Will Build-To-Rent Supercharge This Dividend-Paying Real Estate Stock?

Home prices have kept single-family rentals robust over the last several years. Many people who might have pursued homeownership have opted for a single-family home rental that gives them the home experience without a mortgage or down payment. 

Data from CoreLogic in June showed that single-family home rental prices were up 2.9% year over year. Numbers appear to be stabilizing after two years of robust growth. “Single-family rents have been bouncing around their pre-pandemic rate of growth of about 3% this year after growing by double digits for most of 2021 and 2022,” said Molly Boesel, principal economist for CoreLogic.

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When the single-family rental boom started picking up speed after the great financial crisis, many institutional operators were able to buy homes out of foreclosure. After that ended, these buyers began competing on the open market with residential homebuyers. They soon learned that one way to increase supply was to work with homebuilders to buy new homes from their inventory. That evolved into building homes to rent, creating purpose-built rental communities.

Fueling The Build-To-Rent Boom

Build-to-rent is still a relatively small part of the overall homebuilding market. Arbor Realty and Chandan Economic found that build-to-rent now represents 8.1% of housing starts, a record. Ground-up development offers companies more control over their housing supply.

American Homes 4 Rent AMH, a real estate investment trust, has embraced the build-to-rent strategy. Founded in 2012, the company has over 58,000 homes in 30 markets, primarily concentrated in Sunbelt cities. Around 10,000 of those homes were built through the REIT's development arm. The company has grown into the largest integrated single-family rental builder, with 2,200 – 2,400 deliveries expected in 2024. It has a land development pipeline of approximately 11,000 lots, creating a pipeline for continued growth. American Homes 4 Rent also still acquires new homes from its network of homebuilders. 

American Homes 4 Rent reported that rent prices were up by 7.1% in the second quarter. Core Funds From Operations, a key REIT metric, was up 8.5% yearly. The company delivered 671 homes during the quarter. To help de-risk its current debt maturities, American Homes 4 Rent issued $500 million in unsecured senior notes due in 2034. 

The stock's performance has been steady but not outstanding, up around 7% this year as of this writing. It has a current dividend yield of 2.64% with an annual payout of $1.04. Analysts have rated it a consensus Buy. Goldman Sachs analyst Julien Blouin recently said that American Homes 4 Rent’s focus on development is a positive that should enable the company to achieve superior external growth.

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The Forecast For Single-Family Rentals

Lower mortgage rates might spur more people to leave their rentals and buy a home, but it will take time, which is good news for American Homes 4 Rent. The most recent Fannie Mae Home Purchase Sentiment Index found that 39% of consumers expect mortgage rates to decline in the next 12 months, but only 17% said it's a good time to buy a home. Most still see the market as favoring sellers. "Despite significantly greater optimism that mortgage rates and home prices will move in a more favorable direction for potential homebuyers, most consumers remain apprehensive about the housing market and continue to point to the lack of affordability and supply as the chief reasons for their pessimism," said Mark Palim, Fannie Mae Vice President and Deputy Chief Economist.

Affordability is one factor, but finding single-family homes in fast-growing metropolitan areas is another reason single-family rentals are still growing. On the Nareit podcast, Colin Trovato, portfolio manager at Ranger Global Real Estate Advisors, said that build-to-rent will continue to be a bigger part of the rental landscape. “Large institutional landlords like American Homes 4 Rent and Invitation Homes have been addressing this problem in two ways. So one, they are just delivering new units that wouldn’t otherwise exist, and secondly, they’ve been buying existing homes and investing in them to bring them up to date.” 

American Homes 4 Rent could always overbuild, inhibiting its ability to maintain low vacancy rates and strong rental growth. However, given the current lack of rental supply in many markets, the company's targeted approach to development should serve it well going forward. 

Better Yields Than Some REITs?

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through publicly-traded REITs.

Arrived Homes, the Jeff Bezos-backed investment platform has launched its Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target 7% to 9% net annual yield paid to investors monthly. It paid 8.1% in July. The best part? Unlike other private credit funds, this one has a minimum investment of only $100. 

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