One of the biggest macro themes to come out of the COVID-19 crisis has been the exodus from the cities. Lengthy stay-at-home orders have demonstrated the downside of crowded urban environments. While we were already seeing younger adults leave the cities for the suburbs, the coronavirus has accelerated the move. And single-family rental real estate investment trusts (REITs) like American Homes 4 Rent (NYSE:AMH) are seeing record demand for properties.
COVID-19 has driven a migration out of the cities
"Demand for our homes has never been stronger as our leasing and occupancy levels reached all-time highs during June and July," American Homes 4 Rent CEO David Singelyn said in a statement. "The COVID-19 crisis shined a light on the benefits of our homes as people are moving from high-density city living to single-family suburban communities."
The company noted a 20% increase in the number of new tenants coming from multi-family complexes. This helps put a number on what sort of incremental demand is due to COVID-19. We heard similar sentiments from competitor Invitation Homes. In the company's internal survey of new tenants, 30% were leaving denser urban areas, and a similar amount said that COVID-19 increased their desire to move into a single-family home versus an apartment or townhouse.
Tenants are paying rent
Rental collections have been strong for the company as well. Through July, American Homes 4 Rent has collected 96.5% of second-quarter rent and 92% of July rent. For the second quarter, this represents about 99% of what the company collected in the same quarter last year. So despite the higher unemployment numbers, tenants are making rental payments. The company also reported record same-home portfolio average occupied days percentages -- a measure for apartments that's similar to same-store sales.
Revenue for the quarter was roughly flat, which at first glance would seem incongruous with the growth story. The flat revenue was due to a decline in the number of people paying rent and also a waiver of late fees, which the company instituted due to COVID-19. These are temporary concessions and should not be taken as an indicator of future revenue growth.
Two sources of income: appreciation and rent
American Homes 4 Rent has managed to accomplish scalability in single-family rentals, which has long bedeviled landlords. Essentially, it is hard to achieve the economies of scale (in other words, falling average costs as volume picks up) in real estate, especially single-family rentals. American Homes uses data analysis to find the best markets and to control property management costs. That said, the single-family rental business doesn't have the scalability you would expect with, say, a manufacturing business. The scalability isn't zero, but it isn't great either.
American Homes 4 Rent is one of the few single-family REITs in the build-to-rent space. The build-to-rent concept saves on maintenance costs up front, and is an attractive business when real estate prices are rising. This is something to keep in mind when looking at the growth story. American Homes 4 Rent will benefit from rental income as well as asset appreciation when it sells properties. American Homes 4 Rent also pays a dividend of $0.20 annually (for a yield under 1%), which is pretty miserly given the company generated $1.09 per share last year in funds from operations (the REIT equivalent of earnings). That said, American Homes 4 Rent will probably have a lower yield than most REITs given its growth potential.