Ticker: AMH
Headline: Providing support for model assumptions, buy the stock
The core tenets of our Best Idea Long thesis for AMH have been that (1) accelerating RoC on rental rates + normalizing bad debt expense would lead to RoC acceleration on SSRev and SSNOI, (2) that the earnings impact from on-balance sheet development deliveries were misunderstood/underestimated, and (3) that Street estimates were too low and upward revisions would serve as a catalyst for the stock. Indeed, our updated FY22 Core FFO estimate of $1.64/share is +$0.10/share or +7% above consensus. Additionally, we are modeling SSNOI and Core FFO earnings growth acceleration through 1Q/2Q22, depending on the timing around necessary debt and equity capital raises to fund investment activity and preferred redemptions. Things get even more interesting in FY23 and beyond, when development deliveries should hit ~3,500 to 4,000 homes annually. We like to break things down into component parts, and given the persistent spread between Hedgeye and the Street, despite numbers coming up, we wanted to lend additional support (Figure 1 below). AMH remains our favorite TAIL duration long idea.
- Realized rental rates are highly correlated and regress well against blended SS leasing spreads on a 2-3 quarter lag. Leasing spreads are still accelerating, and given that market rental rate growth lags HPA by 9-12 months typically, we put a high probability on SS leasing spreads accelerating from here despite the slight sequential decline in October vs. 3Q21. This would by definition drive realized rates higher. See Figure 2 below. For context, our model conservatively assumes leasing spreads peak in 4Q21 at just +9%. We are likely being very conservative, and we are absolutely confident the Street is being ridiculously conservative, given that we are still well-above consensus. There is significant earnings surprise to the upside.
- We breakout the line-by-line build-up to the +$0.27/share or +19.5% y/y growth in Core FFO earnings in FY22 vs. $1.37/share in FY21. In particular we would stress that we are by no means short-changing the cost of the growth - in our model we are assuming 20 million new ATM/secondary shares issued (for a +5% increase in the average share count) and another ~$700 million of unsecured debt issued at ~3% to fund growth. And we are STILL this far ahead of the Street.
- Numbers are coming up, the stock is moving higher, and AMH (and probably all of SFR) is still going to melt faces by REIT standards. Buy the stock.
Figure 1: AMH Core FFO Bridge Assumptions
Source: Company Reports, Hedgeye Estimates
Figure 2: Blended Leasing Spreads vs. HPA
Source: Company Reports, Hedgeye Estimates
Figure 3: AMH Income Statement
Source: Company Reports, Hedgeye Estimates
Figure 4: AMH Core FFO & AFFO Reconciliation
Source: Company Reports, Hedgeye Estimates
