There Is Hidden Value in American Homes 4 Rent – The Motley Fool

There Is Hidden Value in American Homes 4 Rent – The Motley Fool

There Is Hidden Value in American Homes 4 Rent – The Motley Fool

Returns as of 01/09/2022
Returns as of 01/09/2022
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
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. 
Image source: Getty Images.
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. 
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. 
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. 

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Stock Advisor launched in February of 2002. Returns as of 01/09/2022.
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