|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|
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.
· 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
continued strong demand
|Entry||07/19/2018 10:43 AM|
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.")
|Subject||Re: New vs Used|
|Entry||07/19/2018 04:42 PM|
cash flow durability