Key Takeaways: Is it time to start talking more seriously about third-party management (3PM) for the SFR REITs? We think so, as it is the next logical step in the evolution of the asset class for the public REITs which have spent the past decade or so building scaled and efficient management platforms (think EXR on the cutting edge for self-storage in the early-2000s). AMH and INVH basically solved the management challenge through a "cluster" model, which was always the limiting factor in the space vis-a-vis building and stacking units vertically versus owning a horizontally dispersed portfolio reporting up to a central corporate structure. With this management infrastructure in place, 3PM offers several advantages: (1) increasing overall platform efficiency through a new revenue stream at possibly 3-5% of revenues on average, (2) active participation in an increasingly competitive market where acquisitions will become harder to come by, and (3) creation of a captive long-term acquisition pipeline through managing for JV relationships.
Yesterday we got another article HERE regarding a brand-name institutional money manager moving more aggressively into the space - Invesco is backing management platform Mynd to acquire ~$5 billion of SFR assets including debt, or roughly ~20,000 homes at ~$250k per asset, through a number of Invesco funds. Mynd was founded in 2016, is based in Oakland,CA, and currently manages over 7,000 SFR rental properties primarily across the Sunbelt. Invesco joins Blackstone, Starwood, Nuveen, CPPIB, JP Morgan and others in recognizing SFR as a growing and highly attractive economic proposition relative to some of the more legacy real estate sectors. The result has been that an increasingly large pool of capital is chasing after an increasingly scarce asset class, with months supply of available inventory of homes hovering near all-lows. All of this capital will at the same time be in need of experienced management if not run captively.
Bringing this back to AMH specifically, which is our Best Idea Long in the space, we see evidence that AMH is gearing up to roll out 3PM and INVH is likely not far behind. The company already has a unique and very valuable "moat" with its SFR development program. We are not making a call that 3PM at scale is imminent, rather that the pieces are in place and investors will likely need to increase estimates of value attributable to corporate platform. As REIT investors know well, platform value/scale (along with underlying property-level economics and leverage) is one of the main drivers of persistent and meaningful premiums/discounts to "NAV." AMH is already managing and earning fees through three UJVs with JP Morgan, the Alaska Permanent Fund Corporation and another undisclosed institutional investor in which the company owns ~20% ownership interests. Effectively these UJVs are serving as a 3PM test-run in addition to participating in the ownership economics. In the spirit of trying to see "where the puck is going," we expect AMH's platform efficiency ratio in Figure 1 below, which basically has not changed in four years, to begin improving (moving lower - expenses divided by revenue) as management fee streams become a more meaningful revenue contributor in the coming years. This would likely translate into higher platform value and perhaps a structural share price premium to estimates of underlying asset value.
Figure 1: AMH Platform Efficiency Ratio
