American Homes 4 Rent Stock: Growing By Leaps And Bounds (NYSE:AMH)

SFR (Single Family Rental) REITs have been the second-hottest REIT sector this year, with an average total return of 18.5%, outpacing all the major indexes except the red-hot NASDAQ.

It is no accident. Rising material costs, relatively high mortgage rates, and an uptick in institutional buyers taking houses off the market (13% of home sales in 2021), have combined to keep the U.S. about 3 million housing units short of the demand. This shortage has kept prices high, and made renting more attractive.

Home inventory levels have been dropping for more than a decade.

At the same time, new single family building permits are expected to remain nearly flat for another 4 years at least.

Meanwhile, renting is drastically less expensive than owning a home under current conditions, with rents about 27% below the cost of ownership in the hottest markets across the country.

Plus, the 35 – 49 year-old demographic, which is the age group most likely to choose single family housing over apartment living, will spike to a peak over the next 4 years, while the 20 – 35 year-old population should slightly decline, according to the U.S. Census Bureau.

All of this has created an opportunity for companies that build to rent, such as American Homes 4 Rent (NYSE:AMH).

Meet the company

Founded in 2012 and headquartered in Las Vegas, American Homes 4 Rent owns almost 59,000 houses, in 21 U.S. states, in more than 30 markets, chosen by the company for their expected high growth in population and employment. Accordingly, 13 of the top 20 AMH markets by asset concentration are in the Sunbelt.

The average AMH home is 17 years old, with 1990 square feet, and rents for $2048 per month. The portfolio is averaging 96.5% occupancy as of June 30.

AMH is the largest build-to-rent company in the U.S., and expects to deliver more than 2200 new homes this year, without raising additional equity. These are not cheap flop-houses, but desirable, durable, and efficient smart homes. AMH also owns a land pipeline that will support another 13,000 units, so there are likely to be years of stable growth on the horizon.

AMH grows its asset base in 3 ways:

• Traditional data-driven MLS acquisitions in markets where the company already has a footprint.
• The aforementioned build-to-own program, targeting Class A locations, using an integrated development and operations platform, built at a significant discount to market value.
• Acquisition of newly-built homes through relationships with homebuilders.

Quarterly results

For Q2 2023, AMH reported the following:

• Revenues of $395.5 million, up 9.3% YoY (year-over-year).
• Net income per diluted share of $0.27, up 68.8% YoY.
• Core FFO of $0.41 per share, up 7.6% YoY.
• Core NOI up 4.8% YoY.
• Blended leasing spreads of 7.7% (9.4% on new leases, 4.8% on renewals).
• 634 newly-constructed homes delivered to the wholly-owned portfolio.

AMH also formed a $625 million joint venture to build more rental homes, and raised core FFO guidance from $1.61 per share at the midpoint, to $1.64.

Growth metrics

Here are the 3-year growth figures for FFO (funds from operations), and TCFO (total cash from operations).

Metric	2019	2020	2021	2022	3-year CAGR
FFO (millions)	$384	$397	$471	$565	—
FFO Growth %	—	3.4	18.6	20.0	13.7%
FFO per share	$1.11	$1.16	$1.36	$1.54	—
FFO per share growth %	—	4.5	17.2	13.2	11.5%
TCFO (millions)	$458	$474	$595	$666	—
TCFO Growth %	—	3.5	25.5	11.9	13.3%

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Source: TD Ameritrade, Hoya Capital Income Builder, and author calculations

AMH kept growing revenues and cash flow, right through the pandemic, and picked up the pace sharply over the past two years. The company’s growth rates are FROG-worthy double digits across the board.

Meanwhile, here is how the stock price has done over the past 3 twelve-month periods, compared to the REIT average as represented by the Vanguard Real Estate ETF (VNQ).

Metric	2020	2021	2022	2023	3-yr CAGR
AMH share price Sep. 15	$29.71	$40.49	$35.63	$36.53	—
AMH share price Gain %	—	36.3	(-12.0)	2.5	7.1%
VNQ share price Sep. 15	$83.20	$107.27	$90.28	$81.81	—
VNQ share price Gain %	—	28.9	(-15.8)	(-9.4)	(-0.6)%

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Source: MarketWatch.com and author calculations

AMH has outperformed the VNQ in each of the past three 12-month periods, returning investors an average of 7.1% per annum, while the VNQ has been essentially flat over the same period.

Balance sheet metrics

AMH has an investment grade balance sheet with an excellent debt ratio of 28%, and debt/EBITDA of just 5.4. This very strong balance sheet, coupled with double-digit growth in revenue and cash flow and market-beating returns, marks AMH as a bona fide FROG.

Company	Liquidity Ratio	Debt Ratio	Debt/EBITDA	Bond Rating
AMH	2.21	28%	5.4	BBB

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Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations

AMH has $1.25 billion in untapped revolver capacity, plus another $200 million in cash and equivalents, over against debts totaling $4.4 billion. Maturities are favorable. Except for 2024, when 22% of the debt comes due, AMH faces only negligible debt payments until 2028. Less than 1% of the company’s debt is held at variable rates, and the fixed-charge coverage ratio stands at 4.2x.

Dividend metrics

Don’t be fooled by the low 2.41% current yield. AMH has grown its dividend at a spectacular 34.5% per annum for the past 5 years, so this company is a much better dividend payer than the average REIT.

Company	Div. Yield	5-yr Div. Growth	Div. Score	Payout	Div. Safety
AMH	2.41%	34.5%	5.86	60%	A

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Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium

Dividend Score projects the Yield three years from now, on shares bought today, assuming the Dividend Growth rate remains unchanged.

The dividend safety grade of A, assigned by Seeking Alpha Premium, indicates that despite the rapid growth in the dividend, the company still leans toward retaining earnings for expansion, rather than paying investors. An amazing combination.

Valuation metrics

AMH sports an above-average Price/FFO ’23 of 22.3, which is right where you want a FROG to be. Definitive research by Hoya Capital indicates that the best returns are earned by companies that sell for above-average price multiples.

Company	Div. Score	Price/FFO ’23	Premium to NAV
AMH	5.86	22.3	(-13.0)%

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Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations

The 20 Wall Street analysts that cover this firm show an average price target of $38.65, implying just 5.8% upside.

What could go wrong?

FROGs do best in low-interest-rate environments. Thus, an uptick in inflation, or a return to a rate-raising regime at the Fed, would impede AMH returns.

Anything that causes renters to leave AMH markets, or be unable to pay the rents while staying, could dent the bright prospects of this company. For example, another pandemic, which is always a possibility, or outmigration from the U.S. as a result of the deteriorating political situation, would dampen rents.

Investor’s bottom line

In the long run, AMH is a good investment, but this is not a good time to get in just yet. In my personal opinion, there will be a sell-off in REITs over the next week or two, that would create a better entry point. However, it is not wise to wait for a growth stock to be “bargain” priced below the REIT average. The best growth REITs continually sell at FFO multiples above the average. So with a 2 – 5 year investing horizon, my rating is Buy, (soon, but not quite yet).

The Street, Zacks, and Ford Equity Research say Buy, as do half of the Wall Street analysts covering this firm. TipRanks rates AMH at the high end of Neutral, and the Seeking Alpha Quant ratings system rates AMH a Hold.

As always, however, the opinion that matters most is yours.