Raymond James Believes Single-Family REIT Sector Is 'Overlooked,' Suggests 2 Strong Buys

On Friday, Raymond James analyst Buck Horne and his team published a research note updating valuations on the residential REIT sector and reiterating Strong Buy ratings on two single-family home rental REITs:

• American Homes 4 Rent (NYSE: AMH): $3.5 billion cap, 1.2 percent yield
• American Residential Properties Inc (NYSE: ARPI): $603 million cap, no dividend

According to Horne, "Within our housing coverage, we continue to find that many investors still don't grasp the magnitude of the ongoing household shift into single-family rentals (or the value opportunity in the single-family REITs)."

Tale Of The Tape: SFR Sector 2015 YTD

Silver Bay Realty Trust Corp (NYSE: SBY) and Starwood Property Trust, Inc. (NYSE: STWD) are the two other publicly listed single-family home rental REITs with similar business models.

Source - AMH REITWeek Presentation

RJA Likes SFR Risk/Reward

Within the Raymond James residential coverage universe, the only Strong Buy recommendations are AMH and ARPI.

RJA's SFR Rationale

• Growing Asset Class: "[Sixty] 60 percent of the net household formation that has occurred in the U.S. since 2009 has been created by new single-family renter households."
• High Occupancy: "Vacancy rates among single-family rentals are now the lowest (7.6 percent) in more than 10 years."
• Home Price Appreciation: "Existing home prices continue to accelerate higher in single family residence (SFR) portfolios, as for-sale inventory hovers near a 20-year low and the value gap versus replacement cost slowly normalizes from the foreclosure crisis trough."

RJA On Q1 2015 Operating Metrics

This relatively new institutional asset class is dominated by a few large players; however, the majority of the industry is still highly fragmented and owned by many small/private operators.

Source: REITWeek 2015 Presentation

American Homes 4 Rent is larger than its public SFR peer group combined, giving AMH the operating leverage and superior access to capital to "bolt-on" accretive acquisitions in the markets where it operates.

RJA–American Homes 4 Rent: Maintain Strong Buy, Lower PT From $20.50 To $20.00

• The new RJA target price represents a potential upside of approximately 21 percent from Friday's close of $16.48 per share.
• The AMH $20 PT represents a 9 percent premium to RJA's updated NAV estimate of $18.65 per share.
• AMH PT Rationale: RJA cited "1) AMH's accelerating cash flow growth, 2) its best-in-class operating platform and sponsorship, and 3) visible value accretion as existing home prices (+8.9 percent y/y in April) steadily close the gap versus current replacement costs."
• The pace of AMH acquisitions during Q1 2015 slowed to 1,989 homes vs. 3,700 homes in each of the preceding quarters.
• AMH reported same-home portfolio results (13,446 stabilized homes) for the first time Q1 2015 and RJA found the metrics to be encouraging.

RJA–American Residential: Maintain Strong Buy, Maintain $23 PT

• The RJA target price represents a potential 22.8 percent upside from Friday's close of $18.72 per share.
• The ARPI $23 PT is just slightly below RJA's revised NAV estimate of $23.24 per share.
• RJA believes ARPI's "shift of focus away from acquisitions toward lease-up efforts, internal cost controls and disposing of non-core homes is starting to pay dividends."
• ARPI PT Rationale: RJA cited 1) 800 bps occupancy increase in total portfolio occupancy to over 90 percent by April 30, with a goal mid-90s, 2) 140 bps increase of stabilized (90+ days rent ready) self-managed homes Q/Q, 3) ARPI added local construction managers in each of its regional offices.
• ARPI management intends to institute a dividend once the entire portfolio is stabilized.
• ARPI's halt on new acquisitions will limit its ability to spread G&A costs moving forward.
• RJA believes that ARPI management would be open to an acquisition by larger operations.

ARPI's Big Picture

Source - ARPI REITWeek presentation

Investor Takeaway

None of the publicly traded SFR REIT common shares pays an impressive dividend yield currently. However, American Homes 4 Rent does offer income-oriented investors, who are also interested in participating in home price appreciation, a unique hybrid security.

Information regarding AMH Series A 5 percent, Series B 5 percent and Series C 5.5 percent Participating Preferred Shares is available on the company IR website page.

Image Credit: Public Domain