American Homes 4 Rent

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

American Homes 4 Rent is a real estate investment trust (REIT) focused on acquiring, developing, renovating, leasing, and managing single-family homes across the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: American Homes 4 Rent (AMH) operates as a real estate investment trust (REIT) that concentrates on the single-family home market. Unlike a conventional real estate company that may focus on various types of properties, AMH’s core business model centers around acquiring, developing, renovating, leasing, and managing single-family homes for rent. This is a growing and fragmented industry, that’s why no one has a dominant position in this market. As a REIT, they are structured to pass through income to shareholders, which means that they are highly sensitive to interest rate risk.

  • Revenue Distribution: AMH primarily generates revenue through rental income from its single-family properties. This rental income is a function of the number of occupied properties, rental rates, and occupancy levels, which can fluctuate depending on various market conditions. Although most of the revenues come from renting homes to the families, other revenue sources include other income from the business.

  • Trends in the Industry: The single-family rental market has seen rapid growth in recent years, driven by demographic shifts, lifestyle preferences, and affordability concerns in the housing market. Some of the other trends include increased home prices, and therefore more rental demand, and increase in single person households. It is extremely fragmented and therefore no one holds a large market share, that’s why its harder to build competitive advantage. Although, this also creates a lot of consolidation and roll-up opportunities. There is also a rise in tech platforms that connect property managers with tenants, which increases competition for attracting tenants.

  • Margins: AMH’s profitability is driven by occupancy levels, rental rates, and cost efficiencies. Their profit margins fluctuate primarily due to changes in operating expenses (especially real estate related expenses) and interest expenses. In terms of reported financial performance, the company had revenues $1.55B for TTM period, while earning $427M in net income. The gross profits are 77% and operating margin is 42.1%, which are exceptional for this type of business. However, we must note that these numbers are artificially high for this type of business.

  • Competitive Landscape: AMH operates in a highly competitive space alongside other single-family rental REITs, private equity firms, and individual investors. Competition revolves around having higher quality houses, higher occupancy rates, lower costs, and locations in more attractive geographic areas. This all directly affects prices. In terms of size, AMH is among the biggest players in the market.

  • What makes AMH different: AMH is notable in two ways: its scale of operation and its technological implementation. AMH has become one of the biggest companies in single family homes with over 55000 homes currently. They also utilize a proprietary technology platform that allows them to find homes and manage its business in efficient manner. Both of these give them a (small) edge in a highly fragmented and very competitive market.

Financials In-Depth:

  • Income Statement: AMH’s latest quarterly financials show total revenues of $426.87M and net income of $163.95M, indicating a healthy profitability. However, the growth rate is 4.71% which is less than its historical rate. Their gross margin for the quarter stood at $341.83M with operating income at $221.56M. TTM numbers are $1.55B in revenues, and a profit of $427M.

  • Balance Sheet: As of September 30, 2023, AMH’s total assets were $12.96 billion and liabilities stood at $8.39 billion. The cash position is relatively low at $735M. But the business has a relatively very good cash flow profile, meaning it generates a lot of cash from operations. Total equity was $4.5B, meaning their leverage is quite high, and they rely a lot of debts for operations. This will be a liability during periods of rate hikes.

  • Cash Flow: For the latest quarter ending September 30 2023, AMH’s cash flow from operations was $383.48M, and investments was $439.59M. The difference was made up by proceeds from debt issuance. Therefore, they generate sufficient cash from operations, but the majority is reinvested back into the business.

Recent Concerns and Problems:

  • Interest Rate Sensitivity: The most significant recent concern for AMH is its sensitivity to interest rate hikes, that has been increasing. As a highly leveraged business, they are more likely to suffer from rate hikes than other similar companies. There was also a recent news that the US treasury yields have declined, which may benefit AMH. As a result, their cost of funding increases, and their ability to borrow cheap money decreases, making their future projections much less certain.

  • Market Saturation: As the single-family rental market matures, AMH faces the challenge of growing sales and profit. If the company cannot achieve significant growth for its portfolio, then the stock is highly overvalued. This puts more pressure on execution for management and more diligence on the part of the investor.

Moat Rating: 2 / 5

  • AMH possesses a narrow, but not insurmountable economic moat. Their competitive advantage lies in:
    • Scale and Market Presence: AMH benefits from its scale of operations and widespread national presence.
  • Technology: Proprietary technology provides competitive advantage by streamlining operations.
  • Data: They also have a lot of data that can help them optimize operations and management.
  • However, the market is competitive, and it would be difficult for them to build a wide sustainable moat that will sustain through time.

Risks to the Moat and Business Resilience:

  • Interest Rate Hikes: Increased interest rates can hurt borrowing and therefore expansions.
  • Competition: New companies can compete easily in existing areas, due to the highly fragmented industry.
  • Operational Difficulties: As a company grows to be a very large player, it may face troubles in operational efficiencies, thus putting a drag on profitability.
  • Economic Downturn: A broad recession could have a negative impact on demand for rentals and hence cause decrease in revenues and profitability.

Understandability: 2 / 5

  • AMH’s business model is relatively easy to understand, but has some nuances, particularly with respect to the intricacies of the housing market, and its financial statements require some knowledge to accurately assess all the risks, that’s why I rate it 2 out of 5 on understandability.

Balance Sheet Health: 3 / 5

  • AMH’s balance sheet is okay. Total assets of $12.96B with liabilities at $8.39B and equity of $4.5B shows that the company has a high debt structure. This can be a positive thing if the debt is used for expansion with a good ROIC, but given the interest rate hike risk, it is not clear that it would be a net positive. Cash position of $735M and high debt-equity ratio puts it at 3/5 for balance sheet health.