Single Family Rentals to Benefit from Falling Turnover; Highlights Challenge for For-Sale Market

Dan Oppenheim
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Dan Oppenheim, CFA

(415) 889-5617

doppenheim@ssrllc.com

October 31th 2018

Single Family Rentals to Benefit from Falling Turnover; Highlights Challenge for For-Sale Market

  • Low turnover likely to bring rising cash flow for single family rental companies. We believe that the stretched affordability and increasingly favorable rent vs own economics will result in lower-than-expected turnover (move-outs) for the single family rental companies over the remainder of 2018 and into 2019, given the widening gap between the cost of owning and renting in key markets. We anticipate that turnover will fall approximately 75 basis points year/year for the single family rental sector in 2018, with a similar decline likely in 2019. We continue to believe the rental sector – both single family and multi-family – is well-positioned relative to the for-sale market.
  • Higher occupancy, reduced expenses, and higher margins. We anticipate that the reduced turnover will aid occupancy, as turnover typically leads to at least 15 days of vacancy. We expect 3Q18 same-store occupancy of 95.5%, consistent with the 95.3% reported for both American Homes 4 Rent (AMH) and Invitation Homes (INVH) through August. In addition, the lower turnover will mean decreased repair and maintenance (R&M) expenses, as move-outs are a significant source of R&M expenses. (We note that INVH’s expenses are elevated in 2018 due to issues related to portfolio integration and that AMH’s expenses are higher given the expensing of some R&M costs that had previously been capitalized.)
  • Affordability favors renting in key markets. The Atlanta market (second largest market for both AMH and INVH) provides a good illustration of the shift in the economics of owning vs renting. As Exhibit 1 indicates, the monthly cost of ownership of the median-priced home in Atlanta exceeded the monthly single-family rent by $105/month in 2Q18 ($1,630/monthly cost of ownership vs $1,525 monthly rent), whereas the two costs had essentially been the same in 2Q17 ($1,443 monthly cost of ownership and $1,445 monthly rent). This affordability gap is similar across other markets and we expect that it will lead more households to remain in rentals.
  • Rising cost of ownership provides slightly greater relative benefit to AMH than INVH. On an incremental basis, we believe that the rising cost of ownership provides more of a relative benefit to AMH than INVH, given that AMH’s portfolio is largely in more affordable markets, where there is greater risk that residents will move out in order to purchase a home (AMH’s five largest markets are Dallas-Fort Worth, Atlanta, Indianapolis, Charlotte, and Houston). In contrast, INVH’s portfolio is more skewed to areas where for-sale affordability was already challenging for most of its residents, limiting the risk of move-outs on account of home purchases (INVH generates 70% of its rental revenue from the western US and Florida).
Exhibit 1: Rent vs Own Economics Favor Renting in Atlanta
Note: Cost of ownership reflects monthly mortgage payment on median priced home, real estate taxes, insurance, and maintenance. Monthly rent reflects AMH’s same-store rent in Atlanta from 1Q17-2Q18 and SSR estimates for 3Q18 and 4Q18.
Source: National Association of Realtors, Freddie Mac, company reports, and SSR Analysis
Exhibit 2: SSR’s Preference for Housing-Related Sectors

Source: SSR Analysis

 

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