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Third Avenue Management Sees Potential Cash Flow in American Homes (AMH)

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Jose Karlo Mari Tottoc
·4 min read
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Third Avenue Management, a disciplined, value-oriented asset manager and investment fund, published its third-quarter 2020 Investor Letter – a copy of which can be downloaded here. A return of 10.94% was recorded by the fund for the 3rd Quarter of 2020, ahead of its FTSE EPRA NAREIT Developed benchmark that returned 10.32%. You can view the fund’s top 10 holdings to have a peek at their top bets for 2021.

Third Avenue Management in their Q3 2020 Investor Letter said that they were able to distinguish a value in American Homes 4 Rent (NYSE: AMH) and initiated a position in the company. American Homes 4 Rent is a real estate investment trust that currently has a $9.5 billion market cap. For the past 3 months, AMH delivered a 3.88% return and settled at $30.24 per share at the closing of January 15th.

Here is what Third Avenue Management has to say about American Homes 4 Rent in their Investor Letter:

"During the quarter, the Fund initiated a position in the common stock of AMH—a US based Real Estate Investment Trust (“REIT”) that is the second largest owner of single-family homes for-rent (“SFR”) in North America with more than 52,000 homes throughout the Sunbelt region that are more than 94.0% leased on average. In addition, the company controls one of the few SFR build-to-rent platforms of scale with land secured to accommodate an additional 6,000 homes, including 1,200 currently under development.

AMH is a very well-capitalized issuer with a net debt to asset ratio of 25% and a fixed-charge coverage ratio in excess of 4.5 times. The company also retains substantial free cash flow despite its REIT tax status (which requires 90% of net income to be distributed via dividends annually) given legacy net operating losses. As a result, the company seems poised to self-finance the expansion of its portfolio through its unique build-to-rent initiative (which would likely ramp up considerably to the extent that anticipated reform at Fannie Mae and Freddie Mac increases the cost of conforming loans). Further, the very-much aligned control group (with strong ties to the self-storage industry) likely recognizes the opportunity to monetize the company’s scale in a capital-light manner by undertaking property management for third-parties and securing a future pipeline of acquisition opportunities in the process."

Residential REIT Stocks
Residential REIT Stocks

robert cicchetti / Shutterstock.com

Last October 2020, we published an article telling that American Homes 4 Rent (NYSE: AMH) was in 23 hedge funds’ portfolio, almost making to its all time high statistics of 27. American Homes 4 Rent proved its worth by giving a 12.21% return in the past 12 months.

As of September 2020, Third Avenue Management had a 461K share position in AMH that amounted to $13 million. This made Third Avenue Management a part of the top 8 hedge funds that holds most of AMH’s stake, just behind Islet Management with $14 million worth of AMH shares, while Echo Street Capital Management tops the list with $78 million. However, our calculations showed that American Homes 4 Rent (NYSE: AMH) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website.

Disclosure: None. This article is originally published at Insider Monkey.