MIZUHO SECURITIES USA INC.  |  US EQUITY RESEARCH

Summary

We recently visited Las Vegas, meeting with AMH & SFR. Our key takeaways include: 1) Both companies' single family rental portfolios are performing strongly, supported by an improved local economy, favorable sub-market positioning and concentrations; 2) We believe S/F rental REITs can support mid-to-high single digit ssNOI through 2018 given available operating leverage and upside potential via lowering turn times, cap ex, and further enhancing operating platforms and fully implementing smart home technologies; 3) Despite its recent run, we believe the S/F rental REITs are one of the most compelling investment opportunities in REITs today given favorable demand, valuation and growth, especially in contrast to slowing growth and fundamentals in other subsectors.

Key Points

Las Vegas Still Hot. The Las Vegas market, AMH’s 16th largest market and SFR’s 9th largest, ranks among both companies’ top performers by revenue growth (4%+), operating margins (70%+) and embedded HPA (50%+). The Las Vegas economy has continued its expansion, supported most meaningfully by a vibrant tourism industry and an improving real estate / construction industry. Looking ahead, regional economists (at Colliers International and CBER) project continued economic growth, which should provide a favorable demand tailwind, especially for the rental side of the equation.

Today, both AMH and SFR’s Las Vegas portfolios are full (95%-ish) and enjoy good pricing power (~3-4% renewal / 3-6% new lease growth), as they head into the mid-year quarters (2Q & 3Q) that tend to have stronger demands, but also higher turnover / lower operating margin. AMH and SFR homes are also both largely concentrated in the northern Las Vegas (Summerlin) and southern Las Vegas (Henderson) sub-markets, marked by higher population density and household income. Putting this all together along with low new supply and formidable operating platforms, we expect both companies’ Las Vegas portfolios to continue to perform strongly in the near future.

"How Much Better Can it Get?" Despite hitting their l/t occupancy (95%) and operating margins (65%) targets a bit sooner than we expected, AMH and SFR management see further operating margin potential with occupancy upside (to 96-97%), lower cap ex, lower turn times, and optimizing operating platforms through greater experience and data as AMH begins and SFR fully implements smart home technologies. For 2017, we project ~5% ssNOI growth; every 100 / 200bps of margin expansion would add $2c / $4c to AMH 2017 core FFO/sh and $3c / $6c SFR 2017 core FFO/sh.

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