Another Dividend in Single-Family REIT Land

Real estate investment trusts (REITs) are pass-through entities known for sizable yields. Silver Bay (NYSE: SBY  ) , the oldest of the single family REITs, however, only pays a token penny a share quarterly dividend. With American Homes 4 Rent's (NYSE: AMH  ) recent dividend announcement, however, it looks like the players in this new niche may have to start giving more back to their shareholders.

For the income
Some REITs are focused on growth and pay relatively small dividends. The REIT structure, however, was specifically created to give individuals access to institutional level properties so they can earn income. Part of the benefit of the REIT structure is that it avoids double taxation by distributing at least 90% of earnings to shareholders as dividends.

Most REITs pay more than this, since non-cash depreciation expenses keep earnings low. That's why funds from operations, which adds back depreciation, is a more meaningful metric when looking at the sustainability of REIT dividends. With that backdrop, the emerging single-family REIT sector is notably devoid of dividends.

Growth, for now
That isn't surprising since single-family home REITs didn't even exist a year ago. The housing crash created the opportunity to economically build large portfolios of single-family homes. American Homes 4 Rent is the biggest of the REITs with over 20,000 properties. Silver Bay, the oldest public player, and American Residential Properties (NYSE: ARPI  ) each own less than half that number.

All three, however, have been focusing on growth since purchasing distressed homes is key to their business models. Silver Bay purchased 2,259 homes in the first three quarters of the year, growing its portfolio by over 66%. American Residential added 1,351 homes in just the third quarter, increasing its size by a third. And American Homes added around 2,900 homes in the quarter.

The companies are working to gain scale while they can still find desirable properties at good prices. And since most of what they buy needs work, it takes time to repair and lease out their still-growing portfolios. That's why they're presenting metrics like American Homes 4 Rent's occupancy on "rent-ready" homes, or Silver Bay and American Residential's occupancy statistics based on the length of time each has owned a home.

Making some money
Growth mode, however, may be about to slow. For example, Silver Bay is telegraphing dividend hikes next year: "...we are working toward stabilizing the great majority of [our portfolio] by year end. Achieving this will position us to begin generating positive cash flow and to increase our dividend." The company was the first to start paying dividends, though $0.04 a year is hardly much to write home about.

American Homes 4 Rent, however, recently announced a $0.05 per share quarterly dividend that gives a bit more of a clue as to where the niche is heading. In its quarterly conference call, management noted, "We anticipate we will have taxable earnings in 2014." In other words, the company will have no choice but to start paying a dividend now that its portfolio is starting to lease up.

It's a good bet that American Homes 4 Rent will pay only what it needs to so it can stay in compliance with REIT rules. The company's prospectus clearly states that portfolio growth trumps dividends. And the $0.20 a year run rate only amounts to an around 1.2% yield.

The only holdout is American Residential Properties. So long as the company isn't making money, it doesn't have to pay investors a dime (or a penny or a nickle). However, now that American Homes is paying a dividend and Silver Bay is talking about a dividend hike, not paying a dividend will be a drag on American Residential's shares. So look for the lone homeowner holdout to change its tune fairly quickly.

How high?
Although dividends are clearly on their way at Silver Bay, American Homes 4 Rent, and, most likely, American Residential, the big question is still, "How much income can investors expect?" While only time will tell us that answer, look for the shares to move higher as dividends become more prominent. 

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