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

Thank you, everyone, for joining us for our first panel on the first day of our Global Real Estate Conference. I'm excited to have AMH's management team with me. Right next to me is CFO, Chris Lau. To his left is the CEO, David Singelyn; and then COO, Bryan Smith, all the way to the left. With that, I'll pass it over to Dave to go over AMH and then we can jump into Q&A and feel free to be jump in any time with questions.

Thanks, Josh. Just a couple of very brief comments, and then we'll get into your questions. American Homes 4 Rent, for those that are not familiar, is a single-family rental REIT. We own approximately 60,000 homes. What I would summarize where we are today is a period of time where there is significant demand for all housing, especially in the single-family rental space. We are in more than 30 markets. Those markets are where people are moving to -- all but 2 of those markets had a population and job growth greater than the median national -- the national median. Our growth program continues to be robust. We continue to grow even in this difficult economic cycle through our development platform. And our development program is unique. It's the only program that where we build houses in a platform where we're going to own it long term and manage it. Other build-to-rent is -- other people building to sell to other operators. And that's important because when we build a home, we are going to put in higher quality materials because of the long-term durability and the long-term maintenance requirements. And we also have the ability to acquire land in the infill areas or the areas that people want to move. And we don't have the opportunity to buy that level of house from a national homebuilder. Those are their retail products, the stuff that they are selling to -- for build-to-rent are the homes that are outside the current population centers, and it's the next generation of housing. So -- we look at those lands too, but we're very, very pleased with our ability to grow in all economic cycles through our building program. We'll add approximately 2,200 homes this year through our build-to-rent program. So that's a brief interaction. Operationally, a very, very strong quarter. There is an update on the website if you're interested. With that, I'll turn it back to you, Josh.

Yes, definitely.

I want to add in ratio -- I can just cover a little bit on the operating update. Dave did hit it. There's a deck on the website includes a July and August update in it, which I would characterize as an update that we're really happy with. Very consistent with the increased expectations that we outlined at the end of the second quarter. With the business just performing really well, at this point, we're past the peak of leasing season. We're in the midst of turnover season and things are performing well, largely driven by the continued really strong demand for single-family rentals that Dave was talking about. And so what that means is as we're continuing to work through some of the increased seasonal turnover that we started talking about at the end of the second quarter. Those units are being met with really strong demand and great absorption, enabling us to hold occupancy in the mid-96s in both July and August while continuing to push rate as well. So for the 2 months quarter-to-date update, we pushed new leases close to 8% and renewals in the mid-7s, which if you take a step back and think of the longer-term historical context, those are some really strong levels of rate growth this deep into the year, and this late into kind of the third quarter. So real happy with the update. And Josh, back to you.

Yes. No, thanks guys for that. Maybe we could just start there. What's kind of driving that like deep into the season rate growth, like that demand? What are you guys seeing? Any additional color you can provide?

Yes. Thanks, Josh. The demand for single-family housing has been robust. It's been fantastic, specifically for our portfolio. We're seeing at the top end of the funnel, fantastic website activity. Growth in new users year-over-year just for the August update of over 25%. These new potential residents are coming to the website. They're searching more. They're utilizing the 3D tours, creating search accounts. A lot of this is driving improvements in applications. So top to bottom, the demand side looks really good into a time of the year that traditionally has had a little bit more of a slowdown. So we're in a really good position there and that strength continues through to foot traffic into the houses. So we're in a very good position to process a lot of those move-outs that we talked about from the peak move-out season of July and August.

Let me add 2 points. One is -- one of the demand drivers for all of housing, especially for single-family homes and then specifically single-family rentals is the fact that this country is undersupplied in housing. Today, there's more than 1 million households that are looking for high-quality housing. Couple that with the fact that that's not evenly distributed through the United States. And we're in those markets, as I indicated, where people are migrating to, we have population and job growth, and that's creating high demand. And then one last piece, and that is over the last 10 years, people have become more and more aware of what the single-family rental value proposition is. And what we see today is, as we went through COVID and people wanted to look to socially distance, they moved into single-family homes. And they learned what the quality of that product is. Today's population, there is more renters today. I was just talking a minute ago about the number of single-family homes that are rentals today, it's 17 million to 18 million. And 10 years ago, it was 13 million. And that demand is continuing to grow. And our residents will buy homes, many of them at some point, but they are doing all of their life change as much later in life, whether it is getting married, having children or buying a home much later in life. So all of those have really driven demand in single-family homes and single-family rentals.

Just given what you've seen kind of this late into the season, kind of what's your expectations for the back half of this year? Do you think that strength continues and you don't really get a big seasonal slowdown like you typically would see?

Yes, I do think that strength will continue. Dave talked about the value proposition. And one of the interesting things, too, is the relative cost difference between owning and renting or similar homes in our markets. Right now, it's about 28% less expensive to rent a home in our markets than it would be to buy that similar house. It puts us in a really good position going forward from -- it's showing a lack of supply. As Dave mentioned, the demand is really good. So I see this momentum continuing. Our expectation is to continue to process the move-outs, continue to prepare ourselves for high occupancy and be in a really good position going into next year. So yes, I see this momentum continuing.

Okay. And for the residents who maybe moved out, was there any kind of common theme or changes in like reasons for move out? It seems like moving out to buy probably more difficult? Like is it pricing driven or something else?

Yes. So move-out to buy has always been our largest reason for move-outs. And we saw a decrease in that over the past year, but it wasn't as dramatic as I would have thought until August. We've seen -- it was a really significant pullback sequentially from July. So that's gone down a bit as a reason. But keep in mind that if you look at our move-outs today relative to pre-COVID, the volume of move-outs is much lower, but the proportion is kind of remaining the same, so this change that we've seen in August. In addition, with -- on the counter side, we are pushing and that has gone up as well.

Does that...[indiscernible]

Move-out to buy, it's in the 20% -- in high 20s.

Just a quick question. On the 28% as demand -- do you know roughly how much mortgage rates would have to evolve for that to manage how to 0?

Yes. So if you go back pre -- if you go back 2, 3 years ago, we were pretty much in parity when interest rates were at 2%. So they need to get back to the low to mid-2s.

[indiscernible]

Higher what?

[indiscernible]

Yes. So actually, the reality is the rental rate increase is as aggressive as they've been, have not kept up with home price appreciation. And so -- you've got to get back to the 2s and the home price appreciation is the driver there.

Let me flip in that question around a little bit. How much further would rents have to increase to get the parity where -- what's happening with the homeownership side?

That's the 28%. So we -- right now, we're 28% cheaper. So you got to do the inverse math of that. So it's probably about 35%.

I think about affordability from like absolute standpoint you commented on the relative GAP, which is pretty substantial. How you think about just [indiscernible]?

Yes, I think the easiest way for us to look at that is the applicants who are coming in, who are getting improved in our system and their income has kept pace with the rental increases, part of that's due to kind of the depth of the demand pool. Some of that's due to some of the migration patterns that we saw, as an example, people leaving California to move to Nevada and Arizona are bringing presumably higher level wages into those marketplaces. But we've been really pleased over the past few years to see the income keep pace, if not slightly outpace the changes in rent.

Yes. That's the key is. The rents today and the income levels today of the people applying for our product -- that ratio hasn't changed negatively. It's actually. I think it's 1/10 of -- one turn higher right now.

Ratio that you guys [indiscernible]

Well, the average in our system is over 5x income to rent. Our minimum standard is 3x. And I would tell you the 5x doesn't -- isn't fully baked because if you come in and you and your spouse are renting and your income qualifies, then we don't even get your spouse's income. So there's more than 5x in our system.

Can you remind me the rent on the [indiscernible]?

Yes, that's right. And we pay that as the landlord, but it's the fixed cost. There's a maintenance component in all the fixed costs.

[indiscernible]

Yes. So it's done by a third party. The affordability, the 28%. Both sides are done by a third party. And they are -- the average cost that it cost to maintain a similar house -- as a homeowner. Now for us to maintain, it's a lot cheaper because we have our own people doing it and we don't pay all the markups.

[indiscernible] like insurance premiums, right, in terms of whatever years, if you're a renter [indiscernible] if you're fully aware of everything you'll be able to [indiscernible] causes you will pay more for rent because you know that they will have only $1,000 year for insurance?

One of the fixed costs, for sure.

Yes. I mean it's -- today, we've had very strong demand. If you -- and we've had very strong rental rate increases over the last year, and they're continuing as we go forward.

How much of that 28% vary by margin?

Of the top 20 markets that are the lowest is 11%. So I don't know what the top is, but the lowest was 11%. I don't recall.

Let me just turn in to the operating platform, you've made a couple of investments. Could you just go over just the rollout of that? And if there's anything that we're seeing actually in results yet?

Yes, I think the most significant one this year was called Resident 360, that's an investment across our platform and to the resident experience. We saw kind of one of the first deliveries with the new Enhance website in January, which I talked about kind of the results on that side. But more importantly, it includes a significant investment in our field personnel. The maintenance, the services department for maintenance and turn work, we made an investment, not only both on the platform, but on our people, to increase the self-performance, to increase the in-house work. The feedback from our in-house maintenance experience over the past few years was much higher satisfaction levels and better cost controls. So we continue to invest more heavily into that program. We rolled that out nationally. The teams are hired. They're almost fully trained, and we expect to start seeing some real nice benefits to that in the coming year. What we've seen so far is excellent feedback on the customer service side from surveys, Google reviews, as an example, are up across the board nationally. So it's being very well received by our residents, and we're really excited about the results of that particular program in the future.

Let me expand on the Google scores that he refers to. That's one of the ways that we can measure the quality of our customer service. Google scores that are presented are lifetime scores, but you can go in and see the number of surveys that have been posted in the current year. This year, we have seen our scores increase. And again, looking at our top 20 markets against our peers, and that's both public and private, large institution. Our Google scores in every single market outperform every single peer in 2023. So that's a significant improvement from what we have seen in prior years.

Maybe back to 360 a bit more anecdotally, can you explain some of the things like that yourself peforming now versus [indiscernible] rather than taking care of things versus using [indiscernible]. What is the specific [indiscernible]?

Better coverage on occupied maintenance calls. Specifics would be more self-performance on turns because of increased capacity. So our team members are coming in there. And -- Yes. They're in a perfect world running self-performing all of the turn aspects and getting the house back on the market very quickly. When you have the larger the higher move-out seasons, it's really important for speed because everybody else has high move-out to that time too. Reliance on third-party vendors can be expensive and less predictable. So that's one the -- having more of our internal people going to occupied maintenance phone calls is a huge benefit from cost protection, ability.

[indiscernible]

Yes. Well, the diagnostic piece is one. But yes, there are a lot of fixes replacing garbage disposals, warehousing, refrigerators, dishwashers. We do all our own replacements there. There have been a number of upgrades in the system that will add speed and cost efficiencies.

What kind of things like would it be [indiscernible] ?

Yes, roof repair isn't one, but roof diagnostics would be in the event that we needed -- we had a judgment call on repair versus replace, we could send them one out. Most of our in-house technicians are HVAC certified. So they're able to go out and handle most of the fixes. We're not doing full system replacements in-house. But to be able to go out and diagnose it kind of figure out how to extend the life of that particular system for a few years is really valuable. So we're trying to handle as much of the HVAC work as we can internally, and that's a high-margin business and very important on the resident experience side, too, especially when you get into the more extreme seasons you have of heat in the summer or in a couple of our markets when it starts to cool down the year.

As far as the benefits like hitting P&L, how far along are we to like hitting like the stabilized like levels that you were underwriting to after rolling this out?

Yes, I think the biggest -- or one of the biggest ones was the impact that improved resident experience will have on retention. We built this business over the past decade plus, really at the start, providing high-quality assets. And then since then, we've overlaid this really strong services platform that provides convenience. I mean, anybody who owns a house has a punch list pages long, it doesn't get done. And if you're busy, it's -- there's a lot to being able to call professional maintenance company that has really quick turnaround times and is interested in preserving the asset as well. So we expect to see improvements in retention. That doesn't happen until through a full cycle plus. And then the cost control side, we're hoping that to play out next year. You can see the difference in or some of the efficiencies that we gained by doing our own work. If you take a look at the increases over the past couple of years in our repairs and maintenance line item, we've been able to deliver that program at below inflationary levels when you consider the types of services that we've been performing. There's been a lot of demand on maintenance and repairs and housing. And this year, we can comfortably land in the 6.5% range, which is well below what you would pay as a consumer in the marketplace.

On the -- one of the big inbounds I've had on the residential space has been on the operating expense side, insurance and real estate taxes have come up a lot. Could you remind us when your insurance like renewals up? And just like what you're hearing as far as potential renewal rates going forward?

Yes. So our renewal for this year being 2023 is done. We renewed in the first quarter. We saw an increase in the 20s, which is pretty consistent with our expectations what we had contemplated in guidance. And I would say, more broadly, generally reflective of the insurance market at large. As I think we all know the insurance market is in a world of trouble right now after countless years of catastrophic losses and unprofitability. Quite frankly, the insurance market is at a point now where it is needing to broad brush rate increases across the board to all asset classes, including ours, which has been a profitable asset class. I can speak for our program, our program has been profitable to our insurance -- still the insurance industry more broadly needs to be passing on rate itself back to a point of profitability. Crystal ball looking forward. Unfortunately, I don't see things changing in the near term from an insurance market perspective overall. And so for those of us that have well-performing insurance programs like SFR, in general, ours in particular, I think that there's opportunity, and you'll see more of us move to a slightly larger captive participation in their programs, us personally. We will do it in a very responsible way so that we're not changing the risk complexion of our balance sheet or portfolio. But I think that, that will help us to mitigate some of the level of increase over time. And it's just helpful from a broader negotiation standpoint as we're out there renewing kind of the third-party components of our program. But I would remind all of us as well as we're thinking about insurance, I think it's a very important topic, very top of mind. But at the same time, it's also one of our smallest expense line items as we're thinking about the P&L.

And then maybe flipping over to real estate taxes. When did those bills start coming in for 2024? And just how should we think about kind of the flow through? There seem to have been a big increase last year.

Yes. Latest update, since the end of the second quarter, we have a bit more information now, not a ton more. We have a few more pieces of information back on the value side. We've heard back on more of our appeal results. I would characterize that information over the last 6 weeks or so has been pretty consistent with what we were expecting. In terms of remaining information, the largest remaining piece at this point, will be actual property tax rates that generally come along with the bills in the fourth quarter, that's still ahead of us. But based on the information we have kind of here to date, we are not seeing anything out of balance with what's contemplated in our guidance, which, as a reminder, at the midpoint, contemplates property tax growth this year of 9%. That's pretty elevated and outsized, largely reflective of the fact that property taxes are backwards looking. And if you think about the years of home price appreciation kind of that our property taxes continue to reflect backwards looking. We have a little bit of a mismatch in terms of this year where property taxes are growing in kind of the rest of the world. But as we're thinking about, to your point, Josh, read-throughs into next year and beyond, I can't put numbers behind it yet. But we're optimistic that this year is really kind of the high watermark from a property tax perspective. Our view is that property taxes over time directionally trend with home price appreciation. We know that home price appreciation or at least a rate of growth in home price appreciation really kind of peaked out in 2022 -- move further away from that peak as we head into 2024, we're optimistic that, that should translate into moderation on the value side of property taxes.

Okay. No, I appreciate that color, Chris. And then maybe just going back over to the balance sheet. You have a securitization coming due later next year. Just I guess what are your early plans for refinancing? And is there any extensions that are an option?

Yes, sure. Maybe just a bit of history for anyone that maybe wasn't following the story 10 years ago. Securitization, we're really -- the lifeblood of our acquisition machine back in 2013, '14, '15, super important in terms of the growth and history of the organization. But even back then, we knew that securitizations and secured financing structures in general were suboptimal for our type of asset class, right? The asset encumbrances that come along with secured financing makes it really difficult to freely move assets and decision make at the individual unit level, not just the building level that we do all the time, right? That's one of the great aspects of our -- the granular nature of our asset class is the ability to asset manage discretely at the unit level, which we do all of the time. Think about what we've done this year from an asset management and disposition perspective, right? Year-to-date through the end of the second quarter, we sold over 1,000 homes, generated something like $300 million of recycled capital, an average disposition cap rate somewhere in the 3s, right? Fantastic and really, really powerful if you think about what that means in terms of the opportunity to optimize the portfolio. But that's difficult when you have thousands of homes tied up in securitization pools of collateral. So we're actually looking forward to securitization maturities at the end of next year -- end of 2024, so that we can free up that collateral as we look to refinance those into the unsecured bond market. As we think about execution around entering the unsecured market, both of those securitization maturities again, the maturities are at the end of 2024. They both have 12-month prepayment windows without any penalty that opened up at the end of this calendar year. So we have a nice wide window to look for kind of best market conditions to get those refinanced into the unsecured market.

Any kind of early indications on where you could issue unsecured debt today?

Today, a new issue tenure would probably be high 5s to 6 or so. That is obviously tenure is being 4 or a little bit north of 4, I'm looking at Dave's screen something like that.

High 5s to 6 or so today.

Okay. And then maybe switching gears to the development program. That's a unique aspect of AMH. Just any updates on that front? How is it going and then just maybe thinking about the evolution of that program going forward?

Yes. We're very excited about where we are on the development program. I think it's -- for us, it really differentiates our ability to grow in all economic cycles. But it's more than just the ability to grow. It's the ability to acquire better assets than we could from national homebuilders from the -- through the MLS better located asset. And because there's no development profit or you're not paying retail, much better yields. Now when you look at going forward, we're going to deliver 2,200 homes this year. We haven't given guidance for next year. What we have said is that it will be more than this year. And we have 12,000 or so lots in our pipeline. We are doing the horizontal work on all of those. So -- and we are continuing to buy land. The delivery is just a little bit on yields. Remember that development is a long process. So the items that we delivered in the second quarter, we acquired the Lumber, and I specifically call out Lumber. Because it is the commodity that has changed pricing the greatest. So the stuff that we delivered in the second quarter, we acquired or contracted for the Lumber. Last year in the first and second quarter. That was the high watermark, $1,600 per 1,000 board feet. Now we're in the $400 per 1,000 board feet. That's $20,000, $25,000 right there per house. Stuff that we will be delivering in the third quarter and fourth quarter and going into next year is moving to and through into the 6s. But the stuff that we're underwriting, keep in mind, that's what we'll be delivering in 2 to 3 years, 4 years, maybe. And that's in the mid- to high 6s today.

Land prices [indiscernible]

Land prices are relatively consistent with where they were before the interest rates moved up in the quality locations that we want to be in. There is some land that is -- we've seen the pricing come down, but it's not in the locations that we want to be in. The program here for me is it's all about discipline in your growth. It's growing when you have the right time to do the right capital and the right opportunities. So when you look at our acquisition pipelines, the existing hubs, MLS as well as national builders. The opportunities that are out -- locations or the quality of the asset that we are looking for and that could be age or type of asset. So land is kind of has to follow the same program. And so we want land that is where the homebuilders are building their retail product, not their build-to-rent product. And that land is back to the same pricing levels that we saw about 2 years ago. And the better part of that story is that land is becoming tradable. The sellers were a little bit frozen for a period of time and not really transacting.

Maybe on that point to your designing [indiscernible] design based now [indiscernible]. Are there any changes to either the footprint or [indiscernible] how is your building size wise or the lot size you will put inline versus what's being delivered now?

Yes. So a couple of things there. One, the first thing I'm going to talk about is our systems. We invested in our systems 3, 4 years ago. No different than we're investing in Resident 360 to date. And when we invest in systems, the idea was that it would pay dividends in the future, and we're seeing that. And part of the reason that our cost to build a home is coming down, is we're much more efficient on our ordering and the amount of products. So we have less and less waste. And we have value engineering with our -- we have in-house architecture committee or product design group that is designing these for the best efficiency possible. On the communities, we were -- we adopted through the COVID period changed some of the upstair loft areas into workspace area, so people could work from home. Lot sizes, changing the lot sizes, that's very difficult. That's really dictated primarily by the municipalities, what they desire. Municipalities are going to dictate a number of things, lot sizes, what the exterior of the house needs to look like as well. And so there's not been a lot of change in that. On the amenity centers, we have made some changes, but -- it's an interesting question. Maybe the timing of your question is interesting because right now, we are just at that point where we've delivered enough amenity centers that we are doing a deeper dive, and this is going to take a couple of years because they -- we need some turns to occur to see what the exact value is and whether we need to change, enhance or maybe even reduce the size of the amenity center. So we're not quite at a point in our life cycle that we can make that evaluation.

Given that number, [indiscernible] at this point was [indiscernible] when you compare your scattered size portfolio, both operational and financial angle?

Do you want to take the operation...

Yes, I mean I think the earliest that we're seeing is that the turn profile in terms of speed, re-leasing and cost is what we expected. They're quicker to turn. They're easier to pre-lease and the costs are kind of coming in where we thought much less than a normal kind of scattered side house. It might be a little bit older. So that side has been really good. Quicker cash, cash turn times, better occupancy. We still need a little bit more time to really quantify the retention benefits that we think we'll see. You got to think to a lot of these communities that are delivered kind of at a measured pace over a period of time. So even though the community might be live for a couple of years, it hasn't had a chance to completely stabilize. So we're looking forward to seeing that and really understand the value some of the other additions that we have in those communities.

Yes. A couple of other things that we have learned. I think Bryan hit one of them, but it's how do you build the flow of a community. Do you build from the front of the community to the back, the back of the community. So you have the least disruption to the existing residents while you continue to build out the community. So that process and building the access roads, so they're not having to go through construction zones as much has been a part of the learning curve. The other piece that we are very -- again, gets back to the discipline of how you build and deliver assets is exactly how many do you want to be delivering per month. We could build faster. There's no doubt we can build these communities that we are delivering homes in faster. We choose not to because that way, when we deliver the homes we can deliver at a cadence that the operations team can absorb them in, in an efficient manner.

So we're out of time, but we're asking all the management teams on the panel today, 3 rapid fire questions. The multiple choice should be easy. So the first one is, do you believe the Fed has done hiking? Yes or no?

No.

Do you expect the Fed to cut rates in 2024?

Yes.

Do you believe real estate transactions will meaningfully pick up by: a, the fourth quarter of 2023, by the first half of 2024, or the second half of 2024?

In our space, it's going to be the latest one that you have available. So...

Second half of '24.

Chris is -- analogy C.

And then the final question is, are you using AI today to help you run your business, yes or no?

Not in a significant way, no.

Do you plan to ramp up spending on AI initiatives over the next year?

We are in evaluation as we speak.

Great. Thank you.

Thank you.