“Behind the Numbers of America's Largest Landlords”

by Andrew Dealy, Managing Partner

Wall Street's wager on high earning suburban renters is in full view as major industry players are choosing to double down on their SFR investments despite the pandemic.  One publicly traded REIT, American Homes 4 Rent (AMH), recently announced that a $225 million deal that it made with J.P. Morgan Asset Management in February to build rental houses was increasing to $650 million!  How did this happen while nearly every major real estate company in the country had a moratorium on new deals?

Initially, investors were unsure of how COVID-19 would impact REIT's such as AMH and Invitation Homes (INVH) as both were carrying massive SFR portfolios into March.  Shares of both tanked as many experts wondered whether the majority of Americans would be able to make their rent payments on time.  Both of these companies started offering discounts and incentives to fill homes in order to get in front of the defaults that were on the horizon.  

Then something interesting happened.  The defaults never came, and AMH and INVH quickly rescinded those incentives.  Their stocks bounced right off of their lows as rent collections and occupancies exceeded all expectations.  On their most recent earnings call, INVH reported record occupancy of its approximately 80,000 homes and better than normal rent payments in May.  AMH also cited levels of rent collection and occupancy that were right in line with their pre-pandemic numbers.

Personally, we had also braced for defaults at our first built-to-rent SFR community outside of Minneapolis, known as Mills Creek.  However, we were pleasantly surprised that not a single household was late on a payment in either April or May.  We also continued to sign new leases throughout Minnesota's shelter-in-place order and hit 100% occupancy through the use of virtual tours alone.  In fact, we were even able to increase rents on those remaining homes by an average of 2-3%.   

AMH and INVH were experiencing the same phenomenon, albeit on a much larger scale, and investors responded with confidence once their numbers were released.  Both AMH and INVH have outpaced the broader stock market since the S&P 500 bottomed out in the middle of March.  INVH has gained 36% since then versus the S&P 500's 31% climb.  

As for some of the factors behind these strong metrics, the dual-income nature of tenants in higher end SFR communities appears to be playing a significant role.  The average annual income of our households at Mills Creek is roughly $130,000, which means that these families are more likely to be able to absorb the pressure of a potential layoff. 

It's also likely that turbulent conditions in the housing market are making prospective homebuyers wary of purchasing anything right now and therefore more likely to rent until this situation subsides.   To that point, only 50% of Americans think that it's a good time to buy a home, according to a recent Gallup poll from April.  

That's in addition to all of the renters in densely populated cities who are fleeing to the suburbs in order to quarantine with more space, privacy, and safety.  Significantly more companies have also allowed their employees to work remotely over the last few months, making commute times and access to central business districts less important.  Civil unrest in many of America's major cities is another issue to watch going forward in terms of families with the means to move choosing to leave urban cores.  

One thing is clear, SFR's as an asset class have outpaced almost every other real estate sector since the pandemic began, and there are major deals to prove it.  Demand for built-for-rent SFR communities continues to outpace supply, which is evident at our fully stabilized community at Mills Creek.  We're looking forward to tracking this deal between AMH and J.P.Morgan, while also competing and beating them at their own (SFR) game!

Andrew Dealy, Partner at Steel City Management