Doctors and dentists often become landlords once they have some money saved up. They buy a house, fix it up, rent it out and turn its increasing value into their retirement nest egg.
American Homes 4 Rent Inc. (NYSE:AMH) does the same thing, only under corporate cover — as a Real Estate Investment Trust (REIT) that is publicly traded. The company, based in Agoura Hills, California, due north of Malibu, has bought about 49,000 homes since being formed in 2012 by self-storage magnate B. Wayne Hughes.
Since March, the stock is up 15%, as speculation has grown about the industry consolidating. Two rivals, Starwood Waypoint Homes and Invitation Homes Inc. (NYSE:INVH), recently merged under the financial leadership of Blackstone Group L.P. (NYSE:BX) and real estate is seen as a good place to be when the market looks ready to roll over.
The new company is now the largest in the industry, surpassing American Homes 4 Rent.
The single-family REIT industry got its start after the 2008 financial collapse, when thousands of homes were left stranded in places like southern California, Florida and Atlanta. The REITs helped support the market, and now 95% of the industry’s properties are under lease, with a low 29% rate of debt-to-capitalization.
But as the housing market has heated up, those easy profits have gone away. American Homes 4 Rent has responded by buying new homes directly from builders, who now don’t have to wait for families to kick the tires on their developments before moving on. It is adjusting its business model as the market changes, cleaning up market messes left by overbuilding and overextended builders.
The result has been impressive growth. American Homes’ revenues are up nearly 50% in the last three years, from $630 million in 2015 to $960 million last year, and $81 million flowed to the net income line last year. During the March quarter, another $20.4 million in profit rained down, on $258 million in revenue.
This led to questions at its first quarter earnings call on May 31. Management said it is buying in Southeast markets like Atlanta and Nashville and selling out of markets with big military populations, where transfers mean leases can be broken without penalty. The company has only recently begun bond offerings.
Big Risks, Big Rewards
Analysts were slightly disappointed with the March numbers, which management attributed to weather. The winter’s freezes meant repairs had to be done on many homes. The hurricane season is always a threat.
The stock is rising, however, as interest rates rise. In some ways, American Homes 4 Rent is like any other homeowner. Low interest mortgages make the mortgage more attractive. But as interest rates rise on homeowners, prices come under pressure. A REIT buyer, however, can get the best rates on money by buying in bulk, and the best returns by increasing rents. AMH’s rental increases average 7% per year.
This has put the sector in a sweet spot, according to analysts. The average rating on the stock is overweight, thanks to high occupancy rates and millennials — whose average age is now over 30 — looking for homes in which to raise families rather than apartments.
The Bottom Line on American Homes 4 Rent
This is not a hot or sexy part of the stock market, making it an especially appealing place to park money as markets become volatile.
Higher interest rates pricing buyers out of the market are an opportunity for AMH to keep its rental prices high and its homes occupied, while only paying regular (and weather-related) maintenance. It’s like buying into that dentist’s home business. It shouldn’t collapse, but it won’t fly. Thus defensive institutions are interested in it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.