Zenolytics is bullish on single family rental REITs for conservative portfolios:
- AMH - American Homes 4 Rent
- INVH - Invitation Homes
The largest homeowners in the country post financial crisis are private equity firms and corporations. Single family rental REITs purchase portfolios of homes for the purpose of renting them out and capital appreciation on the underlying real estate assets.
Rental REITs thrive in a low interest rate environment due to a cheap cost of capital to expand their real estate portfolios and appreciating real estate prices incentivizing consumers to seek out rentals.
The 11% decline in the ten year yield thus far in 2019 has created an attractive situation. The negative correlation to rates (rates decline, single family rental REITs appreciate) has been showing up in performance YTD:
AMH +21%
INVH +26%
The uptrend in the sector is set to accelerate. AMH and INVH are conservative, low volatility plays on the sector.
Growth at INVH is accelerating while operational efficiencies are taking place:
- 18% growth in funds from operations in Q1
- Highest ever average occupancy of 96.5% in Q1
- A 9% decrease in net cost to maintain properties in Q1
In the most recent earnings call the CEO stated:
Fundamentals are fantastic. New single-family supply is not keeping pace with demand, especially in Invitation Homes markets where household formations in 2019 are expected to grow at almost 2% or 90% greater than the U.S. average. With the millennial generation aging toward our average resident age of 40 years old, we are convinced more and more people will continue choosing the convenience of a professionally managed single-family leasing lifestyle.
He goes on to state:
Now our operating teams continue to get more efficient. Our asset management teams continue to enhance the portfolio. And our capital markets teams continue to reduce leverage on our balance sheet.
Across the sector, the message is the same:
- Economic tailwinds
- Demographics tailwinds
- Operating efficiencies
- Portfolio enhancements
- Reduction in leverage
AMH is experiencing much of the same benefits:
- 11.6% growth in funds from operations in Q1
- 96.7% occupancy
AMH has the most conservative balance sheet in the industry, with no significant maturities until 2024. Additionally, there has been significant insider buying taking place at AMH over a considerable period of time, led by the original founder of the company.
The low volatility, income producing nature of INVH and AMH make them a conservative portfolio investment.
Zenolytics is adding AMH and INVH to its conservative portfolio with a quarterly review period for further allocation or liquidation.
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