Key Takeaways: We are back from a short vacation with the family, and given (1) AMH's pullback last week and (2) two downgrades / continued debate around valuation, we wanted to offer a few thoughts and lay out our assumptions underlying the Best Idea Long call on AMH. We view the pullback as an opportunity to accumulate or build a long position (AMH just added to Investing Ideas HERE on 8/10), and view both AMH & INVH as two of the best positioned REITs from a fundamental perspective over a Tail duration:
- As can be seen in Figure 1 below, our SSNOI assumptions are essentially identical for both companies through FY23, and there is a decent probability that our SSRev assumptions are too conservative
- We are above Consensus on Core FFO earnings expectations for both names, however (1) assume higher compounded growth for AMH driving (2) much more upside relative to expectations. We remain +15% above the Street on FY23 Core FFO, and continue to see the math as supporting significant future upward estimate revisions
- The difference maker in our view, as we expressed HERE and have talked about since launching, is AMH's development platform. We have modeled (1) 2,500 home deliveries into the consolidated operating portfolio in FY23 with a run-rate of 2,600 hit by year-end, (2) $66 million of NOI contribution from developments in FY23 (~33% of non-same store NOI and ~7% of total NOI), (3) a ~5% realized yield on investment through FY23, and (4) a +5% increase in the share count and +30% increase in interest expense from financing the development, so its being paid for. As a reminder the target is to hit an annual delivery run-rate of 3,000 to 4,000 homes by 2023, and we assume the majority are delivered into the operating portfolio (as opposed to UJVs). We are positive that most models have this part of the story wrong, which means that estimates are wrong and, by extension, valuation multiples are wrong
- Regarding the valuation argument, as expected we constantly hear about the 2-3x multiple premium versus INVH. Just in the last two weeks there were two Old Wall downgrades on valuation. We would push back with the following: (1) who cares, (2) when you adjust the multiples for growth (high probability growth at that), the picture looks very different, and (3) we are in the middle of an earnings acceleration and early innings of an upward revision cycle. Adjusting for 2-year forward growth where AMH is adding nearly +500bps of earnings growth per annum, INVH is nearly 1.5x more "expensive" (see the PEG ratio in Figure 1 below). The point here is that the valuation argument can be spun a million different ways, and focusing on that is missing the forest for the trees. Why would anyone listen to a downgrade if the numbers are obviously wrong on the order of +/-15%? Buy the stock. We like INVH as well, by the way, and have it on our Long Bias list.
- One final point from a macro perspective - both AMH and INVH love the transition from Quad 2 to Quad 3 (see Figure 3 below) and AMH has delivered a positive return 100% of the time in the back-test
Figure 1: AMH & INVH Model Assumptions
Figure 2: Quarterly Expected Value by Quad
Figure 3: Quarterly Expected Value by Quad (cont'd)
Figure 4: % Positive Ratio by Quad
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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