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You May Have Been Looking At American Homes 4 Rent (NYSE:AMH) All Wrong

Simply Wall St

American Homes 4 Rent is a US$9.1b mid-cap, real estate investment trust (REIT) based in Agoura Hills, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of AMH is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess AMH.

Check out our latest analysis for American Homes 4 Rent

REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of AMH’s daily operations. For AMH, its FFO of US$411m makes up 71% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:AMH Historical Debt, September 5th 2019

AMH's financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky AMH is, broadly speaking, to have debt on its books. The metric I'll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 15%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take AMH 6.82 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.

Next, interest coverage ratio shows how many times AMH’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 3.34x, it’s safe to say AMH is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at AMH's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. AMH's price-to-FFO is 21.96x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, American Homes 4 Rent offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in AMH, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for AMH’s future growth? Take a look at our free research report of analyst consensus for AMH’s outlook.
  2. Valuation: What is AMH worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AMH is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.