American Homes 4 Rent (AMH) Earnings Call Transcript & Summary

All right. Thank you, everybody. We are ready to get started with this special edition of the virtual NAREIT conference. My name is Buck Horne. I'm the housing analyst at Raymond James covering homebuilding, single-family rental and multifamily, all things residential for Raymond James. Thrilled to be able to introduce to you to senior management team from American Homes 4 Rent. We've got Dave Singelyn, Chris Lau, Bryan Smith. We're all here hopefully to answer all your questions. I'll be moderating your session today. [Operator Instructions] I'll try to moderate as many of them as I can. We're going to start with a few opening remarks from Dave and the team and cover some of the key messages they want to leave you with and so the operating updates they've got. There is a slide deck available. I'm sure you can find it on their Investor Relations section of the website, but it's pretty comprehensive. Please do that while you're listening. And with that, I'm going to turn it over to Dave.

Thank you, Buck. Before I start, let me just introduce -- I'm here today with Chris Lau, Chief Financial Officer; and Bryan Smith, our Chief Operating Officer. And I thought I'd start today talking a little bit about how COVID has impacted demand and impacted our leasing and collections. It's kind of the news of the day in real estate. With respect to demand, historically, we have had a discussion that demand has been strong for single-family rentals since our formation back in 2011. And we've talked about the housing shortage and the behavior and desires of millennials to have more of an experience than to accumulate assets and that their life events happen much later in life. And also talked a little bit about the elimination of the tax incentives that previously existed in owning a home. But to date, we're seeing the demand for single-family rentals significantly increased. It's fueled by families and others who are moving from city centers and from apartments to the single-family rentals in the suburbs. The stimulus for this migration is linked to COVID. They're moving to get away from the high-density living and housing that they're in for safety reasons and social distancing reasons. Once they're in the single-family homes, they're finding that they have more space and this facilitates a better work-from-home environment. So this provides the long-term benefit. And while the COVID was the inspiration to move to single-family rentals, these individuals now see the benefits of single-family rentals over multifamily benefiting demand in the long term. A little bit about how COVID has impacted American Homes 4 Rent leasing and our collections. As I outlined above our lease -- or for reasons outlined above, demand for single-family homes to date in April and May has been very, very strong. It's resulted in record levels of showings that's facilitated by our technology platform. Chris and Bryan will, in a minute, go through April and May leasing numbers and our collections. But I'd like to talk about 3 things that impact both our long-term leasing and collections. The first is the asset management process that we have used in our history to identify those markets to ensure long-term demand. The markets that we are in have population growth and historical employment growth above the national averages. But one thing that COVID has identified is the markets that we're in on a weighted average basis has less unemployment in our markets than all of our single-family rental peers and 5 of the 7 multifamily peers that we follow. The 2 multifamily peers that we follow that have better unemployment experience -- lower unemployment experience in their markets have one thing in common with us, and that is they have a very diversified portfolio. American Homes is diversified in 35 markets. That means we're less susceptible to being severely impacted by any one market as no market represents 10% of our portfolio. The third thing to talk about is the resident profile. And just like the portfolio being diversified, our resident profiles are very diversified. They have the means to pay. The typical resident profile is a dual income, meaning if one is furloughed or unemployed, there's still an income coming into the house. The income -- the resident household incomes average above $100,000, meaning that they have 5x their rental obligations in earnings. But another interesting point about who our residents are. 2/3 of our residents come from sectors that are employed in sectors that are not impacted by COVID. They're in offices. They're in the trades, such as construction. They're in health care, and they're government workers. But one area that we've all focused on, the one employment sector we've all focused on is hospitality. Between 5% and 6% of our residents work in the hospitality area. And hospitality is not only the hotels, but it's the restaurants and the travel industry as well. Last thing before I turn it over to Chris, just a mention quick on growth initiatives. They remain intact. Out growth initiatives start with a strong balance sheet, strong liquidity profile, as evidenced by our investment-grade rating, and our strong access to capital, which has recently been evidenced by a new joint venture that we entered into in February and was upsized in the middle of COVID. This is a joint venture with JPMorgan Asset Management. And it's a huge validation of our development program and its long-term potential. Talking about our development program. We continue to develop through the COVID process. These homes are in our markets and in the same neighborhoods that we have existing homes, same neighborhoods that are typical rental neighborhoods by our peers as well. But we're building a better rental product. And with the fact that our investment in these homes is less than we could acquire the same home through other channels provides better economics. And as Bryan will talk about, there's just tremendous demand for these assets. We did stop acquiring in March as we were going into the COVID crisis, through our other 2 channels, traditional acquisition channels and national builders. A lot of uncertainty at the time, and it was a conservative move to preserve liquidity. But it also allows prices of those acquisition-type homes through traditional channels and national builder to reset. So there may be a small impact in 2020 from COVID. We'll see. But long term, COVID has validated the single-family rental concept, its resiliency, the strong rental demand for the product. And American Homes is well positioned for long-term growth later this year as well as 2021 and 2022. We have the capital. We continue to grow through this economic cycle. And as we see opportunities, as we come out of it, we will again acquire more assets at favorable prices. With that, Chris, I'd like to turn it over to you. Maybe you can go through collections and leasing statistics.

Yes. And generally speaking, just want to make sure everyone gets the operational update for the highlights of it that is included in the deck we posted earlier this week. If you're following along, you can find all this on Page 6. Really, the punchline here is that consistent with the April update we gave last month on our earnings call, we've really just continued seeing incredible levels of foot traffic and demand for our homes through May. And then we're also continuing to see a continuation of the trend of fewer of our families moving out of our homes, which interestingly drove a 50 basis point year-over-year decline in our May turnover rate. And then when you think about the combination of that level of traffic and demand we're seeing coupled with the decreases in move-outs, the combination there drove an increase to our May same-home average occupied days percentage up to 95.4%, which was 30 basis points higher on a sequential month-over-month basis from April. And then importantly, we also accomplished all of that while pushing new lease spreads to 4.3% in May, which was 80 basis points higher than our new lease spreads in April. And then consistent with our last update, we've continued offering 0% increases on newly signed renewal leases into May as we kept our focus on demonstrating a socially responsible posture, if you will, to our residents and local communities during this time, which I think is really important. And then turning to collections for a minute, which is also on Page 6. Punchline there, things also are continuing to trend well. For April, we've now collected 96% of our rents, with 93% of that being collected during the month, with an additional 3% being collected after month-end into May. And we're continuing to work with our residents on an individual basis to collect as much of that remaining balance as possible from April, which, quite frankly, is not terribly dissimilar to a normal month where a small portion of our risk is always carried as a receivable at month end and then collected into the following month. And then on May, we've collected 93% of our May rents by month end, which is right around 97% of pre COVID levels and then right in line with our April experience. But importantly -- and I think this is a key point here, when we look at our total May collections, including the April recoveries that I was just talking about, we actually received more cash rent payments in the month of May than we did in the month of April, which I think is important from a tenant team and pattern perspective. And then to round out the other update on Page 6, we did include a brief update on the balance sheet, largely unchanged from our last update in April, but we continue to remain in great shape there with over $700 million of liquidity available to us between cash on the balance sheet and availability on our line of credit. And then with that, I guess, Buck, before we turn it over to you. I'll open it up -- or pass it back to Bryan for any more operational color.

Thanks, Chris. Just to give a little bit more color and some more details on the leasing momentum that saw in May. If you remember from the Q1 call, we gave the April update, and we were seeing very strong demand, very good leasing momentum throughout the month of April, and that actually accelerated into May. We saw record website activity in May with the growth in users and page views of over 25% from the prior year. This led to an increase in showings that Dave referenced of over 22% year-over-year. All of this resulted in us having our best leasing months since 2015, and we signed over 2,400 leases in May. And please keep in mind, too, that we did all these without the use of concessions and while raising rents -- growing rents on new leases by 4.3%, as Chris mentioned. So you take improvements in retention and you look at the improvement that we had in May over April and average occupied days, and then the leasing momentum that we had in May bodes well for continued improvement in our average occupied days through June. Going on to the issue of collections, too. Please keep in mind that these favorable results, which we're really happy about, came from a period where we had to change our normal collection processes. We halted charging late fees, notice fees and paused on all of our evictions. So we think that when things return to normal, we may have the ability to go back and access some of those capacity balances as well. And Buck, back to you.

All right. Wonderful. Thank you, guys. I appreciate that. It's a great rundown. So let's dive a little bit more into the -- just the Page 6 update, and we got a couple of questions already queued up here. But let's clarify a little bit on the -- so that acceleration, you're talking about that new lease rates going from 3.5% up to 4.3%. That's just re-leasing, correct? That's not the blended -- or doesn't include the renewal leases? And maybe while you're -- and answer this as well, but how you think the renewal lease pattern will trend. I know this kind of lags for months and those offers are out. So do wily see that blended lease progression going out for the next couple of months.

Yes. Let me clarify the data point, and then Bryan, maybe I'll hand it to you for some of your thoughts. Just to clarify, that 3.5% spread growth in April growing to 4.3% in May, that is on new leases, obviously separate than our renewal increases, which, as I spoke about. We maintained our posture of offering flat or 0% increases on newly signed renewals in those 2 months. Bryan, I'll pass over to you for any other thoughts going forward.

Yes. When the pandemic hit, we evaluated our asking rates on new leases, and we started to think about how we were going to treat renewals as well. And there was a lot of uncertainty with employment and everything. And that kind of continued through April and May. So we thought it was socially responsible to offer flat increases during that time period. So for leases signed in April and May, our renewal leases [indiscernible] increases. We're evaluating that policy going forward. And we think that as things turn around, as there's a clear path for people getting back to work for states and economies opening up, we'll be moving back to at least approaching a level of renewal increase offers. But for the time being, we've been -- we feel strong about -- strongly about offering those 0% during really a time of need and a lot of -- a time of uncertainty. On the flip side, with new leases, we're going to take those out to market at what we believe -- our market rates and we're seeing that accelerate into May. We're optimistic with our occupancy levels and our momentum that we're going to continue to improve on that in June. But for the time being, the offers, which really cover a lot of the May renewals, June and July, we've gone on a flat.

Okay. And to clarify, so what percentage of the residents actually ask for some sort of payment relief either by April or May or cumulatively? I don't know if you've got those statistics, but just the number of residents that actually asked for that payment relief?

Yes. So we had a hardship request -- we talked about on the Q1 call, were about 4% of our residents. And we've actually seen a deceleration in requests into May. So a lot of the requests were people who were hit hard early on, and we've seen fewer and fewer of those requests as time went on. I think the most important ones, the ones that we're really actioning on are the ones that are severely affected. The ones who -- it's probably prudent for us to release them from their lease obligations, and that's a very small number. It's in the hundreds. We're working with them on a really an amicable split, where there's just no prospect of recovery. But when you think about that, we're really pleased that, that number is in the 200, 200-plus range. Beyond that, our residents are talking to us. They're very grateful, in some cases, for the relaxation of late fees so they have the ability to pay throughout the month. But our collection results, I think, are very strong. And we were pleased with May. May was a little bit better than April, as Chris mentioned, and we're optimistic that June will be good as well.

That's great. Awesome. So backing up -- maybe just go back to those high-level thoughts again about these trends that seem to be benefiting single-family rental now and the hypothesis around de-densification of living situations or de-urbanization, migration patterns. It all makes a lot of sense intuitively. Do we have any evidence anecdotally or otherwise in some of the new leasing data so far that -- whether it's a shift from multifamily renters starting to look for their first single-family home, or markets, people coming from out of market to lease one of your homes? Any early signs that some of these themes are actually playing out?

I think there's 2 concepts that you have there. One is the migration from state to state. That we have seen pre-COVID. So that was a trend that we were seeing into some of our markets, such as the Texas market before COVID. I don't know if we have data that we have seen where we have seen people moving from state to state because of COVID. But we definitely have seen, as I indicated in the prepared remarks, moving from the high-density living areas of the city centers and apartments into single-family homes in the suburbs. Not only have we seen it through our surveys, I think we've also seen it in confirming it through other surveys that we have seen. One of the things we've heard from the tenants once they have moved in is their realization that they have more space in their homes, and that's going to facilitate their ability to work from home. And I think that's going to be a shift that we're going to have in COVID coming out of this, that there will be more working from home. And single-family homes are well-designed for that concept.

And if I could just add to that a little bit. If you take a look at our rental home communities, our new build-to-rent communities, we've seen a very heightened level of interest from people coming from multifamily for that. It's still anecdotal at this point, but the percentage of applicants coming from multifamilies is a lot higher in that than it would be for the rest of the homes in that portfolio.

Sorry. I'm reading there. Yes, that's great. Perfect. Let's dive into that. Let's follow up a little bit on the build-for-rent platform. We've got another incoming question from an investor. I'm curious about what you're seeing in terms of maybe competitive build-for-rent supply. And there's a lot of other developers jumping in. They are operating -- maybe some of them are multifamily developers renting horizontal communities with on-site leasing model homes and amenities all on site. How do you -- what are you seeing competitively in terms of build-for-rent supply? And any -- the other question would be how do margins compare versus doing this -- I think Andrew meant versus apartments. But anyway, we'll dive in there. We can just follow up on some other thoughts with the build-for-rent platform.

On the build-for-rent, you've got a couple of things to be successful. You got to be able to build it. You can then have to be able to manage it. And we have seen that managing large portfolios of single-family homes is a little more difficult than people realized initially. We are doing build-for-rent. We are doing horizontal and vertical development, and we are doing communities as well, communities of 100, 125 homes in a single location. Again, as I mentioned in our prepared remarks, there's a couple of things about our communities. One is they're -- where others are -- they're contiguous to other rental home communities that we already own homes in and others own homes in. But the economics are better for 2 reasons, getting to your margin question. The first is that our investment in these homes is less than acquiring that same home from other channels. The investment in these homes -- let's go back. To a homebuilder, when he builds a home and sells at retail, 30% of that retail price plus or minus, is typically in 2 components. It is in the component of sales and marketing costs, and his profit. And our sales and marketing is 0. We build it for our own account. We don't have the sales risk of the home build -- that the homebuilder has because when we build a home, we know where it's going and there's no cost there. The profit component is just a reduction in our investment. So the investment value for the same home is going to be significantly less when we build it. Now on the -- the other piece on the margins is how we build the home. We are building these homes to be rentals, and therefore, we are building with slightly different materials and slightly different designs. And the materials that I'm talking about are higher-quality materials, not lower-quality materials, which may be counterintuitive. And the reason for that is we are going to need to maintain these homes in the long term, and we want to do it efficiently from a cost standpoint and a time standpoint. So we will build, for instance, a deck out of composite wood as opposed to a homebuilder doing it out a regular wood. A higher-cost component, but it doesn't need to be maintained, doesn't need to be stained and waterproofed on a recurring basis. So therefore, the margins in these homes are going to be higher than comparable homes in the same market from the standpoint that long term, the maintenance is going to be lower. And definitely in the short term, the maintenance will be lower, as they're new homes. The demand for the homes is -- it's just off the charts. And Bryan can talk about some of the experiences he's had with some of the tenants, but very, very strong demand for these new communities.

Yes. I think a factor -- a key point here with these communities and maybe how we're different than other entrants into this. Let me start by saying we haven't seen a lot of competition from other build-to-rent communities in our areas, when they may come in. When you think about the power of our platform, we look at the number of distinct shoppers, distinct customers who looked at our portfolio in May, we had almost 23,000 unique people come into our homes. And we only [ lease to people ]. So we have fantastic differentiators. We have the ability to shift that interest into upcoming new home communities. The match to a home might be 3, 4 months in advance as we deliver new product. So we can solve a lot of the prospects issues and really leverage that platform. And it's unique in that regard. I don't think anybody else -- maybe Invitation Homes has that level. But we're capturing all that interest, and we're trying to match-make our inventory with the prospects who are coming into the system.

Got you. That's great. So let me shift also to the new joint venture and the capital commitment from JPMorgan investor. So congratulations on that, number one. And maybe number two, what does that do for the platform now in terms of your ability to scale up? Maybe, Chris, if you can explain a little bit on maybe some added benefits of how that structure may work going forward. But yes, what does that do for the pipeline going forward in the future?

Sure. Having to talk about it, unless Dave, you want to start with any larger thoughts in terms of what it means was from a strategic standpoint.

No. I think the real benefit here is it's another really valuable source of capital. But it's also more than that. It is a high-quality partner. And you're going to hear from Chris in just a second. It's really a very high-quality structure that we have in this joint venture. But the partnership is more than just capital. JPMorgan Asset Management brings -- can bring opportunities for land and other opportunities like that to us. I know we're short on time, so Chris, you may want to go through the unique aspects of this partnership and how it benefits us more than just a source of capital.

Yes, yes. And Buck, let me just touch a tiny bit more on the strategy because I think that, that's an important piece to how the new venture fits in. And a lot of this goes back to some of our initial commentary from last quarter when we originally announced the venture. And keep in mind that our first priority is to ensure that we're meeting our on balance sheet capital deployment targets between investing of our retained cash flow generated from the portfolio, investing of recycled capital from our disposition program and then making sure that we are investing the appropriate level of debt capital kind in line with our leverage targets on the balance sheet. But recognizing the development opportunity and then the related demand for this product is so much greater than what we can just do our own on our balance sheet. And that's exactly where the venture comes in, right? And it's a $625 million venture, for anyone who is unfamiliar, that will be invested into our AMH Development program, building out newly constructed homes by us. And again, it's designed to be incremental and complementary to what we're doing on balance sheet. If I could take a minute real quick. I think it's really important to also keep in mind that the venture started as a $250 million venture just a couple of months ago, which we quickly upsized in April even amid the pandemic, to the $625 million range. So I think it speaks volumes to our partners' conviction level. And on that conviction level, I think it's important to point out that because of the long-term alignment with our high-quality partner here, we've been able to structure this venture on an evergreen basis. Buck this is exactly what you're getting to in terms of some of the unique aspects of it. And by an evergreen basis, I mean that the venture does not have a finite maturity date on it. It has the ability to live into perpetuity, which is very different than most other conventional joint ventures that typically and commonly have 5-, 7- and 10-year lines on them. And so as we get the ventures capital deployed over the next, call it, 12 to 24 months, it will enable us to capture a much larger portion of the overall build-for-rental opportunity as well as helping us to scale our existing development infrastructure, providing us with an attractive fee structure through a comprehensive fee set for development, property management and asset management functions. And then very importantly, because of the evergreen nature of the venture, we structured it and devised a way where we can earn our promoted interest inside the venture while it continues to live on. And what I mean by that, if we think about a sponsor's economics in a venture. One of the most meaningful parts is your promoted interest, which typically you earn on the back end conventionally when a joint venture is liquidated. Clearly, our strategy is not going to be liquidating homes. Our strategy is to be building homes that we're investing into on a very long-term basis. And so our ability here in this venture is that we -- after we deploy the capital, construct the homes and they operate in cash flow for a short period of time, we go through and we hypothetically value the entire portfolio on where we think the thing could be liquidated hypothetically on that day. We then put all those cash flows through the joint venture promoted interest waterfall, we calculate what the promoted interest payment hypothetically would be, and we readjust our capital account. So our capital is starting at 20%. Our partner is starting at 80%. Whatever the promoted interest is, our 20% goes up by that amount. Our partner's 80% interest goes down by that amount. Our capital accounts will relock in and live on into perpetuity that way, entitling us to do something greater than 20% of share of income, share of distributions, share of sale proceeds if we were to sell something down the road. So if you think about what that's doing for us and the amount of value that is created from our development program that's otherwise kind of somewhat trapped-ish on the balance sheet. Yes, I totally would make the argument -- you can argue that into NAV. But if you truly want to monetize it into cash flows, the only way that you can do that is to sell something. This gives us a great alternative to that, monetizing a portion of the value-creation process into cash flows on an ongoing basis as well as all the other benefits I was talking about.

And it's wonderful and a great thorough answer, and we appreciate that. And we are at our time limit for this session. I want to thank the team again for joining us, and thank you all, the attendees, for making time on your day to join us. If you've got follow-up questions, please let us know. We're happy to help if we can. And with that, I'm going to let the guys go. Thanks again, and congratulations on these outstanding and encouraging results. Good job, guys.

Thanks, Buck.

Thanks, everyone. Talk to you soon.