One of this year’s meta-narratives was the housing recession. Between rising mortgage rates and soaring home prices, there is an affordability crisis, especially for the first-time home buyer.
Recent data from the National Association of Realtors on home inventory and sales underscores the data. How will this housing recession affect single-family rental real estate investment trusts (REITs) such as American Homes 4 Rental (AMH 1.09%)?
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What is the real estate recession?
The collapse in housing affordability has dampened home sales. According to the National Association of Realtors, sales of existing homes have fallen back to levels last seen during the worst times of the pandemic shutdown.
Sales of existing homes in the United States given by Y-Charts
The drop in home sales reflects the fact that the first-time home buyer is struggling to afford a first home. This means that the up-selling homebuyer and the downsizing homebuyer are both “stuck”. The first-time home buyer accounted for 26% of sales in 2022, which is an all-time high since the National Association of Realtors began tracking the data. The bottom line is that a lack of sales means a lack of people moving.
American Homes 4 Rent is a single-family rental REIT that owned 58,961 properties as of September 30. The Company is focused on purchasing single-family homes in Metropolitan Statistical Areas (MSAs) that are experiencing strong population growth and rapid appreciation in house prices and rents. . American Homes 4 Rent uses models to get extremely granular data on a property’s potential benefit.
American Homes 4 Rent is exposed to the hottest markets
American Homes 4 Rent’s portfolio is concentrated in some of the fastest growing MSAs in recent years and many of them have seen the fastest home price appreciation. The company’s largest MSAs include Atlanta, Dallas, Nashville, Charlotte and Phoenix. This translated into an average blended rent inflation rate of 9.5% in the quarter ended September 30.
Lack of inventory benefits American Homes 4 Rent
The National Association of Realtors estimates that there is a housing deficit of between 5.5 million and 6.8 million units, representing several years of housing starts. Until there is a housing glut in the United States (and especially in American Homes 4 Rent MSAs), expect to see continued strong growth in occupancy and rents. The housing slump is primarily a problem for mortgage originators, real estate agents, real estate swimmers and home builders. Apartment REITs like American Homes 4 Rent actually benefit from the restricted supply.
The actual book value of the business is higher than the balance sheet suggests
The American Homes 4 Rent portfolio was purchased on average in 2015. Since generally accepted accounting principles (GAAP) do not allow companies to “write” the value of their portfolio, the true book value of the company is far greater than what appears on the balance sheet. The company expects funds from operations (FFO) for 2022 to be between $1.52 and $1.56 per share. Note that REITs use FFO to describe earnings because depreciation is a major deduction from GAAP earnings and not really a cash expense. This means that GAAP earnings underestimate the company’s cash flow.
Based on forecasts, American Homes 4 Rent is trading at 19.6 times the 2022 FFO guided by action, which is reasonable given that it is one of the leading single-family rental REITs. the dividend is $0.70 per share, which means the company has a relatively low payout ratio for a REIT. American Homes 4 Rent still invests in the business, which explains the use of cash. Despite talk of a housing slump, American Homes 4 Rent will be relatively isolated.