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Why American Homes 4 Rent (AMH) Stock is a Compelling Investment Case

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Alex Smith
·4 min read
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Third Avenue Management recently released its Q2 2020 Investor Letter, a copy of which you can download here. The Third Avenue Real Estate Value Fund posted a return of 10.94% for the quarter as compared to its benchmark, the FTSE EPRA NAREIT Developed Index which returned 10.32% (before fees) in the same quarter. You should check out Third Avenue Management's top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Third Avenue highlighted a few stocks and American Homes 4 Rent (NYSE:AMH) is one of them. American Homes 4 Rent (NYSE:AMH) is a real estate investment trust company. Year-to-date, American Homes 4 Rent (NYSE:AMH) stock gained 7.4% and on August 11th it had a closing price of $28.16. Here is what Third Avenue said:

"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 selfstorage 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

In Q1 2020, the number of bullish hedge fund positions on American Homes 4 Rent (NYSE:AMH) stock decreased by about 9% from the previous quarter (see the chart here), so a number of other hedge fund managers don't seem to agree with AMH's growth potential. 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 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 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. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. You can subscribe to our free enewsletter below to receive our stories in your inbox:

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