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

Thank you. Welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Nick Joseph with Citi Research. We're pleased to have with us American Homes 4 Rent and CEO Dave Singelyn. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. [Operator Instructions] Dave, I'll turn it over to you to introduce the company and the team, make any opening remarks, and then we'll get into Q&A.

Thank you. First of all, I'm joined today with -- by Chris Lau, our Chief Financial Officer; and Bryan Smith, our Chief Operating Officer, is also joining me today. Let me start by summarizing a couple of points from our recent earnings call. First, it starts with demand for single-family rentals, then a couple of comments about our platform and then to talk about our future. It all starts with demand. And we've done these conferences for a number of years. And I feel like it's a repetitive statement that every time I come, I make a statement that demand is stronger than we've ever seen before. And that's true again this year. And I think it's really a reflection of the fact that over the last 10 years, we have seen or had a spotlight put on single-family rentals and what that value proposition is with the professional managers demonstrating the value that you can have in a single-family home and contrast that to the mom-and-pops. So the demand that we see, it continues to get stronger. This is not a new trend, that's a continuing trend, and I expect this trend to continue. The second piece is our platforms. We've talked about our platforms at prior conferences. We've talked about the quality -- the investments we make in our operating platform, the investments that we've made to date in our balance sheet, giving us the most flexible balance sheet in that space and then all of our growth programs. And we've said that those investments are well positioning us for the future. Well, the exciting thing is today is the future. And we are seeing all of those platforms benefiting us today. In 2020, we had the highest FFO in the residential real estate sector. Our guidance for 2021 is just as high. It's the highest in the sector at 8%. But my excitement is not necessarily 2021, it's 2022, '23, '24. See our growth programs are well primed for future deliveries into the single-family rental space. Our development program is 4 years old, and the homes that we're delivering today are homes that are on land that we acquired a number of years ago. We've made a push to acquire additional land. And today, we control 10,000 lots. I expect that will be 11,000 to 13,000 lots by the end of the year. And that's the real excitement for us is that not only are we delivering good operating results today and have good growth today. The growth is going to be better in the future and continue to escalate each and every year. Before I turn it back to you, Nick, let me just turn to Chris just to emphasize a couple of those points.

Yes. Just some -- thanks, Dave. Just for some additional color, as Dave mentioned, to emphasize a couple of points. In particular, around that demand environment that Dave is talking about, where in the fourth quarter, we saw a 60% year-over-year increase in our number of showings per available unit, just incredible numbers. And we saw a 30% increase in our applicants coming from states outside of the American Homes 4 Rent footprint, right, which I think is just a really good example of the ongoing migration patterns right now in our country that we believe are a long-term demand tailwind for specifically our portfolio footprint. And we see that momentum carrying right through the beginning of '21 so far with January and February. Same-Home average occupied days is still running over 97%. And that is nearly 200 basis points higher than the same time last year. And new lease spreads are running over 9% and renewal increases are running over 5%. That's translating into a blended leasing spread in the mid-6% area, and that's about 300 basis points higher than same time last year. You then couple that with the external growth programs that Dave is talking about, where we expect to deploy approximately $1.2 billion of AMH capital this year, without the need for common equity. And that's because of the strength of our investment-grade balance sheet and then our existing leverage capacity. And just as Dave said, you can see that we have some really great momentum as we're executing on that full year guidance expectation plan of nearly 8% core FFO growth in '21. So Nick, I'll pause there, turn it back to you, but I just wanted to share a little bit of extra color.

That's very helpful. Thank you. We're starting our session off with the same opening question. Coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in AMH?

I just go back, Nick, to our opening comments. And one of the things that we said on our earnings call is we're very well positioned to grow, grow, grow. And I know that's not 3 different things, but that's kind of where our model is. Our platforms are delivered excellent results for the pandemic. And that's not by accident. We've designed them to be flexible as well as responsive. But the investments we've made in the position that we have coming out of this pandemic and the demand behind us needing good quality housing positions us for very, very strong growth in future years. And our industry-leading FFO growth of last year and based on guidance for 2021, I actually think 2022 is going to be stronger than '21 and vice -- and '23 even stronger than that based on the homes that we expect to deliver based on our landholdings today.

And so that comment of '22 and '23, is that specific to the external growth? Or do you also think you'll see accelerated internal as well?

The internal platform is designed to be able to take the homes that we are acquiring into the platform. And majority of our platform is centralized. So as we continue to acquire more homes onto the platform, it will provide synergistic benefits to the entire platform as we spread the fixed cost of a centralized platform over more and more homes. So yes, we'll get some benefits to the existing homes as well. Bryan can talk and I'll turn it over to Bryan in just a second about the demand that we're seeing and the pricing power that we have today in our platform. And all of that, based on the demand that we see, I expect to continue. And with that, Bryan, you may just add a couple of data points for Nick and the listeners on what we're seeing on occupancy and rental rate changes.

Great. Chris mentioned a couple of the most dramatic ones in his opening comments, and we talked about it on the earnings call as well. Huge uptick in interstate migration, specifically from California into the West, including Texas, and then a marked increase from the Northeast, New York, New Jersey, into the Carolinas and Florida. So we're seeing a fantastic demand for our existing portfolio, even better-than-expected demand for the new build-to-rent product that we're bringing to market. It's translating into really nice rental increases on re-leasing. It's also -- I think our value proposition is being appreciated in these current times as can be seen in our retention numbers. So we have some really, really nice momentum going into this year. And I don't see the demand letting up at all, at least through the first couple of months. So I think we're in a great position to continue to push rents certainly on the re-leasing side. Deliver very strong renewal rate increases and maintain really high record levels of occupancy.

How do you think about the durability of that demand tailwind? Obviously, COVID was an accelerator somewhat. Do you think that trend persists? Or do you think there's a possibility of a headwind and a move back to the coasts?

I don't see the demand changing. The demand and the trajectory of the demand was well in place before the pandemic. If the pandemic did anything, it intensified the spotlight on the single-family rental value proposition. I see there continuing to be a further and further demand for our product. There's one thing to keep in mind is that we have a housing shortage and we've gone 10, 12 years with household formations exceeding new housing stuff. And even in light of the fact that we had very, very strong homebuilder results over the last year, the demand for single-family rental continues to be very, very strong at the same time. The demographics of our renter population look for the flexibility, look for the lack of commitment and obligation, look to experience life today, and the single-family rental product fits their needs very, very well.

You collect a lot of data, Bryan, you mentioned some a bit of where people are moving from. Is there anything changing of who's actually occupying these homes? Is it younger? Or is it older? Anything from an income-level perspective? What other insights are you getting from that data?

Yes. The applicant makeup, the profile is remarkably similar to pre-pandemic in terms of age, number of applicants. So we're still seeing families. The increase that we've noted lately is an increase in incomes, which is great. It keeps the income-to-rent ratio in the 5% range, which we're very comfortable with, facilitates the renewal process and really puts us in a good place. But the demographic, the profile has held remarkably consistent through the pandemic from a credit score perspective, which is a slight uptick in income that we're seeing more recently. So Q4 had a bit of a difference.

And what have you seen in terms of move-out to buy homes? You talked about the higher income demographically had been moving in. Do you think that there's a higher propensity for them to eventually move out to buy a home? Or do you think they're as sticky as your traditional renter?

Yes. I think there's a couple of factors at play. Our residents have, for the most part, the ability to buy homes with their rent -- with their income levels and their credit scores. In many cases, they're choosing to rent for some of the reasons that Dave articulated earlier. Our -- the percentage of residents who are moving out to buy homes has held consistent as well. It's in the mid-30%. It's what we've seen consistently for the last few years. So I believe they have the option, and many of them are choosing to rent because of the convenience and the lifestyle. A couple of things that we track very carefully. Our resident surveys are important to us. The customer satisfaction scores from move-in to when they have a maintenance call to ultimately their move-out process, coupled with our Google review scores, all show record levels of resident satisfaction. Our Google scores are at all-time highs. We're really making sure that they realize the value proposition, and it's being appreciated by our residents. So I think all of that contributes to really showing what we deliver, what we can offer as an institutional manager. And I think people are choosing to stay in the rental homes rather than buy in a lot of cases.

You put out the operating update ahead of the conference. Obviously, you mentioned the strong occupancy and rate growth that you're seeing. Is there anything you're seeing from a geographic standpoint, either from the positive or negative side of those averages?

Sure. The Western United States is performing phenomenally, not only on the occupancy side, which you've seen in rate growth but also on collection. So Phoenix has just been outperforming for a long time. Salt Lake City has been fantastic. Vegas has some local economic pressures, but I think that it's been picked up by people migrating from California. In many cases, they're keeping their jobs and working remotely into California. So the Western United States is really performing well. The whole portfolio is, in terms of occupancy and rate growth, setting new records all the time. There are a couple of places where we've had a little bit of collection pressures that we've talked about on prior earnings calls, but they are the ones you could probably logically deduce: Houston, a little bit; Vegas; Chicago, to a certain extent. But it's really overshadowed by the fantastic outperformance on rate growth and occupancy that we've seen.

What are you still dealing with either local or state-level restrictions either on collection to the ability to move rent?

I think -- Dave, do you want to go?

I mean that -- we are seeing that and essentially in one market, and it's the state of Washington for us. There's -- the state of Washington today has restrictions on increasing the rental rates on renewals and on late fees. On a national basis, we do have the eviction moratorium from the CDC still in place. And there's a little bit of uncertainty exactly when and if -- when that's going to expire. And it looks like that's going to probably get extended for a couple of more months by executive action. So that is something that is a moratorium only on those people that are impacted by COVID. They have to sign declarations to that effect. But those are still in place. Those have been in place all year, and we've seen our collections be pretty stable from the time that pandemic started through today in right around that 2.5%. So we're managing that process, but those are the real 2 areas that we're seeing the impact.

What opportunities are you seeing on the other revenue or ancillary revenue line items that could produce growth going forward?

Yes. So on the other income areas, one is we don't necessarily talk about exactly what we're going to be rolling out until it's rolled out. And we've done a couple of innovative things that now are kind of standard. Let Yourself In technology, we work with the company to help develop that and others are using it. But -- and then the development program, this is kind of one of those other innovations. But on ancillary income, to date, we have the pet programs in place. And there are a couple of other ancillary business lines that we are exploring. And when they're ready to be rolled out, then we will talk about them.

You have any details around the potential size of what kind of the annual revenue uptick could be?

Yes. Once it's rolled out, then we'll discuss that.

Can I add some numbers to that? Just shorter-term for '21, you can deduce this from our guidance, but we're expecting about 30 basis points of same-store revenue contribution from the fee line. That's a combination of the continued rollout of the pet fee program. And then also keep in mind, we have a little bit of a soft comp as our late fees were turned off for about 4 months in 2020. Those 2 combined will be about 30 basis points of contribution.

Perfect. Maybe on the expense side, obviously, real estate taxes are the big driver. But how do you think about the ability to become even more efficient going forward? Obviously, you've moved your NOI margin up significantly over the past few years. Part of that's revenue driven. But if you're looking at the expense side of it, how do you think about the scalability of the platform?

I may be a little bit different. We look at margins maybe slightly different. We look at it as the total cash that's available to the shareholders from revenue. And so it's the EBITDA after CapEx. It's the total package. And today, we lead the industry at 53.6% margin. And so how do you maintain that position? How do you improve that position? I think it starts, Nick, with our development program. And the reason I say that is when you think about the future and where you've got to be concerned about expenses, it's tied to the age of your portfolio, tied to the maintenance that's going to result from an aging portfolio. Not only are we keeping the age of our portfolio lower by adding new homes. Our development program is different than acquiring homes from a homebuilder because we are building them with future maintenance in mind. We are building them with the hard surface floors. We are building them with more resilient countertops with composite materials in decking. So you don't have to stain them. You don't have to maintain them. Not only is that good for our profits, it's good for the environment to some extent as well. And that's part of what we are looking at as we build homes is how to build these homes as environmentally friendly as we can. So I think the whole program around being as efficient as you can is about centralized operations and scaling your centralized operations. The field operations, if you add more homes, you've got to have more field techs. It's just -- there's going to be one field tech, he can do 10 homes. He can't do 100 homes or 1,000 homes. You just have to scale that. But the centralized operations is different. And then it's maintaining your maintenance cost. And today, we maintain a home between our CapEx and our maintenance costs as efficient as anybody in the industry. And we are going to stay there because of the way we're building the homes and the way we maintain the age of our homes. So that's the way I look at the long-term margins. Really, you got to look at it in totality after all costs, G&A, CapEx, et cetera.

And so from the size of the organization from a centralized perspective today, how many homes could it support?

It can support -- one of the things that we have looked at is making sure that we build all of our platforms for scale. We continue to invest in the technology. Right now, we are doing some significant upgrades to the technology and the development side to make sure that we can significantly scale from where we are. Scaling to where we expect to be in 2023, '24, we can do that. But we're going to invest more into those platforms to make sure that we can continue to scale. We've done the same. We talked about, in the opening comments, investments in our platform. This is what we're talking about. We've done that on the operations side. So if you took our platform from 50 to 100, I'm confident that there's no issues there. And yes, we'll need to add personnel in field, and we'll probably even need to add some personnel in home office because -- but it will become more efficient overall.

Maybe one more operations question before we turn to development and capital allocation. You've seen significant reduction in the days to re-lease the house. Can you walk through the opportunities for here? Where we are today, where we were and then where it could ultimately be?

Bryan, you might have a better knowledge of the exact numbers where we are.

Yes. So if you take a look at how we did in Q4, year-over-year, we had a dramatic improvement of about 20 days. I think that might be what you're referring to, Nick. The biggest piece of that has been reducing the marketing time, a function of the demand, function of improvements in pre-leasing. But we also did that in the context of significant upgrades to our flooring, to our property-enhancing CapEx program. So there's a lot of work going on into those, and we do have efficiencies on our time to prepare the house for being -- for rent ready. I still think there's room for that. There's opportunities to increase our pre-marketing efforts, which drive those times down. In terms of preparing the home, we will see future benefit from the hard surface flooring. As those homes turn, we're going to see benefit from the new builds, specifically the build-to-rent communities. Those are going to be easier and quicker to turn as they come into the system. So I do think there is room for improvement, but we've made fantastic strides into the mid-30s. My expectation is to hold it there and then try to optimize to drive those down into the low 30s, 30 days, that is.

Dave, what's the best capital allocation decision for AMH today?

Well, it starts with keeping it in balance. Today, we got $200 million plus of routine cash flow. We're going to have about $100 million of recycled cash coming out of dispositions. And we are currently sitting at mid-4s on our net debt-to-EBITDA and our target is mid-5s. So that's a significant amount of debt capacity that we have. When you look at -- when you ask the question about capital, capital is really, at the time, is -- right now, we have the currency in our comment. We have a lot of interest that is inbound right now of potential joint venture partners, wanting to partner with us on the build-for-rent concept. And so we have a lot of flexibility on how we handle our future growth. The exciting part of this question is it's -- we've got all these options. But we have capacity to take advantage of any opportunity that's in front of us. When we look at our growth program, we know pretty much what our development programs are. But to date, the supply of MLS, we -- those opportunities are at record lows and the homebuilders are having record retail performance, reducing the potential to us. At some point, that's going to increase for us. And when that does or when M&A occurs, our balance sheet is in position to take advantage of all those opportunities. So the good part here is that we've got many, many options. And on any given day, we'll evaluate what we believe to be the best option at that point.

And how do you think about on balance sheet development versus third-party JVs or JVs versus third-party developer relationships?

Oh, third-party development relationships. The ability that we can build our own homes is going to be, first and foremost, the best channel for us. It gives us a better product. It gives us a much better yield on what we are building. The better product is due to the fact that we are building it for rental specific. Homebuilders are building it for a profit. So we will put in higher-quality materials that are going to wear better. They are going to cost more. That would erode some of the homebuilder profit margin. But when you look at the economics, you've got to keep in mind that when we are building a home, we are not incurring the sales and marketing cost, the development profit that would be experienced by the homebuilder. It is just a reduction of our investments. And even though that we have a slightly higher cost of materials because we're putting in higher-quality materials, our investment cost is significantly lower when we are building that home. And we are also building that home with the amenities that our renters are looking for. And we've got, I believe, 5 different amenity packages, depending on the size of the communities that we are utilizing. So we have the ability to provide a better product at a better yield. But we are limited. It doesn't mean that we should not look at the National Builder Program as well. We do. We think it's a very high-quality product, not as good as ours but a high-quality product. We're limited based on the land that we own as to what we are going to be able to build and add to inventory. And we can supplement that with the other 2 channels and still have very good accretive properties.

I think you talked about a target of less than 5% in land. How do you come to that number? How do you think about kind of growth of the platform and part of that is backfilling with the future pipeline?

Yes. At 5%, it's still enough capacity for us to have land on our own balance sheet, especially to get the program going. But it doesn't change the risk profile of the company. We're still a company that 95% of our assets will be the annuity, cash-flowing assets, operating assets that we have. Today, we're still under 5%, but we are getting closer to the 5%. And at this point, we are looking to avail ourselves of some of the landholding techniques that the national homebuilders use. We're optioning land and using land banking firms as well. That will reduce -- that will keep the risk in line with where we are, the lower risk than having it all on our balance sheet. But we're looking to really keep this company being perceived as an income-producing rental company, not a development company. And 5% is kind of the target that we set for ourselves.

Great. Well, I appreciate everyone sending in so many questions. So I want to make sure we hit on these. Dave, the first one is about your opening comment actually, the '22 or '23 clarification. Are you talking about core FFO growth will accelerate above this year's 8% rate? Or what was that kind of out-year growth comment specific to?

Well, your growth in FFO is tied to your operating platform growth. And then it's enhanced by your external growth. And our external growth, while significantly higher in '21 versus through 2020, I see that to be higher in 2022 than 2021. So the external growth is going to facilitate better FFO growth as a result.

We have a question on the increases in the price of lumber, land, labor, et cetera, and how that's impacting rental rates and yields on development.

Yes. So those are the 3 elements, the 3 Ls of cost increases, the cost pressures. We're actually very fortunate on the land side. We -- there's always going to be competition anyway. It's been since Day 1. When you look at our land holdings, we significantly increased our land in 2020. And that path has continued in the first 2 months of 2021. So we've been very successful in increasing our land holdings. And it's all inside our pro forma numbers. And while there is a little bit of an impact on inflation that we have seen, it's not a significant amount. The labor, we've been very fortunate on the labor side. I don't think we've seen the same increases in labor that our homebuilding friends have seen. And I think it can be attributed to the fact that our development program is slightly different. Our cadence of deliveries is very, very consistent from month to month. It's designed that way for the absorption of the homes into the operating platform. That cadence keeps all of our trades very consistently employed, and that's a little bit different than the peaks and valleys you will see in the homebuilding industry. And I think we've enjoyed that loyalty and some of the pricing that we've seen because they can be employed 12 months. And we've got many that have been on the job for 12 months or more. And that brings us to lumber. Lumber has definitely increased. It's essentially doubled in the cost over the year. But keep in mind what lumber represents as a percent of a house. Lumber is -- when you drive by and you see a house that's trained and all you see is lumber, it seems overwhelming that, that's a large piece of the cost of a house. In fact, it's single digits. It's 4% to 5% of the cost of a house traditionally. It's -- with the pricing doubling, it's more than 7% for us. And so that's a 3% to 4% increase in the cost of the house over and above everything else. And so that we will see year-over-year. But at the same time, you talk about how does that impact rental rates. I don't think it impacts rental rates. They're really on 2 separate tracks. But the significant increase in rental rates that has happened because of the demand for single-family rentals has outpaced our performance as well. And one has offset the other. And we're still seeing essentially the same yields in 6% on a stabilized expense basis on per share revenues. That's kind of where we are. And that's where we were. And yes, there's 2 different opposing events going on, but they offset one another.

Right. What are your top 3 priorities to improve your ESG score next year?

Well, I think the first -- it all starts at focus. Our Board is very focused on ESG. You'll see that if you go check the charters of our committees, they've been rewritten this year to have ESG oversight. So the Board is very focused on ESG, and that makes it a priority for the company. If you look at where we probably have the biggest impact is, again, it comes back to the development program. We're putting in low-flow showerheads, low-flow faucets. We are putting in hard surface flooring, so we are not replacing carpet every time. We are putting in composite decks, so there is not the chemicals necessary to waterproof and stain it being applied every year or every other year. So that's where we are today on that. And the other piece about the development program is that we are also in the process of, I would say, setting the benchmarks. And then you can set standards for further benefit doing HERS ratings on our homes, et cetera. We have less than 4,000 homes. We'll deliver another 2,000 this year. Majority of those 4,000 were actually delivered in the last 18 months. And so we are just at that point where we are starting to do the benchmarking in HERS ratings. And then we'll have some probably better discussion points on this a year from now.

Great. We have our -- we're less than a minute here, but let's hit the rapid fire quickly. When we're sitting physically together in Florida 1 year from today, what will be the one thing that will have surprised people the most about your business over the prior 12 months?

Yes. I actually think there is a relatively good possibility that we will see a little bit of home affordability on the home seller side, opening up more opportunities there. And I think you'll see some more opportunities in the MLS, whatever they are, whether they occur or don't and what -- no matter what the magnitude is within reason, our balance sheet is positioned to take advantage of those. So there may be more growth than we expect. But at this point, we -- there's too much uncertainty to factor it all in.

What do you think your corporate travel budget will be in 2022 as a rough percentage of what it was in 2019?

Next year versus last year? 2 years ago. It's going to be reduced, but it's still going to -- there's still going to be some reasonable travel. It's probably 60%, 70%. We need to get out and see the homes. We need to go out and see the land. Some of the corporate travel will probably be reduced. Technology has been a big assist, especially through Teams and Zoom, et cetera. So some of the travel that we did in the past, I think technology is going to reduce that travel budget.

What will same-store NOI growth be for the single-family rental sector overall next year in 2022?

Same-Home NOI, 3.5%, 4%.

And finally, what will the 10-year U.S. Treasury yield be a year from today? It's about 1.55% today.

Yes. That is -- one, at the beginning of the year, I'm going to say 1.75% to 2%, probably closer to 2%.

Great. Very much appreciate your time. It was nice talking, and enjoy the rest of the conference, and we'll talk soon.

Thanks, Nick. Take care. Bye-bye.

Bye.