The opportunity to buy in the single-family home market is going away.
That doesn't mean that there aren't undervalued assets floating around ripe for the picking, however. For example, American Homes 4 Rent (NYSE:AMH) is offering dividend-paying, exchange-traded securities that give you a piece of the future price appreciation of homes it owns.
A fast changing market
The single family home sector is a new niche in the real estate investment trust (REIT) market. In fact, Silver Bay Realty (NYSE:SBY) was the first publicly traded REIT, and it's only a touch over a year old. So it's understandable that investors would have some concerns about the single-family home niche.
The concerns aren't unfounded, either.
Silver Bay and competitors like American Homes 4 Rent have been aggressively building their portfolios by buying up properties. Silver Bay, for example, started life with around 2,500 properties. A little over a year later, the portfolio held over 5,700 homes.
That's a lot of growth in a short period of time.
To be fair to Silver Bay and its brethren, the opportunity to build large portfolios of "cheap" homes was brought about by the deep 2007 to 2009 recession and has proven to be short lived. That, of course, has much to do with giant competitors like Silver Bay and even larger American Homes 4 Rent (with over 25,000 properties) effectively clearing the distressed home market of inventory.
Not cheap on Main Street
This helps to explain why buying single-family homes is getting more and more expensive on Main Street, if you will.
However, Silver Bay's non-GAAP "estimated net asset value (NAV) per share" suggests there's still bargains to be had -- only on Wall Street, not Main Street. Estimated net asset value is supposed to take into consideration that appreciation of the homes in Silver Bay's portfolios.
That's an interesting take. We all know those assets are appreciating, but accounting standards require Silver Bay to depreciate (write off) a portion of the original value every year.
That's an inherent disconnect.
At the end of the first quarter, Silver Bay's estimated NAV per share was over $20. It's GAAP book value was just under $17 a share. And it's share price, meanwhile, has been hovering around $16.
That's a buying opportunity!
For an investor seeking a bargain, Silver Bay is saying its shares are undervalued. However, Mr. Market will determine whether that discrepancy gets "fixed" or not. American Homes 4 Rent has another option. It has sold preferred shares that are designed to participate in the appreciation of its home portfolio.
American Homes has three preferred shares (A, B, and C) outstanding under the names "Participating Preferred Shares." It recently announced the "home price appreciation amount" for the preferred shares, with the A and B preferreds receiving $0.42 a share and the C getting $0.085 a share. Those amounts get tacked on to the $25 face value of the preferred shares if and when American Homes redeems them. You get paid dividends along the way, as is customary for preferreds.
Uncertain or certain?
That's not a bad deal being offered by American Homes 4 Rent, since it gives you some certainty that you'll get a piece of the appreciation of the homes it owns. That's particularly true since Silver Bay is basically saying that its portfolio value isn't being recognized by the market, but buying its shares is the only way that you can (maybe) take advantage of the disconnect.
Waiting on Mr. Market to correct a perceived mispricing can take a long time.
If you buy into Silver Bay's argument that GAAP statistics don't capture the value being built in the single-family REIT space, take a close look at American Homes 4 Rent's A, B, and C preferred shares. They offer a Wall Street direct line to the appreciation you see taking place on Main Street.