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

All right. We've got the green light. So I guess that we are on the clock now. So I want to thank everyone for joining us for this session for American Homes 4 Rent. My name is Buck Horne. I'm the housing analyst, multifamily, single-family rental, all things residential for Raymond James. Really thrilled to be able to introduce the team from AMH today. From my far left, we've got Bryan Smith, COO of American Homes 4 Rent; CEO, David Singelyn; and Chris Lau, the CFO. So with that, I think what we'll do is a brief kind of operating update. There's a new slide deck out there with fully fresh, some stats on trends through the month of May. I'll let these guys talk through any highlights they want to discuss, and then we'll jump right into some questions. So with that, let me turn it over.

Thanks, Buck. My opening comments, I guess I have 3 thoughts. The first is the first quarter and as we continue looking into 2022, our operations remain very robust. What we saw in the first quarter is continuing on the same pace through the second quarter, and I see that continuing as time moves on. It's all fueled by my second point, and that's demand. Demand for housing doesn't change. This is a product that every household in America needs. In fact, there is not enough housing in the United States to meet the demand. There is anywhere from 3 million to 5 million households looking for high-quality housing. So demand for our product is going to continue. And when you consider the fact that the additions to the housing stock that the homebuilders were adding is slowing down. It's going to add even more fuel to the demand equation for our business. When you look at our ability to grow, that too is we're in a very, very good place. It starts with capital, and then it goes to opportunities. And when you look at the capital, we raised $1.8 billion already this year at the beginning of the year. Much of that's in the bank to be invested throughout the balance of this year. And when we look at the opportunities, what sets us apart from everyone else in single-family rentals is that we control our own growth because we have our own development pipeline. And that development pipeline is years in the making. So for the last 5 years, we've been either testing it or expanding that program year by year. And it's all based on the land that you have. So we've delivered 1,600 homes 2 years ago, 2,000 last year, would be about 2,200 this year. But the real excitement is what we see in the future. We sit today and control approximately 20,000 lots. And when you look at the cost to build, the input costs are coming down, as the homebuilders are reducing their production. So the ability to grow this company is already baked in. We will see significant opportunities later in this year or next year as the housing prices begin to reset and stabilize. So our outlook is very, very strong. We're very excited about where we sit today. And with that, I know there's detailed questions about operations, but I'm going to turn it back to you, Buck, and we can kind of go through where you want to take it.

All right. Yes. No, you did keep the comments brief. I appreciate that. So I guess the key thing that's happened most recently to the housing market is this interest rate shock and the spike in mortgage rates which has jumped kind of, I mean, 200 basis points be coming off such an unprecedented low. So we definitely have this thicker shock moment for a lot of potential homebuyers and entry-level buyers. Is it -- can you -- is it possible to parse through how that's affected your demand trends versus maybe seasonality? It certainly feels like -- I mean, when you look at your May statistics, the acceleration in new lease rates up to what 14.3%, really strong number. Is that an effect of buyers getting priced out of buying a home? Or is it just how tight the overall inventory picture. Any color you can add there?

Yes. I don't think we've actually seen the benefit or the impact from what's happening in interest rates and home affordability on the ownership side. What we see when you talk about the 14% is a continuation of a trend that we've seen for many years. And our first quarter was very comparable before the interest rates rose to what we're seeing in that 14%. What we are seeing in single-family rentals is a recognition that the product from both an asset standpoint as well as a customer service standpoint is a significantly different product than it was 20 years ago. And that recognition now is making this a high-quality consumer option for their housing needs. So we are seeing a lot of demand come from individuals that desire the convenience and the community that our product provides, also from individuals that are bridging between 2 life events, whether it's from one job to another or from their renting today for multifamily. And at some point in the future, they may or may not buy a house, but they're bridging to that as well. So the -- I think what you're talking about is going to be incremental fuel to what we see today.

And so I mean, as the cost of homeownership have jumped. I mean, it certainly feels like -- I mean, multifamily rates are also accelerating rapidly. How do you think about your -- I don't know if it's a loss-to-lease equation versus -- I mean, how do you think about market rates for SFR product versus multifamily versus ownership costs?

Yes. Let me give a couple of comments, then ask Bryan to talk a little bit about the loss to lease component. Our rental rates have been very robust for many, many years. It's been very, very consistent what you have seen from the pre-pandemic times through the pandemic and now hopefully, we can say we're post pandemic. I hope that's a true statement. But it's been very consistent through all those periods. What you are seeing when you compare us to multifamily, for instance, multifamily has seen a decline in rental rates in the pandemic, and they're in a recovery period today, capturing a lot of that decline plus some incremental increase on top of it. So rental rates have, for us, been very consistent. One of the things that we are entering today in this new environment with interest rates rising is housing prices will be volatile. But if you look at history and you look at the last 10 years that we've been a public company and go back and look in the history books through the census data and other research reports, what you will find is over that 40-year period, rental rates in the United States on a national average never declined. 7x during that period, we saw declines in the home cost or home price appreciation. So we are going to be a very consistent and stable asset class, especially today when demand is so strong and housing supply is so short. So I look forward to the fact that I don't see the volatility in rentals that you see in rentals of single-family homes that you see in the home prices of homebuilders in the secondary market. With respect to what is built into our portfolio today, we've seen significant increases in our re-leasing, very strong increases in our renewals, but we've built up a strong loss to lease. And if you want to walk them through our loss to lease?

Yes, we're estimating the loss to lease to be in the low double digits. It gives us really nice momentum coming into this year. The demand backdrop has been fantastic. We had record inbound phone calls and electronic inquiries in May. So that gives me a lot of confidence that we're going to continue to be able to push rates, the 14% that we have quarter to-date really signals that strength. And then you notice improvement, too, on our renewal rates, the rates we've been able to achieve have been gradually improving for a number of quarters now. And we're hoping to maintain that momentum as well. The loss to lease is one of the factors of that.

I kind of want to follow up on the comment you're making that you see some opportunities potentially coming later this year and you're mentioning that there will be some volatility in home prices. How are you kind of sizing up your view of kind of how the -- maybe the for-sale market or the transaction market for M&A opportunities? How do you think this is going to evolve in this new higher rate environment? How -- is there a...

Well, the benefit of having 3 different ways that you can grow a business having a development program is going to be very consistent and then having the ability to be opportunistic when opportunities arise. That's what we're talking about here. And we're talking about the multifamily and the MLS. When you look at home prices, and you pretty much look at any asset, the prices will go up very quickly because you end up in bidding wars. On the downside, the sellers take time to recognize the fact that they need to cut their home prices. We see the early stages of that today. We see it through the inquiries that are inbound to our shop. We are receiving numerous telephone calls, not monthly and not weekly, but daily from small portfolios, from build-to-rent portfolios that are in process, and from the national homebuilders. And they are looking at opportunities or avenues to dispose of assets. To date, their concessions are really more in terms that would be longer due diligence periods, longer closing periods, but they're still hopeful that they can still get their rates and their prices that they were asking for. As time moves on and there's patience and discipline in the process, we're going to see those prices come down. We, as I indicated at the beginning, are sitting on a significant amount of investable cash and funds, and we can take advantage of those opportunities. So I'm not going to sit here and predict the timing nor can I really predict the size, but the opportunity is going to present itself.

Would you have a greater interest in -- on the new home, new construction side if builders have that product, whether it's unsold spec inventory that they didn't find a match for the buyer? Are you more interested in the new product versus one of the small portfolio deals? Is there a different -- or is it very just opportunistic based on what's out there?

It's -- I mean, there's so many factors, Buck that go into the acquisition decision. It's -- first and foremost is where is the asset located, who is the prospective tenant base for that asset, what are the schools for that asset sits in. So first thing is you want to get the right real estate and then the second is going to be about the quality of the asset and the pricing. So typically, a newer asset is more beneficial as long as it's got quality built, but there's a lot of factors that go into each decision.

All right. Just kind of also kind of shifting to some of the build-for-rent questions that are out there. And the amount of capital that has been raised for single-family rental and -- which specifically with build-for-rent in mind, I mean, it is a large pool of capital that's out there that's still seemingly has yet to be deployed. I'm curious how you think now that the market is shifting a little bit, costs are certainly shifting. How do you see that playing out? Is that capital going to find production capacity to get those houses built and/or are there assumptions float or how do you think about the amount of capital that's trying to do the build-for-rent strategy?

Yes. Well, let's talk about the size of the capital and then let's talk about a vision for the future because we -- it's a little early to have seen any tangible movement. But the size of the capital that we're talking about is roughly about $50 billion to be delivered over numerous years, probably 4 to 5 years. When you translate $50 billion into the number of homes, it's 200,000 homes. 200,000 homes in this country, where we are anywhere from 3 to 5 million homes undersupplied is a drop in the bucket. And so there is adequate capacity to take up that new supply if and when it's built. Now if its built is contingent upon whose hands these build-to-rent monies are in. As I indicated we're getting inbound telephone calls, some of those are from these build-to-rent operators. See, there's the build-to-rent operators that we're talking about are very, very different than American Homes 4 Rent. We're really a unicorn in the build-to-rent. And the reason I say that is we are building an asset for our own account. So when we build it, there is no market risk at the end of the day as to what the value of that home is. It's being built for the rental capacity, the rental potential of that home. The other build-to-rent operators are building homes. They are going to -- their intent is to rent them, stabilize them and then sell them as an assembled portfolio. So they're subject to market risk as it is a homebuilder. So they're just another merchant builder. They also are highly levered. They're private equity, and they're highly levered. And a lot of that leverage is variable rate. So right now, they are seeing their opportunity upon exit to decline their cost to increase through their carry cost, and all of that is leading to inbound telephone calls to us, and I think a number of those opportunities may end up in our lab. Again, I'm going to put it through the same filter. It's got to be in the right location, the right opportunity, the right quality of construction if it's been begun. And so today, there is a large amount chasing build-to-rent, that's historical numbers from essentially last year. That's when the money came in. But the market can absorb it, but I think a lot of it is going to become opportunities for us over the next 12 months.

Okay. So I'm curious, though, speaking to the land side of this strategy. You mentioned you have 20,000 lots under control at this point and then there was the recent announcement of the new land banking venture which I believe is Värde, is that how we pronounce it?

You did very well. Värde.

So yes, so what -- I mean, you've got a lot of land under control here. I mean, 20,000 lots and you're delivering 2,200 homes this year, give or take, obviously, but plans to accelerate that further. Land banking is not necessarily cheap. So -- but what advantages or flexibility does this type of partnership offer you going forward?

Well, the benefits it provides us is it allows us to scale up our land portfolio even greater. And that's important to us. And the reason it's important to us is the fuel or the capacity to deliver homes in the future is all tied to how much land you can build on. You can't deliver homes unless you have the land. And it takes anywhere from 3 to 4 years typically from a land acquisition through the permitting process through the land development process, the infrastructure, the sewers, the water, all of that, putting in the roads. It takes 3 to 4 years before you're going to build a house. The house construction, that's the easiest part. It takes about 150 days. And so what is very traditional in a homebuilding program is to acquire land to derisk your land holdings by optioning land. And when we talked that we entered into a land banking arrangement, what we are talking about is what's typically referred to in homebuilding as optioning of homes. And so the land banking company buys the land. It's land that we sourced, it is land that we will do all the infrastructure work. They will pay for that. And we'll have a deposit down. But the reality is we have the ability to walk away. And we have that ability all the way up until the time we take down the land to do the vertical build the last 150 days. And so it's a means to derisk our land holdings. It gives us more capacity for more land, while not putting it on our balance sheet. Our balance sheet is a balance sheet that is income-producing assets. And all of the assets that are non income-producing assets are less than 10% of our balance sheet. So we want to keep our balance sheet very predictable, very consistent delivery of income numbers and eliminate some of the noise that you would get from these other operations.

Is there a differentiation between locations that you guys are looking for versus where the builders are putting their SFR, are there build-for-rent product or other factors or differentiators and kind of what you're putting in the land banking pipeline?

Yes. No different that's -- what we're putting in the land banking pipeline is absolutely no different than what we acquired and put on our balance sheet during our test program. What is different is your first part of the question. And that is, is our selection process slightly different than other selection process and build to rent. And I would say it is. And it is because we are controlling the acquisition of land. Others that are doing build-to-rent, especially the national homebuilders that are providing build-to-rent opportunities to operators such as ourselves and others and our peers. They're keeping the best homes for homebuilding in the secondary locations. Typically, this is a generalization on an absolute generally are becoming the available product for build-to-rent. So we are sourcing land, we are sourcing it contiguous to homes that we own. We're sourcing contiguous to homes that the national homebuilders are building for sale.

Okay. I guess I would follow with just a broader picture in terms of investor concerns around the housing market in general, just that a feeling that the market has gone too far too fast and that maybe households can't keep up with these home prices or even renters are not able to keep up with the rent increases. What are you seeing in terms of household income levels or rent-to-income ratios? Are renters starting to feel the pinch of whether it's inflation or are the households able to keep up?

Sure. Yes. So the best way to look at it, I think, is to look at our -- the applicant profile for the first 5 months of this year and look at the improvements year-over-year on income versus the rent for the homes that they're applying for. And our income is up about 10%, a little bit more than 10%, while the rents up in the mid-9s. So the incomes are keeping pace. We have such a high level of demand that there are a number of people who are interested in the property who might drop off because of income ratios, not even before they even get to the application process. But the ones that are actually going through the ones that are really realistically going to become residents, their income is outpacing that rental change.

Can I just add, I think the same concept applies for the existing resident base as well. Bryan was speaking about new households coming into the portfolio. But a great data point to look at is how bad debt has trended over the last 12 to 18 months. Bad debt, high watermarked peak pandemic about 2.5% or so. And over the last year, as the economy and importantly, the jobs market has gotten itself back on track, households are back to work. Health -- financial health and well-being has improved across the portfolio. I think it speaks to the quality of our resident base, but the fact that they're back at work and doing well financially. Bad debt has -- it's not fully recovered yet, but bad debt is running in the low 1% area as recently as last quarter. And our expectations are the bad debt over the course of this calendar year is going to gradually return all the way back to normal, which I think speaks to the financial well-being of the existing resident base as well.

And what are we seeing in terms of out of state or out of market migration patterns? Is that sunbelt migration theme still continuing with the return to office trying to normalize? Or any sort of updates, things that may have changed on that front?

Yes, the migration patterns that we've been talking about for the past few quarters are still holding. We're up to almost double prepandemic levels for migration applicants coming out of California into our states. There's been a little bit of an uptick from the Northeast into Florida in the last couple of months. But the rest of it's holding pretty consistent. It's way up from where it was before. We're not seeing any trends of move-outs who appear to be returning. They seem to be permanent moves. I think a lot of the work from home -- a lot of the flexibility is permanent, especially for the residents who we're attracting really looking for a higher quality of life and a little bit more flexibility in the suburbs rather than, say, apartments in Urban, California.

Yes. Let me add 1 thing to that. Our portfolio is a little different than others in the space and that we're highly diversified. But don't mistake diversification with just being everywhere. We are in more markets that means we are going to not be subject to the risk of any 1 market. But when you look at our markets, when we look at a market that we want to go into, the first things that we look at are the demographics, the population trends and the employment trends. And when you look at our more than 30 markets and you look at the population and economic or employment trends, you'll notice that they are above the national average in all, but I think 1 or 2 of our markets today. And so we are where migration is moving to. We are where people want to live today, not where they've historically lived. So I will, just add that.

All right. Let's shift gears to the balance sheet just for a second and talk about -- obviously, you -- we've elaborated on some of the opportunities that could be coming. You've presold quite a bit of equity to start the year. You've taken quite a bit of debt capacity out as well. So what's the -- I guess, how do you feel about where the balance sheet is positioned and how do you want to structure additional capital opportunities going forward?

Chris?

To the last question you asked, I would say we feel great about the balance sheet. Look, although it happened probably quicker than we were expecting, we knew that capital market uncertainty was likely this year. And so with that in mind, we made the strategic decision very early this year to derisk the external needs of this year's capital plan. First, in January, Dave touched on this a bit at a high level, but in January, we raised $864 million of equity, $500 million just about of which was put on a forward, which just for reference, is still outstanding and available to us. And then in March, which closed in April, we raised $900 million in unsecured bonds, $600 million of which were 10-year bonds at [ 3 5/8 ], $300 million of 30-year bonds at 4.3%. If you think about where rates are today, that execution was extremely well timed before the sharp movement in rates. So you take that prefunding, you combine it with retain cash flow out of the business, some recycled capital from our disposition program and the capital plan is funded with over $2 billion of capacity for this year, which we are and will continue to be extremely disciplined around, but it puts us in a great position to execute against our existing and current growth programs, notably the development program, and it enables us to now be ready to go and be opportunistic as opportunities present themselves, right, whether we're talking about opportunities in the MLS market. We talked a little bit about as the builders cool, are there opportunities there, portfolio consolidation opportunities. The capital is there, and we are ready to lean in, in a disciplined way. We're ready to lean in when others are going to be forced to lean out in this type of environment.

This is kind of a little out-of-the-box question. But with publicly traded builders, of course, trading at 4x earnings in many cases, at or below their tangible book value and their land bank basically priced it in many cases, they bought their land prepandemic. Have you -- would you ever consider the possibility of whether it's a public or a private homebuilder to gain access to their either their land pipeline or their, I don't know if you would need their production capabilities.

Yes. So the answer ever is a very long word. So I won't say that we will never look. We have looked at in the past. The opportunity there is, as you articulated, Buck, it's really what land do they have, are they in the markets that we want to have and can we get our -- get access to that land through that type of transaction at a price that makes sense to us. And when you consider that, you consider all of the cost of the transaction plus all the ancillary costs that go with it. With respect to our development team, we have state-of-the-art systems that we have built. We have a construction team. We GC all of our own homes. We have more than 200 individuals that come out of the national homebuilding arena. The 4 regions are all led by the division lead and 4 Vice Presidents and all of them have 25 years of experience. So our team is well built. So a merger to shore up the team, unless we're going into a new market and we can find a local team, we're generally in pretty good shape on the infrastructure side of that business.

All right. All right. Last minute, last question, regulatory risks, concerns about political landscape at the local or national level, rent control measures? Any concerns about how politicians view the SFR business these days?

Well, there's no doubt that there's been a lot of rhetoric around rent and opportunities and SFR companies. Most of the rhetoric is at a federal level and that's more discussion that is more theoretical. The real action happens down at the state level in reality, it's at the local level of the communities. The states are where you're going to see rent control if it does come about. I would say a couple of things on regulation with respect to us. One is if you look at all of the rhetoric that's out there, most of it is not about us. Actually, I can't recall an article that's directly about us. Tangentially, may be brought in as just another player, but it's not about us. We have been very cognizant of how we manage that process, manage our rents, manage our relations with our residents, manage our relations with the community. We have a communications department, we have a government relations department, and they're very active and proactive in establishing the relationship that we're looking for. And so today, when you think about the regulations, you have to balance 2 things. And the 1 thing that you have to keep in mind as this country needs more high-quality housing. And putting obstacles in a way of creating high-quality housing is counterproductive to a lot of the local municipalities that are trying to have economic growth, attract industry to their cities, they have to be able to provide housing. We are building housing. And that's one of the reasons that differentiates us from some of our peers. And so to date, there's a lot of education that we need to go about and demonstrating that it's a high-quality asset. But when you get through that education process, at the end of the day, we need more housing and we facilitate that process.

Thank you so much. Great. Great to have you guys join us. We appreciate everyone's attendance. Thank you so much for the time.