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

Welcome to the 10:30 a.m. session at Citi's 2022 Global Property CEO Conference. I'm Nick Joseph with Citi Research. Pleased to have with us AMH and CEO, Dave Singelyn. Session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those joining us here today in person, to ask management any questions, please step up to one of the mics we have located in the center aisle of the room. If you're joining us remotely, simply type them into the question box on the screen and they will come directly to me, and I'll do my best to ask them during the session. Dave, I'll turn it over to you to introduce the company and the management team, then we can get into Q&A.

Thank you, Nick. I am here joined here today, Chris Lau, on my right, your left and our Chief Financial Officer; Bryan Smith, on my left, our Chief Operating Officer. 2021, and looking forward for American Homes 4 rent, I would say the one thing that differentiates us the most is our development program. We -- 5 years ago started an in-house development program, where we are developing our own homes. And today, we are building more than 2,000 homes each and every year. Those have a better economics while providing a better quality asset and customer service for our residents. The economic landscape for single-family rentals continues to get stronger and stronger year after year. And what we have seen is that the value proposition of single-family rentals has changed significantly in the last 15 years. The perception and the reality of what a single-family home was 15 years ago, it was a home that you and I would have owned as a prior resident and the quality of that asset was inferior, significantly inferior to the quality of single-family rental assets today. And the customer service was non-existent before and is very different today. That value proposition is now being understood. And today, single-family rentals, they are deemed to be a high-quality housing option, not a housing option of last resort. And that's all translated for American Homes 4 Rent, combined with our consistent execution into a very, very strong operating performance. We have led the residential REITs, the major multi-family REITs, single-family rental peers and FFO growth in each of the last 3 years; 2019, '20 and '21. So -- but I -- to me, the biggest accomplishment of our first 10 years in existence is building the foundation for the next 10 years. We sit today with 18,000 lots, which means our growth programs are all baked in into existence today. And they're not contingent upon many of the factors of supply and demand of opportunity that others have. So Nick, with that, I'll turn it back to you and handle some -- go through some of the questions.

Great. Thank you. I think you hit on a few of these, but we are opening every session with the same question. What are the top 3 reasons that investors should buy your stock instead of any other listed property company today?

Yes. As I just mentioned in opening comments, I think it starts with having a unique development program, a unique growth program, 3 channels for us to grow in. Development is going to be the anchor of our development program. It's the most predictable and consistent. And we'll supplement that from time to time with other acquisitions through the MLS as we did in the second half of 2021 and through national builders, as we did in the early part of 2021. And as we saw that channel diminished significantly as the year went on and the homebuilders had strong retail year for themselves. The second point is just the strong demand for single-family rentals, stronger today than we've ever seen. 17 million single-family homes today versus 13 million for 30 years prior to us getting in. And occupancies couldn't be stronger at 98%. And finish it off with just the fact that our consistent operations have led to significant FFO growth for many years, capped off in 2021 with more than 17% FFO growth, and we see that continuing into 2022 as well.

Great. Why don't we start with your second point, right, strong demand that you're seeing. Obviously, that's coming through in the operating results. How are you thinking about 2022, particularly on the pricing strategy, just given such high occupancy today?

Yes. I'll start on that, and I'll ask Bryan to fill in a couple of the additional points. Pricing strategy is one component of the overall revenue maximization process. So how you look at pricing on the re-leasing, how you look at pricing on renewals, as well as how you manage all of the levers for revenue. In 2021, I mentioned that we led the residential industry in FFO growth. Well, we also led it in revenue growth on same homes. And it's all of those levers that were pulled. And today, we sit with a significant loss to lease. We had significant rental rate growth on re-leasing in 2021. And that is continuing into 2022. And that growth in 2021 is adding fuel to our renewal opportunities in 2022. You'll look at 2021, the end of the year, you look at 2022, the first 2 months, and you will see consistent increases in both -- in the renewal rates that are going out. And that accounts for 70% of our tenants because our turnover today is a little less than 30%, meaning more than 70% are renewing. Is there anything you want to add?

Yes. Looking into 2022, all these -- the demand metrics, the level of occupancy that we're maintaining in the portfolio and just the operating momentum gives us a lot of confidence that we're going to continue. As Dave mentioned, we've had quarter-over-quarter improvements in our renewal rates. We expect that to continue into the beginning of the year. And on the re-leasing side, we're continuing to push into double digits while maintaining fantastic occupancy. So it looks really good today sitting here, and we don't see any slowing down on the demand side, which is key.

And how are you thinking about kind of pricing into a higher inflationary environment as your residents have other potential strains either from gas prices or anything else? How are you thinking about wage growth versus the ability to keep up?

Yes. So inflation is going to hit all aspects of our business. Starting on wages, as you indicated, Nick, the wage -- or the employment market is very different today than 2019. And we recognized a number of shifts in 2021. We were probably a little early here to the game and adjusting the -- or the wage rates of our employees. We accelerated wage increases to August instead of January in recognition of the significant change in the labor market. Just a comment on the labor market. For us, it's about doing the right thing in the culture that we are trying to create at American Homes 4 Rent and not only in our employee base as well as our resident base. We're very proud of the fact that for 2022, we were named a Great Company to Work with a very, very high approval rating from our employees. Inflation also impacts our revenue. And it impacts it in a couple of ways. First is, if there is additional inflation and home prices continue to rise to an unaffordable level, that's going to even accelerate the demand for rental rate -- for rental product even more. We go back and we look over history. For the 30 years prior to us starting this company, we saw rental rates nationwide never declined on a year-by-year basis. But we saw in that same 30-year period, home prices declined 7x, and that accelerated demand for rental. So, I think we're sitting in a very, very good place. For us, the -- we measure the ability to pay rent based on the multiples of household income when they file an application to their rent. And we have not seen any material change in that in many, many years and still is in the 5:1 ratio, meaning that people have the wherewithal -- financial wherewithal to buy a house they choose to rent for the convenience and the flexibility it offers. On the development side, on the expense side, yes, we have seen increases in costs. And the cost of our developments today are a little bit higher than our pro formas, but so are the rents and the yields are equal to or greater than what we underwrote even with higher development costs.

Nick, can I add one thing to the revenue discussion real quick? We got on the topic via rate. Rate is important, and we're expecting a strong rate growth year. But ultimately, we manage the business to optimizing revenue overall. There's a lot of different factors that go into that. And as Dave mentioned, we led the industry with really strong record revenue growth in 2021 in the low-7s. And as we head into '22, I think it's important to just put out there for those that may not be aware, based on the rate environment and the holistic approach to revenues, we're expecting revenue growth to accelerate by almost 100 basis points of revenue growth to accelerate almost 100 basis points into the low 8% area in 2022.

Great. I guess, we have a lot of questions coming in on Q&A, a lot on the regulatory side, which I think we'll get to in a minute, but I do want to keep these operating questions here now. There's a question just at loss to lease to the portfolio today and the ability to capture that either this year or over the next few years. How you think about that?

Yes. As I said before, our loss to lease, we estimate it to be in the low double digits. It gives us a fantastic tailwind going into the year. When you think about loss to lease, though, and you think about the average length of stay of our residents, it's going to take some time to capture that there. Average length of stay is in excess of 3 years. So it's not all going to come at once, but it gives us a lot of confidence going into the year on the renewal side on one hand and on the other hand, if those homes do become vacant to be able to continue this record rate growth.

If you think about the operating platform, Dave, I think you talked about the business being 10 years old, right? So, you were able to kind of build it more recently than I think a lot of what your residential peers, specifically apartments with longer legacy businesses had to do. And so I think a big topic across all these meetings have been kind of operating initiatives and operating platform efficiencies, driving margin. How do you think about the opportunity going forward versus where you are today relative to some of these apartment platforms?

Well, you're 100% right. We were very -- we had a very unique time that we were able to start our company. A time when the cost of homes was a little bit depressed below replacement cost, allowing us to co-invest into a platform that didn't exist. So it had to be built from scratch. And amassing more than $20 million of assets in the last 10 years is a huge feat, especially today when we see housing prices at record prices. With that said, the yield expectations are a little bit lower, allowing for the acquisition of homes, but it's very difficult to acquire those homes and build a platform at the same time and still maintain an adequate yield. So, we're in a very, very unique place and have a lot of opportunities in front of us. And for us, our build-to-rent platform that provides 100 basis points higher yield is really an accelerator of our growth -- FFO growth of our company.

I guess, more specific to the operating platform though. If you think about kind of ancillary revenue opportunities or expense savings from efficiencies or reducing days vacant on a turn, how much of that have you already captured versus either using proptech or other kind of initiatives to be able to expand the margin outside of just market rent growth?

As we indicated at the beginning, revenue is a lot of components. So the components you're talking about are important. 98% occupancy today is pretty close to full occupancy when you consider refreshment. But one of the announcements that we made 3 weeks, 4 weeks ago was an investment in a company called Vesta. Vesta is not an investment that is to be looked at as what is the economic return on that investment. That investment is less than $10 million. But that investment is in a joint venture of proptech funds, ESG funds that are looking -- that are start-ups, that are looking to serve the single-family rental industry. And the investment is an access investment to give us access to these companies. Two of the companies we've already been dealing with in the last recent past, one, on the revenue optimization side, the operations side and one on ESG. On the revenue optimization side, it's on pet screening and pet fees. On the ESG side, it's on controlling your greenhouse gases and on the solar initiatives that may be available to single-family rental companies. So, we're in continuous discussions. We look for access for those companies. There are a number of those companies that are originating and becoming small start-up companies and we're trying to work with as many as possible.

Maybe shifting to the regulatory environment. Obviously, it's been a big topic, both federally and on a state level. How are you thinking about kind of operating in this environment, both from a sector perspective, but also from a company perspective?

Yes. When we started the company 10 years ago, when we were asked what are some of the risks that you are concerned about, regulatory was a risk 10 years ago. Housing is an asset that every individual needs, has to have. Therefore, it becomes a pillar of what our government wants to evaluate. It's like education. And the other aspect for housing is housing recently has attracted a lot of private equity. And private equity is something that Congress for one reason or another, has focused on. We have an individual that [ toes ] on our staff. He works in Washington, D.C. He heads up our Government Affairs. And he would tell you that regulatory matters come in two flavors. One is that, which is policy setting. The other, which is more of the investigations and more of the discussion but doesn't lead to policy setting. When you think about the federal government, the federal government has had many of the latter category in recent periods, the House Finance Committee, the Senate Banking Committee. Senator Warren has sent out letters individually. There are special committees that were formed for COVID. Jim Clyburn head one of those committees. And specifically, he looked at the housing industry's response to COVID. And while many of our peers have been criticized heavily in those hearings, American Homes 4 Rent has been called out as the example of how to do it right. And there is, I believe, on our website, if not, you can contact our Investor Relations department, they could forward you a link to a couple of these hearings, where we have been called out as the example of what to do to treat residents properly. At the state and local level is really where the policy setting occurs. State is primarily focused on rental rates, rental registrations, the local governments more on zoning, permitting and what to build in their community. And that's a generalization. There's a little crossover between the 2. If you look at the states, I would call out certain states that are very difficult to operate in. It's the Northeast. Minnesota passed some regulations through ballot initiatives. In the West Coast, the Pacific Ocean, California being the worst, Oregon not being in there. They have more progressive regulations governing housing than other states do. And our footprint -- we have a footprint in Oregon. We have a very small footprint that we're exiting in California, which we've mentioned many -- for many years that we're exiting California for a number of reasons, one being regulations. At the local level, it's all about the zoning. Our development program has seen a lot of that. There is something called not in my backyard, meaning that they do not want rental product in their yard or in their community. And the whole perception is a product that existed 15 years ago, not today's product. Through education, through sitting down with the government officials, and we are in 16 communities building and we've dealt with this in all 16 communities. And today, we're building in all 16 communities. So through good communications, you can handle your NIMBY matters, but government oversight, government regulations is always going to be part of our industry.

You mentioned the federal side, right, so the letters and stuff like that. What are the tangible risks from a federal perspective of any of these investigations or?

Well, one is we're not part of any of the investigation. So, I don't know the specifics of any of them. So to be able to quantify it for you, Nick, is a little difficult since I haven't seen the specifics. The federal government, the one regulation that they did put in place, that was policy setting and did have an impact, was a temporary set of policies around the COVID eviction moratorium. And while most of that was state driven, the federal government had a little bit of an impact through federal loans. We don't have any [ better way ] insured loans that didn't impact us, but it did impact some. Those moratoriums pretty much have expired. But their oversight right now through FTC and The Consumer Financial Protection Bureau, they are looking at some policies of the industry. Specifically, they haven't contacted us. And so I don't have any specifics on that.

And as you think about those risks, right, even if AMH has been called out as a good actor, right, there's still the sector side of it, right? I mean, it would be difficult to delineate between good and bad actors.

Well, I think there's 2 things you have to keep in mind. One is the country needs more house. You can't shut down the development and the production of new housing. American Homes is doing its part in a very small way by building 2,000 homes last year. The government statistics, there's a number of them and the results are a little bit different, but indicates there's 4 million to 8 million households that need housing that's not available today. We need that many more housing units. And so they have to not be completely restrictive on housing. But they do want to ensure that people are acting in the right way. And that's kind of a motto of what we have attempted to do is run the business doing the right thing. And not only have we been called out in government hearings for it, we've been called out in a number of other press items. Newsweek came out as one of the most responsible companies in America, naming American Homes. Sustainalytics, the agency that oversees governance and all of environmental and social matters in Europe called out American Homes as one of the Best Performing Companies in the Real Estate sector. So as long as we do the right thing, as long as this country needs housing, both of those things, I would expect will continue. We will have to respond to government inquiries, but I see us being able to operate pretty effectively in this country.

You mentioned the development platform, obviously, a big part of the story. I think you are the 45th largest homebuilder at this point, which is pretty amazing from where you started. How large could that grow? And how are those conversations as you're building specific to build to rent with the different municipalities? Are they supportive of it? Or is that nimbyism still an impediment?

Well, that program is going to grow. It takes 4 years to 5 years to develop a piece of land into a delivered home. Last year, we delivered a little over 2,000 homes, the prior year, 1,600. And that number is increasing into 2022 by about 10%. But today, the bigger number to keep in mind is that we, today, at the end of 2021, control 18,000 lots. And most of those lots were acquired in 2020, the latter half of 2020 and 2021. And taking the 4 years to 5 years, that means the years of '24 and '25 are going to be a monumental change in the opportunity set that we have. The second part of the question is the nimbyism. And yes, it does exist. And as I indicated earlier, it's an education process. And we've been pretty successful in explaining the benefits of single-family rentals and the need for single-family rentals in the communities that we are talking to. But not all communities get to the finish line at the same pace. With our internal government affairs team management, we do talk to a number of cities and their representatives, whether planning department or government officials on the matter. And I expect that, in most cases, if not all, we will be successful. At the end of the day, all the communities that we operate in have growth greater than the national average, either on population or employment, meaning that they need additional housing in their communities. And so at the end of the day, these communities need to find an answer for that housing and we're part of the solution.

A handful of questions related to CapEx needs and initial yields on the different growth platforms. So maybe development versus third-party builders versus flow acquisitions.

I'll hit the yields, and I'll turn it over to Chris to talk about capital and what we need and how we're raising it. Our yields, as we've indicated, our development program provides us the best yield. About 100 basis points greater through that channel than through the other 2 channels, being the acquisition channel and the channel of acquiring homes from national builders. Some call that build to rent. That's acquiring homes at a retail price, maybe a small discount, 6%, 5% discount. Today, if you go back a couple of years, we were acquiring acquisitions at 5%, and developments were at 6%. Third quarter of last year, we lowered the targets by about 25 basis points, 4.75% on average for the acquisitions in the first 2 channels, MLS, as well as the national builder. And the in-house development program is at 5.75%. The economics should be pretty easy to understand. Today, housing prices have increased from when we started. And today, to buy a house that typically fits our models, it's going to be in the low-400s, call it, 400 to 425. We build that same house in the low-300s. There's no development profit. There's no sales and marketing costs. That is the big differential between the 2 programs. We layer on to that. That's a differential on initial yields. Long-term maintenance is going to be far superior. We put in better plumbing fixtures. We put in better countertops. We put in -- we build decks in a different way with composite wood instead of natural wood. We do that not for the marketing aspect. We do that for the long-term maintenance aspect. That material level will wear much better. And if you think about the labor cost to replace a fixture, it's far greater than the actual fixture itself. So, we're investing in our future by putting in better quality materials into our homes.

And then from -- just from a capital need standpoint, this year, as we shared as part of guidance, we're expecting to be another really strong year of external growth. Total capital needs, about $2.1 billion this year, 1 point each of that is going to be in the form of our growth programs, pretty similar to what we saw in 2021. And then the balance, $300 million or so represents an opportunity for a couple of preferred shares series that become callable midway through the year. Important to point out, as we're thinking about funding and sources for that capital plan, the equity component of that is already funded. So, we are in the equity market in January. We're raising just shy of about $900 million of equity, very well timed, if we think about what has happened to the market since then. A little over half of that raise was put on a forward, so we can be very efficient in the timing of using that capital over the course of the year as we're deploying it for our growth programs. And then the balance of this year will be retained cash flow, recycled capital from our disposition program and then debt capacity leverage off of the balance sheet, call it, about $800 million or so is the balance.

Dave, you mentioned the 4.75% on acquisitions. How does that compare to portfolios trading in the market?

Yes. The 4.75% is an average acquisition yield. We're going to have some markets that will be a little bit below 4.75%, some that are a little bit above 4.75%. That's on individual asset acquisitions. Portfolios are going to trade lower and they're going to trade lower. And we will be bidding at lower cap rates because of the synergies you get in acquiring portfolios out there. And so today, we are -- we have been bidding on more aggressively than our 4.75%. In some cases, more aggressively down into the very, very low 4s. And they -- this is a very, very competitive market today. And so we've acquired a couple of homes, and I call it in very small numbers through portfolio acquisitions. We see the bidding of these near the 4% range, maybe in some cases, even sub-4 depending on how you run your pro formas.

And how large were these potential portfolios?

Well, they range anywhere from tens of -- tens of homes all the way up to -- right now, there's 8,000 to 9,000 homes being sold by Zillow. They will parse that out. No one was -- is going to be the buyer of all of the homes on the Zillow portfolio, but that's the large portfolio. The majority of the portfolios, I think, are future portfolios. There's a lot of companies getting into the build to rent, but they're really getting to the build-to-rent as merchant builders, looking to build a home, stabilize and then sell those homes. Those companies that are sprouting up today in the last couple of years really are not delivering homes today. They will be delivering homes in '24 and '25, maybe a few in '23. But I see some opportunities in portfolios in those years.

Given the opportunity on development, why acquire homes at those yields?

It's a -- it's -- development is a program that we will be able to build a number of homes that we acquired [land a ] number of years ago. And so it's -- the acquisition of homes in the open market is not intended to be a replacement to the development program. The development program is all based on the opportunity set based on land that you currently own. And that's one of the barriers to entry as it takes so long to get a development program up and running. The acquisition of other homes, whether it's through the MLS through -- whether it's through national builder is a supplement. They are accretive. Development is better, but they are accretive, and they are additive to your portfolio in a number of ways.

What's the biggest growth opportunity that you believe the market is not giving you credit for?

Well, the development program, one of the things that I think is not understood well is the fact that every time we deliver a home, we create value creation for our company and not only in the form of additional cash flow, but we have immediate accretion into our net asset value. If we are building a home for $325,000, that is worth $425,000 upon the delivery date, that's immediate value creation into your platform. And I think there's a number of NAV computations that don't take that into account appropriately.

What's your #1 ESG priority in 2022?

Well, ESG has been a big focus. We've been -- we -- it really starts at our Board. We created a Department of Sustainability that was kind of an informal department in prior years. January 1, we now have a formal Department of Sustainability. We have a committee, an ESG Committee that meets once a month of all the different disciplines of our company. We are focused on the development process on how to make that better. We are focused on the maintenance process, how to make that better. Initial greenhouse gas studies, we have 57,000 plus or minus homes. And those homes take the energy level of 53,000 average American homes. So, our homes are a little more efficient. We have a long ways to go. We have our architects and our development program, looking at that program as well. On the social side, I think we've talked about a lot of the initiatives already. On the social side, it is about treating everybody right, whether it's your residents, whether it is your employees, whether it's your vendors and expecting them to do the same for you. And I think we've built a pretty unique culture at American Homes around that.

Just in time for rapid fire. What will same-store NOI growth be for the single-family rental sector overall next year in 2023?

Yes. I expect the NOI to be near 10%. It's going to be in that high single-digit area, maybe even hitting double-digit area.

What will the 10-year US treasury yield be a year from today?

Well, there's a lot of variables in this one. Inflation and war. So, I think the government is incentivized to keep it down. So, I will put it at 2.25.

And then finally, will the single-family rental sector have more or fewer public companies a year from now?

It will have the same.

Thank you.

Yes.