American Homes seeks to diversify funding
Oct 9 (IFR) - American Homes 4 Rent, the largest publicly-traded player in the emergent single-family rental home market, is looking to raise US$100m from a preferred stock offering. By tying a portion of investor returns to home prices in select markets, the financing represents a novel approach to fund ongoing purchases of homes.
Raymond James and Jefferies are marketing the US$25-par preferred at a base annual dividend of 5%, with additional returns based on a weighted index of home price appreciation in 20 markets where the company operates. The banks, which are looking to price the deal next week, have indicated that sizing could grow based on investor demand.
If the weighted index increases by 17.5% by 2020, investors would realize a 7.5% annual return, according to a hypothetical analysis contained in the offering prospectus.
The security cannot be called for four years and features a step-up in the dividend paid to 10% in September 2020, incentivizing American Homes 4 Rent to take it out by then.
The company, which is using proceeds to repay borrowings on its revolving credit facility, can settle the liquidation preference in either cash or stock.
For investors, the security provides exposure to rising home prices. The largest percentages represented in the index are Dallas-Fort Worth (9.5%), Indianapolis (8.9%), Chicago (7.7%), and Atlanta (7.7%), though high-growth markets such as Las Vegas and Orlando are also included.
And while a syndicate source close to the deal indicated that initial interest is broad-based, rivals suggest it will primarily appeal to retail investors.
"Big institutions can get exposure to home price appreciation. Many have simply bought homes," said one equity-linked banker. "My sense is that is why they did it in a registered form - to be able to sell it to retail."
In addition to registering the preferred stock with the SEC, making it freely salable and tradable, the leads plan an NYSE listing.
For American Homes, preferred stock would represent an important source of new funding.
Backed privately by B. Wayne Hughes and other institutional investors, the company raised US$705.9m on its IPO of 44.1m shares at US$16 per share in late July. Hughes, who founded Public Storage and grew it into the one of the largest REITs, and another pre-IPO investor, Alaska Permanent Fund Corporation, invested US$75m in a concurrent private placement to lend additional support to the IPO.
Following yesterday's launch of the preferred stock offering, common shares closed down 15 cents or 0.9% to US$15.45.
The dilemma for American Homes, and other single-family home operators, is that equity investors ascribe it less value than the value of the homes it owns. At June 30, when it owned 18,326 homes, the company marked the net book value of its home portfolio at US$3.04bn, as compared to a current US$2.86bn equity market capitalization.
And because the single-family rental market is still unproven - American Homes reported a net loss of US$21.7m on revenue of just US$24.6m in the first six months of 2013 - straight debt is certainly not an option to fund continued home purchases.
In addition to equity American Homes has relied predominantly on bank debt to fund its growth. Having exercised an accordion feature to temporarily increase borrowings to US$670m at June 30, the company last month amended the facility to increase the borrowing base to US$800m and extend the maturity until March 2015.