REIT Top Stock: American Homes 4 Rent
The Global Financial Crisis (GFC) started to unravel around a decade ago now, and will have left nasty scars for many. In the United States, large segments of the housing market collapsed and unprecedented numbers of Americans lost their homes over the subsequent years that followed. However, for some, where disaster struck, opportunity emerged. American Homes 4 Rent (AMH) is one Single Family Homes (SFH) Rental operator that grabbed the opportunity with both hands.
A quick overview of the US SFH sector
A Single Family Home is usually a standalone/detached house that is rented out for residential purposes. This, as opposed to a multi-family residential dwelling which usually takes the form of a block of flats or apartments, where multiple tenants reside in the same building.
The basics around the business model in the SFR segment of the real-estate market is to acquire and often renovate homes, thereafter renting them out to paying tenants for a profit. The REIT team then typically manages the property portfolio, deriving an income from the rent and also from selling properties where appropriate (for a capital gain).
If owning residential property is something you are interested in, then consider the diversified portfolio you can access through a listed REIT that does all the hard work for you (e.g. maintenance, rental recovery and tenant searches). It may also be a far more affordable option when seeking top quality properties in sought-after locations.
Managing a property yourself may not always end up being cheaper than if you went through a REIT management team, where the sheer volume of the properties they rent out adds to their bargaining power when entering into gardening, plumbing, painting and electrical contracts. Some REITs, are able to secure fantastic estate agent fees while others run their own internal estate agent services to further rein in costs. All-in-all, this segment of the real estate market benefits hugely from economies of scale.
Currently, there are 5 SFH REITs listed on major US exchanges:
- American Homes 4 Rent (AMH) – mid cap
- Colony Starwood Homes (SFR) – mid cap
- Invitation Homes Inc. (INVH) – mid cap
- Altisource Residential Corporation (RESI) – small cap
- Reven Housing REIT, Inc. (RVEN) – small cap
Buying up houses in the aftermath of the Global Financial Crisis
In the middle of 2011, David Singelyn, now the CEO of American Homes 4 Rent (NYSEMKT: AMH), and Wayne Hughes, founder of Public Storage (NYSE: PSA), decided to start buying up a portfolio of standalone houses in the Las Vegas locale. They wanted to test a business idea that focused on the single family home rental market. Looking back, they couldn’t have timed their entry point better. It was the bottom of the residential real estate cycle that had been hit hard by the GFC.
For Singelyn, it was a great entry point, not only on a price basis, but just as importantly, “tech advances reached a point where it was easier to access data like school information and demographics to make investment choices.” He also added that “there was an opportunity to invest in a management platform and a tech platform to better serve renters.”
In a few short years, the portfolio has grown to about 50,000 underlying houses today. And the company have ventured into 22 states across America. While many properties were initially bought via auction or foreclosure, AMH have had to adapt their acquisition strategy as discounts are largely disappearing in that space.
Demographics in the residential market
According to a 2017 Joint Center for Housing Studies report, approximately 43 million households are tenants. In 2004, the renting share of US households stood at 32%, but trends in favour of renting has helped grow the figure to 37% currently, the highest recorded figure in 50 years.
As people delay getting married and having children, rentals become more and more popular. Another key reason is simply the expense that accompanies buying one’s own home.
According to the same report, millennials, now entering their 20s and 30s, are forming households of their own which in turn impacts growth positively in respect of renter numbers over the next 20 years.
The AMH CEO also points out that larger supply vs demand factors are in support of the single family homes business case. “The US still has a housing shortage, with the number of household formations outpacing the housing stock. There’s a 10-year backlog of fewer single-family homes being built,” says Singelyn.
As for the criteria that goes in to selecting a potential new home, Singelyn says: “We look for areas with good rental demand, with immigration and employment growth and neighbourhoods that we know will attract long-term tenants. We look for newer homes in neighbourhoods with good schools because we want to attract families. A lot of our tenants have been with us since we started.”
Where to from here for AMH?
Tactics have had to change since the early buying opportunity brought about by the financial crisis. Operationally, AMH has had to tighten and streamline business processes. Singelyn has been on record talking about how rental increases are still good and able to drive attractive yields and they have worked hard to keep their cost of capital down.
While foreclosure buying may not add the type of value it did in the past, the REIT is still aiming at adding another $1 billion worth of properties to the portfolio next year. They are doing this by entering into contracts with developers (where discounts have been negotiated) as well as building homes themselves. The latter option offers a cheaper way to acquire stock as they are not having to pay developers’ profits.
“Right now this is less than 10 percent of our business, but we hope to grow it,” says Singelyn.
According to analysts, AMH are also well poised to take advantage of any attractive bulk purchases that could come its way. The REIT has low gearing, a good balance sheet and $1 billion in liquidity.
As a sector, SFH is still relatively young, effectively only around 5 years old. To grasp the growth potential however, one need only look at the fact that the 5 REITs operating in this category, collectively own only 1% of the total rental home in the US.
The Evolution of American Homes 4 Rent – Michelle Lerner – November/December issue of REIT Magazine
Investment Specialist at Discovery Invest
Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at: email@example.com
The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.