Key Points: As expected the most significant pushback on our AMH long call has been on the valuation front, so we wanted to present some math to possibly frame and inform the argument a bit. On our 2022E numbers and on an unadjusted basis, AMH currently trades at about a ~2x turn FFO multiple premium to peer INVH as seen below in Figure 1. However, when ignoring leverage (INVH is more highly levered but not overly or dangerously so) and adjusting for estimated value attributable to lot inventory, the picture looks very different. Recall that key to our thesis presented HERE is the fact that AMH (1) has a differentiated and unique development business, (2) this platform is incredibly valuable in an increasingly tight and competitive institutional home acquisition market, and (3) the business will generate significant earnings upside in 2023 and beyond that is under-appreciated by the Street, leading to an upward revision cycle.
As can be seen below also in Figure 1, assuming ~8,000 lots controlled at the end of 1Q21 (now closer to ~11,000, by the way), a ~$275k total investment per home and 50% of the investment allocated to the land already spent, this equates to roughly ~$3/share in value attributable to AMH's existing lot inventory. Adjusting the multiple for this value and the corresponding earnings contribution, the multiples are actually about ~1x apart. Further adjusting for leverage would likely bring the spread to a negligible difference, but we wanted to zero in on the development business here. Said a different way, and again holding all else constant, the market is ascribing some incremental value to AMH's development business, which is on pace to really ramp in 2023 and beyond. This is not to say that INVH will not work to the upside as well given the tight correlations between the stocks, but we opted to pick the horse with a higher probability of faster earnings growth that is nowhere near its true run-rate earnings power.
Figure 1:
