Key Takeaway: Last night AMH announced a 5.5mm share secondary offering and a 13.2mm share forward sale (includes 2.4mm over allotment) to be settled through May 2022. Based on total expected gross proceeds of ~$599 million excluding the option, pricing represents about a ~3-3.5% discount to yesterday's closing price of $38.08. Proceeds will be used to paydown the balance on the revolver, and partially fund the redemption of the Series D & E preferred stock with combined principal of ~$600 million. Of course the news would come about an hour after our Black Book, we were on our way to the bar!
A few observations:
- We were expecting a potential unsecured offering to retire the preferreds, so we were incorrect on that front and it is a little surprising on the choice of capital to be fair. At the same time, we had also modeled ~18mm shares issued through the end of 2022, so basically right on the screws and nothing inconsistent with our numbers so far
- The reality is that AMH needs to raise capital to fund all the different parallel items happening simultaneously, namely development, traditional acquisitions and retiring the preferreds - expect additional capital raising (hopefully including unsecured debt) going forward and depending on the pace of development
- The stock traded up +5.5% since last Thursday, 5/13 when we added it as a Best Idea Long and following several Street upgrades / estimate revisions. It makes sense for management, who were likely looking to sell stock anyway in the coming weeks / months, to use that appreciation to lock in proceeds at a higher share price
- Stepping back, it is usually a POSITIVE when REITs sell equity: (1) the trading proximity to "NAV" indicates solid economics of the underlying business, (2) there are limitations structurally on how much capital REITs can retain, and (3) the capital helps fund external growth, in this case at VERY attractive economics which we reviewed HERE
- A quick aside: imagine how badly the office REITs, for example, would love to sell stock to fund growth and / or deleverage, but are never able to because the stocks perpetually trade at such steep discounts to NAV
- We would seriously consider using any near-term share price weakness on the dilution as a buying opportunity, contingent on appropriate risk management of course