The COVID-19 crisis has accelerated some trends that were already in place, and one of the biggest has been the exit out of urban areas and the newfound appeal of suburban environments. As a result, apartment real estate investment trusts (REITs) with heavy urban exposure, like Equity Residential, have seen declining earnings driven by weakness in their core New York City, Boston, and San Francisco markets.
On the other side of that equation, American Homes 4 Rent (AMH 0.40%) is seeing massive demand, which is translating into pricing power.
The suburban renaissance
American Homes 4 Rent is experiencing what the company calls a "suburban renaissance." The COVID-19 lockdowns and the increase in remote working have boosted a trend that was already in place, as younger adults begin having families and want the extra space, backyards, and good schools that are more present in the suburbs. Aside from the multifamily to single-family migration, American Homes 4 Rent also noted big changes in geographic popularity. For instance, management is seeing Californians leaving that state (or potentially getting priced out of certain markets) and heading for places like Phoenix, Las Vegas, and Seattle.
For the third quarter (ending Sept. 30, 2020), total revenue increased 4.2% to $310.8 million, compared with $298.3 million in the year-ago period. Core funds from operations (FFO) increased by 6.7% to $0.29 per share from $0.28 per share a year ago. The company reported same-home core net operating income (NOI) year-over-year growth of 4%, which was driven by a 3.6% growth in core revenue and a slower 3% growth in expenses. COVID-19-related bad debt did have some impact on the company. Excluding that bad debt, same-home core NOI growth would have been closer to 6%.
Rental rates continue to increase, with American Homes 4 Rent reporting a 3.5% increase on rental renewals and a 7% increase on rental releases in October. The blended rate increased to almost 5%. In July, the blended rate was 2%, and it has been increasing steadily every month. The company's same-home portfolio notched average occupied days of 96.9% in the third quarter while achieving 5.9% rental rate growth on new leases. Applications per rent-ready property increased 100% in the same period, and that demand is allowing the company to price aggressively. As of Sept. 30, occupancy was 97.5%, compared with 96.4% at the end of June.
While the company's core portfolio is performing well, acquisitions remain difficult as the number of properties for sale is limited. To increase inventory, American Homes 4 Rent has a national build-for-rent program, which gives it access to new construction, along with using the traditional method of scouring the multiple listing services (MLS) looking for properties that fit within the company's strategy. American Homes 4 Rent anticipates investing between $700 million and $800 million in these different growth prongs and expects to deliver a total of 1,500 to 1,600 newly constructed homes to its inventory.
The company did an equity issue during the quarter, selling just under 15 million shares for proceeds of about $412 million. As of Sept. 30, the company had cash of $316 million, an undrawn $800 million revolving line of credit, and about $2.9 billion worth of debt with an average rate of 4.4% and average time to maturity of 12.3 years. For the third quarter, core FFO covered interest expense 3.6 times.
American Homes 4 Rent is also benefiting from accelerating home price appreciation. In August, the Case-Shiller Home Price Index rose 5.7% in August, reflecting improved mortgage rates and tight inventory. During the quarter, the company sold 233 properties for a total of $56 million. While the real estate portfolio isn't "marked to market" every quarter, home price appreciation does increase the value of the company's assets. American Homes 4 Rent is trading at 27 times trailing-12-month core FFO. It also has a dividend yield of 0.65%, which is somewhat miserly for a REIT. Though not necessarily a cheap stock, the company is the leader in consolidating the highly fragmented single-family rental business.