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?

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