ContributorsPublishersAdvertisers

There Is Hidden Value in American Homes 4 Rent

The Motley Fool
The Motley Fool
 2021-12-03

One of the best-performing asset classes the past year has been residential real estate, which has been appreciating at close to 20% per year. American Homes 4 Rent (NYSE: AMH) is a real estate investment trust (REIT) with big exposure to residential real estate. This stock is a good way for investors to get exposure to this asset class without buying physical property.

https://img.particlenews.com/image.php?url=4NpIhQ_0dD8KM2a00

Image source: Getty Images.

Big Data meets one of the oldest businesses

American Homes 4 Rent is a REIT that specializes in single-family rental properties. It was one of the many single-family rental companies to emerge out of the financial crisis in 2008 and formed in 2012, which is the year the residential market finally started to post positive annual gains, according to the Federal Housing Finance Agency. This was perfect timing, as home prices have risen by an average of 7.4% per year since then.

Prior to the crisis, conventional wisdom held that single-family rentals were not really a scalable business. This means that there are few efficiency gains to be had by holding more properties. If the properties are all geographically close, you might be able to gain some efficiencies on maintenance, but it isn't like most other businesses, where costs as a percent of revenue fall as the business grows.

Enter Big Data. American Homes 4 Rent used data analysis to find the most attractive markets to purchase properties, based on a plethora of variables including price range, square footage, renovation costs, median incomes, and factors like school districts. By choosing the right properties, American Homes 4 Rent can provide better risk-adjusted returns than the typical "mom-and-pop" landlord who owns only one or two properties.

The "real" book value is about twice what the balance sheet says

American Homes 4 Rent owned 52,873 homes at the end of 2020. It purchased them at an average price of $189,129, which means the gross purchase price was just under $10 billion. Their average home was purchased in 2014. Since mid-2014, the FHFA House Price Index has risen by 69%. This means the value of its real estate is actually closer to $17 billion.

If you add the $6.9 billion in home price appreciation to the current book value of $6.6 billion, you get a new book value of $13.5 billion. When you consider the current market cap of American Homes 4 Rent is about $13.4 billion, you see the stock is trading at just about book value . In other words, it's a lot cheaper than it initially appears.

Rents are appreciating faster than the cost of borrowing

In addition to the real estate price appreciation, it helps to consider that American Homes 4 Rent is borrowing money at 4%, which is pretty attractive, given that real estate prices have been climbing at 18.5% per year, based on the latest FHFA numbers. As the COVID-19 disruptions fade into history, it's good to keep in mind that rents generally rise in tandem with home price appreciation.

In addition to the cheap multiple of book value, American Homes 4 Rent pays a 1% dividend. While that's on the small side for a REIT, the company has been plowing cash back into the business, although it has been selling some properties as they supposedly become expensive compared to its model. While American Homes 4 Rent might not fit in the typical income investor portfolio, it is a cheap stock nonetheless. It is also a good way for investors to gain access to the residential real estate market in a small size, with much less hassle.

10 stocks we like better than American Homes 4 Rent
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and American Homes 4 Rent wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of November 10, 2021

Brent Nyitray, CFA has no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

Comments / 0

Comments / 0