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

Good morning, everyone. For those of you who don't know me, I'm Josh Dennerlein, Bank of America's senior analyst covering the residential REITS. We're extraordinarily pleased to have with us American Homes 4 Rent's CEO, David Singelyn; CFO, Chris Lau; and COO, Bryan Smith. [Operator Instructions] Before we open it up to questions, I'll turn it over to Dave to provide a brief overview. Dave, over to you.

Thanks, Josh. And let me start with 2021. AMH, American Homes 4 Rent, is tracking to finish the year strong at the top of all of our guidance ranges. And with respect to 2021, when I'm done, Chris will take you through the numbers for the third quarter-to-date as well as the balance of the year. But where 2020 and 2021 have been strong years, what is the most exciting to me is what I see for 2022, 2023 and all the other out years, and it starts with demand. Demand remains strong as ever, and it's on the foundation of a housing shortage that we've had 12 years in the making where household formations have exceeded new housing supply. And that, coupled with the prospective renters' awareness and appreciation of the single-family rental value proposition that has changed since American Homes 4 Rent has begun to offer single-family rentals, changing the rental landscape from that, that existed under mom-and-pops. And demand is the foundation of our growth platform. We have 3 channels that we grow under. The MLS or traditional acquisitions; the National Builder, sometimes referred to as the built-to-rent [late], where you're acquiring brand-new homes from third-parties; and our own build-to-rent platform. 2021, we're seeing that, like our operations, we are tracking and trending towards the top end of our guidance with respect to growth. And that additional growth is coming from additional MLS opportunities that we are now seeing in the marketplace. And we're looking to 2022 and beyond, we're already in position for strong growth. Today, we expect to have 15,000 lots at the end of 2021 that will turn into single-family rentals in future years. Those 15,000 lots are, again, at the top end of our guidance of the 13,000 to 15,000 lots that we expected to have at the end of the year, and those are across 16 markets. A couple of benefits of our own build-for-rent platform. With our property management feedback loop, we can build the best product. It will create the best long-term maintenance experience, and it will create the best economics. We're building a home where we have no development profit that we're paying to a third-party or any sales and marketing costs, meaning that our investment in that house is 20% to 25% lower than it would be if we acquired it on the open market. That is immediate HPA into our system. All of these homes are located inside the footprint, our existing homes, and we posted up a slide deck for this conference on our website. And if you go to pages 14 to 17, you will see the benefits of our build-for-rent program along with maps that show that our communities are inside our existing footprint. And we'll also supplement our growth, as we are doing in 2021, through opportunistic acquisitions through the MLS or traditional acquisition channel as well as through the National Builder channels. Our footprint of nearly 40 markets, the most diversified in the SFR sector, gives us the ability to farm and harvest more opportunities, more growth opportunities than anybody else. With that, I'm going to turn it over to Chris to go through 2021 and the third quarter and the balance of the year.

Thanks, Dave. And Josh, just a couple of quick updates from me. As Dave mentioned, we did post up a new updated investor deck to our website. That deck includes an operational update through August on pages 5 and 6 with the key takeaway being that the business continues to perform really well into the third quarter. With August quarter-to-date, Same-Home average occupied days of 97.4%. That is a 130 basis point increase over prior year. And as expected, we've begun to see some modest seasonality return to our third quarter move-out rates, which is a good sign of reopening and the world returning to normal. But the great news is that those recently turned units continue to be welcomed with record-high demand that is not letting up, helping to translate into turn times running cash-to-cash under 30 days. And given that demand backdrop on the rate side, we have been able to accelerate new lease spreads to 16.7% for the August quarter-to-date, which is actually slightly better than our expectations and represents another new company record. And just for some context, that 16.6% compares to 13.7% in the second quarter and 5.4% a year ago. On the renewal side, we continue to see robust increases there as well at 5.6% for the August quarter-to-date. And then just a real quick update on collections. As expected, our underlying collection trends continued to remain resilient and consistent into the third quarter. However, we've also seen a slight uptick in rental assistance payments, a portion of which has actually helped to recover some back receivable balances. And so even it's a little bit too early to fully quantify, we would expect to see some modest benefit into our third quarter reported bad debt expense. And then finally, also as outlined in the deck, Dave touched on this a bit, but given the strength that we're seeing on the top line, at this point, we see our full year Same-Home core NOI growth and core FFO per share tracking to the high end of our guidance expectations, which, as a reminder, we just revised upwards last quarter. So in summary, Josh, like I said, great to update today, things are going really well. And I'll turn it back to you for Q&A.

Yes. Chris, Dave, really appreciate it. Good to see the trend there kind of continuing into 3Q and hopefully beyond. I'd like to open up my Q&A session with same question and ask the team, what are the top reasons an investor should buy your stock today?

Yes. I'll take that. And I think it goes back to my opening comments. It's -- we are in a position to grow, grow and grow. And whether it is through our build-to-rent program, we've seen the benefits of that in 2021, and we're delivering -- going to deliver just over 2,000 homes. And that trend line, as we outlined in the deck, is positioned and tracking to significantly increase as we go into future years, especially into the '23, '24 and '25 year. We are so well positioned for growth right now from a capital standpoint. The operating platform is positioned to scale, and so we're in a very, very strong -- and the demand is there to accept all of our growth. So we're in a great position to grow.

Maybe touching on one of the things you said in your opening remarks. You're at 15,000 lots already, the high end of kind of your guidance. I guess how long will it take for those lots to turn into single-family rentals? And how are you thinking about kind of expanding beyond that 15,000 lots?

Well, the 15,000 lots is a significant increase from what we had last year when, at the end of the year, we controlled 9,000 lots. So in addition to increasing the number 15,000, that 6,000 increase we had to replace all the 2,000 homes that we delivered. So we are continuing to grow that -- the number of homes in our portfolio, the vacant lots in our portfolio for future growth. How long does it take? It takes typically 3 to 5 years to get a home from acquisition of land to a developed home. And so that's the reason I talk about '23 being really, really exciting. We're going to see a significant increase in '22, but '23 is where the big increases will come.

Okay. Great. And then kind of stepping back, one of the key questions I receive on the single-family rental space is whether or not the growth we've seen over the past 2 years is sustainable. Kind of what are your thoughts? Like is this acceleration we've seen just a function of COVID? Or is there a larger macro team at play?

Yes. No, it's not COVID-related. COVID may have assist -- given us an assist by putting a spotlight on single-family rentals, but the trends that you are seeing are trends that began 10 years ago. 10 years ago, this was a mom-and-pop industry, and there was 13 million single-family rental. The value proposition that American Homes provides as well as other institutions provide is now becoming known and people appreciate that value proposition. We saw these strong trends occurring before COVID. If you go back to pre-COVID, you will listen to earnings call, and you will hear me talk about the demand is stronger than we've ever seen. That's been a repeated story for 10 years every single quarter, and the demand continues to get strong. What COVID did was put a spotlight on the value proposition for all to see, and it's significantly increased the demand, and that's now on the backdrop of a housing market in the United States that is well undersupplied. And whether you look at the Fannie Mae data or the Freddie Mac data or other analyst data, the undersupply of housing is anywhere from 4 million to 8 million homes. And so the demand is going to be very strong for not only years but decades.

And then when we think about American Homes brand and how to capture the future growth and that undersupply in the market, it feels like one of the unique aspects of your development platform. I mean, can you spend a few times discussing your strategy for development and also how you plan to grow the program in the years ahead?

Yes. Our development program is 5 years in the making. So it's just starting to get to stride today. The development program to date is in 16 of our nearly 40 markets. So we do have the opportunity to open additional markets in the future. The development program for us is a program that is going to provide us consistent and predictable growth each and every year. It's not going to be dependent upon what the marketplace is, whether the marketplace provides us the MLS opportunities or not. We've seen in the last 18 months the MLS market go from very few opportunities to today, where they're a little more clinical. The build-to-rent will be a consistent growth driver each and every period.

And how should we think about maybe your expansion beyond the 16 markets into the other 48? And maybe why did you even start with these 16? What did you see there that, I mean, you didn't see in other markets?

Yes. Well, a little bit of your -- where you start is going to be where you have the personnel that is experienced in it. And we started on the East Coast, we started in Carolinas and Atlanta, where we, on our own team, had some x builders on our team. Once we were able to build a couple of homes, then we built out a professional team. We've got now more than 180 personnel on our team. They all come from national home builders. We have just outfitted 4 of the markets. So when we talk about our growth, a year ago, we were in 12 markets, now we're in 16 markets. It will take those last 4 markets about 1 year to 1.5 years to get land. The land process is very slow at the beginning. You have to have experienced individuals, you have to create the relationships, and you have to work with all of the municipalities to get your permitting. So building up the team is important. It takes about 1 year to get in stride. We're not delivering in all 16 markets today, but we are working all 16 markets today.

Got it. And then for other opportunities for growth, great to hear -- it would be great to hear your thoughts around these other avenues of growth, whether it's acquisitions or the preferred builder program or even the margin expansions within your kind of existing portfolio.

Yes. We -- the one benefit of having a diversified portfolio is it gives you a lot of growth opportunities, external growth opportunities. So we're underwriting in nearly all of the 40 markets. There are a couple that we are not expanding in at this current time. But the vast majority, we are underwriting opportunities in those markets. And as I said, we see a lot more opportunity today than we did 6 months ago, 12 months ago. It's another benefit of, I think, COVID unwinding in the marketplaces, in general, getting back to normal. And then on the growth side from our existing operations, maybe I'll turn that over to Bryan because we do see opportunities there.

Yes, Josh, there's a number of really important opportunities on the margin expansion and internal side. And you can see it in the fantastic rate growth that we're getting. We're just getting started in optimizing our services platform. And we've applied some really nice apps and some technological advances to get us where we are today, but there's a ton of upside there as well, the way that we communicate with our residents, really all focused on providing a better experience. A better experience is going to lead to better retention and push -- gives us the ability to push rates even higher than they are today. So we're pretty optimistic about the runway that we have on the existing portfolio on the operations side. In addition, with the new communities and the new development, those are going to benefit the margins and the overall portfolio as they come on board. They're optimized for low maintenance costs, they're newer. We're putting in amenities that the residents are very excited to be able to access our ancillary revenue opportunities within those communities. So there's a very long list of initiatives that we have going forward that will be very positive to internal growth.

Yes. Bryan, maybe it's a great segue. Can you maybe talk through like the margins you get on the new developments versus maybe your legacy portfolio?

Sure. Yes. The new developments, we don't have a long period of -- a long maintenance history with these homes. They're performing a little bit better than we expected. The first few years are almost no maintenance costs. So it's a little difficult to say. But based on our models and our estimates, the margins for the new homes are in the 70s. Part of that has to do with their location and their -- and the component of property tax for those specific markets. But as time goes on, we'll be able to give a better kind of long-term view or a 5- to 10-year view on the maintenance side. To date, it's tracking even a little bit better than we expected with nominal maintenance costs in the initial year -- 1 year or 2.

Okay. And then maybe flipping ahead a little bit on the disposition side. How do you think about calling the portfolio, taking advantage of rising home prices? And maybe just as you sell stuff, I mean, you get the entire portfolio of margins is kind of rising, you get kind of a more expensive things to maintain out.

Yes. So on the disposition side, I mean, there's a number of reasons to look at disposition opportunities. One of them calling for profits is very, very low on the list. If you have a property that is so dislocated in profits, then we'll consider it, but the idea is it's a home that is currently in our system that the synergistic benefits are built in, so we're going to leave it there. But there is a lot of reasons that we will look to sell a home. Our asset management process that we run through every month, we're looking at both the future potential of the market and the home as well as certain homes we will sell for specific property reasons, maybe the location, the neighbors, maybe the fact that it's got septic because we are disposing of our septic for -- to ease the maintenance requirements of those homes. And then we're still disposing of a few homes in markets we've chosen to do that. So it's really about the future opportunity and future growth potential of those homes and where we see that as well as property-specific issues.

Got it. And maybe that's a good segue to kind of thinking about how your portfolio will evolve over time. Are you focused on increasing density within markets? Are you thinking about new markets? What's your big kind of picture strategy?

Well, I think it's a little bit of both, Josh. In the markets that we're in, we're growing, and we are building, we are acquiring. And we haven't added any new markets in many years. We continue to evaluate markets. And one of the things that COVID has done is it's changed migration patterns, and we're seeing certain markets that we did not see the potential in before have potential today. So there are a number of markets that are seriously under consideration today there might be expansions.

Got it. And maybe to get Chris involved in the conversation, it would be great to hear your thoughts on capital planning, current state of the balance sheet. How are you going to fund all this growth that Dave and Bryan are driving?

No. It's a great question and a topic that I and we love to talk about. I mean, I'll start by saying that the balance sheet is in phenomenal shape, positioning us really, really well to fund our ambitious and outsized growth programs, not just throughout the remainder of this year, but into '22 and beyond. Since we're on the topic of the balance sheet overall, if there's anyone new in the audience or new to the story in the audience, a couple of quick stats. We are BBB minus positive outlook with S&P and Baa3 with Moody's. We retain nearly $300 million of reinvestable, retained cash flow each year. We have a $1.25 billion revolving credit facility, and the balance sheet currently runs -- or was running at the end of the second quarter at a net debt and preferred shares to EBITDA of sub-6x. And then, Josh, to your point in terms of funding this growth, we've been very active over the past several months in the capital markets, getting ready for exactly that even further growth. At the end of the second quarter, we were in the market and raised a little over $660 million in a very successful oversubscribed and upsized common equity offering. We put 2/3 of that out on a forward to minimize dilution as we match fund that capital against deployment throughout the balance of '21 being very, very efficient. And then at the start of the third quarter, we issued another $750 million in a dual tranche unsecured bond offering. That offering consisted of $450 million of 2.375% 10-year bonds, great print there. And the second tranche was actually $300 million of debut 30-year bonds priced at 3.375%, pretty incredible there, which proudly made us the only BBB minus residential REIT in history to successfully issue long-end 30-year bonds, so real exciting evolution and milestone for us there. So look, as we head into '22, like I said, the balance sheet is in great shape, and we're in perfect position to not just support, but really help execute on that objective of expanding and accelerating our external growth programs even further into '22.

Great. It's a question that comes up a fair bit in the single-family rental space, and it falls around political, regulatory risk. I guess, it feels like it could be the greatest kind of risk to the story, this great fundamental, everything kind of moving in the right direction. I guess what are you watching as far as political, regulatory risk? And maybe what are you guys doing to kind of divert and mitigate that risk?

David, you are on mute.

Are you on mute?

There we go. Okay. Josh, sorry about that. I think you're right, that is one of the bigger probably risk that single-family rentals have is regulatory. But let's keep in mind what the regulatory environment is. The regulatory environment is a risk to all companies and all real estate companies. There is a little more visibility of the political risk in single-family rentals. So it's a consumer-based product, and publicizing that -- the actions is good political environment for our politicians in getting folks. But what the political risk is, is around many items. It's everything from what we've seen in the COVID collection area, it's about getting permits. And what we do is we engage with those individuals, and so when you look at the political risk or the regulatory risk, we have not been targeted because we have treated our residents properly. And it was actually even acknowledged on the floor of Congress, Jim Clyburn's group had a hearing on the eviction moratorium, they called out a number of companies, but also called out American Homes as an example of how you can do this process and treat everybody correctly. Bryan's team during the COVID period did a great job. We had -- our bad debts were in line with everybody else, and the way we did that is through outbound telephone calls, engaging with our residents. And I would say the majority, but not all, but the majority of our residents all engaged with us. And a number of residents chose to terminate their leases early. We let them out of their lease with no penalties and gave them their security deposits back. In a normal environment, that's probably not the way you would handle that. In this environment, it is the way you handle it because it gets you your property back and it turns a non-productive occupant into a productive occupant. So you have physical occupancy before but not economic occupancy. So we have done very, very well. But the political side and the regulatory side, we all, whether we're in single-family rentals or in real estate or in any company, have to be mindful of it, have to be tracking it, have to talk to those individuals across all areas. And we actually have more probably grassroots work being done on the regulatory front at the local level than we do at the federal level because you have to do it at all levels.

Appreciate the comments there. Actually, I got a few audience questions. The first one is on loss to lease. So one, how do you think about your ability to capture your loss to lease? Or do you think you can get it all done within 1 year, 2 years? And maybe any estimate of the loss to lease in your portfolio currently?

Yes, we're obviously tracking it. We haven't disclosed the actual loss to lease results yet. I do think that it shows some of the opportunities that I was talking about for additional rate growth. There's been a bit of a divergence this year with renewal rates and re-leasing rates, specifically into kind of the post-peak season. Normal seasonality would have pushed us to rates much closer, but we've just had fantastic demand, which is creating that loss to lease. Now the interesting point though, if you look at the majority of our homes, the first-year residents are renewing a little bit more than half, which is different than our 70% overall renewal rate. So we're getting back to market on a lot of our homes after 1 year. So the loss to lease wouldn't be as great as people think. But it just says to me that we have a lot of opportunity for continued growth, and I expect, at some point in the future, maybe next year when things return a little bit more than normal, you'll see more of a convergence on the renewal and re-leasing rates. But at the current time, because re-leasing is so strong, there's -- it's creating a little bit of a gap, which just provides future opportunity for us.

Got it. And then the other question was, what are your thoughts regarding partnering with private institutions in a fund-, management-type venture to accelerate growth even further and drive fee income?

Yes. Chris, do you want to take the JV? I think that's kind of a JV question.

Yes. Sure. Josh, what I would say is, we see a lot of opportunity there, and in the context of a private capital, we actually already do have, and many people probably know this already, a couple of development joint ventures with private capital, which serve a couple of really valuable purposes for us. One, introducing incremental capital to take advantage of even more of the built-for-rental opportunities, scaling our platform and our pipeline even further. And then the other great advantage of the joint venture structures that we have in place is creating and developing access to really high-quality long-term forms of private capital, recognizing that the investments we're making into our development program are long term, and development is a long-term strategy. And ensuring that we have access to high-quality forms of both public and private capital is really, really important to ensure that we have the funding confidence to support the development program for many, many years, even regardless of macro and public market factors that may be outside of our control on top of all the other good things that come along with those venture structures in terms of enhanced returns, to your point, fees, promoted interest structures, et cetera, which obviously accrue to our benefit as sponsor of those ventures.

Got it. And maybe -- we're almost out of time, but I wanted to ask, are there any key initiatives we're working on for the years ahead to kind of drive operating performance, additional external growth? Really anything, just kind of curious strategically what you're working on.

Yes. Josh, we're not normally the ones that will announce what we're working on until it's in place, and then we announce that we've rolled it out. So yes, there are a couple of things, but I think it's a little premature to have that discussion.

Okay. All right. And then maybe on the geographic footprint, earlier you mentioned there were some markets you're still kind of selling out of. How do you feel about your current geographic footprint? Any other markets you might want to turn out or get out of or add to that you're not in? Yes.

Yes. So our geographic footprint, the way we look at markets is we want to be in those markets that have superior growth, both from a population standpoint as well as an employment standpoint. All of our markets are -- and I think it's with the exception of one, are above the U.S. average in both of those categories. And so we're very, very happy with the markets. That is where people are moving to, that's where migration patterns are going. We're not in the markets where people are leaving. We're in the markets where people are going. And that is creating that insatiable demand that is fueling our growth opportunities. As I indicated earlier, I think COVID -- one of the things that COVID did do is change those migration patterns. It's going to lead to a couple of additional opportunities for us. We're still evaluating those markets. And when we start acquiring homes in those markets, we'll announce it.

Great. And we're about out of time, but we've been wrapping up all these panels with 3 rapid-fire questions. We're hoping to get your answers to them. I'll jump right in. The first one is, which of the following is the greatest challenge facing U.S. public REITs today: a, Fed action and higher rates; b, supply chain issues, which include labor and logistics; or c, flows to non-traded REITS?

Yes. Is the first one regulatory, did you say?

No. Fed -- like the Fed action, so like rising interest rates, I suppose.

Well, in the immediate, it's going to be supply chain for us. And with respect to the Fed actions that you're talking about interest rates, I think that actually could be an assist to us. So I think the greatest risk right now would be supply chain.

Got it. And second question. Over the next 5 years, which markets will outperform, more urban or coastal markets or the Sunbelt?

Well, we'll see what the rebound of COVID does on the coastal markets. Right now, I believe the Sunbelt is probably the strongest.

Got it. And then the last question is, for your company's office plans post-pandemic, will you: one, have no change from pre-pandemic; two, leave it up to individual teams within the organization; three, offer hybrid or full -- or go full remote?

That is the big question. And so we have oscillated through all of those. So I'm not sure where we land at the end of the day. As time moves on, it feels like de facto, it's almost full remote, but that's not good for collaboration and training. But that's a very difficult one. I'd like to see people back in the office for the collaboration, but practically, right now, we need to stay remote.

Yes. Hybrid at the moment, I suppose.

Yes.

Awesome. Thank you, guys. We're out of time. Bryan, Chris, Dave, appreciate the time, and good luck with the rest of the conference.

Thank you, Josh.

Take care.