American Residential Properties Is Positioned For Long-Term Growth

 |  Includes: ARPI
by: Robert Loftus

American Residential Properties (NYSE:ARPI) is a company well positioned for long-term growth. ARPI is a REIT stock that began aggressively buying up residential properties during the period when prices were in the deepest part of their trough. ARPI has an aggressive product development pipeline. According to its 2013 Investor Presentation, "[ARPI] own(s) over 2,500 properties in 10 states with close to 90% occupancy on homes that are leased and ready for lease as of March 31, with an additional 1,102 homes closed or under contract as of April 30". That additional 1102 homes represents almost a 31% increase in the size of the rentable portfolio, and could lead to a significant increase in earnings in future financial quarters. ARPI operates in markets that were hit hardest by the real estate bust. ARPI is positioned to benefit from a demographic shift, and behavioral traits of younger Americans, along with retirees moving to Florida, Nevada ,and Arizona. ARPI is vertically integrated, and maintains partnerships with contractors that will help them to keep a lid on property maintenance costs. Perhaps most importantly, ARPI does not appear to have had any significant issues with towns or municipality lawsuits for failure to maintain its properties.

ARPI operates in some of the hardest hit real estate markets in the country. These were areas where homes lost up to - and in some cases more than - 50% of their value. Their real estate portfolio includes properties in California, Nevada, Arizona, Texas, and Florida. The real estate bust allowed the company to acquire thousands of properties at a steep discount off their original asking prices.

Another reason ARPI is so well positioned is that many younger Americans are skittish about the prospect of ever buying a home. The difficulty that many recent college graduates have had in finding full-time employment is likely to shape their future spending decisions. Younger Americans also know that they need to maintain their mobility, in the event that they have to follow their company's relocation plan, or move to pursue an opportunity with another company. The difficulty of getting a home ready for sale, dealing with an agent, and the specter of possibility suffering huge financial losses due to eagerness to get rid of the house and get on with work and life can seem daunting. This combination of traits means that more young Americans are likely to become long-term renters than homeowners. Additionally, the cost of hiring contractors and purchasing materials for homes skyrocketed during the real estate boom, and prices for those kinds of rebuilding services are sticky. A property management firm can employ economies of scale in the maintenance of properties that are not available to a private homeowner. ARPI's focus on properties in Southern states also positions it to offer rental properties to retirees who aren't interested in taking out another mortgage after they've already turned 65.

ARPI is vertically integrated, and issues requirements to contractors who are already operating in the markets it serves (ARPI Investor Presentation, page 17). This mode of operation is far more efficient than seeking out individual contractors whenever work needs to be done, and also allows ARPI to rapidly develop localized property support networks, without having to construct its own maintenance facilities or hire all of its own workers.

Even after doing a bit of googling, I was not able to find any stories regarding significant actions brought against ARPI by municipalities. In the world of large-scale residential property management there are those companies that maintain their properties in hopes of attracting high-quality tenants, and there are slum lords. It really only takes a matter of months for someone to find out what kind of property owner a management firm is going to be. While every property management firm will have occasional nuisance suits from off-the-wall former tenants, I was not able to locate any news regarding municipalities taking significant legal action against this company.

The combination of factors cited above makes ARPI an attractive candidate for a long-term hold. The company initiated operations in hard-hit real estate markets where it was able to acquire properties at steep discounts from their original asking prices. The company is well-positioned to offer rental properties to a generation of young adults who are likely to be skittish about home ownership, and retirees who don't want to deal with another mortgage in their Autumn years. Issuance of requirements contracts to established contractors who work in the markets where they operate is an optimal approach to developing a viable service network at minimal expense. So far ARPI appears to have managed to acquire, repair and maintain its existing properties in a manner that hasn't resulted in it becoming a target of municipalities, or being seen as a "slum lord" company. ARPI is a company that has significant upside potential, given the statement in the investor report about an additional 1100 homes in its product pipeline - a rentable portfolio increase of nearly 31% as measured by number of properties - it's reasonable (and maybe even slightly conservative) to expect valuation growth of 15% to 20% within the next year.

On Monday, June 17, ARPI closed at $18.89 per share, versus a 52-week high of $21.05 and a low of $18.20.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.