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American Residential Properties (ARPI) made its public debut on May the 9th. The internally managed real estate company which acquires, owns and manages single-family homes to use them as rental properties ended its first trading day unchanged at $21.00 per share.

Investors have some doubt as the company is a late entrant to join the housing recovery bandwagon and it has little operating history.

The Public Offering

American Residential Properties, which was founded in 2008, is a real estate company which acquires and manages single-family rental properties.

The company currently owns 2,531 properties across a range of states, which it acquired for an aggregate investment of $293.1 million. The company recently increased the pace of acquisitions, as it bought 785 homes in the first twelve days of April alone.

American Residential Properties sold 13.7 million shares for $21.00 a piece. Except for 500 shares being offered by selling shareholders, all shares were sold by the firm, thereby raising $287.7 million in gross proceeds. The public offering values the equity of the company at $675 million.

The offering has been a disappointment. The offer price was set at the low end of the preliminary $21-$23 price range by the firm and its bankers. Trading unchanged in Thursday's and Friday's trading session, shares are still trading below the low end of the preliminary trading range.

Some 43% of the total shares outstanding were offered in the public offering. At Friday's closing price of $21.00, the firm is valued at $675 million.

The major banks that brought the company public were Morgan Stanley, Bank of America/Merrill Lynch, FBR, Jefferies and Raymond James, among others.

Valuation

American Residential Properties continues to acquire, restore and lease out properties which have attractive risk-adjusted returns in the long run. The company plans to acquire these houses from Government-sponsored entities as well going forward.

The company furthermore owns a private mortgage financing strategy which generates attractive returns. The portfolio had a $25.3 million balance which generates a weighted-average rate of 12.1% per annum. Note that average loan terms were only 146 days long.

Since inception on the 30th of March of 2012 till the end of the year, American Residential generated total revenues of just $2.93 million on which the company reported a net loss of $6.24 million. Note that these figures severely underestimate the current revenue rate as it takes the company some 6 months on average to take possession, restore the property and rent it out. In December of 2012, the company only had 70 properties rented out.

In comparison, at the moment the company owns 2,531 properties suggesting revenues will explode throughout the year.

As such it is difficult to value the company based on its operating performance. Operating with $46 million in cash and equivalents, and no debt outstanding, the net cash position could come in around $305 million after the offering. Proceeds will be mainly used for restoration costs, which are estimated at 7.5-15% of the appraisal value, and acquisition of new properties.

Trading around $21 per share, the market values the company at around 1.2 times book value.

Investment Thesis

Commentators are quick to point out that the company is a late entrant to the rent game. Buying home properties for their rental yield is a recent phenomenon as private equity firms and hedge funds seek to buy lower value properties which still carry a decent rental yield.

Continued demand for housing, with limited mortgage access has made such investment really attractive for firms like American Residential Properties, as consumers cannot access mortgage financing.

A plus point for investors is that the company has been set up as a REIT. This means that investors should expect over 90% of profits to be returned to them by means of dividends, which reduces the risk of an investment to some extent.

At the same time the company has some aggressive expansion plans. Besides the funds being raised in the offering, American Residential obtained a $150 million senior secured revolving facility with a potential to double that amount. The rate at LIBOR + 250 to 325 basis points seems attractive given the higher rental yields to be expected.

The overall valuation seems reasonable, trading just above book value, yet there is little operating data available as the company is a bit late in the game. American Residential aims to benefit from "Generation Y" which have a greater tendency to rent, rather than buying, in order to maintain flexibility as the generation deals with high unemployment and large debts.

I remain on the sidelines for now. The quality of assets being bought seems okay, but it is fair that shares trade just above book value given that the company is a late entrant and bought at already increased prices. I will await the first operating results in the coming quarters to come up with a more informed opinion.

Source: American Residential Properties - This Recent REIT Public Offering Still Has To Prove Itself