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

Good morning, everyone. Welcome to the 11:15 a.m. session at Citi's 2023 Global Property CEO Conference. I am Eric Wolfe here with Nick Joseph of Citi Research. And we are very pleased to have with us today, AMH 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 and at the AV desk. And as a reminder, the questions that I'll ask today are not the opinions of myself or Citigroup, they are being asked for information purposes only. For those in the room or the webcast, you can log on to liveqa.com, enter code GPC23, submit your questions if you don't want to raise your hand. Dave, I'll turn it over to you to introduce your team, give some opening remarks, and then we'll go into Q&A.

Thank you, Eric. And before I start, congratulations, Nick, on your new role here at Citi.

Thank you.

Before I start, I'll introduce to my left, your right -- or my right, your left is Chris Lau, our Chief Financial Officer; and on my left and your right is Bryan Smith, our Chief Operating Officer. So let me just start with a couple of opening comments, Eric. Basically, we are talking about what the trend of single-payment rentals have been since our inception in our meetings. And when you look at the last 10 years, you have seen consistent improvement in all of the metrics, including the demand and the awareness and value proposition of single-family rentals. The period of COVID was a little bit of a period that may have been on steroids. But if you go back pre-COVID and you trend all of the different metrics, we are back to essentially being normal. Very, very small amounts of residual impacts from the last 2 or 3 years. They really reside in a couple of areas. The first area is in our operations that we've got really a couple of states that have not returned to pre-COVID regulations with respect to rental matters, primarily collections, those named are primarily Washington and California. On the development side, we still have a little bit of residual impact. If you asked me 2 years ago, how many homes we would be delivering, it would be slightly higher than it is today. And what we have seen over the last couple of years is basically concerns in getting permits and inspections done timely as the municipalities in the planning offices weren't adequately staffed. And over the last 2 years, that's impacted us on our vertical deliveries. And it also has impacted us in getting the horizontal work done, which is now coming to be the land that's available for development this year. So while we continue to develop and deliver more homes each and every year, and in 2023, we'll deliver more homes than 2022, we're a couple of hundred, a few hundred homes behind where I thought we would be at this time, if you asked me 18 months ago. So the industry, the demand is very, very strong. The prospects for growth are very strong, and we're very excited about the future.

Right. So that leads into our first question, which we've been asking in each session, which is what are the top 3 reasons [indiscernible] today?

Yes, I think that's pretty easy. First and foremost, demand for single-family rentals is, as I indicated, getting stronger and stronger. But keep in mind that this commodity, this real estate class is slightly different than all other real estate classes. Housing is an asset class that everybody needs. It's nondiscretionary. We're undersupplied in housing, and people more and more each and every year as they understand the single-family rental value proposition desire to be in rentals. It's not the asset of last resort like it was perceived to be 10 years ago. Number two, I would say, when you look at our footprint, we're in those markets that people want to live in. We are in those markets that people are migrating to. And with the exception maybe of one or 2 markets that are more neutral, we all are positive. We're in markets that have positive migration moving to them. And number 3 would be the development program, which I think really is a differentiator between American Homes or AMH and all of our peers. We develop homes for our own portfolio. We don't build them and sell them to others. We have a higher-quality product. Therefore, we put in higher finishes for the purpose of having better maintenance experiences long term. We also don't have to pay any development profits, so we have higher yields. And we can continue to deliver homes in every economic cycle as we see today. We've funded the development that we're delivering in 2023 in prior years. So it's match funded and the yields on those homes will be continuing to go up over the year as we have seen the pricing of the input costs coming down.

Great. And you mentioned in your opening remarks about the [indiscernible] maybe last year, which I think has made it challenging for investors to try to determine sort of as things are coming down, where do things bottom. Today, you're at 7% blended rent growth that feels very strong based on the statistics that you put out during your call, in terms of what you're seeing on site traffic, what you're seeing in terms of applications, things feel very strong. But help us sort of understand how you think about sort of the long-term growth prospects of the business, whether a sort of above-inflationary type of rent growth as possible, something in like the 5% to 6% range? Or over the long term, we should be expecting something more normal, like a 3%?

Let me give you a couple of general comments, and I'm going to ask Bryan to give some specifics for 2023. As I mentioned in opening comments, what we are seeing today is really going back to the norm trends that we have seen since the inception. If you carve out the COVID period, the COVID period was really a unique period in many, many ways. So people lack mobility, we lack collection tools, a number of things. So it really puts some of this asset class on steroids. If you look at where we are in 2023 and where we look to be in 2024, those historical trends are getting stronger and stronger. And we are beating -- we'll beat inflation in the long-term trends over the long term, but we will moderate a little bit against what we saw during 2020 through 2022. And with that, give you -- we can give you a little bit of an update on what we believe for '23 and what we have seen in 2 months.

Yes. The start of the year has been really, really good for us from a demand perspective. We gave an update on the earnings call and then in February update in the current deck supports that elevated traffic or phone calls are up, our website activity. It's been a really strong start to the year. Our guidance contemplates mid-5% re-leasing increases and renewal increases for the year, we're obviously starting off in a better position than that. And what I really like is the position that we're entering -- that we will be entering the prime leasing season in. High levels of occupancy, great demand backdrop. I don't see any supply pressures. We have a demand-supply imbalance that puts us really in a good place. That being coupled with the fact that it is over 20% cheaper to rent and to buy in our markets, it puts us in an excellent position to continue to outpace the expectations hopefully and then and also inflation over the long run in terms of rental rate growth.

And as you said, you mentioned some of the statistics, but I was hoping to kind of frame them versus history. So when you say things like showings are up 20% in January and February, meaning that the best you've ever seen? Is that within a sort of normal? I don't know if you want to consider like a statistical distribution, like how strong is that relative to history? And when you see something like that, does that tell you that you effectively have very strong pricing power for how many months, 3, 4 months into the future?

Yes. So the statistics that I cited on the call and current, was, I guess, the 4-year look back, so this is the really first 2 months of the year. The foot traffic is a key indicator. It shows level of demand that's behind each of these offerings. We have pre-leasing efforts as well. So we look at the foot traffic and the application activity. What we've seen to date was probably a little bit better than we might have expected. We saw some seasonal pullback in Q4 last year, but it's off to really a roaring start. In terms of how long does that give me confidence, visibility looking forward, I've necessarily quantified it at the 3-month level. But if you look at the trends as we get January is when the telephone activity and the inbound inquiries really start to pick up off of kind of the slower holiday season, and that translates into a better foot traffic. And it's all trending really positively. March tends to be better than February. April tends to be better than March. So I think visibility into the spring leasing season, everything points positively.

Which markets you're pointing most positive, which ones you're going was negative? It doesn't sound like there's any that are negative, but which ones are underperforming sort of the average by the most?

Sure. The Florida markets are fantastic. We've seen just outstanding activity there, very high levels of occupancy, low turnover as well. I think if you were to look at the ones that may be a little bit behind, I think Houston comes to mind on some of the activity levels, but we're still maintaining strong occupancy. It's good across the board. The pace rate growth and high levels of occupancy in the West that we saw in the past few years has come down a little bit. So those went from being really the top of class to maybe pulling back a little bit into the middle of the pack, maybe a little bit more of a normal pace. And I'm referring to Las Vegas, Arizona, Seattle to a certain extent.

And is all the variability there really caused by just sort of comps and demand? Or is there actually any markets that are actually experiencing sort of above-average supply? I mean you talked about the tailwind that low supply should have for you in the foreseeable future. But just curious if there are any markets we're actually seeing some supply impacts?

Yes. I think the supply impacts, we've seen a little bit of it in Phoenix. We saw it in the past 10 years ago when the SFR industry really started to take off. We saw supply pressures in Phoenix. We saw a little bit of it in Tampa, but it was temporary in nature, and that's supported by the migration patterns and supported by just if you look through levels of absorption. So again, we're talking about moving occupancies from 98% down to 97%. So it's still fantastic. But Phoenix shows a little bit more supply than it has in the past.

Eric, let me just supplement that with a couple of thoughts. One is while we will see things in a very short-term period like what we're seeing in Phoenix, the long-term trends in that market like all of our markets today, we see population growth, and we see job growth in these markets. And we see the long-term fundamentals being very, very positive for housing, single-family rentals, and in particular, AMH. We have seen in the past very, very short-term impacts to supply. And I use the word very short term because it's all about absorption in that period of time. Long term, we've seen Phoenix go through this process multiple times in 10 years. And so it's going to do it again for the next couple of years. But long term, it will be a very, very strong market. So I just -- I want to basically differentiate between looking at something for a quarter versus what is the long-term potential of these markets. We have an undersupply of housing that's where people are migrating to those markets. And that is going to be what causes demand to be outpacing supply in the long term, maybe not the short term.

Got it. I get that you're favorably disposed to your markets and to the subsector for the long term. But I'm wondering if the deterioration of affordability, some weakness potentially in the labor market causes you to change your from a development and acquisition standpoint, the mix of assets you might be looking to acquire the price point, maybe even make other markets look more attractive?

Yes. No, very good question. And there's like 2 or 3 questions embedded in that. So I -- so let's -- we'll take the affordability and then we'll take the asset management market mix question. Affordability of homes or housing between renting and home ownership over the last 10 years or the majority of that period of time has been very close to being in parity, a little bit favorable one way, sometimes a little bit more favorable the other way. Today, that is not the case. Today, in our top 20 markets, using data from John Burns and others, we are 20% more affordable in single-family rentals in our top 20 markets than homeownership. We grew -- this industry grew from 13 million homes to 17 million homes over the last 10 years, 400,000 of those homes, plus or minus are in institutional hands, 3.5 million, therefore, in somebody else's hands being mom-and-pops. And the -- so with that significant increase in supply and demand outpacing that increase in supply tells you something was going on. And what was going on is the value proposition of single-family rentals would be coming understood and acknowledged. So where 10 years ago, single-family rentals was an asset class of last resort. Now it's a preferred asset class. People will desire and want to live in this asset class. And there's [indiscernible] demographics that we can talk about, if you wish, behind that. Let me just move to the other question and that's asset selection or market selection. Asset management is a process that you have to go through consistently. You have to go through it at 2 levels. You have to go through it at a market level. You have to go through it at an asset level and maybe even between a neighborhood level because you generally don't buy markets, you buy areas inside markets. And we go through that. And that's when I say today, we've got maybe 2 markets that are probably in the neutral camp and everybody -- everywhere else has migration, net migration in. That's from those analysis that we do. That doesn't mean that those 2 markets long term are good or bad. It just means that's where they are today. And so we go through that process. And if you look at our disposition program, you will see in 2022 that we disposed a couple of hundred more home, maybe 300 more homes than we did in any of the prior years, and it went over a little bit over 1,000 homes, and we'll see that same number again, I think, in 2023, maybe even a little bit more elevated. And that's not necessarily that those markets are good or bad, it's just there is a characteristic of that asset. And it may be a market that we look to get out of. We've gotten out of 3 or 4 markets in our history. We've gotten out of [indiscernible] and Corpus Christi, one in Georgia that we've gotten out of. So we will get out of the market from time to time. California is a market we're going to try to get out of the second time. We've been -- we got out, we merged with a company that had some assets. We put some assets and we see the long-term asset evaluation of that market not being as positive. And there are so many factors that go in. It is demand. It is what it is the current yield. It is, what is the regulatory environment in that market. And what's just the long-term potential. And sometimes the asset is more valuable if we sell it and retain it. So it is something we do. We do every month at a property level, multiple times a year at a market level. So and we reevaluate what markets we're growing. And we have closed certain markets that we've grown in. Right now, we're evaluating. There's a lot of change in the last couple of years, and we're reevaluating a couple of markets on development right now. Too early to comment and talk about it.

The audience question, I think it was just your last point. Has there just been any behavioral shifts in renters post-pandemic seeking more space due to increased hybrid remote work? And how does that inform your views about which markets you want to be in? So you touched on that a little bit, but maybe just quickly follow up on that.

I didn't get all of that.

So -- I'll repeat the question. It's about behavioral shifts in renters post-pandemic, and then how that informs your view of which market...

No, I got it, the behavioral shifts. So what we have seen, and we saw a little bit of this 10 years ago. It's a little bit of a thesis that got us into this area. But the individuals today that have young families have different behaviors, different expectations than their parents. If you look at the generation today, their life decisions, their choice to -- their time to get married, their time to have children, their time to buy a house, they are going to do everything that their parents did. They're just going to do it much, much later in life. So instead of doing all of those things as my generation did in their 20s, now that it's being spread out into their 30s and even into almost 40s in some cases. What has happened is the -- and there's one other factor if you look at behavior of the population that has changed. And that is the generation that's in their 30s today is a generation that really puts value on the experience of life and living life today to the fullest. And their parents who are raised by depression parents, came out of the depression, put more value on saving for retirement and basically controlling your financial -- long-term financial as opposed to short-term financial outlook. What that means is people today put more value on flexibility, more value on less obligations. We see that in not owning cars. They rent their car every single day. They've taught their parents, they've taught me that you can use Uber. You don't need to have 2 cars in the garage. I still have at least 2 cars in the garage. But it's a different lifestyle. What we have seen is the time period that they want to be in rentals now that they understand that a rental is a high-quality housing option, not one of last resort has really exploded. You look and say, you've gone from 13 million to 17 million single-family homes. And the demand is higher today with 50% increase and 40% increase in supply, pretty amazing fact. And it's just a realization of the value proposition and a little changing in behaviors of consumers.

And then if I can add to speaking specifically to what some of the residents are looking for and asking for. Currently, [indiscernible] more space is very important. There's a premium on the ability to work from home. We've seen higher demand for the 5-bedroom units, relatively speaking, than what we saw before. We've made some adjustments in -- on the development side to deliver units that have office [indiscernible] facilitate some of those changes. But absolutely, the -- especially the residents were migrating as an example from California to Nevada, they are looking for more space. They're looking for flexibility and the ability to work from home. And there's less of a premium on being located in close proximity to the office necessarily just with some of the changes that have occurred in the past couple of years.

That's a good segue into the next topic, which I want to touch on your development pipeline. It's a differentiator versus peers. Can you just sort of walk us through the whole process or how long it takes to buy the land and title it, develop the communities and lease them up? And if we think about sort of the variability in that time line is some communities it's up in like 6 months and they're so strong or others take 3 years. So what's the range of time that it takes to get to stabilization for some of these communities?

So if you're looking at the rental side alone, we -- one of the things that we have the ability when we build our own homes is to build them out of cadence that allows for fill-up without having an impact to rental rates or to absorption. And so we won't deliver -- we may build 100 homes in a community, we won't deliver 50 homes this month and 50 homes 6 months from now. We will deliver 4 homes, 6 homes, 8 homes, 10 homes per month depending on what the demand in that market is. So we are not having a negative impact on rental rate or any significant impact on rental rates. The reason I say it that way is sometimes we do give concessions due to the fact that we're still building in the area and there's a nuisance component. But it's -- when we deliver a home, the majority of the time that home has been pre-leased, and they're just waiting for delivery. You have much more flexibility to pre-lease a development home where you don't have to worry about the prior resident moving out and assessing the condition of that home and getting it turned. We know when that home is going to deliver. We can map it out 2 to 3 days in advance. And so we can take pre-leasing for these homes, high, high demand for the homes. And there's very, very seldom that you will see a home that's more than 14 days on the market, not leased.

Okay. And when we think about the return that this generates and try to compare versus, say, acquisitions today, when you consider the sort of full carrying cost of sort of holding land for some period of time, the G&A and the overhead of your development program, do you think that the spread that you're getting on development is sort of worth the extra risk of not just buying assets today? So as an example, if you buy something today at a 5.5% and you grow by 4% for 3 years, you're getting up into the 6s, is that spread that you're getting on development, say, 2 or 3 years from now when things are leasing up enough to justify sort of the extra risk of having to maintain this entire program?

Yes. So we're getting, first of all, on the G&A cost, on any cost that is tangentially related to development, is going into the cost of the product and the coming part of the yield computation. So there are no costs that are being outside the system. Everything is in the yield computation. We are getting 100 basis points higher yield on our development over our opportunities for acquisition, at the time that we underwrite. But we also fund the operation -- the acquisitions or the developments pretty much at the time we acquired that land. And when we talk about 2023, we talk about the deliveries, they're going to be lower than what we would have expected if we were signing a new land deal to get today. But 2 things. One is they are prefunded. So we are using more favorable capital because it's capital we raised last year. And the yields that we're getting while a little bit lower, still higher than I can buy a home today for. And I get a much, much better asset. The benefits are not just in the 100 basis point yield. The benefits are in the quality of the home and the location of the home. The quality of the home is very, very important. We put in a much higher-end fixtures and amenities into the home. We do it for the long-term maintenance of that home. We get the side benefit of marketing, but we do it for the maintenance. So better plumbing fixtures are going to last a lot longer. And if you think about the few extra dollars that you cost to put in a higher-end plumbing fixture and you just contrast that to the cost of labor to just show up at the house before you even replace it, it's not a difficult decision why we do it. But we also do it in other things that people may not even think about. We do it in our decking. It's composite with material [indiscernible], we do it, that way you don't have to maintain it every single year by waterproofing it. So there's a significant long-term cost benefit over and above the initial yield. Location, we can't buy homes from the national homebuilders where we build, just can't. We build next 2 National Home Builders. We build next to the Lennar, the Pulte, the D.R. Horton, all of them. Those homes that we are looking at that we are building, those that Pulte is building next to us have much more value to Pulte as retail product, much more value to Lennar's retail product than they do their single family. They do have a lot of homes they put into single-family. Lennar was putting a number of them into their own single-family portfolio, a JV with a partner. But those homes are not the homes and the locations where we are building. So we get better locations by our development program. So I still believe in the development program, I think you have to monitor it very closely. We are seeing significant reductions in the input cost. We have seen from the high watermark of May -- April and May of last year, lumber has come from $1,250 1,000 board feet down to $410, a 1,000 board feet. The futures for the balance of the year looks like it's going to be in the low $400s, all year long. We've seen a reduction in other vertical construction costs probably in the neighborhood of 5% right now. But those are actually starting to come down more now that we've gotten [indiscernible] and the National Home Builders have lowered their asking prices on some of their homes, and vendors now realize there's less margin in the program for the National Home Builders, they're becoming more competitive for all of us that build homes. So we are seeing benefits. And we are not seeing a lot of opportunities yet, but we are seeing a lot more today than we did fourth quarter of opportunities to build homes in the 7-plus range yield-wise.

Obviously the regulatory environments, always a big topic. Does build-to-rent change those conversations with municipalities? Or is it still kind of -- are they concerned on the single-family rental institutional owner?

Yes. The answer to that is sometimes yes and sometimes no. The regulatory environment is -- it's more of a theater for the most part at the federal level and the stuff that you hear. The real actions happen in municipalities and to some extent at the state level. And it's a true [indiscernible] or ground game for them. So the answer is the fact that we are developing and being part of the housing solution by adding housing stock goes a very long way. Once in a great while, you'll get a rebuttal against it while you're taking away opportunities for people to buy houses. That's been a very favorite rebuttal in Atlanta recently. The number of articles have come out. What's really interesting is there's a professor at one of the major universities there putting together some studies. And it is evident that over the last 10 years, there's been more homes going into ownership than there has been single-family homes over the last 10 years, while the institutions have been active. So not every statement made in the rhetoric is always true.

And we have an audience question and then I'll -- I might combine it since we're running out of time with one question we've been asking in every session, even though the questions aren't really related. But last year, operating expenses were higher than guidance. As a result of that, I mean, have you baked in sort of extra conservatism this year simply because you don't want to be in the same position you were in prior year with having to raise your expense guidance?

Yes. And if I could just clarify, the only component that was higher last year than expectations at the start was property taxes out of the state of Texas in a vacuum, and that was a total curveball, which I'm sure everyone has probably heard a ton about at the back part of last year. But outside of that, everything was on the nose, including all of our other property tax assumptions, Florida, Georgia, et cetera. And so heading into this year, yes, no different than any other year. We take a very, very deep dive at the local level in informing our property tax estimates at the start of the year. We have a very large property tax infrastructure and machine that's very connected, helping inform us with the best finger-on-the-pulse view for property taxes in the year ahead that is informing our expectations this year. We're making sure that we're starting the year with enough conservatism in that line. I think everyone's familiar, we're expecting 9% growth in property taxes this year again, which essentially represents in our view, the peak, the high watermark of property taxes in large part because we are backwards looking in terms of capturing record home price appreciation behind us. Notably from about 1/3 of our properties that are located in states that pay property taxes on a multi-year revaluation cycle basis, meaning we have 1/3 of our properties capturing 2 to 3 years of backwards-looking peak home price appreciation right now. The read-through for that as we move forward into '24 and beyond, I can't put anything with numbers behind it yet, but our expectation is that rate of growth moderates as we move further away from the peak of home price appreciation. We probably got some of these comments on the earnings call [indiscernible] to see leading indicators of that in some of our states that revalue on an annual basis. Florida and Georgia, a perfect example in 2023, still elevated, but coming off of the peak we saw in 2022, and that's the trend line we're expecting to continue into '24.

There were a few more audience questions, but we're running out of time. So if you just want to come up afterwards, I'll promise I'll get the questions asked and answered for you. So we do rapid fire and I may add one, top ESG priority this year?

Yes. We've been very active in ESG over the last 3, 4 years, established a department about 2 years ago. A lot of benefits we've seen in the social side. We have -- we are in the process of putting solar on new developments in a couple of jurisdictions, a lot of things to work through at the state and local levels through the public utility commissions, et cetera, because we are not the consumer of that electricity, our resident is. But we are testing solar in communities. We already have put solar on amenity centers.

What will same-store NOI growth be for your property sector in 2024?

Yes. It's -- I expect it will be a little bit higher than what we will see in '23. We -- as property taxes get more back to the year that we're in, I would expect you're not going to have the same drag from property tax [indiscernible]. A couple of percentage points above inflation, but more likely it's going to be in the 6% range.

Great. What's the best real estate decision today, buy, build, sell, redevelop or hold?

Well, it's -- you need to be disciplined right now, but there's going to be...

[indiscernible].

There's going to be -- there will be significant growth opportunities in all 3 acquisition lines, just got to be patient.

Thank you.

Thank you.