When investors decide to buy a certain type of stock, there is usually more than one company that operates in that sector or subsector. This is very true of real estate investment trusts (REITs), where several companies may be quite similar in the portfolio they own and operate, but very different in performance records.
Take a look at two residential REITs that have similar performance numbers, yet one seems to be a slightly better buy than the other:
American Homes 4 Rent AMH is a Calabasas, California-based residential REIT that purchases, develops, renovates and leases both existing and new single-family homes as rental properties. American Homes 4 Rent was created in 2012 and in 11 years has built a portfolio of almost 59,000 single-family units across 21 states. Its largest concentration of homes is in the Southeastern U.S., where population growth has been explosive. Its initial public offering (IPO) was in July 2013.
One negative about American Homes 4 Rent’s portfolio is that the average age of its homes is 17 years. That portends higher maintenance costs for many of its homes in the future as roofs, water heaters and appliances will need replacing. However, within the past few years, American Homes 4 Rent has begun to contract with builders on bulk buys of new construction homes. Brand new subdivisions are springing up, with every home for rent. Recent rent increases have been averaging about 7% for renewals and new leases.
Invitation Homes Inc. INVH is a Dallas-based residential REIT that purchases large numbers of higher-quality single-family homes and then leases or lease-purchases them to higher-income tenants. Its new residents have an average annual income of $134,000 and an income-to-rent ratio of over 5.
Invitation Homes has over 80,000 homes for lease in desirable neighborhoods across the U.S. and is now the largest owner/landlord of single-family homes in the U.S. It focuses on communities with strong rental demand and where purchasing homes is difficult because of high prices and a lack of inventory. Its recent occupancy rate was 97.8%.
Invitation Homes significantly adds to its rental revenue by offering tenants the option to have pets for an initial $325 fee plus an additional $40 per month per pet. It also provides tenants with lawn care and pest control discounts. Other options such as keyless access, temperature control, air filter delivery and utility management can be obtained for an additional monthly fee.
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Market Capitalization
American Homes 4 Rent has a market capitalization of $12.2 billion. Invitation Homes has a market capitalization of $20.49 billion. Edge on size to Invitation Homes.
Performance Over Time (Total Returns)
|
REIT |
ONE MONTH |
YTD |
ONE YEAR |
FIVE YEARS |
|
American Homes 4 Rent |
0.48% |
14.01% |
(6.74%) |
78.09% |
|
Invitation Homes |
0.69% |
15.89% |
(8.93%) |
64.18% |
There’s no clear edge here. Although American Homes 4 Rent has a better total return over one and five years, Invitation Homes’ shorter-term performances of one month and year to date are slightly better.
Dividend Growth and Yield
Over the past five years, American Homes 4 Rent has increased its dividend three times, from $0.05 to $0.22 per share. That’s a 340% increase in five years, without any suspensions or cuts, even during the worst of the COVID-19 pandemic. Even with the increases, American Homes 4 Rent’s dividend yield is still only 2.61%. The annual dividend of $0.88 per share is well covered with a 55% funds from operations (FFO) payout ratio.
Over the past five years, Invitation Homes’ dividend has been raised five times and has grown 136% from $0.11 to $0.26. There have also been no cuts or suspensions of the dividend since August 2018. The present dividend yield is 3.11%. The payout ratio is 53%.
Although American Homes 4 Rent has greater dividend growth, it began with a much smaller dividend despite a similar share price to Invitation Homes, and the yield is still less than the Invitation Homes dividend. The payout ratio for both REITs is in the safe range, but Invitation Homes’ payout ratio is slightly lower. Edge to Invitation Homes.
Price/FFO Ratios
American Homes 4 Rent has a P/FFO of 20.72 while Invitation Homes has a P/FFO of 18.73. Both P/FFO numbers are a little high, but comparing the two, Invitation Homes P/FFO is lower. Edge to Invitation Homes.
Recent Operating Results
On May 4, American Homes 4 Rent presented its first-quarter operating results. FFO of $0.41 per share beat the estimates by a penny and was a 7.89% increase over FFO of $0.38 in the first quarter of 2022. Revenue of $397.7 million beat the consensus estimate of $390.57 million and was an 11.68% increase over revenue of $356.11 million in the first quarter of 2022.
On May 1, Invitation Homes reported its first-quarter operating results. FFO of $0.44 was up from $0.40 in the first quarter of 2022. Revenue of $589.89 million beat the estimate for $580 million and was 10.8% better than the first quarter of 2022.
Invitation Homes has recent higher revenue and FFO numbers than American Homes 4 Rent, so Invitation Homes gets the edge in this category as well.
Analyst Ratings
American Homes 4 Rent has an Equity Summary Score from Refinitiv of 5.5, with a Neutral rating.
On May 30, Wells Fargo analyst James Feldman maintained an Equal-Weight rating on American Homes 4 Rent and raised the price target from $31 to $36. In May, four other analysts raised price targets on American Homes 4 Rent between $35 and $37.
Invitation Homes has an Equity Summary Score from Refinitiv of 6.4 and is also rated as Neutral.
On May 30, Feldman maintained his Overweight position on Invitation Homes and raised his price target from $33.50 to $37. Earlier in the month RBC Capital Markets maintained an Outperform on Invitation Homes and raised its price target from $36 to $37. Both J.P. Morgan Chase and Mizuho have recently maintained Neutral ratings and raised price targets on Invitation Homes to $35.
The price targets are basically the same, but a slight edge goes to Invitation Homes on a higher Equity Summary Score. A recent closing price for American Homes 4 Rent was $33.70 and $33.39 for Invitation Homes.
Summary
American Homes 4 Rent and Invitation Homes are similar in their operations and in their present share price. However, Invitation Homes seems to have a slight edge in most of the comparisons. It has better recent earnings and revenue, a lower price/FFO, a lower payout ratio and a higher dividend yield. Because it caters more to higher-income tenants, it may be at less risk of loss of occupancy in a recessionary period. It seems to provide more services that generate extra revenue as well.
American Homes 4 Rent and Invitation Homes both have outstanding long-term total returns. But going forward, Invitation Homes looks like the better buy of the two.
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