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

We're going to get started here. Looks like we're on the countdown. So good morning, everyone. My name is Jamie Feldman. I'm the senior REIT analyst at Wells Fargo. I appreciate you joining us today for this session with AMH. So directly to my right is Lincoln Palmer, COO. To his right is Brian Smith, CEO; and to his right is Chris Lau, CFO. The team has a short overview they're going to provide. We've got some questions. But if anyone has questions they want to ask, certainly let us know, we'll make some time at the end of the presentation. And with that, I'll turn it over to Brian to get us started.

Thank you. I'll start off with a few comments, and then I'll pass it to Chris to go over some of the updates that we posted last week. The single-family rental industry is in a great place, and it continues to benefit from some very strong macro fundamentals. First, there's a limited supply of quality housing in the United States. Second, demand will continue to grow as the large millennial cohort ages into prime single-family rental age. And then third, there is a wide affordability gap between owning and renting a home is as wide as we've ever seen. AMH continues to be at the forefront of the SFR industry by providing high-quality homes in desirable family-friendly locations throughout the country. We've strategically built this well-diversified portfolio of over 60,000 homes in more than 30 different markets that's positioned for resiliency and growth across all economic cycles. These high-quality assets are supported by a robust and efficient services platform that is benefiting from our continued investment and innovation in the form of technology. And now more than ever, prospective residents are seeking out AMH homes as they search for the next home to move and live in. Occupancy across most of our markets is north of 96%, and we continue to see strong rental rate growth across the portfolio. And then finally, on the growth front, we continue to benefit from our in-house development program, which delivers purpose-built, high-quality homes directly into our portfolio. One important distinction on the development program is that it's strategically sized so that it does not require incremental equity on an annual basis. In addition, our investment-grade balance sheet provides flexibility to capitalize on incremental opportunities such as portfolio acquisitions when they present themselves. The single-family rental space is full of opportunity for us to continue to innovate and grow, and we're in a great position as we look forward to what's ahead. With that, I'll pass it off to Chris.

Yes. A couple of quick updates. As you probably saw, we put out an updated deck after market Thursday of last week. I would say, thematically, very similar to the first quarter earnings call in that spring has shaped up nicely. Just as we were hoping for, occupancy held strong at 96.3% in both April and May. What is especially notable about that to us is that we were able to hold that level of occupancy even with shifting leases like we've been talking about from the second half of the year or shifting lease expirations from the second half of the year to the first half of the year as we endeavor to optimize the lease expiration curve over the course of the year. Against that occupancy backdrop, renewals held steady at 4.4%. And then importantly, we saw nice new lease acceleration from 3.9% in April to 4.3% in May. As we shift into June, our focus now transitions a bit from a pricing perspective as we're beginning to head into move-out season right around the corner. A couple of quick updates or just callouts on the expense side since we've got everyone. Same as the first quarter on turnover costs. We'd expect to see slightly higher turnover costs in the second quarter, again, coming from the timing and shifting of lease expirations from the second half of the year to the first half of the year, again, as we optimize that curve. And then two, I don't have concrete information yet that we can talk about, but we are watching property taxes in Texas very closely. As many of you probably recall, Texas is the state that passed the property tax relief reform back in 2022. That was in place in '23 and '24, and we knew that coming into this year, the state would be revisiting potentially another round of property tax relief using a portion of the state's $24 billion budget surplus. Again, I can't give specifics yet, but it appears that the state is getting closer to potentially passing another round of property tax relief, and we're optimistic that we may have an update that we can share on that by the time we report the second quarter. Rounding it out, Bryan mentioned development right on track for full year delivery expectations. And then finally, a quick update on the capital plan. As you probably saw, we were in the bond market beginning of last month, raising $650 million in a 5-year offering that priced at a coupon of $495 million, which is clearly a super attractive piece of capital, but also complements our maturity profile perfectly in that we previously did not have any maturities on deck in 2030. So a 5-year slots in really nicely. So Jamie, turn it back to you. But general updates, business is good, spring is shaping up nicely, and nice update on the capital plan.

Great. Thank you. So can you talk a little bit more about market specifics on demand trends post 1Q? Obviously, a lot of headlines out there, a lot of confusion, higher rates, lower rates, more inflation, less inflation jobs. Anything you can read into your portfolio that tells a picture about where things are heading or how things have been?

You go...

Yes. So the indications for most of our markets are that they're all extremely healthy. As Chris mentioned, we're running plus 96% in most of them. But a little bit of talk about Florida. Our Florida are running 95.5%, 96.5%, extremely healthy. still seeing a little bit of softness in, call it, Arizona, Texas. Those have widely talked about. But it's also a time when we're grateful for our diversified portfolio. Our Midwest markets are doing extremely well. Carolinas are doing very well, many of our Western markets. And when you look at supply and kind of demand overall, demand remains healthy across all of our markets for quality and product. There's a little bit more supply in others. But overall, we're really pleased with the way that that's produced results post 1Q. As Chris mentioned, we've seen acceleration in occupancy growth. So we feel good about.

We spent a lot of time yesterday with Newmark talking about tariffs and manufacturing coming back to the U.S. When you think about your regions and your typical job profile, you do see a pickup in manufacturing jobs. I know this is off the script, I apologize. How do you think about how that might impact demand?

Yes. I think it would be a positive. If you look at where our homes are located, a lot of the talk on manufacturing centers around the Midwest. We've got a nice presence in the Midwest. It's -- we took a very close look at our resident, we've been looking at for a long time, but specifically during COVID as to where they were working and what particular functions. And our residents, the general employment profile is there's -- the majority of our houses have are dual income. And the job rates that are -- the job types that are most prevalent in our portfolio center around health care and nurses and first responders and education and so forth. We don't see a huge impact from manufacturing, but any positive movement in that would have good benefits for the entire market. The markets that we're investing in the markets that we're currently in and that we're developing in have a general profile of positive, better than national population growth and better than national employment growth. And I expect changes like that would only help it more.

Okay. And then how should we think about your expectations in terms of the curve for the rest of the year in terms of rents? What's embedded in guidance? What are the expectations? And where do you think you're trending better or worse than you originally thought?

A couple of things, and then you guys feel free to chime in, too. Starting maybe with the last part of your question first. I think you can tell, spring shaped up nicely, really like what we saw in terms of foot traffic, demand, full occupancy acceleration in new leases throughout the first 5 months of the year, all felt really good. I would say we were also expecting a strong spring in the first 5 months of the year when we contemplated the guide as well. So feeling good, but we're also expecting a strong spring. To your point about the shape of the curve, it's a good question. And as many of you know, we spent a lot of time thinking about it and talking about it and really dissecting kind of what the shape of that curve looks like. And in particular, what the shape of that curve, leasing curve looked like kind of long-term stabilized pre-COVID average of the portfolio. And then what we've seen over maybe the last 3, 4, 5 years that was more COVID distorted. And what we really saw is with all things, COVID, trends were distorted out of whack, and we really saw kind of an atypical elongating of the curve over COVID and through the COVID recovery. And so if we look back at, call it, 2019 and prior stabilized average, the leasing curve really peaked out mid May, late May, sometimes early June. And it really feels like that is the way this year's curve is shaping up, really kind of pre-COVID stabilized average. And one of our objectives for this year, we talked a lot about this end of '24 heading into '25 is as we think about '24, we really didn't like how steep the back end of the curve was last year through third quarter and fourth quarter and how kind of rate trajectory followed. And so one of our key objectives coming into this year was really rounding out that curve, kind of smoothing it a touch, and there's 2 ways that you can accomplish that, pricing strategy and then lease expiration management, which like we talked about, big benefit as we're shifting leases from second half of the year to first half of the year to better align with demand. So great progress this year, really smoothing out the curve, which is feeling much more kind of pre-COVID stabilized shape like in the business.

So do you expect a bigger occupancy headwind at the end of the year as you move these leases forward or change the expiration pattern?

Theoretically, on a longer-term basis, I mean, I think the other thing to point out and kind of zoom out as we think about lease expiration management, this is really a multiyear kind of future ongoing benefit that we would expect from the program. And really, it should be benefiting the back half of the year, both in terms of kind of durability of both occupancy and then frictional turn costs as well, right? As we're moving expirations out of the back half of the year in turn, we're moving move-outs to the first half of the year, which benefits turnover, occupancy and then in turn, frictional turn costs. As we know, the objective in our business first half of the year is to capture as much upside as possible via the spring leasing season. And then as we transition middle of the year, about now, June into the back half of the year, the objective really focuses to controlling the controllables, which we did a fantastic job on last year. That's where a good portion of the upside against our guide came from. Our objective is to deliver and execute the same thing this year again and into the future years and shifting move-outs in the back half of the year to the first half of the year really kind of advantages us along that objective of controlling the controllables.

I was actually thinking just over the immediate term. Longer term, yes, definitely, but it sounds like it's not that meaningful.

Yes. We're talking a little bit of timing year-over-year. I think our view on the full year is still similar in that we're expecting occupancy to be roughly similar year-over-year '24 to 25 in the low 96s.

I know you mentioned Texas on the property tax front. Any other states stand out or that's the one you're watching?

That's the only one that I can really call out so far. As everyone knows, we're still pretty early in the property tax information cycle. This is the time of year where initial pre-appeal assessed values are just beginning to come back. We don't really have enough yet that I can talk meaningfully about it. When we get to report in the second quarter, I can give a better finger on the pulse update of how values are feeling. But we're still early. We get values in over summer kicks off appeal season. That runs through end of summer, early fall. And then importantly, we get rates back late third quarter, sometimes beginning of fourth quarter. So early in the property tax information cycle, but Texas is obviously atypical in terms of the potential relief reform this year.

And that's not an extension. That's an additional potential cut in tax.

That's a new -- okay, so the way -- not to get too into the numbers. But back in 2022, the state passed a compression in state tax rates, which lowered them for '23 and '24. Technically, that has expired. What the state is contemplating some level of new tax rate compression that would be in place for '25 and '26. So you could think of it kind of as it's not technically an extension, it would be a new relief reform, debating. They're discussing a variety of different potential outcomes, but one of which is rate compression relief similar to '22. And then they're also contemplating expanding of the homeowners exemption, which obviously would not affect us.

Okay. But you were assuming that it burned off in your...

We took a middle-of-the-road approach as we contemplated the guide. I think everyone generally expected the state to probably do something this year in terms of new relief. The state has a $24 billion surplus Governor Abbott has made it very clear that property tax relief is a top priority of his. And so we kind of assumed kind of a middle ground approach. We didn't assume that nothing was passed, but we didn't assume that it was the exact same as last time. So is it the difference in the guide.

Got it. Okay. Can you talk about bad debt? How has it been trending in April and May? And what are your expectations?

You guys want me to keep going? I'll start and then you -- So beginning of the year, I would say, again, I feel like I'm overusing this, but I can't speak concrete details on bad debt in the middle of the quarter. It's tough to speak definitively until we get the books fully closed for the quarter. Collections are feeling good, similar to the first quarter. Healthy collection base representative of the health and wherewithal of our type of resident, $150,000 income, 5 plus income to 1 -- 5-plus income to rent ratios on average, 2 working adults per household, good credit quality. So things are feeling good from a collection standpoint. I would point out as we think about comping against last year, recall that the first half of '24 was benefiting from some rollover catch-up payments that we were seeing coming in from 2023 that essentially burned off, if you will, and didn't recur in the back half of the year. So we should factor that in, in terms of comp. I think bad debt comp in 2Q '24 is like 80 basis points or something like that. Things feeling fine. Keep in mind, there's seasonality to bad debt. Typically, it trends and correlates with move-out season as well.

Are there any markets where you're seeing a change or anything surprising you upside or downside?

You want to talk...

I think markets pretty consistent. Our teams do a great job of executing our policies very consistently. I think we're one of the better performers on bad debt. Haven't seen any meaningful changes in regulatory policies or administrative process in any of the markets. So overall, it's just continued consistent execution by the teams to capture what we can.

Okay. And then we do a lot of work with our homebuilder analysts, still a pretty wide spread between cost of the homebuilder incentives and what you guys can charge or what you are charging. But are there any markets where that gap is closing pretty meaningfully as you think about it are still pretty wide or anything you want to flag?

Yes. I think it is closing. But for us, we take a look at tens of thousands of homes from national builders on a quarterly basis. And then filtering that down into our buybox locations, obviously, the first thing to look at and then asset type. A lot of the stuff that's being offered is attached as townhomes. And we're very focused on single-family detached with the yard to car garage. It's very cookie cutter within our portfolio. So when you start to filter it all the way down, the ones that fit our buy box, we're taking a close look at. We haven't seen a ton of price movement, maybe a little bit of willingness to negotiate, but we're still pretty wide of where it would need to be for us to do anything meaningfully. We're underwriting these homes on our model in the high 4s still, and we're able to deliver our own development product, which is purpose-built, our exact locations, our exact finishes, which are different in a lot of cases from the starter homes being offered. We're delivering those into the mid-5s. So we're very, very pleased that we have the foundation of the development program. But at the same time, we kind of started this 8 or 9 years ago by buying from the national builders. So it was a really good acquisition channel back then. And it's possible that it returns, but we need to see a little bit more movement than we've seen to date.

And what are your -- can you remind us of your expectations for development this year? -- terms of starts?

Yes, I think the deliveries are in the $2,300, 22 -- to $2,300 range. We're on track with that. it's going very well. The demand for the product is strong. The lease-up is strong, and our expectations are that our -- the yield that we're delivering at will be in the mid-5s for the year. .

And how do you think of the impact on tariffs on construction costs or just your appetite overall to start new products?

Yes. We haven't seen an effect yet. We've obviously been following it very closely, even though it changes on a daily basis. It's very hard to track. But a couple of things that are important. We talked about it on the last call. Our costs for the homes that we're delivering today and into -- through the second quarter into the third quarter effects, those were contracted prior to any effect from tariffs. So if there is an effect on tariffs, it's going to be at the tail end of the year. And we did our best to quantify what they could potentially be. Our estimates remain the same, talking 2% to 3% of total investment cost for a home. We're delivering homes around $400,000 in total. If they hold, if almost -- it's not a worst-case scenario, but with a conservative estimate. On the flip side, we have a very strong and robust purchasing platform that services both the development side and the property management side of the business. So in the event that one of our suppliers is manufacturing whatever the product is flooring or appliances in a country that's subject to large tariffs, we have the ability to pivot very similar activity from that department as to what we saw with the supply chain disruptions during COVID and some of the cost pressures that came along with that, we were able to maintain really good cost controls by taking different choices and leveraging our scale. So in a long -- in a short answer, if they're in effect, it will be minimal, but we haven't seen anything yet.

How do you think about the impact just on your regular operating business? I assume it's appliances and maybe talk through where it has hurt so far and where you think it could hurt the development pipeline?

Yes, it's a very good question. The dynamics with that are a little bit different in terms of being able to plan and you can get different pricing and if you have a longer planning threshold. But because we have the 2 departments, we're able to warehouse materials, we're able to -- we're doing it on the appliance side right now. So we might see some effect. We haven't seen anything large yet. The few cases where our vendors or our suppliers have come to us with indications of an increase, we fought back pretty hard. So we protected ourselves so far. It's really hard to predict how it's going to end up. If there is an effect, I wouldn't expect it to be too dramatic.

Can you quantify what percentage of your OpEx? I assume it's all repairs and maintenance, but how much of that is even imported...

[indiscernible] Labor is a major component of that. I don't know, if you have any...

I hate to venture a guess. I think the important thing, like Brian said, is we have these 2 teams that are purchasing. We've had several things come up recently that we've had to renegotiate. Our flooring program is a good example. We spend a lot of money on resilient flooring every year so that we can prevent future costs. Appliance is another good example. HVAC is another good example, just high CapEx items. And we've been able to renegotiate a lot of those contracts if we are notified of increases at either flat or maybe even a slight benefit because of the purchasing power that we have on both sides. So I don't know how much of it is imported, but we're doing a good job at finding substitutes when necessary.

And then I guess, thinking about other uses of capital. On the acquisition side, what are you seeing in terms of potential portfolio acquisitions, how does that market look?

Similar update to end of the year. As everyone knows, we acquired a very attractive portfolio in the fourth quarter, 1,700 properties. What we really liked about that property that I think is representative of other potential future opportunities was the ability to create value by bringing that portfolio onto our platform. So as many of you probably know, that portfolio was currently or previously being managed by 3, 4, 5 different local and/or regional property managers all across the country. And property managers of that size just can't operate at our level of institutional performance. And so by bringing that property or that portfolio onto our platform, there's immediate opportunity to create value in the first year, right? In-place cash flows on that deal, by area, low 5s or so and then over the course of the first 12 months, as we overlay our collection practices, pricing acumen, controllable expense controls, our expectation is that yields out of that portfolio should grow into the high 5s. If we do a really good job executing, maybe even close to a 6 because of the value unlock on our platform. As we think about other opportunities out there, like we've talked about many times, we know that there's a large universe of assembled portfolios both existing stock scattered site units and then more recently, newly constructed BTR portfolios. Eventually, that capital is going to need to find liquidity and need to monetize itself. Much of that capital has been on the levered IRR clock for 5, 6, 7 years at this point, naturally going to need to recycle. It also probably was debt financed in a very different environment than today. We think that will translate into increased seller motivations. Nothing concrete to talk about, but we know that those opportunities are out there. We will be unwavering on our commitment to the AMH buybox in terms of location, quality and product type. But for the right opportunities that fit the buy box, we love those. They're great growth opportunities and great opportunity to create value on our platform.

And what's your appetite for third-party capital, whether it's JVs...

For acquisitions? We have a couple of existing joint venture relationships that have to date been focused on increasing size and scale to our AMH Development program. One of those still has -- I don't know the exact number off the top of my head, but several hundred millions of capital that is still to be deployed ahead of us. I think we view joint ventures as a nice complement when the time is right to do either something more or complementary to what we're able to do on the balance sheet. But when the math works relative to on-balance sheet cost of capital, priority #1 is always grow from and deploy from the balance sheet accretively.

What about funds? Is that something you guys have to place?

We think about a lot of things. We've thought a lot about things over the years. It depends. Is there a case in time where that could make sense for certain operators? Potentially, I would say that's another level of kind of complexity to the story. I would say we have had the good fortune of good access to capital over the years and haven't needed to go there. And we very much pride ourselves on keeping the strategy, the message and the balance sheet simple.

All right. Speaking of the balance sheet, I'll let you take us home here. How should we be thinking about balance sheet strategy and what's on your plate for the next 12 months.

Balance sheet strategy is that we are almost there finally accomplishing our objective of 100% unencumbering the balance sheet. Coming into this year, we had 2 remaining securitizations on the balance sheet, one of which was paid off at the end of the first quarter. That was financed through last month's trip to the bond market. We over-indexed to that bond execution last month where we essentially pre-funded close to half of the second securitization refinancing that will pay down in the back half of this year. And at that point, the balance sheet will be 100% unencumbered, been an objective of ours for the last 10 years with the additional benefit of freeing up our ability to asset manage the portfolio. One of the great things about our asset class and its granularity is our ability to asset manage discretely down to the individual unit level and recycle capital very attractively. I think as most people know, today, we're disposing of homes with an exit cap rate of sub-4%, somewhere in the 3s and attractively recycling that capital into our development program. The 2 securitizations that are being paid off this year free up about 9,000 homes that have been tied up in collateral pools for the past decade that will create kind of the next leg of runway for our disposition program over the next couple of years.

And do you think -- what do the credit agencies say about -- the rating agencies say about the securitiz that impacts ratings at all or...

Definitely a positive. I will say though, that's been our strategy for years at this point to ourselves, communicated externally and to the rating agencies as well. So I think to a certain extent, they were already expecting it, but certainly a positive. And I'm sure that was part of the rating agency calculus when S&P moved us to a positive outlook earlier this year.

I think we're just about out of time. Is there anything we didn't cover that you want to get across to the crowd?

No, I think it was pretty thorough. I mean just really to emphasize that the industry and specifically AMH is just in a really good place to finish this year strong.

Great. Thank you. Thanks, everyone.

Thank you. Thanks, everyone.

Thanks, Jamie.