The National Association of Homebuilders recently released a study that concluded that 63 million households (or just over half) cannot afford a $250,000 home. According to the National Association of Realtors, the median home price in January was $266,300, while the median new home price was $348,200, according to the Census Bureau.
Since people still need a place to live, this statistical disparity is creating an opportunity for single-family rentals, especially for long-term renters. This is American Homes 4 Rent's (NYSE:AMH) niche.
A sea change in the single-family rental landscape
Born out of the post-bubble real estate bust, American Homes 4 Rent is a real estate investment trust (REIT) that has managed to scale a business once thought to be unscalable: single-family rental homes. Historically, single-family rentals have been a highly fragmented market, dominated by local landlords and institutions. American Homes 4 Rent now has a portfolio of 52,552 properties in 22 states as of Dec. 31, 2019, and is one of the first movers in this space.
Data drives higher returns
American Homes 4 Rent uses data analysis to build homes that match consumer preferences and also minimize maintenance costs. On the fourth-quarter conference call, Chief Operating Officer Bryan Smith explained the tangible benefits of this approach: "A perfect example of this is our Steele Forest community in Atlanta, which was designed from the ground up using this data-driven approach. The homes were tenant leased 12 days faster, and at a 10% premium to our neighboring traditionally acquired Homes."
The REIT has concentrated on markets where there is strong housing demand, rental pricing, and job growth. As of the end of the year, no single market accounted for over 10% of its exposure. The biggest markets were Atlanta, Dallas, Phoenix, Houston, and Charlotte, North Carolina.
Build to rent is the focus going forward
American Homes 4 Rent sources its properties via the real estate broker market, from partnerships with homebuilders, and from its internal pipeline of building homes to rent. It has been growing its build-to-rent segment, where communities are built with the long-term renter in mind. The company uses data analysis to inform building decisions down to floor plans and amenities, along with construction that minimizes maintenance costs.
The company intends to invest $800 million to $1 billion in this activity in 2020, compared to just under $400 million last year and has announced a new $250 million joint venture with institutional investors led by JPMorgan Asset Management. American Homes 4 Rent will own 20% of the operation. The biggest attraction to the joint venture is a steady base of capital, although American Homes 4 Rent has a balance sheet with plenty of borrowing capacity to grow. It also has an untapped revolving line of credit of $800 million.
Valuation and performance
In terms of valuation, the REIT is priced at 26.1 times 2019 Core Funds from Operations (FFO) per share, which is net income plus non-cash charges like depreciation and amortization and gain on sale. FFO per share growth was 7% in 2019, and the company is guiding for a similar increase in 2020. American Homes 4 Rent has a 0.7% dividend yield. The company's principal competitor is Invitation Homes (NYSE:INVH) which is larger and trades at a slightly lower multiple (23.6 times 2019 FFO) but has slower FFO/share growth at 5.9% versus 7% for American Homes.
American Homes 4 Rent has outperformed Invitation, rising 31% over the past 12 months. The Vanguard Real Estate ETF is up only 8% over the same period. Falling interest rates are usually a plus for REITs, which will provide an additional tailwind. Falling rates will help in two ways -- first by lowering borrowing costs, and second by supporting asset prices. Increasing house prices means an increase in inventory valuation and rental rates.
The economic backdrop is supportive
The market conditions for single-family rentals are robust. According to the Harvard Joint Center for Housing Studies, the national rental vacancy rate fell to 6.8% in mid-2019, the lowest level since the mid-1980s. There are approximately 15.7 million single-family rentals in the United States, and the two biggest single-family rental REITs only control 135,000 of them. There is ample room for the overall sector to grow over the next decade, and with a persistent imbalance between housing supply and demand, single-family rental REITs like American Homes 4 Rent will be poised to alleviate the national housing shortage and earn a return over the longer-term horizon.