendly states like California and New York (unlike INVH's 17% exposure to California, which has rent control measures specifically targeted at corporate landlords like REITs).
• Strong presence in fast-growing Sunbelt markets as well as Midwestern markets that continue to enjoy steady rent growth.
• Demand for SFRs should be elevated over the next decade or so due to the Millennial cohort aging into their prime single-family home phase of life.
• Buying a home has scarcely ever been less affordable than it is today.
• Starter homes are increasingly being purchased by investors (like AMH), making them even less affordable to first-time buyers.
• The housing shortage has temporarily abated due to a spate of new (mostly multifamily) supply, but the long-term shortage persists.

But the question every potential AMH investor has to face is whether the stock is worth 20.9x core FFO and 23.75x AFFO. That is an awfully rich valuation for a company growing at a mid-single-digit pace. Is AMH worth the price tag? I'll offer my answer.

In my January 2023 article on AMH, I had fundamentally the same investment thesis, centered on the housing shortage and AMH's strong positioning in the Sunbelt. Since that "Strong Buy" rating over a year ago, the stock has delivered over 10% appreciation and more than 13% total returns, certainly not beating the S&P 500 but handily beating the REIT index. Today, I view AMH as only a "Buy," but if the stock price continues its slide, it would end up back in "Strong Buy" territory.

Let's dive in.

The Fundamental Case For SFRs

Real estate is like any other part of the economy. Prices, including rent rates, are basically determined by supply and demand.

So, let's start on the demand side.

Unsurprisingly, the average age of an SFR renter is older than the average apartment renter. The average age for SFRs is around 38, while the average age for apartments is about 30. As such, the large generational cohort of Millennials, aged 28 to 43, are a particularly large generation, because their parents' generation (the Baby Boomers) is also abnormally large.

There is a decently large bulge of Millennials and older Gen Zers that are on the verge of aging into their prime single-family home years.

Historically, the preference has been to own rather than rent a single-family home. After all, the traditional American Dream includes to own your own home on your own piece of land. Well, the American Dream is increasingly being redefined to allow renting than home instead of owning it.

After all, the post-GFC era of relatively low mortgage rates and monthly costs of homeownership seem to have come to an end. Buying a home now costs about 50% more on a monthly basis than renting the same home.

The highest mortgage rates in decades play a big part in that equation, but so also does the fact that the average US home price has risen some 50% since the beginning of 2020.

The supply of new homes has increased in recent years, but this appears to be an idiosyncratic, post-COVID phenomenon. Single-family housing starts are now below their pre-COVID growth trend, and single-family home permits have dropped precipitously.

The long-term housing shortage that developed in the aftermath of the GFC remains in place, even if a short-term burst of new housing supply (mostly in the multifamily space) is currently masking that.

Household formation has consistently outpaced housing completions and especially single-family housing completions (typically about 2/3rds of total completions) in the post-GFC era.

This has led to a steady drop in the US home vacancy rate since peaking during the GFC. Currently, the overall housing vacancy rate is about as low as it was at its lowest points in the late 1950s and 1970s.

Another way of illustrating the long-term, structural housing shortage is the ratio of total housing units to households. Since peaking in 2010, the housing-to-households ratio has dropped to its lowest point since 2001 (excluding the unique case of the COVID-19 lockdown period).

The entire housing market system became more conservative after the GFC. Banks became more reluctant and restrictive in mortgage lending (due to the increased regulatory burden, if for no other reason), while homebuilders became more skittish about oversupply risks. Like oil companies in recent years, homebuilders became more interested in increasing free cash flows rather than growing earnings via expanded development spending.

Another point that is unfavorable to would-be homebuyers is the evolution toward more and more investor ownership of lower-priced "starter homes."

Since 2000, a growing share of home transactions across all price tiers have been purchased by investors, especially for the low-priced tier.

Investors, including major corporate landlords like AMH, are contributing to rising prices of starter homes, which limits the availability and affordability of these homes for would-be first-time buyers.

Low-priced homes, which were already limited due to the lower margins they offer to homebuilders, are increasingly becoming renter-occupied rather than owner-occupied.

The unaffordability of buying a home and the rising investor market share have naturally resulted in a falling rate of resident turnover due to homebuying. As the management team of Sunbelt multifamily REIT Mid-America Apartment Communities (MAA) noted on their Q4 2023 conference call:

Move-outs to buy a home dropped 20% in the fourth quarter on a year-over-year basis, and we expect a continued low number of move-outs due to home buying to contribute to low turnover overall in 2024.

Will this change if and when mortgage rates decline? Perhaps. But presumably, when mortgage rates decline, the cost of debt will decline for investors as well. The long-term trend of more and more starter homes being purchased by investors has continued through both low interest rate periods and high interest rate periods.

In short, then, the long-term, structural supply-demand balance looks very favorable to SFR landlords (and BTR developers) like AMH.

Two Distinguishing Characteristics of AMH

There are a few unique and attractive characteristics of AMH that I would like to briefly highlight.

First, AMH's SFR portfolio is heavily concentrated in fast-growing areas of the Sunbelt as well as Midwestern markets that have seen less supply growth in recent years.

At the same time, AMH has largely avoided some of the Sunbelt markets that have seen the highest levels of new housing supply like Austin and Miami. These two markets enjoyed among the highest SFR rent growth in 2022, according to CoreLogic, but have suffered the biggest rent rate declines in 2023 due to the abundance of new supply.

If you compare AMH's portfolio footprint to the fastest growing states in recent years, you will find a lot of overlap.

The states with the fastest population growth in the next five years are more or less the same as the ones that have enjoyed the most growth in the last five years: Texas, Florida, the Carolinas, Idaho, Utah, Georgia, and Arizona.

Second, consider the fact that AMH combines SFR ownership, management, and development all under one roof, so to speak.

As both home prices and the cost of capital have risen, it has become uneconomical for AMH (and other corporate landlords) to acquire SFRs through the traditional means of the MLS and homebuilders. But AMH is still able to add thousands of homes to its portfolio each year at attractive and accretive yields via its internal development platform.

As SFR rent rates and NOIs continue to creep up while construction costs stay roughly flat, AMH's stabilized NOI yields on newly built homes has drifted up from the mid-5% area starting 2023 to about 6% in early 2024, according to AMH management on the Q3 2023 conference call.

Meanwhile, as demand for homes continues to outstrip ultra-low inventory levels, AMH has been able to sell some of its older homes at favorable prices and NOI yields in the mid-3% area.

I consider this a major competitive advantage against INVH, which boasts a larger portfolio of homes but lacks an in-house development platform and must therefore rely on a smaller set of growth channels.

Worth It?

AMH's valuation multiples of about 21x core FFO and 24x AFFO (based on 2023 guidance and rounding up) are admittedly tough pills to swallow. The REIT sports an AFFO yield of 4.2%, among the lowest in the entire REIT space.

And yet, AMH has not consistently turned in the level of growth that one would expect from such a richly valued REIT. In the first three quarters of 2023, AFFO per share grew *only* 5.9%. Although, previous years' AFFO per share growth was pretty impressive.

Post-COVID growth was an anomaly. Pre-COVID, as you can see, was a bit more mixed and lumpy.

Given the low cap rates (NOI yields) of SFRs and the fact that return-driven investors are constantly competing with emotion-driven owner-occupiers, home prices and costs of capital are bound to cause swings in levels of growth.

Right now, AMH is in a cyclically low period of growth. Only one of AMH's three external growth channels (internal developments) is viable at the moment. When all three growth channels (including acquisitions of existing homes via the MLS and new homes from third-party homebuilders) are functioning, I would expect AMH's AFFO per share growth rate to be in the high single-digits.

And given the fact that AMH's AFFO payout ratio is in the low 60% territory, the REIT should be able to raise its dividend at least as fast as its AFFO per share going forward.

At a 2.56% dividend yield, many investors (especially income-seeking investors) will conclude that AMH is not worth the price.

But as a younger investor more focused on long-term dividend growth and total returns, I value the fact that AMH has a low cost of capital with which to accretively expand its SFR portfolio and capture a greater share of the growing demand for this product.

For an investor like me, I would argue that AMH is worth it.

Upcoming Q4 Earnings

AMH's full-year 2023 core FFO per share guidance calls for $1.65 at the midpoint, which, given $1.23 in earnings in the first three quarters, implies $0.42 per share in Q4 2023. That is also the number expected by the analyst consensus.

The consensus estimate for 2024 core FFO per share is $1.74, which would imply ~5.5% growth year-over-year. Investors will surely be watching to see whether management give guidance that is above or below that number.

INVH recently disappointed with softer than expected guidance. If AMH does the same, expect the stock to continue its recent downward slide. However, given AMH's development platform regularly delivering higher-yielding homes into its portfolio, I think AMH has a better chance of giving 2024 guidance that is around the analyst consensus estimate.

We shall see.

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