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

Good morning, and welcome to Bank of America's 2024 Global Real Estate Conference. I'm pleased to have with us AMH's CEO, David Singelyn; COO, Bryan Smith; and CFO, Chris Lau. I'm going to pass it off to Dave for a few opening remarks about AMH, and then we can jump into Q&A. With that, David?

Thank you, Josh. In a moment, I'll have Chris update you on our numbers for July and August and some more details on the business. But I have a couple of thoughts before that, and they really revolve around the drivers of our business in SFR as well as specifically to AMH. For any company, it starts with demand for your services, demand for your product. For AMH, it starts and ends with the fact that we have a huge housing shortage in the United States. That housing shortage is not evenly distributed. It's much greater in markets that people want to live in, those markets that people are moving to. And that's where American Homes and AMH have its portfolio. If you look at our diversified portfolio across all sectors of the United States, those markets with the exception of two, are greater than the median in the U.S. for both job growth and population growth. The other 2 are pretty much at the median. So demand for our product has been very strong. You see that in our operating results that Chris will go through in a moment. The second piece is the platform. And I think we are -- the reason that you see strong operating results is the platform has had numerous investments made in it over the 10 to 12 years that AMH has been in business. We started with no platform, nothing that could be bought off the shelf. In fact, nobody that you could hire that had experience in professional management of SFR. And we have continued to invest in it. You may recall about 2 years ago, we had an initiative we called the Resident 360, where we really invested in the communications with our residents. And to me, that is paying significant dividends in our operating results as well. You can best see the impact of that investment in two ways. One is Google satisfaction scores. If you parse the scores that are on the Internet, which are lifetime scores, and you can parse down the data and just take data on a year-by-year basis. Last year and this year, our Google scores are better than all of our peers in aggregate. And if you look at the top 20 markets and our top 5 peers, you've got a lot of data points. And we pretty much see all of our peers in all of our markets, I think with the exception of two. So we will work on those two for you. The other place is if you look at our employee turnover, that -- those numbers continue to be very, very favorable compared to pre-COVID periods. And that, to me, is also reflective of the investments in the Resident 360 program moving some of the decision-making out to the field. Third point is growth. So you really have growth two ways in your operations. That's all going to come from demand, but it's the external growth. And it's been a couple of years where we have seen an event that we really haven't seen for decades, and that is rising interest rates, at least the velocity in which they have risen and slowed growth for all real estate. And we're no exception. So last time we saw this would be late '70s, early '80s. And the one thing that we thought about a number of years ago, pre-COVID is controlling our destiny in all economic cycles and creating a development program. And the development program not only allows you to grow in all the economic cycles, but it gives you a better product at a better yield. So it's going to wear better, it's going to be better located. It's going to perform better when the demand drivers are a little bit softer than normal. And we're seeing that today. So development program continues as it has in prior years. We'll deliver approximately 2,300 homes. Our development team is right on pace to do that. So we're very excited about that. The other piece of growth is acquisitions, acquisitions from two sources, existing homes and national homebuilders. Those have pretty much been on pause for the better part of more than a year, and that's a reflection that interest rates have moved up. Pricing has not come down. But it's just patience. And it's -- you got to have the discipline. And so it's not a concern. We saw this again back in the '70s and '80s. And since then, we've had many, many real estate bull markets. It's just you need to buy well-located, good assets at the right price. And when those opportunities come about, we have the capital resources to do those acquisitions, but we need to press and buy acquisitions just for growth's sake. We have growth coming already from our development program. Last comment I will say is many of you know, now you all know if you don't, before that in February of this year, I announced my intent to retire at the end of this year, December 31. So this, I guess, is my last conference. So I just thank all of you in the room for being on this journey with me. And Bryan, who's sitting to my right, your left, will become the CEO on January 1. And he's been with AMH for really since inception. And most of that time, he's been the Chief Operating Officer. So I am highly confident that you actually won't see much of a change in the direction of AMH. I can't guarantee it. I'm not going to be in charge. So we'll see what Bryan does next year. I'll be watching on your side of the table, not this side of the table with you. So just thank you to all of you. It's been a very, very interesting 12 years or 13 years building a company from totally scratch and no playbook. But it is such a unique asset class. It's an asset class very different than any other real estate asset class, I guess, multifamily and some of the other housing or like that. But it's not a discretionary demand. And every person in America needs housing. And this country is so undersupplied. So the future is very, very bright. I look at things differently than I know all of you do, because I look at the long term, and the long term is great. Each and every quarter, you're going to have the noise of the quarter and that's -- we'll have some issues but -- in the future, but not in the long term. So thank you for that. I'm going to turn it over to Chris now. And for the most part, I'm going to let Bryan answer all the questions. So...

A quick update on business. We put out an updated deck. You may have seen it, it actually hit the website last week at this point. Punchline is that we are deep in the middle of turnover season, right? That is the time of year that it is. The teams are doing a great job executing. August quarter-to-date occupancy was 96.1%. Taking a step back and thinking about that in terms of the seasonal context, that very much reflects kind of the typical shape of occupancy in the direction of it at this time of the year. As we think about that seasonal curve, keep in mind that, that typically continues into the month of September or so. Zooming out a bit, demand continued to feel good over the summer months. Renewals for the 2 months through August ran in the low 1s, pretty much as we were expecting. And new leases grew in the high 5s for July and August combined before those naturally start to moderate as we get into the fall and winter months post-Labor Day, really. Let's see, what else? Growth and disposition programs, chugging right along according to plan. Development program is feeling good on track with expectations for 2,300 deliveries or so on a full year basis. And since our last update, dispositions continue to move along nicely as well, on track for $400 million to $500 million of full year dispositions there as well. So Josh, those are the updates, and kick it back to you.

Yes. No. Chris, maybe I'll just start there. People are, I guess, trying to think through the balance of the year and kind of how you're thinking about where you're maybe sending out renewals today, if that's something you can share? Or yes, just the trajectory for the balance of the year versus like what you've achieved.

Yes. I can take that. We're seeing a moderation, a seasonal moderation, and it's more evident in the re-leasing rate growth than it is in the renewal rate, which is probably going to experience a slight taper towards the back half of the year as expected, picking in the 4s for the balance of the year with blended rate growth for the year ending in the 5 area.

Okay. And then I guess a lot of questions at the conference about thinking about kind of where we're heading and the building blocks that have already been laid for 2025. Can you speak about your expected earn-in for 2025 and like what else -- where the other variables are for the remainder of the year and how that might change?

Yes. So going into next year, earn-in is in the low 2s is our expectation based on the rate growth of this year. And going into next year, we're really pleased with a lot of the investments we made into the platform. Dave referenced the Resident 360 program that allows us to control our expenses a little bit better. So we're optimistic that we're going to enter next year in a good position to continue, as Chris calls it, controlling the controllables as you've seen this year. Regarding some of the other major components, property taxes, we haven't formed a full view on that next year, but tracking with HPA. We hope that they're going to be moving in the right direction soon. In the next year or 2, the seasonal curve, as we've seen over the past decade, expecting demand to really start rolling back as we get into the first quarter. But our expectation this year is to finish strong and be in a really good position to capitalize on that spring leasing season next year.

Any questions from the field on just like the operating update or where things are kind of heading operationally?

Supply SFR, product supply [indiscernible] your assets or communities to be effective?

Sure, yes. The supply outlook, there are pockets where we've seen an increased supply. We've talked about it on prior calls. Common knowledge that there's been an increased supply in places like Phoenix. I'm starting to see a little bit of it in Florida, but it tends to be cyclical. From an SFR perspective, there's a big discussion around build to rent and the effect that some of that increased supply would have on our business. A couple of key points, though. The center of the build-to-rent universe is really Phoenix. And the product that's being delivered there, close to 80% of it is not the detached single-family product that we're building through our development program. It's characterized by horizontal apartments, townhomes and more attached product that differs from our two-car garages and full single-family homes. So there's some supply coming in that's a little bit different than what we're offering. One of the benefits of having the diversified portfolio footprint, though, is we have markets that are experiencing really outstanding performance that don't have the supply pressures. But in a couple of areas, we're seeing increased supply, which we believe will be temporary. And that belief is based on seeing these cycles over the past decade. We saw for a couple of years, 2012 and 2013 in Phoenix, increased supply caused some pressure on rates. But it quickly recovered, and then we saw the phenomenal growth over the past 5 or 6 years in that market. So our expectation is where there is supply, it will be absorbed quickly. Because, as Dave mentioned before, there's housing -- housing shortage is the best way to characterize these growth markets.

Yes. Stephen, let me just add one thought. There's 2 types, I think, of supply impacts: those that are direct and those that are indirect. And I would characterize the -- and this is a neighborhood business that residential is in. And I would characterize the impacts to American Homes being more indirect. That's different than a lot of other companies. And this is where you really see the difference of the AMH development platform. We've talked about it many times. It's when things -- and when things are going well, you just can't see it or measure it or feel it. But when things are starting to slow. You see it in space. And this is a perfect example. So when American Homes buys land, it is buying land in really infill locations. It's buying it where our national homebuilders are buying land that they use and develop for retail. If you would characterize homebuilders, they buy A, B and C lots. The As and Bs, they sell to end users, and a lot of the Cs are ending up as SFR. And I would say they're a little bit outside the city. And when we had our success in building, a number of years ago private equity came in and bought a lot of land, I agree with Bryan, phoenix is where the center of this was. $50 billion was reported, not -- a lot of that never got out of the ground, but a lot of it did. And it's outside the city. And that's also where the national homebuilders are selling land to professional managers such as ourselves. We just happen not to be buying it because we have that growth program already built in. So the direct impact for some is very, very significant. The indirect is -- there are always going to be some people that move out. It's cheaper housing. It's also cheaper because of the product type being townhome. But we are where -- we are the closest to the employment centers, the good shopping, the school -- the newer schools. It's where the retail houses are. And so while our impact is happening, it's much more muted than others are seeing. And we will recover a lot faster. And supply, if we could control supply, then it comes in like we deliver it 2 homes or 4 homes or 6 homes, whatever the right number is per month, then you have no absorption issues. But multifamily and others that have year-end or quarter-end goals deliver in chunks. And that creates an absorption issue. So I hope that helps.

Maybe a tangential question on that. Does the build-to-rent product that you're talking about, does that compete for the customers from more traditional apartments or the SFR that you own? Just trying to think of like where the profile is.

Yes, it's a very good question. The detached, the townhomes, it's definitely closer to multifamily, maybe a little bit of a bridge. What's interesting to note, though, you have increased supply, let's just stay in Phoenix for a second. And you look at the performance of our newly built homes, the communities that we're delivering in Phoenix. And the occupancy profile there, we're in the 97s on the homes that we're delivering. It shows the differentiation in product because that's certainly not market occupancy. But we are seeing some pressure there because of the different build-to-rent product and also the multifamily supply that, that market is seeing. So we're affected but temporarily and not in a huge way. But we're very proud of the product that we're delivering, and it does differentiate itself on location and quality.

And maybe just a little bit of a technical question. Does that -- like a start for this build-to-rent product, does it show up as a single-family start or a multifamily start?

I don't know the exact answer. I know that the statistics -- most people are following John Burns, his research, and he intends to group everything together. So when people see the raw numbers of units, they're not differentiating between detached and townhomes. But I don't know whether that on the building side. If it's individually planted, it probably comes out of single-family, but I'm not sure.

Okay. Interesting. And then, I guess, just the development platform, I think is the most unique -- one of the more unique aspects of AMH. Just kind of one of the questions I feel is it seems like the yields that have been discussed on the development side have come in maybe a little bit lower than kind of expected or what was discussed. Just kind of -- can you walk us through kind of what your latest thoughts on the returns that you're achieving, where you expect those to go? And maybe just why they've been lagged kind of that expectation a little bit?

Yes. I'm not sure lag is the right word. When we talk about yields, we're talking about going in -- as soon as that house gets rented, there's no stabilization factor or anything like that. So they're true yields. We just experienced some -- a period of hyperinflation and input costs, and it was partly offset by improvement in rents. But the yields themselves are high 5s and not that far off of expectation from original underwriting. Keep in mind too, there was a different cost of capital environment when a lot of these deals were approved. The good news is, though, we're very optimistic about future performance, and we built these to be durable, low maintenance, upgraded a lot of the products. So we expect to see the benefits of these newly built homes, both on the revenue side through improved retention and on the expense side for years to come. So we're at a good starting point. And in terms of yields compared to other -- through acquisitions and other portfolio that we've seen, there's a huge premium to our development program.

I'll just add two things. I'm going to reiterate one thing he said because it's very important. These things were underwritten 4 to 6 years ago. And so cost of capital is very different and the underwriting was actually in the low to mid-5s, and we are getting the higher 5. We also went through an inflationary period in the building market that is really, again, one of those things that we haven't seen in decades at this level. And it's all tied to inflation and rising interest rates. The other thing, just to simplify the whole thing down very easy, why you get a much better yield on when you build it yourself is we're not paying a development profit to anybody. And the typical development profit plus the sales and marketing costs that don't get incurred is anywhere from 15% to 25% of the sales price. And if you don't have that, by definition, you're going to get a higher yield. And right now, we are seeing mid-4s on the pricing of existing homes and opportunities from the national homebuilders. We're getting around 6s, but just a little bit under 6s right now, so high 5s. And if you just take 6% because it's a much easier number than 5.95% for me to do, 6%, 15% to 20% development yields, 90 to 120 basis points. And that's the difference in the yields. And it's just -- and think about it, we have the immediate HPA. We're investing an amount that's a lot less than what the value of that is when it's done, and that's the development profit. We don't pay anybody.

Sure. I guess on the yields, we've seen a competitor kind of buy from the homebuilders that would seem like comparable yields to maybe what your current development orders are. Just kind of curious like how you view your product versus maybe what you're seeing from homebuilders. And I don't know, it's just hard from our seat sometimes to reconcile the 2 yield differences.

Yes, I'll take that one because nobody can yell at me next quarter. And that is we've seen a lot of those acquisition opportunities. And we underwrite them differently, and they don't underwrite to the same numbers. And how you get into those numbers, I think you have to ask the people that are underwriting, I can't answer that.

I guess when you're underwriting, what are some of kind of your key assumptions from the homebuilders?

It's very simple, very, very simple. What is the rent that we are going to get in at the first time when we rent it and what are the expenses when they become stabilized? Property taxes in year 1 are going to be very low. They will get reassessed. They'll get up in year 2. You have very little -- you should have 0 repairs and maintenance in year 1. You're actually not going to have much in years 2, 3 and 4 and 5. But in year 10, you're going to be on a normalized path. That's what we underwrite. What is that year 10 in current dollars, what are the expenses when stabilized on current rent? It's -- expenses is expenditures. So it's an economic yield, not an accounting yield. It's economic after CapEx reserve. That's how we do it. That's how we do everything. That's how we do acquisitions of MLS. That's how we do our own development program, and that's how we do our dispositions, is what is the income today in the marketplace, whether it's leased or not on dispositions and what is the stabilized operating expenses for that asset.

Questions from the field?

So just to clarify, what's your sort of marginal dollar, what kind of yield -- economic yield do you want to see today given the higher cost of capital?

No, our cost of capital is very favorable. And we're very fortunate for that investment-grade rating. We've got a very -- we've had a very consistent delivery of growth and we've been rewarded for that. And so we have an opportunity to buy a little more aggressive than some of our peers. But with that said, we are still looking for something that's going to be in the upper 5s to -- and if it's a good location, there's always an exception, some of them may be mid-5s, if we're trying to fill in a market for efficiency purposes or for making sure that we keep our development program going. Maybe there will be a mid-5 sprinkled in here or there.

I was just looking at your presentation, Slide 15 just shows like your development land pipeline. It looks like a number of lots owned kind of peaked in 2022. I know you're developing, so it's probably coming down. I guess kind of how do you think about the pace going forward of the development pipeline as well as like potentially kind of backfilling this so it doesn't dip too low?

'22 or a couple of years ago, we were very fortunate to have bought that. We were a little land heavy as far as I was concerned. And we -- I was just super, super fortunate. I mean, today, we're delivering 2,300 homes. We got 4 years of inventory. And that is what we need, because it takes about that amount of time. So we've got to start replenishing here pretty soon. We have the luxury. It was very, very fortunate that we have the luxury to be patient and disciplined and didn't have to buy land that we couldn't get to pencil. And even today, we can be patient and disciplined. I would say we have 1 or 2 markets that we need a little bit more land in. But the rest of them, we're in a really good place to be able to weather for a couple of more years if we had to.

Josh, just an important point. You and I know, we've talked a lot about this, but for everyone's benefit in terms of how we have sized the development program. We've been very intentional to size the program in a way that each and every year that we think about developing that year's portion of the pipeline, it is fundable without the built-in need for equity, right? So this year is a good example. This year's development program is fundable through a combination of retained cash flow from the business, recycled capital from dispositions and then a little bit of growing leverage capacity off of the balance sheet. And we have each year into the future of our development program sized similarly currently. We have a little bit of an ability to dial it up and down a little bit, but those are some important guiding kind of principles to how we've thought about the development program from a capital management standpoint that then enables us to use or think about using incremental debt, equity, et cetera, as opportunistic weapons to do more, whether that is acquisitions, if and when they make sense into the future from national builders, MLS, consolidation opportunities, et cetera. But all of that is made possible because of how we have intentionally sized the development program.

The character trends of what you're selling that 400, 500 relative to what you keep?

Yes. I think the -- it's a good example. We talked about cap rates on the MLS in the past. We're -- the homes that we're selling, we're selling to end users. And thinking about cap rates, if you were to treat them as investments in the mid-3s. So we're taking noncore assets that may have had outpaced HPA growth relative to rent or acquired and portfolio buys in the past. There are a number of different reasons, locations, one; effective yield is another. But we're able to recycle those assets that aren't core back into our development program and really bringing a different type of asset in terms of long-term runway back to the market at a better yield.

Is that a geography or is that everywhere?

There's geographical considerations. There's here and there kind of one-offs throughout the portfolio. But location is the #1.

There's a multitude of reasons that a house could get in that bucket and identified. We do have some markets that we're leaving. That would be geography. We have some that are a little far out for management purposes, that's geography. But we have some that have asset characteristics like septic that we have chosen to dispose of. So we don't have to deal with the maintenance issues surrounding that. So a multitude of reasons.

Phrased well. I noticed the -- I was just looking to the slide deck. It's very difficult. Slide 4 shows your footprint. And I noticed -- and I don't know if this is new, but it looks like you have a development in Boise, Idaho and Denver. It didn't say market presence total. But are those newer developments, newer markets, places you want to grow capital allocation front?

They're not new. They're not -- they've been there, but they've been in the below the top 20. So you probably just haven't seen them. And I think they're getting a little more scale. Boise is a fabulous marketplace. We talk about migration. We talk about demand. If you look at California, California for the first time about 2 years ago has people moving out of California on a net basis. And they're moving to places like Boise, like Reno, like Denver, like Las Vegas and Phoenix. And then they go farther east as well. Austin is a big recipient as well. And so Idaho has had super strong demand. We've owned a small number of homes there and we've done some small developments up there over the last 2, 3 years.

So we just have a few minutes left. And we do have an election coming up, and I feel like there's been some noise around the housing market. Is there anything on the regulatory horizon that is worth mentioning? Do you have any thoughts on potential impacts of the presidential's housing proposals?

Wow. That's how you're going to finish? So let's start with 2024 has been actually a very, very positive year for single-family rentals actually probably for all housing and in the regulatory side. We have seen some very favorable legislation started in Florida, and it's around the trespassers, squatters and enhancements to eviction rules. And we've seen that to go to Georgia as well as the North Carolina marketplace. So very, very strong. No real negative bills out there that actually passed. A lot of negative bills have been proposed. And let's talk about what those bills are and what they -- what's really happening. And I'm going to start with the federal, because it's one that everybody probably is aware of. You can repeat the story in many states. At the federal level, there are 5 bills or 4 bills that got introduced around rent control, around institutional and professional managers owning assets and putting limits on them and there are a couple of others. And they are all introduced actually by a couple of individuals that are both Chairman of various committees in the Senate, one being the Chairman of the Senate Banking Committee that actually oversees housing. Now if this was a real bill we want to create legislation from, it has to go through that committee and it has to go to the floor. And in order to do that, you better schedule a hearing. None of these bills that were introduced in May or prior this year have even gone through scheduling. They were never, in my opinion, intended to actually be legislation. They were meant to be campaign messaging bills. And those campaign messaging bills are -- maybe a coincidence, probably not, that the Chairman of the Senate Banking Committee is up for reelection in Ohio and one of his most difficult reelection campaign. So it gives him messaging capabilities. You see that in other markets as well. And what the politicians are doing here is, they've got a job to do as well, but they also know that if they want to have economic growth, they have to be able to provide housing. If you want a great example of what real rent control can do, just look at what happened in Minneapolis, St. Paul, when the electorate, the voters through an initiative put 3% rent control in. It didn't even last a year. 89% of all the building permits were canceled the day after -- the week after, but very shortly thereafter that bill passed. All economic growth stopped. And they know that. And so you got to separate, and it's almost impossible unless you're under the hood to be able to figure it out. But you got to separate messaging from reality. And we're one of the peers -- pillars that every American needs. And therefore, it's really, really good for voter influence. And so I think the rhetoric is depending on who wins is probably going to increase. But I think you got to remember, it's going to be rhetoric more than action. That's my take on it.

So I'll leave you with an easier one. It's multiple choice. We have 3 rapid fire questions. Do you expect real estate transactions to increase once the Fed starts to cut, yes or no?

Do you want to answer? Do you know the Fed is going to cut?

Yes.

Can I take that to the bank?

Yes.

See how we reversed this. But if the Fed cuts interest rates, if interest rates come down, you're going to see, I think, a couple of things, one is your cost of capital comes down.

Yes or no?

The answer is yes.

If yes, when do you expect them to pick up? I thought Bryan was answering everything. If yes, when do you expect them to pick up? A, 4Q '24; B, first half '25; or C, second half '25?

B.

How would you characterize demand for space today? A, improving; B, steady; C, weakening.

Space or residential?

I guess, demand for your product, B.

Steady.

You listen better.

Last year, the majority of companies at our conference stated they expected to ramp up spending on AI initiatives in 2024. How would you characterize your plans over the next year? A, higher; B, flat; C, lower.

A.

Awesome. Thank you. And congrats, David.

Thank you, all.