Earnings Call Transcript
American Homes 4 Rent (AMH)
Earnings Call Transcript - AMH Q4 2022
Operator, Operator
Greetings and welcome to the AMH Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nick Fromm, Director of Investor Relations. Thank you, Mr. Fromm, you may begin.
Nicholas Fromm, Director of Investor Relations
Good morning. Thank you for joining us for our fourth quarter 2022 earnings conference call. With me today are David Singelyn, Chief Executive Officer; Bryan Smith, Chief Operating Officer; and Chris Lau, Chief Financial Officer. Please be advised that this call may include forward-looking statements. All statements other than statements of historical fact included in this conference call are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in our press releases and in our filings with the SEC. All forward-looking statements speak only as of today, February 24th, 2023. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. A reconciliation of GAAP to non-GAAP financial measures is included in our earnings press release and supplemental information package. As a note, our operating and financial results, including GAAP and non-GAAP measures, are fully detailed in our earnings release and supplemental information package. You can find these documents as well as SEC reports and the audio webcast replay of this conference call on our website at www.amh.com. With that, I will turn the call over to our CEO, David Singelyn.
David Singelyn, CEO
Thanks, Nick. Welcome, everyone, and thank you for joining us today. To start, I would like to highlight our company-wide rebranding that was announced last month. Our goal has always been to make leasing a high-quality home easy, so our residents can focus on what really matters to them in life. Our rebranding embraces a simplified modern look representing our commitment to continued innovation, including an updated website and enhanced mobile experience. But this is just one part of the equation. The single-family rental sector is constantly evolving and we plan to further solidify our market leadership by continuing our investment in customer service and maintenance delivery this year through an initiative we named the Resident 360 program. Investments this year will include a combination of added resources to our property management platform, continued system innovation, and bolstering our various supporting functions. In a few moments, Bryan and Chris will share details on our operational plan and the financial impacts of this very important initiative. Now, turning to the quarter and full year. We closed out 2022 strong, resulting in 13% core FFO growth per share for the year. This represents the second consecutive year of double-digit growth, which is a testament to the AMH team, platform, and portfolio. As we look ahead to 2023, we recognize the landscape is changing as the economy cools and inflation continues to pressure consumers and businesses alike. With that in mind, our 2023 outlook contemplates our top line to remain resilient with growth stronger than historical norms, even with some moderation from 2022. This strength and resiliency is due to long-term fundamental tailwinds in our industry. First, there is an undersupply of housing and current building permits project a significant decline in new housing inventory. Second, housing affordability significantly favors renting. According to the latest John Burns data, it is more than 20% more affordable to rent versus own across our top 20 markets. And finally, our portfolio is concentrated in high quality of life markets with the majority of our households consisting of dual incomes that are employed in resilient sectors with some of the most common professions for our residents being nurses, firefighters, and other first responders. Shifting gears to the investment front, we continue to benefit from our AMH Development program, the backbone of our growth. Currently, our traditional and national builder channels are largely on pause. To date, it remains difficult to acquire properties in an accretive and responsible manner with expected returns to today's pricing still too low to clear our required return thresholds. The channels will reopen one day, but we do not have a crystal ball showing us the exact timing. As such, our investment guidance reflects no material activity across these two channels in 2023. Updates will be provided should market conditions change. A key benefit of our three-pronged growth strategy is that, unlike others, we do not rely solely on open market acquisitions to grow. In 2022, we continued to have consistent and predictable growth through our AMH Development program that delivered 2,183 homes, consistent with our 2022 plan. We expect another year of consistent growth in deliveries during 2023. Similar to commentary from our last earnings call, we are seeing signs of reduced development labor and input costs in many of our markets. While the deliveries in the fourth quarter reflect peak pricing, today, we are seeing those prices decline. As an example, today, lumber is one-third the cost of its peak pricing in May of 2022. We expect to see further price reductions in vertical input costs for the balance of this year. Please keep in mind that the vertical development phase is six to nine months, resulting in today's cost reduction benefits showing up in yields in late 2023 or 2024. With respect to asset management, we continue to be focused on optimizing our existing asset base. Specifically, we anticipate another active year on the disposition front to capitalize on current market pricing opportunities by selling homes that do not align with our long-term objectives. This can already be seen in the fourth quarter where we sold approximately $130 million of homes, bringing the full year total to nearly $300 million. The vast majority of these homes were sold to individuals. In closing, as we head into 2023, our resilient asset class, strong tenant base, and one-of-a-kind development program positions us well during these uncertain economic times. Our Resident 360 program, as well as long-term favorable rental demand tailwinds, pave the way for consistent value creation for many years to come. And now I'll turn the call over to Bryan for an update on our operations.
Bryan Smith, CFO
Thank you, Dave. 2022 was another great year for AMH. Our team posted strong operating results and an impressive 9.1% same-home core NOI growth for the full year. Before I get into our results, I'd like to recognize the team for delivering on key technology initiatives that set the stage for our Resident 360 program. First, we launched our upgraded website last month, which is a key step in delivering the modern resident experience. With a focus on mobile, our new website makes leasing more convenient than ever before. New functionality includes simplified home searches, streamlined map functions, and an even easier showing process. This new website is the key platform for future resident experience improvements. Second, we've made great progress on our next-generation maintenance services platform, which includes system enhancements to our logistics, scheduling, and communications functions. We expect to deliver another round of improvements later this year. Most importantly, these initiatives allow us to capture even more data on prospects and residents, which is already driving our analytics engine. Moving on to operating results. Fourth quarter demand was in line with our expectations. Although we saw some seasonality, demand metrics continue to exceed pre-pandemic levels. Same-home average occupied days was 97%. New, renewal, and blended rental rate growth was 8.5%, 7.9%, and 8.1%, respectively, which drove 7.3% same-home core revenue growth for the quarter. Core operating expense growth was 10.5%, primarily driven by the Texas property tax true-up that we discussed last quarter. All of this resulted in 5.7% same-home core NOI growth for the quarter. Turning to the current year, 2023 is off to a great start with strong demand for our homes continuing in January and February. So far this year, we are seeing increased website traffic and inbound leasing inquiries, driving a 20% increase in distinct showings per ready property when compared to our long-term averages for the same period. For the month of January, same-home average occupied days was 97%, and new and renewal spreads were 7.2% and 7.6%, respectively. This resulted in blended rate growth of 7.5% for the month. On a full year basis, our same-home core revenues growth outlook is 6% at the midpoint. This is primarily driven by forecasted growth in average monthly realized rent in the 6.5% area, which includes a low 4% earnings from last year's leasing activity and the partial year contribution from 2023 blended rate growth expectations. This is partially offset by small year-over-year movements in occupancy and fees and our expectation for a modest 35 basis point increase in our bad debt percentage. This expected increase can be attributed to a small cohort of lingering COVID-impacted accounts taking longer to resolve than expected. Looking ahead to core property operating expenses, next year's same-home growth outlook of 9.75% at the midpoint reflects another year of elevated property taxes and insurance, which Chris will speak to in a moment. For all other expenses, our outlook contemplates general inflationary pressures and proactive investments into our Resident 360 program. Today, our platform provides the best customer service in the industry, which has allowed us to differentiate ourselves from the competition. Resident 360 expands our platform's capabilities, which will benefit resident retention, provide for greater cost control, and strengthen our position as the market leader in customer service over the long term. I can't wait to see Resident 360 come to life. We have a great operational platform and team already in place, and our market-leading customer service will only get better as this program is fully rolled out. With that, I'll turn the call over to Chris.
Christopher Lau, CFO
Thanks, Bryan and good morning everyone. I'll cover three areas in my comments today. First, a brief review of our year-end results; second, an update on our balance sheet and recent capital activity; and third, I'll close with an overview of our 2023 guidance. Beginning with our operating results, we closed out 2022 with another strong quarter of consistent execution with net income attributable to common shareholders of $87.5 million or $0.25 per diluted share, and $0.40 of core FFO per share in unit, representing 6.7% year-over-year growth. And for full year 2022, we generated net income attributable to common shareholders of $250.8 million or $0.71 per diluted share and $1.54 of core FFO per share and unit, which was in line with the midpoint of our most recent 2022 guidance. Additionally, given our continued strong growth in taxable income, after year-end, our Board of Trustees approved a 22% increase in our quarterly distribution to $0.22 per share. As a reminder, our distribution increases have been outsized in recent years as we burned off our remaining net operating losses. Now, that our net operating losses have been materially utilized, we expect future distribution increases to trend similar to earnings growth over time. From an investment standpoint, during the quarter, we delivered 701 total homes from our AMH Development program, which was modestly better than our expectations. Of our total deliveries, 415 homes and 286 homes were delivered to our wholly-owned and joint venture portfolios, respectively. On the acquisitions front, our programs continue to remain largely on pause as we patiently look for further stabilization in home values and the capital markets. During the quarter, we acquired a modest 74 homes, which largely consisted of pre-existing national homebuilder contract closings. Next, I'd like to turn to our balance sheet and recent capital activity. At the end of the year, our net debt, including preferred shares to adjusted EBITDA was six times. We had $69 million of cash available on the balance sheet, and our $1.25 billion revolving credit facility had a $130 million drawn balance. Subsequent to year-end, we settled the remaining 8 million Class A common shares from last year's forward equity sale agreement, receiving net proceeds of $298.4 million, which was partially used to pay down our credit facility with remaining proceeds funding a portion of our 2023 capital plan that I'll discuss more in a couple of minutes. Additionally, recognizing the continued uncertainty in the public capital markets, we recently agreed to increase the total capital capacity of our existing joint venture with institutional investors advised by JPMorgan Asset Management to approximately $900 million. This provides nearly $300 million of additional joint venture capital capacity that will be used to target incremental land and development opportunities. Notably, this increased JV capital capacity enables us to remain opportunistic while also ensuring that our wholly-owned development pipeline remains strategically sized to be fundable without the need for additional common equity. Next, I'd like to share an overview of our initial 2023 guidance. For full year 2023, we expect core FFO per share in unit of $1.58 to $1.64, which at the midpoint, represents year-over-year growth of 4.5%. As some additional color, at the midpoint, our expectations contemplate same-home core revenues growth of 6%, which Bryan discussed a few minutes ago, along with same-home core property operating expense growth of 9.75%, driven by property tax growth in the 9% area as we have now completed our year-end property tax forecasting process and believe that 2023 property tax growth will likely remain at the same peak levels as last year, driven by the impact of multi-year revaluation states continuing to capture backwards-looking home price appreciation. On a positive note, we are beginning to see modest deceleration in certain of our annual revaluation states, supporting our view that property tax moderation is still to come in future years. Additionally, we expect 10% to 11% combined growth on all other expense line items, reflecting the general inflationary environment, a challenging property insurance market, and the incremental costs associated with the Resident 360 program. And putting together our same-home portfolio revenue and expense growth expectations, we expect 2023 same-home core NOI growth of 4% at the midpoint. From an investment standpoint, given ongoing market conditions, our 2023 investment expectations do not contemplate any material acquisitions through our traditional or national builder channels. And although we expect these channels to eventually reopen in the future, we cannot predict when, which, as a reminder, underscores the consistent and predictable value from our AMH Development program. Despite the currently constrained acquisition environment, we still expect to attractively deploy $1 billion to $1.2 billion of total capital this year, adding between 2,200 and 2,400 newly constructed AMH Development homes to our wholly-owned and joint venture portfolios. Specifically, for our wholly-owned portfolio, at the midpoint of our ranges, we expect to invest approximately $900 million of AMH Capital consisting of $650 million or 1,850 homes added from our development program, along with $250 million of combined investment into our wholly-owned development pipeline, pro rata share of JV investments, and property enhancing CapEx programs. From a funding standpoint, we expect this year's $900 million AMH Capital plan to be funded through a combination of retained cash flow, $200 million to $300 million of recycled capital from dispositions, net proceeds from our forward equity shares settled last month, and modest leverage capacity utilization from our balance sheet, leaving a couple of hundred million dollars of dry capital capacity to take advantage of additional growth opportunities should market conditions change. That brings us to the end of our prepared remarks. But before we open the call to your questions, I'd like to remind you that our asset class, diversified portfolio footprint, and investment-grade balance sheet position us for resiliency during these uncertain economic times. Additionally, our operating platform is further bolstered by Resident 360 along with our one-of-a-kind AMH Development program position us for continued long-term value creation. And with that, thank you again for your time and we'll open the call to your questions.
Operator, Operator
Thank you. We will now be conducting a question-and-answer session. Thank you. And our first question is from Nick Joseph with Citi. Please proceed with your question.
Nick Joseph, Analyst
Thank you. I completely understand the capital allocation plan, but what would get you more interested in acquisitions going forward from here? And then maybe just where do you see cap rates today?
David Singelyn, CEO
Yes. Nick, it's Dave. Good afternoon. The capital plan and the investment plan are intertwined, and it's really about where your cost of capital is today and where the growth opportunities lie. Today, what we are seeing is the acquisition market, as well as the national builder market. The yields at the current pricing are in the mid-5s, and at the mid-5s, they are not attractive to us. We look at our acquisition program or our investment program, having three channels. The development program gives us the best assets and, in the long-term, the best yields in the acquisition channels, which are opportunistic. Today, we need to see another 50 basis points or more increase before we would be entering into that market. Nick, you can see or heard from the prepared remarks, we don't have any material acquisitions planned, but if the market changes, we will be ready to acquire in an opportunistic manner.
Nick Joseph, Analyst
Thank you for that information. Regarding the guidance for expense growth, real estate taxes continue to be a factor. Do you think this is a 2023 adjustment due to home price increases, or should we anticipate similar impacts over the next two to three years, considering the varying approaches municipalities take towards real estate tax assessments?
Christopher Lau, CFO
Yes. Nick, it's Chris here. Good question. And look, I would actually tie back to some of our commentary from last quarter. And as we all know, home price appreciation, which is one of the primary drivers of property taxes hit an inflection point somewhere around the middle of last year or so. As a result, as we've shared before, our expectation is that property taxes will hit an inflection point as well. But given that property taxes are backwards-looking and also the fact that about a third or so of our property taxes are paid in states that revalue on a multi-year basis, meaning that they're still capturing multiple years of backwards-looking record home price appreciation at this point. Our expectation is that 2023 property tax growth will still remain similar to 2022 in that 9% area. But as I mentioned in my prepared remarks, we are beginning to see some green shoots in a couple of our annual revaluation markets. Notably, we talked about a decent amount last quarter and last year. In Florida and Georgia, rather than the mid-teens increases we saw last year, we're seeing those cool into the low teens or so this year. And then notably in Texas, we're still expecting 2023 to run higher than average. But given that home price appreciation there has moderated as well and is likely now below the Homestead Exemption cap, we're not expecting to see a repeat of last year's disproportionate treatment, if you want to call it that, to non-homeowner occupied properties. But like I said, these are good leading indicators on likely property tax trajectory into the future. They're just not material enough yet to change the complexion of this year's property tax growth, which is being anchored by those backwards-looking multi-year revaluation states.
Operator, Operator
Thank you. And our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Juan Sanabria, Analyst
Hello. Good morning. Just hoping you could spend a little time talking about the Resident 360 program and what that may be doing in the operating cost expense guidance as well as implications for G&A? And how we should think about return on those investments going forward?
David Singelyn, CEO
Good morning Juan, it's Dave. I want to provide an overview of the Resident 360 program before handing it off to Chris for some of the numbers. The Resident 360 program enhances our current platform, specifically focusing on resident communications and improvements in our maintenance delivery program. We take pride in our leadership in customer service and maintenance programs, as shown by third-party surveys we've commissioned. These surveys also provide insights into what residents want from their landlords, whether they are single-family homes, American homes, or multifamily. The key areas for improvement are communication and maintenance delivery. We listen to our residents, and being a leader means we are always looking to improve. This initiative benefits us by requiring an initial investment period followed by a benefit period. We are confident that, based on our pilot of this program in 2022, we will see enhancements in customer satisfaction that lead to improved retention and reduced turnover costs. Additionally, we expect better execution in our maintenance platform, which allows for more internal work, improves quality, and keeps costs down. We anticipate a slight investment in 2023, but the benefits will likely become more apparent by the end of this year and even more so in 2024. Now, I’ll turn it over to Chris to discuss the components of expenses.
Christopher Lau, CFO
Yes, Juan, the primary place you're going to see the investment this year will be in the property management line. For reference, what's contemplated in guidance is about a 12% increase this year on property management and it reflects a couple of different considerations. One, of course, just a general inflationary environment. Two, we did have some modest understaffing in the first quarter of last year that will compare somewhat a little bit unfavorably on a year-over-year basis into this year. And then the balance of this year will be represented by the investments into our Resident 360 program.
Juan Sanabria, Analyst
Great. And then if I could just switch gears to bad debt. It increased sequentially. You kind of called it out at the top. Just curious if there's any particular parts of the country or regions or the type of customer that you're seeing cause that? And when do you think we'll get past that kind of COVID noise, if you will?
Christopher Lau, CFO
Yes. Juan, Chris here again. Good question. Let me start, I'll frame things a little bit, and then Bryan can probably share some more thoughts as well. Generally speaking, we would characterize collections as continuing to hold strong. Full year 2022 bad debt landed in the low 1% area, which was very consistent with our expectations that were contemplated in guidance. The one aspect that has played out slightly differently than our initial expectations, Bryan, previewed this a little bit. We have a small subset of residents that are taking a little longer to work through COVID resolution, given that some of the court systems are still moving a little bit slower than normal. Additionally, we've seen a few more households that appeared to be back on their financial feet after the expiration of rental assistance that we're really excited about, that unfortunately were able to sustain permanently without assistance. And so, that is what you saw drive our fourth quarter bad debt in the 1.4% area. Given just a slow-moving timeline on some of these final resolutions, at this point, we've conservatively assumed that our current level of bad debt in the 1.4% area continues over the course of 2023. Our hope is that we may be able to do better than that. But just given some of the aspects of that timeline that are out of our control, we wanted to make sure we started the year with a conservative improvement view on that timeline.
Bryan Smith, CFO
And Juan, this is Bryan. To address the second part of your question, we can really break it down into two main areas concerning the impacted accounts. First, there are procedural requirements in Washington that are causing significant delays, which is the most concentrated issue. Second, as Chris pointed out, there are core backlogs, and the process has been extended significantly in other states like Georgia and North Carolina. We are working through these challenges as quickly as possible. I had hoped we would have this resolved by now, but we are still processing. Just to clarify, Washington is not Washington, D.C.
Operator, Operator
Thank you. Our next question comes from Josh Dennerlein with Bank of America. Please proceed with your question.
Josh Dennerlein, Analyst
Yes, hey guys. Thanks for the time. I guess I wanted to kind of touch base on maybe some of the underlying assumptions in same-store expense guidance. I was just hoping you guys can elaborate on what your expectations for turnover are in the portfolio? And then what's embedded as far as turnover cost?
Christopher Lau, CFO
Yes. Good morning Josh. Chris here. Why don't I unpack the pieces just to put all of this in context, and then I'm sure Bryan has some thoughts on a few more of the assumptions of what we're thinking about. But in terms of major components of the expense guide, remember, we're expecting 9% property taxes at the midpoint, which we talked about a couple of minutes ago. That comes to about 10% to 11% or so on everything else, driven by a couple of different key considerations. First, about 20% or so on insurance. Our insurance renewal is still in process of being finalized. We're not quite there yet. But as we all know, the property insurance market is very challenging right now. And we want to ensure we have that factored into our expectations on the year. Two, as I mentioned a minute ago, 12% on property management reflects the inflationary environment; the year-over-year comping of some of last year's understaff miss at the very beginning of the year and the investments into our Resident 360 program. And then inflationary-like increases on R&M and turn costs in HOAs in the 7% area or so, all of which gets you to the midpoint of 9.75%. But before Bryan shares any other color, I just wanted to remind everyone when we're thinking about expenses in 2023, don't forget that because our Texas property taxes were under-accrued for the first nine months of 2022, which were trued up in the fourth quarter of last year, our 2023 expense growth is going to be lumpy this year with higher growth in the first nine months, which will then normalize in the fourth quarter into our expected guidance range.
Bryan Smith, CFO
And Josh, further regarding our expectations on turnover costs and turnover rates for 2023, we expect occupancy to be similar to 2022. We're pushing a number of initiatives, as Dave mentioned, and some operationally to see if we can improve on that turnover rate. But our expectation is to be similar to 2022 from that perspective. In terms of turnover costs, we are still seeing some cost pressures on the CapEx side, and some of those COVID-related accounts may be more costly to turn than normal turns within the portfolio. So, those are built into our expectations as well.
Josh Dennerlein, Analyst
I appreciate that. Looking at this year, it seems that margins on the same-store pool are likely to decrease. Do you think we might be at peak margins, or is there still room to grow margins across the portfolio in the future?
David Singelyn, CEO
Yes, Sam, this is Dave. When we analyze 2022 and 2023 margins, a significant portion of the shrinkage can be linked to the timing of property taxes. We've experienced considerable revenue growth and home price appreciation in previous years, but property taxes tend to lag behind, acting as a catch-up mechanism. Looking ahead, I want to highlight another point regarding our expectations on bad debt that you mentioned—this has already been addressed. I anticipate that bad debts will realign with 2019 levels. The initiatives we're currently pursuing, similar to past efforts, come with upfront costs but yield future benefits. This has been true for our operational platform improvements and development programs; we invest initially and reap rewards later on. Therefore, I believe the margins you're seeing for 2022 and 2023 should not continue their downward trend in the coming years. Instead, I expect us to revert to the consistency we observed in 2018 and 2019, excluding the impacts of COVID.
Operator, Operator
Thank you. Our next question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question.
Sam Choe, Analyst
Sorry. Yes, I was on mute. Can you guys hear me now?
Christopher Lau, CFO
Yes, we can.
Sam Choe, Analyst
Okay. Sorry about that. So, I applaud your guys' commitment to technology, and Resident 360 is pretty much a testament to that. I guess just when you are planning technology initiatives, I know you guys think about the long-term. So, when we have a backdrop like 2023 when there's an inflationary backdrop, I guess, were there some concerns about rolling Resident 360 out because expense a lot of excitement with what this can do to the business? But just wondering if you had any concerns about the timing?
Bryan Smith, CFO
Hi Sam. Thank you. This is Bryan. Our Resident 360 program really highlights our long-term vision. As Dave mentioned earlier, we tested this program in various markets and are pleased with the results. We chose to implement it nationally without delay because the sooner we launch it, the sooner we can optimize it and see the benefits in expense control and retention. On the technology front, we have an effective feedback loop within our company that allows us to listen to residents and align their needs and requests with enhancements to our platform. Often, the potential for improvement lies in technical upgrades. For instance, the enhancements we're making to our logistics program connect with how we communicate with residents and our broader communications initiative. We're always innovating, and technology plays a vital role. The Resident 360 initiative directly addresses what our residents are asking for, and we believe there’s no better time to get started.
Sam Choe, Analyst
Got it. That's really helpful color. And then just looking at your January metrics that you provided, it does show a lot of resiliency. I guess when I'm thinking about the same-store revenue guide, what kind of economic assumptions did you make in getting to the high and lows for that range?
Christopher Lau, CFO
Chris here. Let me take a step back and break down the components driving our revenue guidance. We're expecting average monthly realized rent this year to increase by about 6.5%. This is based on last year's earnings and a partial contribution from this year's leasing spreads, which we anticipate will be in the 5% to 6% range for the full year. Regarding occupancy, we project that full year 2023 will be around 97%, which remains quite strong, slightly below last year's 97.2%. This leads to rent revenue growth in the low 6% range, plus around 20 basis points from our growing ancillary income programs and approximately 40 basis points of bad debt drag we mentioned earlier, resulting in a midpoint of 6%. Looking at potential levers and opportunities for growth, a 97% occupancy is nearing structural full occupancy. The main opportunity for upside seems to be in leasing spreads. We anticipate that 2023 will differ from 2022, thus we aim for a cautious approach in our expectations, acknowledging some possible moderation this year. Should we experience less moderation than expected, it could serve as a lever for the upper range. Additionally, we're adopting a conservative outlook on bad debt at the year's start. If we can improve upon the anticipated 1.4% in our guidance, that would provide another opportunity for reaching the upper end of our range.
Sam Choe, Analyst
Got it. Thank you.
David Singelyn, CEO
Thanks Sam.
Operator, Operator
Thank you. Our next question comes from Steve Sakwa with Evercore ISI. Please proceed with your question.
Steve Sakwa, Analyst
Great. Thanks. I guess, Bryan, could you maybe just talk about what your expectations are for leasing spreads this year, kind of new renewal blended and how that might trend over the year? And Dave, could you just maybe reclarify that margin improvement, are you suggesting that that will take place in 2024? Or could there still be, I guess, expense pressures next year that kind of keep that margin from maybe improving until 2025 and beyond?
Bryan Smith, CFO
Thanks Steve. I'll start on the rate side. Our expectations for the full year are for re-leasing and renewal spreads to grow in the 5% to 6% range pretty close to being in step. We had an excellent start to January where we've exceeded that. The guide contemplates a little bit of a slowdown as we proceed through the year. We're going to continue to push those rates as much as we can, but we're also being conservative in light of the current economic environment. So, 5% to 6% for the year, blended with new and renewals being consistent.
David Singelyn, CEO
Yes. And Steve, to your second question on the Resident 360 program and margins and cost pressures. Based on what we saw in the pilot program, it takes about one year to get the program rolled out, get the individuals trained, and get some of the redundancies that do occur when you roll out initiatives like this behind you. I would expect that we will start seeing benefits maybe in the fourth quarter, but we would see benefits in 2024. I don't expect we would see any material incremental cost from this program in 2024, maybe a little bit of trailing costs at the beginning of the year depending on how fast it gets rolled out. But based on what we saw in the pilot program, it took us about a year to start enjoying or seeing the benefits of the initiative.
Steve Sakwa, Analyst
Okay. And just one other question on CapEx, Chris, I don't know if maybe I missed it, but did you talk about just what maintenance CapEx would be? I mean I know that that's kind of been trending up for you and some of your peers. And I'm just wondering what your expectations are for maintenance CapEx in 2023.
Christopher Lau, CFO
Yes. Good question, Steve. I can share thoughts and if Bryan wants to add any color. We didn't comment on it in guidance. But generally speaking, the primary driver to CapEx is the inflationary environment. And as we've talked about before, the highest and best use for our internal labor is more on the maintenance and turn side, not the full system replacement type of work, which is more represented in CapEx, which means that line item is a little bit more susceptible to third-party labor and full material inflationary pressures, which is why we saw it in the 20% area in 2022. We'll probably see something like that again in 2023, given that we continue to expect another year of strong inflationary pressures in terms of third-party labor and materials. But we're doing everything we can to maintain it and mitigate it. As Resident 360 continues to roll out, expanding focus on maintenance delivery capabilities and bandwidth, one of the areas of potential benefit there is being able to do more on the CapEx side as well.
David Singelyn, CEO
Steve, this is Dave. Let me add a couple of things. One is our asset management program which includes our development deliveries. As you saw, we sold about 1,000 homes this year. The whole thing focuses on many, many variables. But one of the variables that you get through your development program is keeping the average age of your portfolio to be younger. And that has a benefit on maintaining expenses and capital expenditures as well. If you look back over the last five years or so, I think our AFFO as a percent of FFO has been 88%, 89%, very consistent year in and year out. I would expect that to be materially the same this year with inflationary impacts impacting our CapEx.
Operator, Operator
Our next question comes from Haendel St. Juste with Mizuho. Please proceed with your question.
Haendel St. Juste, Analyst
Hey, I guess good morning to you guys out there. I guess a couple of quick questions from me here. Chris, you had mentioned the preferred on your list of potential uses for this year, they're yielding, I think, over 6%. How are you thinking about that? Any scenario in which you contemplate buying those in this year? Thanks.
Christopher Lau, CFO
Yes. Good question, Haendel. Look, it's something that we watch very closely is something we were watching throughout last year. Yes, you're correct. We have a couple of series that either callable or will become callable. It is a simple function of relative considerations compared to the current cost of capital. Given some of the volatility in the capital markets currently and where new issue pricing is, I think it's probably lower likelihood that we would be calling those in. But keep in mind that, that is one of the great aspects of preferred is that they are truly perpetual capital with one-way optionality to redeem them after we get past call dates. So, we will watch it closely. The optionality doesn't go away. When we find the right time in the marketplace relative to current capital market pricing and considerations, we'll look for the best opportunity to take those out.
Haendel St. Juste, Analyst
Got it. Got it. I appreciate that. I wanted to ask you a follow-up on the development. You guys mentioned the lower cost in lumber and the expected improvement in yields and the timeline later this year, next year. Where are you underwriting new development yields for new starts today versus the 6% bog you guys have talked about in the past? Thanks.
David Singelyn, CEO
Yes. Today, when we evaluate new acquisitions and developments, we are considering our current cost of capital, which we expect to be in the high 6% to 7% range. It's important to note that during the fourth quarter of 2022, we focused on being patient and disciplined. We acquired a tract of land, which has about 180 lots, because our underwriting requires aligning land, development, and vertical costs. We have extended and renegotiated several land contracts, successfully adjusting one to fit our acceptable price range. To clarify, the land currently being developed for delivery in 2023 was purchased and developed in previous years, meaning those costs have already been incurred. We have observed fluctuations in vertical costs, particularly with lumber, which you mentioned. Recently, we've seen improvements, especially following peak prices in the second quarter. Lumber prices peaked at $1,250 in May but are currently around $400 per 1,000 board feet. Projections from Random Lengths suggest this trend may continue throughout the year. It's essential to understand that vertical construction takes about five to six months, but supply and labor contracts are established beforehand, typically leading to a six to nine-month timeline. The projects we are executing today, which have capital costs between 5.5% and 6%, are funded; we secured the necessary capital during our investment decisions, specifically for the equity component. There has been some match funding involved.
Operator, Operator
Our next question comes from Adam Kramer with Morgan Stanley. Please proceed with your question.
Adam Kramer, Analyst
Hey guys, thanks for the question. I just wanted to ask about maybe where loss-to-lease stands today. Look, certainly recognize it's probably not nearly as robust as it was at points in 2022. I'm wondering where off-these stands today? I think kind of a related question is, is maybe just kind of on the sequential trends in market rents for new lease growth, whether it's 4Q into January, 4Q into January into February, but wondering just kind of given normal seasonal impacts, which I think returned in the fourth quarter, what are kind of the sequential trends in market rent growth that you guys are seeing?
Bryan Smith, CFO
Hi Adam, thanks for the question. This is Bryan. We estimate our loss to lease to be in the 5% to 6% range today. Regarding new lease growth, we had a strong start to the year with significant pricing power, full occupancy, and high demand. I hope this trend continues. In our guidance, we've factored in a moderation from the 7% growth we experienced at the end of the first quarter to around 7%, and then a gradual moderation for the latter half of the year. We will do our best to push those new lease rates. If demand remains strong, we would have great pricing power heading into the spring leasing season.
Adam Kramer, Analyst
Great. That's really helpful. Thanks Bryan. Just on this kind of the JV side of things. Look, I know you kind of expanded this relationship with JPMorgan in that group. But just wondering overall kind of the desire or ability to go further down the JV path. Is that something that you're thinking about looking at? Are there opportunities there or maybe less so?
Christopher Lau, CFO
Yes. Adam, Chris here. Simple answer is yes. There are plenty of opportunities. But let me just take a step back from more of a higher-level strategic standpoint. As we've shared many times before, given the right attractive and accretive opportunities, our focus is to prioritize growth on the balance sheet as much as possible. But with that said, we also believe that a mix of joint venture capital is strategically very important, giving us additional opportunities to leverage our platform and fixed costs over a larger base of assets with compensation through fees. JVs create really unique opportunities for attractive longer-term economics via our promoted interests. Then very importantly, during times of public capital market uncertainty and volatility like right now, they strategically provide access to high-quality, long-term forms of capital, which is exactly the thought process and strategy behind the recent agreement to upsize our joint venture with JPMorgan Asset Management, which, as a reminder, provides nearly $300 million of increased JV capital capacity that enables us to remain opportunistic on incremental land and development opportunities that might not make sense right now relative to our current on-balance sheet cost of capital.
Adam Kramer, Analyst
Thanks for the time. Appreciate it Chris.
Christopher Lau, CFO
Thanks Adam.
Operator, Operator
Our next question comes from Keegan Carl with Wolfe Research. Please proceed with your question.
Keegan Carl, Analyst
Thanks for the time guys. I know it's touched on a little bit earlier, but as we enter peak leasing season, just kind of curious how demand compares both last year and pre-pandemic levels. It was touched on about website traffic and home visits, but maybe where application is at and kind of how do they compare to previous periods?
Bryan Smith, CFO
Thank you, Keegan. We looked at kind of year-to-date, and I talked about it in the prepared remarks, one of our key metrics is our check-ins per rent ready. So those are distinct shoppers going into our homes. As I mentioned, that was up around 20% based compared to a rolling historical average. That's one component of it. Getting those check-ins to applications is the next piece. So far this year, the application activity and the leasing activity have been fantastic. We're very pleased with how it started continuing through February. We've had good absorption of homes in the portfolio. I'm optimistic that, that's going to continue. If it does, we'll have really good pricing power coming in the spring leasing season. One thing that I would expect to see this year potentially is kind of a return to a more normal sequence where, during the peak leasing season, we're allowed to push re-leasing rates, and then really in the first and fourth quarters of the year, you see more strength maybe on the renewal side, just to kind of match the way it used to look historically. But as it sits right now, demand continues to be really strong across all metrics. The new website has made it easier to navigate, especially from a mobile perspective. We're getting really good feedback from our prospects from that side. They are coming onto the website and staying longer and getting to the relevant check-in and application pages quicker than they did under the old website. So, that's been real positive. We're going to hope to continue to see those benefits as we enter the busier season.
David Singelyn, CEO
Keegan, it's Dave. Let me just add a couple of maybe more macro thoughts on the marketplace. Today, nothing has changed from prior periods in that there are still many, many households that are looking for high-quality housing in this country remains under supply. With that said, a couple of things have changed. One is that the homebuilders' velocity and pace at which they were building new homes has slowed. So, the ability to meet that demand has waned a little bit as well. The second is the affordability of a brand new house, the mortgage, and the other ancillary costs that go with homeownership versus the affordability of a rental. While they were pretty much an equilibrium for a significant period of time—today, if you look at some data out there, primarily the John Burns data that we've looked at, you'll see that it's significantly more affordable today to rent. It's greater than 20% more affordable, which is a very, very significant change from where we were. All of that is keeping significant demand for rental products in the marketplace. Now, keep in mind, we're also in volatile and uncertain times and a little bit of pricing pressures on households, but the demand is there. It's just incumbent upon us to capture that demand.
Keegan Carl, Analyst
Then shifting gears here. I know I feel like we discussed on every call, but it seems like there's just more and more chatter on regulation in the SFR space, most recently in North Carolina. Just kind of curious how are you guys thinking about not just the broader regulatory environment, maybe even on a state-by-state basis, how that impacts your decisions?
David Singelyn, CEO
Yes, Kean, I think you're right that there is increased awareness of the political situation. North Carolina is one of the states where we see this, but it's not the only one. We've observed similar trends in Georgia, California, and Washington. We have been very proactive in our government affairs. About a year and a half ago, we established a government affairs department and now have dedicated staff for this purpose. We also engage with government officials at the federal, state, and local levels. While media coverage may mention us as a player in the single-family rental industry, it hasn't been overly critical toward us, which reflects our strong relationships. We will continue these discussions consistently each year. Our Resident 360 initiative will also touch on some of these issues, although it's not its main goal. Generally, at the federal level, the discussion tends to be more theatrical, while local levels see more tangible action. Thus, we are working strategically at both local and federal levels.
Operator, Operator
Our next question comes from Alan Peterson with Green Street. Please proceed with your question.
Alan Peterson, Analyst
Hi everyone, thanks for the time. Chris, are you able to talk about the appeals process from the assessments you got late last year? Right now, does your current expense guide assume that you win any of the appeals process that you're currently engaging in?
Christopher Lau, CFO
Yes. Alan, Chris, great question. We've talked about this for years. We are one of, if not the most active appealers of property tax values across the country. We are very, very active each and every year. A couple of updates. Last year, we filed 12,000 to 13,000 to 14,000 individual property tax value appeals. We had a pretty successful year. I think our actual success rate last year was about 70%. We saw a 4% to 5% value reduction based on the successful appeals that we won. There are still, I'd call it, a couple of hundred or so open appeals that are rolling from last year into this year. I think we've got a pretty good idea of where those are going to land. Largely, all of that has been captured into our actuals. As we're heading into 2023, we absolutely expect to lean into the appeals machine again. Hopefully, we have another year of good success there. In terms of how we contemplate it in our guidance, no different than any other year. We always start the year with a conservative expectation or a conservative consideration of likelihood of success. We don't want to be on the wrong side of that. So, we've got, like I said, a conservative estimate factored into 2023. Hopefully, we can do better than that. But again, that's not something that we really hear back on until the second half of the year, and we'll have to provide updates as we get through the process.
Alan Peterson, Analyst
I appreciate that. And maybe just following up on your response to Adam's question on the development pipeline. I know that Jack had mentioned a couple of years ago that the development program could ramp to 3,000, 4,000 new deliveries on a yearly basis. Is the current guidance of 2,300 homes? Is that a capital allocation consideration today? Or are there any other factors limiting your ability to scale construction to that new delivery target?
David Singelyn, CEO
Yes, it's a good question. There are a number of factors. The first answer is 3,000, 4,000 homes is very doable from an infrastructure and demand standpoint. With respect to executing the deliveries, what we have experienced over the last three years is a slowdown through the COVID years of getting inspectors out to be able and permitting at the municipal level of the horizontal or land delivery or the land development process. You need to develop the land to be able to do vertical building. We're set back a little bit on the 2023-2024 delivery plan not because of what's happening in 2023 and 2024, but what happened in 2020, 2021, 2022 with respect to land development and getting the inspections of that work done. Going into 2025, this is not necessarily COVID, this is more the economic and interest rate changes that we saw late 2022, which has slowed down our land acquisition pipeline. We’re going to grow in a disciplined and controlled way. We can be patient if we need to. We don't need to grow just for adding numbers to an infrastructure line. We have seen in 2022 that the development fund allows us to keep our infrastructure intact with some of the future programs. So, we need to be disciplined with our growth and our development to deliver the right way.
Operator, Operator
Our next question comes from Brad Heffern with RBC. Please proceed with your question.
Brad Heffern, Analyst
Yes, thanks. So, how does the supply picture look for build-to-rent product? And are you seeing increasing competition as we sit here today, either in terms of elevated listings or anything else that you track?
David Singelyn, CEO
Yes, on the actual building of build-to-rent, we're actually seeing that significantly slow. The number of people looking to do build-to-rent, including some of the national builders that were getting into build-to-rent have pulled back a little bit. A lot of the build-to-rent was private equity, small projects where they would be doing one or two projects. One is, I think their initial models were a little optimistic. The other piece is the economics that we have talked about that we have worked through. We have economies of scale. We have vendor rebates, et cetera. We're in a different place than they are, and they got impacted. So, they have slowed. We have had inquiries from those doing build-to-rent as to whether we would like to partner or acquire those build-to-rent projects, in some cases, in mid-flight. The opportunity there is there if we can find the pricing to make that an attractive opportunity for us. As for increased listings, we are seeing a slight increase compared to previous months, but the overall supply is still limited compared to historical norms. Although, we have seen some movement in the pricing to sell homes in that sector.
Brad Heffern, Analyst
Okay. Thank you.
David Singelyn, CEO
Thanks, Brad.
Operator, Operator
Our next question comes from Linda Tsai with Jefferies. Please proceed with your question.
Linda Tsai, Analyst
Hi. In terms of it being 20% more affordable to rent than owned, how much does that vary by market?
David Singelyn, CEO
It definitely varies by market. That 20% that we quote is actually a little north of that. I think it's 24% is the average of our top 20 markets but obviously, it does vary. They all are more affordable, but they do vary. I don't have the range on my hands, Linda.
Linda Tsai, Analyst
Got it. And then what percentage of your residents are dual income? And would you consider tightening your credit standards in the current environment?
Bryan Smith, CFO
The majority of our residents are dual-income families, significantly more than half. We're very satisfied with our collections, especially when excluding residents affected by COVID, as they align with historical trends. Therefore, I don't foresee making any changes. The residents who moved in over the past couple of years are paying consistently, and their bad debt aligns with pre-COVID levels. I believe no adjustments are necessary.
Linda Tsai, Analyst
Thanks. And then just one last one. In terms of pushing those new lease rates, where would you like to be occupancy-wise ideally, if you're at 97%?
Bryan Smith, CFO
We believe that a 97% occupancy rate is very strong considering how quickly we are turning over homes and re-tenanting them. This rate aligns with demand, and we feel comfortable maintaining it. As a reminder, we view revenue in a comprehensive manner and are focused on maximizing it, while we experience some fluctuations between rate and occupancy. Therefore, we see 97% occupancy as a solid target for this year.
Operator, Operator
Thank you. Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Austin Wurschmidt, Analyst
Great. Thank you and good morning everybody. The breakdown of development this year is tilting more heavily towards the wholly-owned projects versus last year, a fairly significant shift in increase in your funding commitment. But I guess if the capital markets remain volatile and your cost of capital isn't where you'd like it to be, presumably, you won't have the benefit of accessing equity proceeds that you guys fortuitously did last year. So, just how do you think about future funding to keep your share of development funding commitments ramping in future years to get you moving closer towards that 3,000 to 5,000 home goal that you referenced earlier?
Christopher Lau, CFO
Good morning, Austin. That's a great question and one of my favorite topics. There are a few points to consider. First, our decision to expand our joint venture with JPMorgan Asset Management is aimed at increasing our capital capacity to ensure we can seize additional land and development opportunities. As we look at our existing wholly-owned pipeline, we've designed it to be fundable without needing equity. The development plans for this year and next, using the land we already own, can be financed through retained cash flow, some recycled capital from property sales, and a bit of leverage from our balance sheet, all without requiring equity. As we plan for future expansion, we will take into consideration current capital costs and seek the best sourcing of capital, whether from our own balance sheet or through joint ventures.
Austin Wurschmidt, Analyst
That's helpful, Chris. And then, Dave, you referenced cap rates in the mid-5% range or 50 basis points inside where they become more attractive to you. But I'm just curious who are the most active buyers you see today at that mid-5% level, are you seeing deals get re-traded at all? And what do you think changes to push pricing in your direction? Because today, I think you're on a spot basis in and around or just inside that mid-5% level, but yes, just curious about your thoughts there. Thank you.
David Singelyn, CEO
Yes. Currently, institutional buyers have largely taken a step back. There are a few private SFR companies that are starting to buy again, but at a much lower level than before. We're beginning to see some decline in pricing, as asset values are decreasing. This is noteworthy because the market is quite volatile. We've also observed that prices for national builder programs have been decreasing. In recent weeks, it seems they have either stabilized, flattened, or perhaps even increased slightly. The market remains unpredictable. It's essential to remain patient and continue to assess all our markets. Having a diversified portfolio across various markets offers us more opportunities. We don't need to rush into purchases; patience and discipline are key. Opportunities are closer now than they were during our last call, whether that was 30 or 90 days ago, but they still aren’t fully available. The cost of capital is another factor that is not stable; it is also volatile and subject to change.
Operator, Operator
Thank you. Our next question comes from Daniel with Scotiabank. Please go ahead with your question.
Unidentified Analyst, Analyst
Thanks. Good afternoon. Question on the development platform following up on Haendel's question. So, you're guiding to about 1,850 wholly-owned delivery this year at an average 350,000 home. That's based on the $650 million capital investment guidance. How much of the vertical cost softening that you mentioned, Dave, does that imply versus the stuff that's being delivered today?
David Singelyn, CEO
The total cost of deliveries for the fourth quarter is approximately $350,000, with around $250,000 attributed to vertical costs. While I don’t have the exact numbers, this is directionally accurate. We are currently seeing a reduction in vertical costs from their peak, likely in the range of 10% to 15%, with the possibility of reaching 20%. However, it's important to note that a 20% reduction does not directly translate to lower overall costs, as you must also consider land and land development expenses. We anticipate a benefit of about $40,000 from this, and we are already noticing a benefit of approximately $17,000 to $18,000 in lumber costs compared to contracts from nine months ago. We have identified some savings across various aspects of our development platform and expect more reductions in several areas. Overall, we estimate a 10% decrease in home costs from the fourth quarter of last year to what we plan to deliver in the fourth quarter of next year, provided we analyze comparable markets. Market mix will influence this as land costs differ, being more expensive in the West than in the Southeast. Therefore, when examining market-by-market rather than averaging across the entire company, we believe there will be about a 10% reduction from fourth quarter to fourth quarter.
Unidentified Analyst, Analyst
Really helpful, Dave. Thank you. Chris, a quick follow-up. How much rental assistance did you receive last year? And I guess what's left for, if anything, for 2023?
Christopher Lau, CFO
It's definitely tapering down. In last year, I’d say it was around $16 million to $18 million or so. That's tapered from, call it, $5 million to $6 million per quarter in the first half of last year, down to about $3 million in the fourth quarter. Hard to predict exactly where it's going to taper to into the first couple of quarters of 2023. I'd expect us to still be receiving some, but glide pathing down over the course of the year.
Unidentified Analyst, Analyst
Great. Thank you.
Christopher Lau, CFO
Thanks Dan.
Operator, Operator
There are no further questions at this time. I would like to turn the floor back over to Mr. Dave Singelyn for closing comments.
David Singelyn, CEO
Thank you, operator. Thank you to all of you for your interest this quarter, kind of a marathon call for us. We will see you next quarter. Have a great day. Take care. Bye-bye.
Operator, Operator
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.