SFR REIT American Homes 4 Rent Announces Preferred Shares

Single family residential (SFR) REIT American Homes 4 Rent (NYSE:AMH) has announced a new issue of preferred stock would be sold.  This is 1st perpetual preferred issued by a REIT in some time.

As most of you know American Homes 4 Rent is a large owner of single family properties and was formed back when the mortgage crisis was in full blown mode.  More recently the company has focused on the rental of their large, 52,000, portfolio of houses.

AMH was initially formed with the backing of B Wayne Hughes–the founder of giant storage REIT Public Storage (NYSE:PSA) and PS Business Properties (NYSE:PSB).  B Wayne Hughes remains the Chairman of American Homes 4 Rent.  Like Public Storage, AMH, has depended upon the issuance of preferred stock in a large way to help finance the business.

AMH currently pays a meager 5 cents/share per quarter to common holders while generating about 23 cents/share in adjusted funds from operations (AFFO).  The company carries $2.4 billion in debt against $8.8 billion in assets–like other B Wayne Hughes companies the use of extreme leverage is avoided.  While we are NOT impressed with the financial performance of SFR REITs the asset quality is generally good and investors seem to believe that SFR REITs are safer than other real estate assets–even though shares are rated Ba1 by Moodys and BB by S&P.

AMH has 4 current preferred issues outstanding with coupon ranging from 5.875% to 6.50%.

The 4 current issues outstanding can be looked at here.

Pricing and size of this new issue have not yet been announced.

6 thoughts on “SFR REIT American Homes 4 Rent Announces Preferred Shares”

  1. The fact that AMH is not highly leveraged, and that the dividend is easily covered, makes these preferreds sound quite safe. On the other hand, the fact that the common stock is yielding less than 1% tells me that the investors are not buying for yield. If a mortgage REIT or a typical equity REIT eliminated its dividend, then most common shareholders would rebel against management and drive down the stock price dramatically. In this case, would common shareholders care much?? My understanding is that in most cases, paying the preferred dividend is only an obligation if the common receives a dividend. Do you worry about owning preferreds where the common dividend is not an integral part of the investment for the common shareholder?? It seems to me that mitigating factors are that they have always paid their preferred dividend, and I assume the issue is cumulative. But I would hate to be holding one of these stocks when the dividend is suspended.

    1. Hi Roger—I think you make the correct statements, but to many investors the important thing is the presence of B Wayne Hughes. While–really–this is not a reason to want to own this issue or any AMH issue, individual investors seem to have confidence in them.

      Of course we saw a similar type of confidence with an individual — Dr Frost (chairman of Ladenburg Thalmann)– evaporate this week when he was charged by the SEC of some manipulation. While I don’t think LTS and AMH are comparable, investors like to own stuff with billionaires ‘standing’ behind them.

      Personally I wouldn’t own it except for a flip as I just don’t own perpetual stuff right now—maybe next year.

      I like to see a strong dividend being paid on the common–but I don’t make that a mandatory requirement.

    2. Roger,

      REITs must pay out 90 percent of taxable income to retain REIT status.
      Taxable income will be less than FFO.
      As long as the REIT has taxable income, it must pay out 90% to preferred
      and common holders.
      So even if a REIT is paying a “low” common dividend, they will be paying
      their preferred to holders to insure they meet the 90% requirement. Hopefully
      the required 90% payout will “always” satisfy the required preferred dividend regardless of the common dividends.

      RB

      1. RazorbackEA–yes the preferred dividends count toward the 90%–no taxable income for AMH though.

  2. Tim,
    I have not done a thorough study of AMH income statements since the company started business. Also, I’ve not studied annual reports including footnotes to discern any differences in book and tax income.
    However their most recent quarterly report indicates to me a profitable company with real income. The treatment of their participating preferreds (which I think now have all been called) made it appear in the past that book income
    was reduced by an “expense” to account for appreciation that went to participating preferred holders. I think now that those securities are gone it will be clearer to see that AMH is making money. Also their current outstanding preferreds will pay quarterly cash dividends only . I think in the
    past the treatment of participating preferreds clouded their profitability compared to other REITs. Perhaps I’m off base here but a quick glance makes me think they are a profitable company.

    RB

    1. In looking more @ AMH financials, perhaps I misspoke re calling participating preferreds. It appears they were converted into common shares. But in any event the entries to reflect change in appreciation for such shares will not be a factor going forward because they are gone and have been replaced with common shares.
      Aside from the 90 percent requirement, FFO or AFFO rather than net income has always been the go to number to determine REIT profitability in my experience – not net income.
      Also I’m not sure how FASB requires depreciation expense to be computed for book income for this firm, but as far as tax computations go residential has a 27.5 year life versus 39.5 for commericlal so tax depreciation expense will be higher for a residential REIT than for a commercial property REIT in general.

      As stated earlier, I could be wrong, but it looks to me like AMH is a profitable company with a fairly conservative capital structure. Even though it’s preferreds are unrated, their coupon rates do not reflect a company in poor financial condition.

      RB

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