AMERICAN HOMES 4 RENT AMH
July 18, 2018 - 4:30pm EST by
piggybanker
2018 2019
Price: 22.50 EPS 0 0
Shares Out. (in M): 353 P/E 0 0
Market Cap (in $M): 7,411 P/FCF 0 0
Net Debt (in $M): 2,753 EBIT 0 0
TEV ($): 10,165 TEV/EBIT 0 0

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Description

212%... that is the average return of our last four long ideas written up on VIC… However, if you are looking for the next 3-bagger; we’re sorry… the cricks run dry. That said, if you are looking to compound value steadily under a variety of economic scenarios, then you may be interested in this idea.

AMH is a REIT, which owns single-family rental properties.  Their business model is simple. They collect rent on their properties, pay expenses on those properties (property tax, HOA fees, repairs/maintenance, insurance, etc), and generate income on the spread between the rental income and the expenses. At a very high level, AMH buys (or builds) a property at a 10% rental yield (rent / value), incurs ~4% in property expenses, and generates a net 6% yield on their book.

You are probably thinking “6% yield… pretty boring!” WE KNOW… we warned you! However, what we like about AMH is that we think it works across multiple scenarios, and that 6% grows with scale and compounds over time, making it a lot more attractive than it appears on the surface.

Industry Dynamics

·         Demand is robust… according to the CEO at a recent conference “I have not seen demand for single-family rentals as strong as you see it today”

·         Demographics are favorable… the sweet spot for AMH is the 35-44 year old age bracket, which will increase by 4-5mm people in the next 8 years, providing a nice tailwind for demand

·         Interest rates don’t matter… again to quote the CEO “Rising interest rates are good. Stable interest rates are good. So pretty much any scenario, we are seeing pretty strong demand…”

·         Psychology / sentiment is very supportive… According to a Freddie Mac survey, the number of prospective renters that would consider single-family rentals increased by over 30% from 2016 to 2017… more awareness / acceptance of this asset class should continue to help demand.

·         Supply remains low… low housing inventory generally, and single-family starts that are still slow to recover from the crisis

·         The math of renting v owning makes sense… and has just gotten a lot more attractive with the recent tax law changes

·         Single-family rental REITs have a tremendous amount of financial flexibility… The rent they receive get resets annually for each property, and every day they have a stream of properties that are renewing/rolling over, making them much more defensive than most other RE plays

AMH Specific Considerations

·         AMH is a scale player in this market, owning over 50,000 properties in over 20 US states

·         Their strategy is simple… utilizing the cash flow they generate to continue to buy and build properties and continue to gain scale (and improve returns)… execution risk is low

·         They are internally managed, meaning that they manage the properties themselves, and can continue to increase efficiency in their management function… they have a proven track record

·         They run with conservative leverage with net debt to market capital cap in the sub 30% range

·         The mgmt. team is highly aligned w/ shareholders, being the largest shareholder in the company

In our opinion, all of these things add up to a company that is a leader in an attractive industry, with a simple focus, and an aligned management team, that will compound value at a low double-digit rate pretty steadily for the foreseeable future.

 

Boring? Perhaps… Useful? Definitely

DISCLAIMER

The author of this posting and related persons or entities ("Author") currently holds a long position in the securities mentioned above. The Author makes no representation that it will continue to hold positions in these securities. The Author is likely to buy or sell long or short securities of this issuer and makes no representation or undertaking that Author will inform Value Investors Club, the reader or anyone else prior to or after making such transactions. While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note. The views expressed in this note are the only the opinion of the Author.  The reader agrees not to invest based on this note and to perform his or her own due diligence and research before taking a position in securities of this issuer. Reader agrees to hold Author harmless and hereby waives any causes of action against Author related to the above note.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

continued strong demand

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    Description

    212%... that is the average return of our last four long ideas written up on VIC… However, if you are looking for the next 3-bagger; we’re sorry… the cricks run dry. That said, if you are looking to compound value steadily under a variety of economic scenarios, then you may be interested in this idea.

    AMH is a REIT, which owns single-family rental properties.  Their business model is simple. They collect rent on their properties, pay expenses on those properties (property tax, HOA fees, repairs/maintenance, insurance, etc), and generate income on the spread between the rental income and the expenses. At a very high level, AMH buys (or builds) a property at a 10% rental yield (rent / value), incurs ~4% in property expenses, and generates a net 6% yield on their book.

    You are probably thinking “6% yield… pretty boring!” WE KNOW… we warned you! However, what we like about AMH is that we think it works across multiple scenarios, and that 6% grows with scale and compounds over time, making it a lot more attractive than it appears on the surface.

    Industry Dynamics

    ·         Demand is robust… according to the CEO at a recent conference “I have not seen demand for single-family rentals as strong as you see it today”

    ·         Demographics are favorable… the sweet spot for AMH is the 35-44 year old age bracket, which will increase by 4-5mm people in the next 8 years, providing a nice tailwind for demand

    ·         Interest rates don’t matter… again to quote the CEO “Rising interest rates are good. Stable interest rates are good. So pretty much any scenario, we are seeing pretty strong demand…”

    ·         Psychology / sentiment is very supportive… According to a Freddie Mac survey, the number of prospective renters that would consider single-family rentals increased by over 30% from 2016 to 2017… more awareness / acceptance of this asset class should continue to help demand.

    ·         Supply remains low… low housing inventory generally, and single-family starts that are still slow to recover from the crisis

    ·         The math of renting v owning makes sense… and has just gotten a lot more attractive with the recent tax law changes

    ·         Single-family rental REITs have a tremendous amount of financial flexibility… The rent they receive get resets annually for each property, and every day they have a stream of properties that are renewing/rolling over, making them much more defensive than most other RE plays

    AMH Specific Considerations

    ·         AMH is a scale player in this market, owning over 50,000 properties in over 20 US states

    ·         Their strategy is simple… utilizing the cash flow they generate to continue to buy and build properties and continue to gain scale (and improve returns)… execution risk is low

    ·         They are internally managed, meaning that they manage the properties themselves, and can continue to increase efficiency in their management function… they have a proven track record

    ·         They run with conservative leverage with net debt to market capital cap in the sub 30% range

    ·         The mgmt. team is highly aligned w/ shareholders, being the largest shareholder in the company

    In our opinion, all of these things add up to a company that is a leader in an attractive industry, with a simple focus, and an aligned management team, that will compound value at a low double-digit rate pretty steadily for the foreseeable future.

     

    Boring? Perhaps… Useful? Definitely

    DISCLAIMER

    The author of this posting and related persons or entities ("Author") currently holds a long position in the securities mentioned above. The Author makes no representation that it will continue to hold positions in these securities. The Author is likely to buy or sell long or short securities of this issuer and makes no representation or undertaking that Author will inform Value Investors Club, the reader or anyone else prior to or after making such transactions. While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note. The views expressed in this note are the only the opinion of the Author.  The reader agrees not to invest based on this note and to perform his or her own due diligence and research before taking a position in securities of this issuer. Reader agrees to hold Author harmless and hereby waives any causes of action against Author related to the above note.

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    continued strong demand

    Messages


    SubjectQuestions
    Entry07/19/2018 10:43 AM
    Memberblaueskobalt

    Hi piggybanker, thanks for the writeup.  We agree that the macro set-up over the next few years is very favorable.  I'm curious about your thoughts on the following:

    1) why AMH over INVH?  If medium-term growth is the main reason to buy the SFR REITs, wouldn't you prefer the one with a bit more organic growth & a bit more leverage to that growth?

    2) all SFR guys have been talking about still being early in the "learning curve" of the business - figuring out how to optimize rents, shorten turns, bring down costs, etc.  PF for all of that, what do you think their normalized, in-place, pro forma , run-rate AFFO is?  And how long does it take them to get there?

    3) do you envision any issues to the model, longer-term?  One thing that I worry about is how local governments & regulators will respond to "big corporations" in their neighborhoods, especially if they are pushing rents aggressively.  I have already seen a couple of articles to this effect of the past year ("big corporations taking over neighborhood; evicting families, etc.")

    Thanks.


    SubjectRe: New vs Used
    Entry07/19/2018 04:42 PM
    Memberblaueskobalt

    cash flow durability

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