One of the meta narratives this year has been the housing recession. Between rising mortgage rates and soaring home prices, there is an affordability crisis, especially for the first-time homebuyer.
Recent data from the National Association of Realtors on housing inventory and sales underscores the data. How will this housing recession affect single-family rental real estate investment trusts (REITs) like American Homes 4 Rent (AMH -0.08%)?
Image source: Getty Images.
What is the housing recession?
The collapse in home affordability has acted as a brake on housing sales. According to the National Association of Realtors, existing home sales have fallen back down to levels last seen during the worst parts of the pandemic lockdown.
US Existing Home Sales data by YCharts
The drop in home sales reflects the fact that the first-time homebuyer is struggling to afford a starter home. This means the move-up homebuyer and the downsizer are both "stuck." The first-time homebuyer accounted for 26% of sales in 2022, which is a record low since the National Association of Realtors began tracking data. The bottom line is that a lack of sales means a lack of people moving.
American Homes 4 Rent is a single-family rental REIT that owned 58,961 properties as of Sept. 30. The company focuses on purchasing single-family homes in metropolitan statistical areas (MSAs) that exhibit strong population growth and rapid appreciation of house prices and rents. American Homes 4 Rent uses models to get extremely granular data on the potential upside of a property.
American Homes 4 Rent has exposure to the hottest markets
American Homes 4 Rent's portfolio is concentrated in some of the fastest-growing MSAs over the past few years and many of these experienced the fastest home price appreciation. The company's largest MSAs include Atlanta, Dallas, Nashville, Charlotte, and Phoenix. This translated into an average blended rate of rental inflation of 9.5% in the quarter ended Sept. 30. Occupancy has been trending up this year, and stood at 95.7% at the end of the quarter.
The lack of inventory benefits American Homes 4 Rent
The National Association of Realtors estimates there is a housing gap of between 5.5 million and 6.8 million units, which represents several years of housing starts. Until there is a glut of housing in the United States (and especially in American Homes 4 Rent's MSAs), expect to see continued strong occupancy and rental growth. The housing recession is mainly an issue for mortgage originators, real estate agents, home flippers, and homebuilders. Apartment REITs like American Homes 4 Rent actually benefit from the restricted supply.
The company's real book value is higher than the balance sheet suggests
American Homes 4 Rent's portfolio was bought on average in 2015. Given that generally accepted accounting principles (GAAP) don't permit companies to "write up" the value of their portfolio, the company's true book value is much higher than what is carried on the balance sheet. The company is guiding for 2022 funds from operations (FFO) to come in between $1.52 and $1.56 per share. Note that REITs use FFO to describe earnings since depreciation and amortization is a major deduction from GAAP earnings and isn't really a cash expense. This means GAAP earnings understate the cash flow of the company.
Based on guidance, American Homes 4 Rent is trading at 19.6 times guided 2022 FFO per share, which is reasonable given that it is one of the leading single-family rental REITs. The dividend is $0.70 per share, which means that the company has a relatively low payout ratio for a REIT. American Homes 4 Rent is still investing in the business, which explains the use of cash. Despite talk of a housing recession, American Homes 4 Rent will be relatively insulated.
