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

Good afternoon, everyone. This is Alua Askarbek from the BofA REIT team, and I have Victoria Francis on the line with me as well. Welcome to our roundtable with American Homes 4 Rent, a leading single-family rental operator and developer. With us today, we have Dave Singelyn, Chief Executive Officer; Chris Lau, Chief Financial Officer; and Bryan Smith, Chief Operating Officer. [Operator Instructions] We will be looking for those questions, and we'll ask on your behalf. I will now pass it on to Dave to start us off with any prepared remarks.

Thank you, Alua. Let me start to -- with recognizing that we may have some individuals on the call that are new to the American Home story and new to single-family rentals. Before I start, I will remind you that we have posted on our website at americanhomes4rent.com on the Investor page a presentation for this conference that will cover much of the material that Chris and I and Bryan will be talking about today. A little background on American Homes 4 Rent. We are a relatively new company. We started in 2011, seeing an opportunity to acquire single-family homes and institutionalize them into a rental class. This unique opportunity was available to us in 2011 because of the pricing of the homes at that time, allowing us to co-invest and build a platform. But technology gains, both on the flow of data as well as the mobile technology, were key drivers in permitting this asset class to start in 2011. A little bit on our life cycle. We focused -- as I said, we started in 2011 purchasing our first homes from banks and foreclosure and through the MLS. We call this the traditional channel. We went public in 2013. And in those early years, our focus was on building scale. We -- our assets -- real estate assets are different than other real estate asset classes in that the dollar amount of -- or the investments of each asset is relatively low, in the hundreds of thousands of dollars, not in the millions of dollars. So scale was very important in the early years. We then focused on our operating platform, being an industry disruptor, using technology in ways it was never used before, allowing prospective tenants to access our homes without leasing agents. But our focus has always been on the long term. Our focus with -- from the operating platform to our balance sheet. In the early days, we used all capital that was available to us, including a significant amount of debt. Our investment in our balance sheet was to reduce the amount of debt to permit us to be flexible in all economic cycles and to derisk the balance sheet as well. We have seen the benefits of that in the last 6 months during the COVID period, where we -- our balance sheet with the low risk gave us the confidence to continue to execute on our growth programs. Our access to capital is -- has been demonstrated on every channel, whether it is debt, whether it's preferred stock, JV, capital or common equity. In 2020, we have done a joint venture with a high-quality joint venture partner. And we did that in February, and we upsized that program in the middle of the COVID period of time, indicating the joint venture partners' confidence in the asset class in all economic cycles. In addition, we have done a common stock offering this year to, again, facilitate our growth programs. Let me just move to our growth programs. They are in 3 channels, the traditional channels that I mentioned. We also built -- or buy a significant number of homes in the past from national builders of new homes. These 2 channels are open. We are executing on them. Our portfolio is over 35 markets, giving us tremendous opportunities to acquire homes. But the traditional channels and the national builder channels are a little supply-constrained today. Our -- the inventory of homes available for sale is at record lows over the last 3 to 4 decades, and national builders are having one of their best quarters in history, meaning that there's going to be less opportunity for us to acquire homes. Our development program, we started at 3 to 4 years. We're the only single-family rental company that has both a development program and an institutional operating platform. We started 3 to 4 years building homes. We have now been delivering homes each and every week. In fact, we are opening new communities each and every week. We're up to 55 or 56 communities, and you can track our new communities through press releases that we issue every week. But more than just a consistent delivery, these homes are better quality rental homes. They're built to be rentals. That means the long-term maintenance of these homes is going to be more favorable than homes that we acquire through other channels. An example of this will be the ability to build a -- the inside with basically permanent materials as opposed to materials that we have to replace on the turns. I'm thinking of flooring as an example. We put hard surface flooring in. Tenants like it. They can tell that the house is clean. It's very good for us because it saves us time on the turns, which is valuable to us as well as it saves on the cost of having to put new carpet in each year. And obviously, that's good for the environment as well. Decking is just another example. We don't have to stain and waterproof our decks that are made out of wood. We make them out of composite materials, significantly reducing future maintenance. But the economics are better, more than just the maintenance. And that's because when you build it, your investment in that home is significantly less than acquiring at other channels. There's the development profit that would go to a homebuilder, the sales and marketing costs that would go to a homebuilder. Those are savings in the investment, meaning that this is the best channel to acquire, giving us the best economics. Today, we own 53,000 homes. So that's what we had at the end of the last quarter. That number continues to increase. We're in 35 markets, providing great diversification to reduce risk from any one market being a concentrated portfolio, and as I indicated, provides many more opportunities to expand and grow. Real quickly on the demand for single-family rentals. It was -- it's been very strong. It's gone -- increased each and every year that we've been in business. We started this business nearly 10 years ago with 13 million homes being single-family rentals. Today, that number is just short of 17 million. The institutional players own about 300,000. As I indicated, we own 53,000 of those. That demand has continued to increase as the prospective renters see the value proposition of single-family homes, especially for family. The yards, the ability to socially distance and the -- with our new communities, the ability to have community like they have in multifamily. It's in better school districts, and it gives you the ability to have that single-family life without the obligations that come with the homeownership, and you get the flexibility of being able to move in and move out without all the commitments. The trends that we've been seeing are consistent. What COVID has done is accelerated these trends. It hasn't changed the trends at all. And those -- the trends that we are seeing getting more pronounced is the migration from multifamily into single-family. The migration from certain states into other states such as New York down into the Carolinas, both North and South, and the Florida markets as well as migration into Texas. On the West, we're seeing our markets in Boise and Las Vegas, Phoenix as well, Salt Lake City as well as Texas being the beneficiary of migration trends as well. So that's a little snapshot of what we are seeing here at American Homes 4 Rent. Our growth, we're well positioned for growth and are more excited about the future. We've had good operations in 2020. And for a little update on that, I'm going to turn it over to Chris.

Thanks, Dave. Yes, Alua, before I turn things over to your Q&A, I just wanted to cover a few of the high points from our operational update that was included in our investor deck, which as Dave mentioned, was posted to our website earlier this week. Simply put, I would say that our operational updates for July and August are just a great reflection of the tremendous demand trends we're seeing across the entire portfolio right now. To put a finer point on it with a couple of examples, in July and August, we saw a 30% increase in our number of showings per available unit and a 50% increase in our number of applications per available unit, just off the charts demand metrics, both of which helped to drive our same home average occupied days percentage to a new company record high of 97% in the month of August which, for some context, is 170 basis points higher than August of last year. And then we also accomplished all of that while pushing new lease rate growth by 5.4% in July, which was 70 basis points better than last year and also by pushing new lease rate growth by 6% in August, which was 260 basis points better than last year. And as a reminder, July and August are actually -- are typically the months where we begin to intentionally and strategically back off rental rate growth as the leasing season typically begins to slow down as we approach Labor Day. So to see this level of sequential month acceleration into August, I think, just goes back to and speaks to the tremendous demand environment that we're seeing right now. On the renewal lease side, just like we announced and began talking about on our last earnings call, we are continuing our socially responsible return to normal operating practices. We saw a 1.4% effective increase on renewals in August and are now sending out renewal rate increases in the 3% to 4% range for October through December as we're continuing that ramp back to normal renewal increase levels. We are also continuing to see great resiliency on the collections front, with slightly over 97% of our second quarter rent billings now collected, which, as a reminder, is in excess of the 96.5% of our billings that we conservatively recorded as revenue in the second quarter, meaning that those extra dollars now collected will be recorded as additional revenues into the third quarter. For July and August, we've been experiencing collection trends very similar to the second quarter. And although still early, our September collections through the first 5 days of the month have actually been our strongest start to any month since the beginning of the pandemic, and we're actually not far off from pre-pandemic levels. To round things out, on the expenditure side, 2 quick items of note. One, similar to the second quarter, we are continuing to deliver our entire suite of maintenance services, of course, operating safely and in compliance with all health and safety requirements. And then item two, also similar to the second quarter, we are continuing to see some levels of elevated stress on our HVAC systems in a number of markets, given the continued heavy usage throughout the summer months with our families living, working and unfortunately now, remote learning again from home. And are expecting some incremental CapEx in the third quarter, likely similar to what we saw in the second quarter. But Alua, just to wrap it up, I think we've been incredibly pleased by what we've been seeing so far in the third quarter, which just puts us in a great position of strength as we round out this year and head into 2021. And so with that, Alua, I'll pass it back to you for Q&A.

Thank you, Dave and Chris, for the overview on the latest operating updates. I would like to stay a little bit big picture before we dive into some of the comments you made. So as you mentioned, the year is going well, 3Q is doing really well. And with about 5 months into the pandemic, how are you thinking about the rest of the fall? And what are your expectations just for 2020 overall?

And is that on the growth side or on the operations side?

On the operations side.

Bryan, would you like to take that?

Yes. Thank you, Alua. We're really pleased with our position right now. Chris mentioned that our business historically has had a pretty's heavy seasonal effect, especially on occupancy. And we're entering the -- finishing up the third quarter, getting ready for the fourth quarter in a position that we haven't been in before with 97% average occupied days in August, as an example. We're expecting to continue that momentum. We're really optimistic about the -- our ability to handle the demand, our ability to turn homes and to maintain that high level of occupancy. We're also very happy about the rate growth that we're seeing, which is, again, a result of that demand, pushing it -- pushing rates to a level on re-leasing that we haven't seen before during this time of the year. And ultimately, to getting back to normal renewal increases, which we're starting to progress towards. So for the rest of the year, we're very pleased with where we stand now. From an occupancy perspective, we're hoping to maintain or slightly improve that and then really translate that into pricing power to move rates as we exit the third quarter into the fourth.

Got it. And so just thinking about guidance, it seems like you guys have a little bit of a better handle on what's going on in the market. What is the biggest uncertainty today that keeps you from reinstating guidance?

Alua, it's Chris. I can hop in on that. As we all know, we did withdraw our guidance at the start of the pandemic just given the unprecedented levels of uncertainty, much of which revolved around collections, quite frankly. And to date, we've been -- as I mentioned in my opening comments, we've been incredibly pleased with the resiliency of our tenants and our collections. But we recognize that there is still uncertainty ahead of us, including the fact that we still have an eviction moratorium in place that runs through the end of this calendar year. So I wish I could give you a concrete answer on the view on guidance, but I would say collection clarity will be the key. And in the meantime, just as we've been doing to date, we'll continue to do our absolute best to provide as much visibility as we can into the other parts of our business that we do have clarity on.

Got it. And then just thinking a little bit on like the unemployment side and the stimulus checks. So you said that September is actually trending much higher in collections for the first 5 days. Is -- have you heard anything from your renters in terms of unemployment in your markets or the lack of government stimulus over the past month that maybe just going forward, may be an impact again?

Yes. Alua, it's Dave. Let me address that in a couple of ways. One is we're very fortunate to have very few of our residents in a position where they are not paying rent. And in those situations, we are in discussions with them on worked out plans, et cetera, and we'll have a little bit more clarity as to their employment situation. But the majority of our tenants are paying. And in that situation, we don't have insight as to whether they're employed or not employed. But let me give you a couple of facts that you can draw some conclusions from. One is, if you look at American Homes 4 Rent, I talked a little bit in opening comments about our markets and how we selected them with employment growth and job growth, and that is better than our peers on average. Well, the same holds true for job loss in our markets from unemployment. And on average, we are better than all the residential real estate companies with the exception of one, and that one is Mid-America, and there's some information in our deck on them. But the other information we have is on our tenants when they apply to lease. Our information is from application date, and that information shows -- has 2 facts. One is that the average household income is greater than $100,000 but generally is represented by 2 individuals working in the house. So if one loses their job then the second one still has funds to pay for the essentials, housing and shelter and food. But where our tenants work is probably the most important. And we have a very small number of at-risk industries represented by our tenants, hospitality being the most risky right now. It's less than 10% of our entire portfolio, primarily concentrated in Las Vegas and Orlando. But most of our residents are in health care, in construction, in office and government, industries that are very resilient through these times. So the last thing I'll just mention is Chris indicated that the collection trends are very strong, and September is the strongest we've seen during this period. And I know that -- and Chris may have mentioned this, but there is a national eviction moratorium that was put in place about a week ago. But I remind you that beginning in March and April, all of the states were putting in moratoriums, and those moratoriums were much more onerous than the moratorium that the federal government put in. Under the federal government one, it's a compromise, and it's an attempt to be fair to both sides. They have to certify as a resident that they cannot pay their rent because of COVID, they've applied for assistance and that they could be homeless otherwise. It also -- they acknowledge that their rent is due and that late fees will be charged. That is much better than what we were living under with the state mandates, where even late fees were prohibited from being charged. So as we move forward, the environment is still uncertain, hence your question on guidance, but we're in a much better place today than we were. But again, there's a lot of uncertainty as we move forward day by day.

Got it. And then just kind of looking at job growth going forward and your current geographic exposure, are there any markets that you think long term will underperform? And any shift that you want to make in your exposures?

No. I mean today, as I indicated, we're in great markets. We have very strong population growth. We have strong employment growth. That's going to facilitate and fuel long-term demand. We have exited a couple of markets over the last 3, 4 years, markets that we may have got into and portfolio acquisitions that were noncore. We do sell homes here and there that, for one reason or another -- so we do have an asset management and recycling program. Today, we're comfortable with the markets that we're in. We do not have any plans to announce of -- opening up any new markets.

Got it. And just a question from a client that goes with selling properties. How do you decide when to sell a property and which property to sell in a portfolio?

I'll turn that one over to Bryan, who is more involved in the day-to-day.

Yes. We're carefully tracking each of our units on an individual basis. And the disposition decisions, they range across a couple of areas. We have some assets that aren't performing as well from the expense side. We have some assets that we're disposing of that were acquired through bulk acquisitions as an example. We're looking for characteristics that just don't fit our current profile and taking the opportunity to recycle that capital into our newer development homes as an example. So the homes with septic systems is one example of assets that we're culling from the portfolio. And then there are certain cases where the effective yield on the home, where the rents haven't increased with the same pace as HPA, that it makes sense to recycle those houses as well.

Great. And then just another client question on the other side of this. How do you look at operating margins and G&A efficiency as you increase the number of homes per market?

Yes. So I'm glad you asked that question. We look at -- when you look at margins, there's a lot of ways to look at margins. And a lot of it is tied to decisions made around accounting as to whether items are going to be expensed above or below the property operating line or expensed or capitalized with respect to maintenance. There is information in our slide deck that provides all the computations I'm going to talk about. But when we look at margins in this industry, we look at it as cash flow after all expenditures, meaning after G&A, after capital improvement, that gets everybody to an even playing field and takes the accounting differences out of the equation. And American Homes 4 Rent has the highest margins in the industry. Why do we have the highest margins? A lot of our performance -- operating performance is done with -- in central operations. Yes, we have people in the field to do maintenance, people in the field to assist in the leasing process. But I indicated that we have a let-yourself-in technology. We have 3 call centers that manage all aspects of the lease life cycle from perspective through maintenance and customer service and all of that is centralized. So we don't have to have as many homes in a market to be efficient. And so when we look at efficiency, we -- as we add homes, you're going to get a small benefit in the field, but we really look at the efficiency, and our scaling is monitored more in our central operations where the majority of the cost is.

Alua, it's Chris. If I could just add one thing. Totally agree with everything Dave just said, and he beat me to the punch. But just to give people a road map, we have a summary on Slide 5 of our most recent deck on how to compute, as we call it, a fully adjusted EBITDA margin. But essentially, the comprehensive metric that Dave is talking about. And if anyone is looking for additional details on that, you can go to our supplemental or the defined terms and reconciliations at the back and you'll see a full road map to how to calculate this metric, which is, as we've been talking about, fully comprehensive and also comparable across companies because as Dave pointed out, NOI margins and things like that oftentimes are not comparable from one company to the next. And when you do that math, either for us or the rest of the single-family rental and multifamily peer set for that matter, as Dave mentioned, you'll see that our margins relative to the rest of the SFR landscape are, at minimum, a couple of hundred basis points higher and have been -- ours have been increasing over the last few years and are beginning to get closer to multifamily levels as well. And we think that, as Dave mentioned, there are plenty of efficiency opportunities still ahead that will help us to squeeze out more of that delta between us and multifamily longer term.

Great. And then just kind of also looking at the city exposure perspective, we have a client asking, would you prefer to expand more towards Tier 1 or Tier 3 city suburbs? And kind of how you look at that decision within a market?

I'm not sure I understand the question. Can you -- maybe I missed a part of the question. Can you say it again?