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The Suburbs Are Hot Again; How American Homes 4 Rent Is Taking Advantage

By Brent Nyitray, CFA - May 20, 2020 at 7:53AM

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The COVID-19 crisis accelerates some favorable trends for this residential REIT.

The COVID-19 crisis has been tough on financial stocks, especially banks and real estate investment trusts (REITs). The banks have been clobbered on market fears that nonperforming loans are about to increase, especially those for small business and consumer debt like credit cards and installment loans. The real estate investment trusts have been under pressure as well. Mortgage REITs have been annihilated, and mall REITs are struggling.

That said, it looks like the financial metrics for residential REITs have been better than feared. In fact, the implications of the coronavirus pandemic may in fact benefit one particular REIT in that it nudges some trends that have already been put in motion. 

Picture of a house with a "for rent" sign in the yard

Image source: Getty Images.

A new joint venture closes

American Homes 4 Rent (AMH 1.57%) and J.P. Morgan Asset Management recently closed on their first joint venture to build 34 single-family rentals in the Las Vegas area. The project will include 12 three-bedroom homes and 22 four-bedroom homes. Mike Kelly, head of Real Estate Americas at J.P. Morgan Asset Management, characterized the project this way:

This partnership provides us with the opportunity to capitalize on an increasing trend amongst city dwellers to seek additional space and the appeal of high-quality suburban living in a newly constructed community. We see this shift as particularly prevalent among the millennial generation, the largest U.S. age cohort, who are looking to transition away from apartment living. The move towards more spread-out living is also expected to accelerate in the wake of the COVID-19 pandemic, and we anticipate strong occupancy and rental growth rates across properties.

The COVID-19 pandemic is driving demand for American Homes 4 Rent properties. First, some customers who had been thinking about buying a home are postponing or canceling their plans until we have more visibility about the extent of the economic damage. Second, many renters in large buildings are interested in moving to lower-density areas where social distancing is easier. COVID-19 may turn out to mark the end of the trend for millennials to choose dense, urban, walkable neighborhoods. 

Tenants are paying rent

So far, it looks like the COVID-19 crisis has not had a major negative impact on American Homes 4 Rent. On its first-quarter earnings conference call, American Homes 4 Rent disclosed that it had collected 95% of its original scheduled rent due in the month of April. This is similar to what Equity Residential received.

In the first week of May; the company collected 82% of rents due, which is about 94% of what it typically collects in the first five calendar days of the month. So regardless of the pandemic's impact on the overall economy, American Homes 4 Rent's tenants are paying their rent. So far, American Homes is not forgiving rent; however, it is waiving late fees and has suspended evictions. 

Traffic is increasing despite COVID-19

Demand recovered markedly in April, despite the headwinds from the coronavirus. March was difficult to show properties given the government's social distancing guidelines, and the company reported 300 fewer leases signed than normal. However, April was a different story. Showing activity was up 5%, and website traffic rose 25% on a year-over-year basis. Chief Operating Officer Bryan Smith mentioned on the earnings call that the company has had 9,500 showings in the last two weeks of April, or about six physical tours per available property. 

The trend for "urban, walkable" environments was probably never going to be permanent. Childless couples and singles may certainly prefer these sorts of environments, but once kids are involved, suburban life simply becomes more convenient and attractive. This trend was already starting to pick up, and COVID-19 will almost certainly accelerate it.

While home-buying demand has remained strong and there remains a serious supply-and-demand imbalance, single-family rentals will benefit as well. American Homes 4 Rent is not the cheapest REIT, trading at 17.6 times 2019 core funds from operations per share, with a dividend yield of 0.87%. Still, American Homes -- along with competitor Invitation Homes -- is at the forefront of what appears to be a trend. 

Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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