Down 14%, is this dividend-paying stock an immediate buy?

Over the past year, residential real estate has been one of the hottest asset classes. Whether you use the Clear Capital Home Data Index, FHFA Home Price Index, or Case-Shiller, we’ve seen home price appreciation among teens as a regular feature since the start of the pandemic.

Stocks have struggled and bonds are on course for the worst year since the early 1970s. property investment can be difficult for small investors, how can someone with a few thousand dollars gain exposure to the residential real estate market?

Image source: Getty Images.

American Homes 4 Rent consolidates a historically fragmented market

American Homes 4 Rental (NYSE:AMH) is a confidence in real estate investment (REIT) which focuses on the purchase and rental of single family residential properties. Historically, single-family home rentals were dominated by small “mom and pop” investors who could collect rent from a duplex to fund their retirement. Now we are seeing more professional and institutional money entering the space.

American Homes 4 Rent is looking for properties with several characteristics: built after 2000, three or more bedrooms, two or more bathrooms and a price between $250,000 and $550,000. The company believes that the key to running a scalable rental business is balancing centralization and decentralization. Centralization helps the company reap the benefits of economies of scale, while decentralization helps diversification.

American Homes 4 Rent is in the Hottest Real Estate Markets

Generally, rents tend to follow home prices, and in many American Homes 4 Rent markets we are seeing rapid appreciation in home prices. The company’s primary markets are Atlanta, Dallas-Fort Worth, Charlotte and Phoenix. According to the Clear Capital Home Data Index, these metropolitan statistical areas (MSAs) were all in the top 15 for home price appreciation last month, and each of these areas saw an annual appreciation of at least 28% of house prices. Given the rapid appreciation in home prices since the start of the year, American Homes 4 Rent should see an acceleration in rent inflation as leases reset to market rates.

Rents are rising at near double-digit rates

On the earnings conference call, COO Bryan Smith provided an update on the company’s rent increases. New leases (for example, a new tenant replacing an old tenant) saw their rents increase by 14.2%, while renewals increased by 7.4%. This equates to a combined increase of 9.3%. In July, new leases increased by 13.2% and renewals by 8.1%. The mixed rate came out at 9.7%, up from the second quarter.

Book value doesn’t tell the whole story

American Homes 4 Rent also has hidden value because its properties are held on the balance sheet at cost less depreciation. These properties were purchased, on average, in 2015 and have appreciated since then. In other words, the book value of the company underestimates the liquidation value of American Homes 4 Rent. Moreover, the vast majority of its debt is fixed rate, which means that rents increase at a much faster rate than the interest it pays.

American Homes 4 Rent expects funds from operations (FFO) to come in at $1.56 per share. Funds from operations is how REITs typically measure income, as it adds back non-cash charges such as depreciation and amortization. This puts the company on a multiple of 24 times 2022 FFO per share. This is a reasonable multiple for a market leader, especially when the FFO is growing in the mid-teens. American Homes 4 Rent has some hidden value and is one of the first to move into single family rental space. As long as real estate prices continue to accelerate, American Homes 4 Rent’s revenue will also increase.

10 stocks we like better than American Homes 4 Rent
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They have just revealed what they believe to be the ten best stocks for investors to buy now…and American Homes 4 Rent was not one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of July 27, 2022

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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Comments are closed.