Investing in real estate on a small scale is difficult. Buying a property is a large, illiquid investment. Most people have their net worth tied up in their primary residence, but it is hard to make a small-scale investment.
American Homes 4 Rent (AMH 0.11%) is a single-family property real estate investment trust (REIT) that lets investors gain exposure to the housing market with the easy liquidity of trading a stock.
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American Homes 4 Rent disrupts a historically fragmented business
Historically, the single-family rental market was a largely fragmented, mom-and-pop business. Most landlords owned one or two properties and the business wasn't considered to be scalable. In the aftermath of the financial crisis, lots of properties became available, and professionally managed money began to enter the market.
American Homes 4 Rent was one of the pioneers, and a lot of money has been raised in this strategy over the past several years. Professional investors were drawn to the prospect of gaining income from a rapidly appreciating property. In an age of ultra-low interest rates, getting a rental yield of nearly 8% along with double-digit home price appreciation was highly attractive.
American Homes 4 Rent owned 58,933 single-family properties in 21 states as of the end of 2022. It invests mainly in markets with above-average median incomes, good schools, and attractive amenities. The company hopes to attract tenants with strong credit profiles and to buy properties with high potential for price appreciation.
The typical American Homes 4 Rent property is a three-bedroom, two-bath property in the $250,000-$600,000 price range constructed after 2000. Data analytics is a key part of American Homes 4 Rent's business model, which helps it target the most attractive markets.
American Homes 4 Rent is also becoming increasingly focused on its build-to-rent program, where it uses its data analytics and property management expertise to build properties designed to attract the long-term renter from the beginning. The REIT also partners with local developers to buy existing properties.
The real estate portfolio is worth a lot more than the balance sheet suggests
American Homes 4 Rent's real estate portfolio is relatively well diversified and is in some markets that have experienced rapid home price appreciation. The biggest markets are Atlanta, Dallas, Phoenix, Charlotte, North Carolina, and Nashville, Tennessee. The average property is just under 2,000 square feet and was purchased in 2015. Under generally accepted accounting principles (GAAP), properties have to be marked down if they become impaired assets, but they aren't marked up as they appreciate in value.
In other words, the value of these properties on American Homes 4 Rent's balance sheet is well below what they are actually worth. While all real estate is local, on average home prices have risen about 77% since the end of 2015. The book value per share of the stock understates the value of the underlying assets.
In 2022, core funds from operations (FFO) per share -- an important measure of REIT performance -- rose 20% to $619 million. REITs generally use FFO to describe their earnings because they are required to deduct depreciation and amortization to reach net income under GAAP. Because depreciation and amortization is a non-cash charge (nobody writes a check to pay them), net income tends to understate the cash-flow generating capacity for a REIT.
American Homes 4 Rent has forecast 2023 FFO per share to come in between $1.58 and $1.64. This gives the company a price-to-FFO multiple of 19.5 times. This is reasonable for a high-quality REIT. The FFO also gives plenty of room to cover the annual dividend of 88 cents a share, for a yield of 2.9%.
In lieu of buying a rental property to get additional exposure to the U.S. single-family housing market, investors should consider a position in American Homes 4 Rent.
