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Wall Street?

American Homes 4 Rent is one of the pioneers of the corporate landlord industry that mushroomed following the recession, as companies scooped up thousands of distressed or foreclosed homes and turned them into rentals. But so far investors aren’t sold on the Agoura Hills company – or the industry. The company raised $706 million two years ago during its initial public offering – but that was nearly 44 percent less than the $1.25 billion estimated in its prospectus. Its share price fell on the first day of trading, and a month later the firm reportedly laid off 15 percent of its workforce. Since then, the stock has traded in a narrow band between $15.20 and $18.50. Shares closed June 24 at $16.31, just 6.7 percent greater than their initial price two years ago. But this year, the firm co-founded by 81-year-old self-storage billionaire B. Wayne Hughes may finally answer the question of whether institutional single-family landlords can match their multifamily-landlord counterparts in creating long-term returns for shareholders. In a presentation to investors in New York this month, the real estate investment trust’s executives said it had grown its portfolio to 37,300 homes, racking up assets of $6.8 billion. It has built out a technology platform to manage those properties, establishing call centers, keyless property access, automated bill payment and mobile communication systems for tenants. Still, the viability of American Homes’ business model is far from proven, given the complexity of operating such a massive, single-family home portfolio without the economies of scale provided by multifamily properties. Add in criticism from tenants and housing advocates, who point to widespread complaints of shoddy maintenance and poor responsiveness on the part of American Homes, and it’s clear that the company has a ways to go. Christopher Thornberg, founding partner of Beacon Economics LLC of Los Angeles, is a skeptic. In 2006, he was one of the few economists to sound the alarm about the imminent housing crash, which eventually opened the opportunity for American Homes to become the largest publicly traded owner-operator in the homes-for-rent market, second only to Dallas-based Invitation Homes LP., owned by New York private equity firm Blackstone Group LP. But while these corporations and their competitors have ramped up acquisitions and helped turn around distressed housing inventory in certain markets, Thornberg said, he doesn’t see them establishing sustainable business models. “Let’s face it, trying to manage a portfolio of thousands of unique, single-family homes has got to be a logistical nightmare. It’s much more complex than in multifamily. And we know that tenants don’t take care of rental property, so these single-family homes are going to need a lot more TLC than your typical apartment building,” he said. American Homes, run by Chief Executive David Singelyn, did not return calls seeking comment for this story. Rising prices One irony is that corporate landlords may become victims of their own success. More than 4 million Americans lost their homes to foreclosure since 2007 but much of that stock has since been purchased by corporate investors like American Homes. And as the landlords buy properties in markets hard hit by the downturn, housing inventory shrinks and prices rise, limiting their ability to pick up more bargain properties. For instance, institutional investors began snapping up homes in 2011 and their activity peaked in 2012 and 2013, with their combined acquisitions representing 7 percent of the total U.S. home sales in those years, according to figures compiled by RealtyTrac, an Irvine real estate data provider. But by the first quarter of this year, institutional investor purchases accounted for just 4 percent of total sales. And many desirable rental markets – including Los Angeles – are simply too pricey: American Homes has acquired just 54 individual homes in the L.A. County market since its inception, the RealtyTrac data shows, preferring to concentrate its purchases in cheaper states such as Texas, Indiana, Georgia and North Carolina. Another problem Thornberg foresees is that in a recovering economy more people will want to own homes and the capital markets will ease up in response to demand, crimping the market for rentals. “They capitalized on some unique conditions in the housing market (after the collapse) but this is not here to stay. It’s a one-time event,” he said. “Of course, I don’t think they care. They’ve got the ultimate exit strategy – sell their inventory and make a gazillion dollars.” But if anyone can make it work, it could be Hughes, who is worth $2.5 billion according to Forbes and has provided the company with financial backing and leadership. His built his wealth with Public Storage Inc., the Glendale company he started in 1972 and turned into the largest self-storage chain in the world, with 2,200 locations. In 1983, it spun off PS Business Parks Inc., a publicly traded real estate investment trust also headquartered in Glendale. Hughes co-founded American Homes 4 Rent in 2011 with a group of colleagues and now serves as its non-executive chairman. The venture is reporting improved leasing and occupancy rates and on-target earnings, and the 752-employee firm seems headed in the right direction. In its recent investor presentation, the company reported overall occupancy rates at 88 percent, up from 82.5 percent in the first quarter. During that quarter, the firm reported funds from operations (a key REIT metric that adds amortization and depreciation expenses into net income) of $41.9 million (16 cents a share). That met analysts’ expectations and was up from $28 million (12 cents) for the same period last year. Those numbers led financial analysts to upgrade their evaluations of its stock. Four of the seven analysts who track it rate it a “strong buy,” two rate it a “buy” and one a “hold.” Indeed, analysts see potential for strong performance in the future, as the company’s funds from operations catches up to its rapid growth. In a note this month, Jade J. Rahmani, an analyst with New York firm Keefe Bruyette & Woods said that once the company’s most recent home acquisitions are leased, revenue they produce could add 20 to 25 cents to annual FFO. “American Homes 4 Rent continues to rank at the top of our list of recommended stocks on a risk-adjusted basis,” he wrote in the note. That attitude has helped the company sell its debt to Wall Street. In the past year, American Homes has raised more than $2 billion through four securitizations collateralized by the rental income on its properties. Rahmani said in his note that the company benefits from some of the lowest borrowing costs in its industry. And with the debt-strapped millennial generation delaying marriage and family and spurning homeownership, there would seem to be a ready supply of renters for the company’s properties. The Urban Institute, a Washington, D.C.-based think tank, predicts that homeownership in America, which took a nosedive during the housing crash, will continue to decline through 2030, when it will hit a low of 61.3 percent, down from its all-time high of 69.2 percent in 2004. Every 1 percent decline in ownership represents 1 million new renters. As for Hughes, Rahmani notes that the octogenarian’s involvement brings a “strong alignment of interest and sponsorship.” While he now lives on a thoroughbred horse farm in Lexington, Ky., Hughes isn’t taking a passive stance toward his latest venture. In the past 12 months he has acquired approximately 2 million shares, giving him a 25 percent ownership stake in the company.

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