AMERICAN HOMES 4 RENT Prefs AMH.PA
November 22, 2016 - 1:01pm EST by
cfavenger
2016 2017
Price: 27.25 EPS 0 0
Shares Out. (in M): 237 P/E 0 0
Market Cap (in $M): 5,014 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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Description

This is a really short/quick idea and I don't need it to apply towards VIC quotas but there is a catalyst on the short-term horizon so I wanted to share it with the group.

AMH Preferred A,B, and C shares have a very interesting Home Price Appreciation linked structure which is misunderstood and undervalued by the market.  

1. We expect these are going to be called in about a year.  This is very expensive capital for the company which they do not need.  The HPA markets the securities are linked to are getting hot and the company can now finance much cheaper.  Also, in 2020 there is a massive coupon step-up so you have duration protection even if we are wrong on a call in September 2017.
 
2. Coupon pays 5% + 50% of HPA in FHFA index weighted by AMH's ownership.  By our math this should produce a Yield to Call of approx 8.5-9.5%.
 
3. You are getting this for a very low levered company with a ton of tangible collateral below you.  We see very minimal credit risk for this yield.  At Q316 AMH had 8B of assets and only 2.8B of debt. The assets are single family homes.  You would need some utterly draconian credit issues to impair the prefs.  Thus, you don't need to be a true believer in the single-family REIT model to like this idea.  
4. Opportunity exists because Home Price Appreciation linked structure is an oddball security which doesn't screen properly on a Bloomberg yield screen and people don't understand the embedded yield.  The HPA numbers flow through into Bloomberg at a significant time lag so the real value of the security is understated.
 
5. Latest HPA numbers will be out any day now.  The relevant sub-markets for the AMH securities (Dallas, For Worth, Atlanta) are running very hot.  At that time the new numbers feed into Bloomberg and the security will screen differently so there is an imminent catalyst. 
 
 
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

HPA numbers 

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    Description

    This is a really short/quick idea and I don't need it to apply towards VIC quotas but there is a catalyst on the short-term horizon so I wanted to share it with the group.

    AMH Preferred A,B, and C shares have a very interesting Home Price Appreciation linked structure which is misunderstood and undervalued by the market.  

    1. We expect these are going to be called in about a year.  This is very expensive capital for the company which they do not need.  The HPA markets the securities are linked to are getting hot and the company can now finance much cheaper.  Also, in 2020 there is a massive coupon step-up so you have duration protection even if we are wrong on a call in September 2017.
     
    2. Coupon pays 5% + 50% of HPA in FHFA index weighted by AMH's ownership.  By our math this should produce a Yield to Call of approx 8.5-9.5%.
     
    3. You are getting this for a very low levered company with a ton of tangible collateral below you.  We see very minimal credit risk for this yield.  At Q316 AMH had 8B of assets and only 2.8B of debt. The assets are single family homes.  You would need some utterly draconian credit issues to impair the prefs.  Thus, you don't need to be a true believer in the single-family REIT model to like this idea.  
    4. Opportunity exists because Home Price Appreciation linked structure is an oddball security which doesn't screen properly on a Bloomberg yield screen and people don't understand the embedded yield.  The HPA numbers flow through into Bloomberg at a significant time lag so the real value of the security is understated.
     
    5. Latest HPA numbers will be out any day now.  The relevant sub-markets for the AMH securities (Dallas, For Worth, Atlanta) are running very hot.  At that time the new numbers feed into Bloomberg and the security will screen differently so there is an imminent catalyst. 
     
     
    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

    HPA numbers 

    Messages


    SubjectStock Conversion and 9% Cap
    Entry11/22/2016 02:39 PM
    Memberstraw1023

    cfavenger,

     

    Thank you for sharing such a fun idea.

     

    I whipped thru the documents and see:

     

    - They can redeem in stock with a 1 day VWAP. If I understand, they would need to announce before market open. Is this your understanding? This might be a significant negative.

    - Otherwise, I am getting (ballpark) an expected index appreciation of 40%. We get half of that at liquidation. So we get $30 ($25 * 1.2) plus the dividends (5% * $25 = $1.25) on the Series A . . . BUT . . . 

    - There is a 9% IRR cap that effectively caps the HPA appreciation at 4% per year, or about 17% over the 4.25 years. Note: there is some timing issues such that can be slightly greater than 18%. But I do think the 9% IRR cap is going to come into play here.

    - The Series B redemption is 3 months later and the Series C redemption is another 3 months later.

    - As well, the Series C cap is 9% but dividend is 5.5% so cap even more relevant on Series C.

    Agree?

     

    Thanks again


    SubjectRe: Stock Conversion and 9% Cap
    Entry11/22/2016 03:15 PM
    Membercfavenger

    Straw:

    You have 4% per year from 25.  For 4.25 years that is about 18%.  1.18x25=29.50.  Do you have different math than that?  Note that because you had basically no HPA the first couple of years we IRR cap is probably a bit higher and around $30.

    We see As and Bs as both callable 9/30/17.  Do you see different?  Yes the C's are slightly later and one bids a bit lower on them.  

    It is possible that they redeem in stock.  The current market cap of the company is 5B so a stock redemption wouldn't be some catastrophically large issuance.  You could short some AMH common on Sept 29, 2017 to hedge yourself.  Regardless, in my base case the company issues corporate level debt to redeem.  Since these prefs were issued I believe they have far greater access to debt markets at reasonable levels.


    SubjectRe: Re: Stock Conversion and 9% Cap
    Entry11/22/2016 03:50 PM
    Memberstraw1023

    I do not think the path of the HPA appreciation is relevant since we do not get the money until redemption. But I get that we are going to get about $29.50, yes. I can build an IRR model and get exact amount (assuming the cap is hit), but not needed.

     

    I see B's as redeemable 12/31/17. and C's as redeemable 3/31/18.

     

    Otherwise, we are in agreement on all the numbers.

     

    Great idea. Thanks for sharing.

     

     

     

     


    SubjectRe: Re: Re: Stock Conversion and 9% Cap
    Entry11/22/2016 04:23 PM
    Memberstraw1023

    Based on when they issued these, it seems to me that the IRR calculation involved in the cap will be from 10/18/13. So let's just say 4 years.

     

    Assuming we hit the cap (requires greater than 35.1% HPA Index Appreciation) and the time period is exactly 4.00 years, I think the kicker will be $4.39 on the Series A. Plus four 5% qtly dividends plus the $25.

     

    Through June 30, 2016, the appreciation is a bit higher than 30% so we will probably come close to the cap.


    SubjectHPA numbers show very strong appreciation in AMH markets
    Entry11/23/2016 10:47 AM
    Membercfavenger

    Home Price numbers out (http://www.fhfa.gov/DataTools/Downloads/pages/house-price-index.aspx) and AMH's key markets running double-digit annualized hot


    SubjectRe: HPA numbers show very strong appreciation in AMH markets
    Entry11/23/2016 12:35 PM
    Memberstraw1023

    I threw them in a spreadsheet and get that the pfd's HPA Index is up +2.163% (NSA) and +2.264% (SA). The NSA is the one to use formally.

     

    So I have the relevant HPA index up +24.86% thru Q3 2016.

     

    Another issue: After reading the legal language of the preferred, I believe there is an ambiguity about what index level to use. For example, if they redeem on Sept 30, 2017, do they use the Sept 30, 2017 level (which will not be published until Nov 2017) or do they use June 30, 2017 level?


    SubjectRe: Re: HPA numbers show very strong appreciation in AMH markets
    Entry11/28/2016 12:15 PM
    Membercfavenger
    American Homes 4 Rent Announces Home Price Appreciation Amounts for its 5% Series A, 5% Series B and 5.5% Series C Participating Preferred Shares
    Company Release - 11/23/2016 16:30

    AGOURA HILLS, Calif., Nov. 23, 2016 /PRNewswire/ -- American Homes 4 Rent (NYSE: AMH), a leading provider of high quality single-family rental homes ("the Company"), today posted the revised "Home Price Appreciation Factor" and "Home Price Appreciation Amount" through September 30, 2016, as those terms are defined in the final prospectuses for the Company's 5% Series A, 5% Series B and 5.5% Series C Participating Preferred Shares (NYSE: AMHPRA, AMHPRB and AMHPRC).  The computations of these amounts are based on the results of the House Price Index of the Federal Housing Finance Agency, or FHFA, known as the Quarterly Purchase-Only Index, or POI, specifically the non-seasonally adjusted "Purchase-Only Index" for the "100 Largest Metropolitan Statistical Areas" as of September 30, 2016, which was released November 23, 2016.

    Based on the weighting among our top 20 markets established under the terms of our 5% Series A and 5% Series B Participating Preferred Shares, cumulative home price appreciation for the period from June 30, 2013 to September 30, 2016 was 24.77%, resulting in a Home Price Appreciation Factor of 12.39%.  The Home Price Appreciation Amount on our 5% Series A and 5% Series B Participating Preferred Shares through September 30, 2016 was $3.097.

    Additionally, based on the weighting among our top 20 markets established under the terms of our 5.5% Series C Participating Preferred Shares, cumulative home price appreciation for the period from December 31, 2013 to September 30, 2016 was 21.51%, resulting in a Home Price Appreciation Factor of 10.75%.  The Home Price Appreciation Amount on our 5.5% Series C Participating Preferred Shares through September 30, 2016 was $2.688.


    SubjectRe: Re: HPA numbers show very strong appreciation in AMH markets
    Entry11/28/2016 12:17 PM
    Membercfavenger

    Straw - We believe that there is a strong legal argument that the company will have to pay with a due bill and pay that extra coupon.  The security is attractive regardless but the extra coupon is positive optionality.

     

     


    SubjectRe: Re: Re: HPA numbers show very strong appreciation in AMH markets
    Entry11/28/2016 12:31 PM
    Memberstraw1023

    The problem with that method is that the index could go down so they cannot use that method and then send everyone a bill. The index is not really an option as it could go down. Of course, they could unilaterally waive the right to claw back any index drop and do it your way.

     

    I suspect the more likely scenario is that they wait until the Sept 30 index result is released in late November and then they redeem at that level.

     

     


    SubjectIG
    Entry03/23/2017 05:43 PM
    Membercfavenger

    AMH got its investment grade rating from Moodys (Baaa3).  This bolsters the case that these securities will be called when possible and replaced with cheaper funding.


    SubjectRe: IG
    Entry03/23/2017 07:34 PM
    Membercreditguy

    I have the series Cs trading at a yield to call of 3.05% (see my math below) and the series Bs at a yield to call of 2%.  Is that your math?

    Great idea BTW.  Just seems like a sell now (I have been slowly selling my position) unless you are looking at it differently.

    3/23/17 (28.300)

     

     

    6/30/17 0.344 

    9/30/17 0.344 

    12/30/17 0.344 

    3/31/18 28.136 

    3.05%


    SubjectRe: Re: IG
    Entry03/23/2017 07:59 PM
    Memberstraw1023

    creditguy,

     

    but they also get the housing index. and the main move in the housing index is always the Q2 move due to seasonality.

     

    this index could move down but the indications i see are that it will be up a fair amount.

     

    also, not sure where you get the final amount on the C's.

     

    The index step-up is currently $2.712. And then we get last dvd of 34.4 cents. So wouldn't last payment be $25 + $3.056 if housing index remains unchanged from 12/31/16.

     

     


    SubjectRe: Re: Re: IG
    Entry03/23/2017 08:17 PM
    Membercreditguy

    My last payment of 28.136 is comprised of 25 + the last quarterly div of .344 + 2.80 which is an increase of 3.11% above the index number of 2.712 at year end.  So that would represent HPA of approximately 6.22% from 12/31/16 to 03/31/17 since the index number increases 1/2 of HPA.

    I don't pretend my estimate for an increase in HPA is precise but 5% to 7% seems reasonable.

    Anyone see fault with my numbers or band the range of outcomes as different?

    Preferred holders tend to look at current yield not "yield to worst" which is what the yield to first call represents so it seems highly possible market is not focusing on yield to worst but instead the current yield here.

    Any thoughts are appreciated.  Sorry to bore the equity guys here! :)


    SubjectRe: Re: Re: Re: IG
    Entry03/23/2017 08:27 PM
    Memberstraw1023

    I understand -- you included your estimate of HPA appreciation in Q1 already.

     

    And I understand your point about how pfd holders look at yield . . . this is why this has traded so cheap when index is included.


    SubjectRe: Re: Re: Re: IG
    Entry03/23/2017 08:39 PM
    Memberstraw1023

     

    On your math, what do you have HPA price appreciation being in Q1? Your number imply a 64 bp increase in the HPA.

    but you seem to suggest a larger one when you compare 2.80 to 2.712 (+3.11%). But the relevant ratio is (25+2.80)/(25+2.712), not 2.80/2.712.

    But if you are predicting a 64bp increase in the HPA index, then I agree with your math.


    SubjectRe: Re: Re: Re: Re: IG
    Entry03/23/2017 08:43 PM
    Membercreditguy

    I was just trying to guesttimate the increase in HPA over the next 5 quarters (until the series Cs are first callable).  I am not trying to predict quarterly increases in HPA.  I think our estimates are similar.  At 2-4% yield to calls seems like we are not playing for a lot at current prices although i guess these are not bad "cash substitutes" as i think it is highly probable (>90% chance) that these are called on the first call date so you are looking at weighted average life securities of 1/2 (i.e. securities that are called on the first call date).


    SubjectRe: Re: Re: Re: Re: Re: IG
    Entry03/23/2017 08:50 PM
    Memberstraw1023

    in that case, then i think you are doing math wrong. you seem to be assuming a 6.22% increase in HPA index. but you are applying it incorrectly.

    a 6.22% in HPA from Dec 31, 2016 to March 31, 2018 would results in a final payment of:

     

    27.712 * 1.0311 + 34.4 cents (dvd) = $28.918

     

    you seem to be applying the 3.11% increase to the wrong number (2.712) rather than the correct number (27.712).


    SubjectRe: Re: Re: Re: Re: Re: Re: IG
    Entry03/23/2017 09:11 PM
    Membercreditguy

    thank you for correcting my mistaken math.  quite a bit more attractive on that basis.

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