Key Takeaways: Last week on Thursday, 5/13 we added single-family rental REIT American Homes 4 Rent (AMH) as a new Best Idea Long at $36/share. Ahead of our best idea Black Book presentation tomorrow, 5/20 at 2pm ET (link HERE), we are previewing some key points on the thesis:
- A combination of (1) acceleration in the rate of change (ROC) of growth in the same store portfolio (nearly ~90% of Core NOI) and (2) under-appreciation of the growth impact from the development program, provides investors with an opportunity to front-run a significant upward revision cycle on earnings estimates. We have a high degree of confidence that expectations on 2023 Core FFO in particular could be low by at least a mid-teens percentage range, which is exceedingly rare to find in REITs given the contractual nature of revenue streams. While we do not publish price targets, we see a mid-$40 stock over the next 12-18 months for a total return in the mid-20% range and an IRR in the mid-teens range.
- From a qualitative perspective, AMH's product offering and portfolio positioning fits the current macro and demographic landscape perfectly, lending AMH well to multiple durations (Trade / Trend / Tail).
- Blended rent change on new leases in the same store portfolio is accelerating to 8% and trending higher through April - we believe expectations for forward rental rate growth is roughly ~4.5% and needs to come up as portfolios churn and higher rates blend in.
- Bad debt expense normalization following the lifting of eviction restrictions will provide a ~160bp tailwind to revenue growth through 2022-2023.
- AMH's development program is a unique and incredibly valuable asset, and we estimate it will drive significant "external" NOI growth (lots are controlled on-balance sheet) and Core FFO contribution / NAV accretion over the next five years.
- Optimization of the balance sheet via retirement of ~$880 million of higher-cost preferred stock provides further earnings uplift and cost of capital improvement.
- Taken together, we estimate Core FFO earnings power in the ~$1.70/share range by the end of 2023 versus ~$1.30/share in 2021. Depending on the forward multiple applied, it is relatively easy to arrive at a mid-$40/share stock price by the end of 2022.