Silver Bay Realty Trust Corp (SBY), American Homes 4 Rent (AMH): One REIT Penalizing Investors for a Higher Stock Price

Using the recent valuations to calculate the run-rate of administrative costs, the company will incur charges of more than $9 million per year to manage 5,000 properties, or $1,800 per door, per year. Traditionally, property management can be hired for one months’ rent or less, on portfolios as small as one single family home.

Given the economics of the business, Silver Bay has a much larger cost structure. If Silver Bay eventually trades for 10 times annual rents, it would pay out some 15% of revenue each year in the form of management expenses. American Homes 4 Rent, assuming a scenario of one months’ rent per property, would spend only 8.3% of revenue to manage its portfolio.

Most problematic is that a rise in home prices would cost Silver Bay investors more money each year. If prices were to rise 50%, and the equity value of the company were to follow, then 50% more revenue would be captured by Two Harbors for administration costs. Silver Bay investors effectively have incentive to root for lower stock prices. American Homes 4 Rent investors don’t have to fear that a rising stock price may cost the firm more money.

If you’re thinking about playing the single-family housing market, wait for American Home 4 Rent’s portfolio to mature and its cost structure to stabilize. It has a huge cost advantage over Silver Bay, which should lead it to outperform, all else being equal.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article 1 REIT Penalizing Investors for a Higher Stock Price originally appeared on Fool.com and is written by Jordan Wathen.

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