Earnings Call Transcript - AMH Q1 2024

Operator, Operator

Greetings, and welcome to American Homes 4 Rent First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nicholas Fromm, Director of Investor Relations. Thank you. You may begin.

Nicholas Fromm, Director of Investor Relations

Good morning. Thank you for joining us for our first quarter 2024 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 facts, 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, May 3, 2024. 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

Welcome, everyone, and thank you for joining us today. 2024 is off to a good start. Demand for single-family rentals, and more specifically, AMH homes remains healthy. In the first quarter, we delivered $0.43 of core FFO per share, representing 5.8% year-over-year growth. As expected, the SFR normal seasonal curve is back, and our property management team is doing a great job capturing the accelerating demand heading into our spring leasing season. More broadly, the ongoing macro drivers, including the national housing shortage, aging millennial demographics, and challenging home affordability dynamics suggest steady demand into the foreseeable future for single-family rental homes. Additionally, the higher-for-longer interest rate scenario seems to be playing out, which may continue to pressure new housing supply. With that in mind, our focus remains on the Development Program, where we continue to do our part in solving the housing shortage by providing new premium housing options in desirable family-friendly locations across the country. Turning to an update on sustainability. We published our sixth annual sustainability report last week, which includes updates on our progress and impact on environmental and social initiatives, such as the expansion of our solar pilot program to residents. As a reminder, whether solar-enabled or not, our newly constructed homes are designed with sustainability in mind. In fact, our 2023 deliveries, on average, are 54% more energy-efficient than the typical American home. Additionally, our corporate headquarters in Las Vegas was recently awarded LEED Gold Certification for the building green design, construction, and use practices. This represents another milestone in the company's sustainability journey, affirming AMH's continued commitment to responsible environmental practices. In closing, AMH is in a great position starting out the new year. Long-term business fundamentals are strong. Leasing momentum continues to build into the second quarter, and our Development Program continues to deliver new high-quality homes into the portfolio.

Bryan Smith, CFO

Thank you, and good morning, everyone. As Dave mentioned, 2024 is off to a great start, with demand accelerating into the spring leasing season. Website activity is up double digits year-over-year, and the inbound inquiries saw a strong sequential pickup to support the occupancy levels and leasing spreads that remain well above long-term historical averages. Further, the kickoff of our seasonal curve is evident in our sequential occupancy metrics, with March occupancy increasing over that of January and February. Turning to first quarter same-home results. Rate growth was healthy with new renewal and blended rental rate spreads of 4.8%, 5.9%, and 5.6%, respectively. And with same-home average occupied days of 96.2%, this drove same-home core revenue growth of 5.3%. Core operating expense growth was 5.9%, also in line with our expectations. All of this resulted in same-home core NOI growth of 4.9% for the quarter. First quarter operating momentum has continued into April, demonstrating the strength of the spring leasing season with same-home average occupied days of 96.6% and new, renewal, and blended spreads of 5.1%, 5.2%, and 5.2%, respectively. While strong, these results are within our range of expectations, and our guide remains unchanged with the bulk of the prime leasing season still ahead. Lastly, expanding more on our investment programs, our strategy, driven by prudent decision-making and consistent execution, remains unchanged. Internally developed homes continue to be our primary method of growth. For the year, we expect the AMH Development Program to deliver between 2,200 and 2,400 homes at average economic yields in the high 5% area after a reserve for CapEx. In closing, operations are off to a strong start as we enter our busiest period of the year, and our investment programs remain in great shape. As I travel to our field offices across the country, I continue to be impressed with the hard work and dedication of our team members in providing the best resident experience in our space. Thank you for setting us up for another strong year.

Christopher Lau, CFO

Thanks, Bryan, and good morning, everyone. I'll cover three areas in my comments today: first, a review of our solid quarterly results; second, an update on our balance sheet through recent capital activity; and third, I'll close with a brief update around our unchanged 2024 guidance. Starting off with our operating results. We delivered another consistent and solid quarter with net income attributable to common shareholders of $109.3 million or $0.30 per diluted share. On an FFO share and unit basis, we generated $0.43 of core FFO, representing 5.8% year-over-year growth and $0.40 of adjusted FFO, representing 6.5% year-over-year growth. From an investment standpoint, our Development Program continues to perform right on track and delivered a total of 469 homes to our wholly owned and joint venture portfolios during the quarter. Specifically, for our wholly owned portfolio, we delivered 441 homes for a total investment cost of approximately $171 million. Additionally, during the quarter, we sold 471 properties, generating approximately $145 million of net proceeds at an average economic disposition yield in the high 3% to 4% area. Next, I'd like to turn to our balance sheet and recent capital activity. At the end of the quarter, our net debt, including preferred shares to adjusted EBITDA, was 5.3x. We had $125 million of cash available on the balance sheet, and our $1.25 billion revolving credit facility was fully undrawn. Additionally, following the successful green bond offering that we discussed on our last call, we fully repaid our 2014-SFR2 securitization during the quarter. As a reminder, the 2014-SFR2 securitization had an outstanding principal balance of $461 million, with an expiring interest rate of 4.4% and was collateralized by approximately 4,500 properties that can now be freely reviewed by our asset management and disposition programs. And finally, I'm happy to share that AMH was added to the S&P 400 Index on March 1. This created an opportunistic window to sell approximately 3 million Class A common shares under our ATM program at an average sales price of $37.03. Given the opportunistic nature, these shares were sold on a 100% forward basis and represent future gross proceeds of $110.6 million that will be used to expand our future growth capacity. Lastly, before we open the call to your questions, I wanted to briefly touch on our 2024 guidance. As expected, the year is off to a strong start with robust demand in leasing activity. However, given that the bulk of the spring leasing season is still ahead of us, we are currently maintaining our previously provided full year 2024 earnings guidance and look forward to providing another update on this front next quarter. And with that, thank you again for your time, and we'll open the call to your questions.

Juan Sanabria, Analyst

Just wanted to ask about external growth and opportunities for portfolio acquisitions, if there's anything out there that would be of interest? And if so, where do you think yields are? And as a subset of that question, could you give us a sense of where your development yields are on a nominal basis pre-CapEx just so we can comp it apples-to-apples with where some of your peers are quoting cap rates at?

David Singelyn, CEO

Juan, it's Dave. Let me start with the acquisition landscape as we see it. In the first quarter, we underwrote or received tapes. I'm going to break this down into two components: the national builder and existing homes. So starting with the national builder side, we received tapes in the first quarter that contained more than 35,000 homes, about 15,000 or a little over 15,000 of those are in our markets. We analyzed those based on location, quality, and the type of asset. We're looking for detached homes and, obviously, get down to price and yield. What we were seeing in the national builder side is that those that would be in the location and quality that we desire are in the high 4s, maybe some in the low 5s on an economic yield. On a nominal accounting yield, probably add 10 to 20 basis points to it. We would need a 15%, plus or minus, decline in the transaction price at the current landscape of rents, etc., to make those deals work. Moving over to the acquisition side, we are seeing a significant reduction in the supply of new homes in our markets. This is not a new story; it has really been playing out since COVID started. In our top 20 markets, we see about half the number of homes that we saw pre-pandemic. Pricing. We haven't seen any significant reduction in pricing, a little bit in a couple of our markets, mainly the Midwest. And again, the way we underwrite on economic yield, those are in the high 4s, low 5s. We might have the ability to sharp shoot a property here and there. We're seeing a little bit of opportunity coming into the 5. So we'll see how that plays out. Portfolios. Again, on the portfolio side, it's kind of the same as the acquisition of the existing homes. On development, high 5s on economic yields, add 10 to 20 basis points, which gets you around 6% in that area on a nominal NOI basis.

Eric Wolfe, Analyst

It looks like the reduced bad debt and higher fees added 50 basis points to your same-store revenue this quarter. So I was just curious whether you think that's sustainable going forward and whether you've seen a step down in bad debt recently.

Christopher Lau, CFO

Yes. Eric, Chris here. Look, on bad debt, why don't we just kind of take a step back a little bit and talk about collections more broadly. Look, like we talked about on our last call, coming into 2024, collections and bad debt really continued to run pretty consistent with what we were seeing last year in the low 1% bad debt area. As we got into March, we saw some really great execution from our teams across a number of our markets that brought overall first quarter bad debt just under 1% that you pointed out. And while we're optimistic, we know that there are still, as we're talking or thinking about local municipal and court system processing times that we've been talking about over the course of the last year, not a lot has really changed there yet. So until we see more data or tangible evidence of things improving at the municipal and court system level, it still feels a little bit too premature to change our outlook on a full year basis. But again, March is a good data point, and as I mentioned, we're optimistic.

Jamie Feldman, Analyst

Great. So maybe just shifting over to the expense side. I know you maintained your guidance. But as you consider some of the moving pieces, is there anything you think may be trending higher or lower than your original expectations? Also, although we're still a bit away from November, do you have any early thoughts on property taxes and millage rates based on conversations with your team regarding how this year may play out?

Christopher Lau, CFO

Sure. Jamie, Chris here. On expenses overall, yes, really no different from the start of the year. Recall that overall expense growth outlook is 6.25% at the midpoint for this year. Major components being property taxes in the low 7% area, which, as expected, is beginning to show some moderation compared to the last couple of years. We talked about this on our last call, but insurance growth, we're expecting to be in the high single digits. That's based on our renewal that is done at this point. And then about 5% inflationary growth on our controllables. So as I mentioned, the outlook on all of that is unchanged from the start of the year. And then just on property taxes. I think you hit it on the head. We're early in the property tax year, just as a reminder for folks in terms of how things play out over the course of the year. Keep in mind, the majority of property tax values are received over the summer months. That then kicks off appeal season, which typically runs until the fall or so. And then, as you pointed out, tax rates and actual property tax bills are received typically out in the fourth quarter. So we're still early. But to answer your question specifically, at this point, our full year outlook of property tax growth in the low 7s still feels good, and it's unchanged.

David Singelyn, CEO

Yes, there are a couple of things to consider. One is the land. The other is that we are seeing income growth outpacing costs slightly. While land prices have increased over the past year, many input costs have remained relatively stable overall. While some costs have risen and others have fallen, the general trend has been flat. I believe we can achieve better yields in the next couple of years.

Keegan Carl, Analyst

Maybe first, this seems a little technical, but I saw you reclassified 139 homes from the Seattle market to the Portland market. I guess, just given the cities over three hours apart, what drove that? And should we be aware of any other markets where the MSAs they're classified at is a bit of a stretch?

Bryan Smith, CFO

Yes. Keegan, this is Bryan. I think the easiest way to look at it is we have some homes that are in the Portland MSA, but are actually in Vancouver, Washington. And there's just a movement of those. But we're still managing that entire area with the same group. There's really no change, nothing to note.

Keegan Carl, Analyst

Got it. And then just maybe on renewal spreads. Just curious if you guys would have sent out for May and June?

Bryan Smith, CFO

Yes. So we mailed in the 5 to 6 range, similar to what I talked about on the last call for April. We saw nice pickup at 5.2% for April. And I would expect May and June to be similar for around 5% for the quarter.

Adam Kramer, Analyst

Wanted to ask about your views on new and renewal growth for the full year. I think you guys provided a really helpful kind of full year outlook last quarter. I think it was renewal in the 5% area and new in the low 4s%. Just kind of given the results year-to-date, I think especially on the new size trending a little bit better, even some of the seasonally softer periods. Just wondering if there's any change in the full year outlook that you could share?

Bryan Smith, CFO

Yes, thanks, Adam. This is Bryan. Our expectations for the full year remain largely the same. We are very pleased with the new lease rate growth. Demand is strong, with April showing a rate of 5.1%, and we anticipate an increase in May based on early indicators. Our team will strive to capture as much of that growth as possible. We are also considering the seasonality we experienced last year, and that has been factored into our expectations, so there are no significant changes to the full year outlook at this point. We still have most of our expirations ahead, and we are managing these effectively. Regarding renewals, they typically show more consistent results. We began the year in the high 5s and are currently around 5%, and we still expect the full year to stay within the 5% range.

Christopher Lau, CFO

Adam, it's Chris here. And if I could just hop in a little bit more to your question around kind of changing of the outlook. As we're thinking about the outlook and the guide, I would just remind, look, it's early, right? We just initiated the guide 2 months ago, as Bryan pointed out. We still have a lot of work to do, right? The belly of the leasing season is still ahead of us. But with that said, as we've been talking about and mentioned in prepared remarks, we really like what we're seeing. In particular, if you recall some of my comments from the start of the year, two of the main areas that we're really focused on when it comes to the shape of the guide over the course of the year come down to, one, newbie spreads heading into the front end of the seasonal curve. And as you just heard from Bryan, those are tracking really nicely through March and April, and with the opportunity that he was talking about to push even further into the 5s for the balance of the second quarter. And then the other area that we're very focused on in the context of the guide is bad debt. And like we were just talking about, we're not out of the woods there yet, but we did see a nice data point in March. So again, we really like what we're seeing. It's early. And the right time for us to be talking about recalibration of the guide is at the second quarter after we're through peak leasing season.

Bryan Smith, CFO

Yes, this is Bryan. That's a very good question. Early on, we encountered some resistance because small landlords typically hadn't raised rents or priced their properties competitively. Over time, they have shifted towards a strategy similar to ours. However, I see a key difference in the value that institutional managers offer through a strong services platform and significant investments in the homes, including aesthetic and functional upgrades like flooring and appliances, which have been acknowledged, giving us some pricing power. Data on single-family rentals is challenging compared to other asset classes like multifamily, but it has improved. There is now more transparency with platforms like Zillow, and small landlords are starting to adapt. The gap is not as wide as it once was, but it enables institutions to take the lead.

Brad Heffern, Analyst

Bryan, occupancy spiked quite a bit in March. It looks like it stayed there in April. Was that an intentional decision to try and gain some occupancy, where you gave back something on the pricing side? And then are you expecting to get back some of that occupancy as peak leasing season picks up?

Bryan Smith, CFO

Thank you, Brad. We were really pleased with how the first quarter played out. I've talked about it in the past, our expectation of a really nice spike in demand in January. That demand starts electronically on the website, and then in the tours. And there's a timing effect before we start to pick up occupancy. You can see that we'll pick up into March. We're very pleased with that because we did it in the context of really strong new and renewal rate growth, all the while not offering concessions either on our lease-up in our new communities or in our scattered sites. So there's a lot of strength coming into March and into April. We're hopeful that, that demand continues to look really good into May, strong occupancy through the second quarter. But as Chris mentioned, as we've talked about, we do have a lot of expirations towards the second part of the year. And with the seasonality that we saw last year are still kind of waiting to see exactly what the shape of occupancy looks like for the year, but we're in a great place right now.

David Singelyn, CEO

Yes. I think we addressed this already, but it's just an extension of what we do in our asset management function, no different than an existing home. We look at the markets and in all of our homes in each of the markets. It's a very small number, I think it's 20. We delivered about 10,000 homes. We are not changing course in any way. We are not building for sale. We are selling these like we do any disposition through our disposition program. So we'll sell them on the MLS. So there's no change. No, there's nothing that's changed from last quarter to this quarter.

Jesse Lederman, Analyst

First one is on the renewal side, renewal rent growth. I saw a little bit of a step lower in April, still at a really healthy level. But just curious, did that have anything to do with increased pushback or negotiation from tenants on renewals? Is that something you may quantify? Or is there anything you could point to that drove that step lower from a rent or health perspective or affordability perspective?

Bryan Smith, CFO

Thank you, Jesse. This is Bryan. No, that's not the case at all. In fact, we talked on the last call about where we're mailing April, and you can kind of carry that consistency forward into May and June. Healthy renewal rates are around 5% into the time of the year where we see a peak in expirations. Some of the seasonality that we saw from last year, we felt those were steady, consistent, and appropriate increases. Our revenue management team has gotten very sophisticated and is managing the seasonality of return last year very well. In terms of pushback from the residents, no change. Obviously, it's playing out nicely with the strong occupancy that we're seeing and the good retention into Q2.

Christopher Lau, CFO

Jesse, Chris here. Good question, and it ties back to some of the aspects of the disposition program and strategy we've been talking about the last couple of quarters. Look, we think that we've got tremendous opportunity to really lean into the disposition program, which is exactly what we've been doing. We've been seeing great traction. As a reminder, this quarter, we sold 471 homes. And on a full year basis, we could see ourselves selling and recycling, call it, $400 million to $500 million of capital on a full year basis. I think it's really just a reflection of the fact that our country has a major lack of housing. Our disposition supply is moving really quickly, and we're achieving sales prices that are at or near asking prices. And so I think that there's a great opportunity there. That's a big part of the strategy to our thought process behind paying off the 2014-2 securitization in the first quarter that unencumbered about 4,500 units. And then as our second securitization maturing this year is paid off, that will unencumber another 4,000 to 4,500 as well. So both of those will unlock opportunities for further asset management review and potential disposition. But also, as we think about the timing on that, we should keep in mind that that's not going to be an immediate overnight disposition opportunity. The way that we are exiting through these homes is via the MLS, which means you need to have vacant units. Keep in mind, 96% plus of our homes are not vacant. We need to let leases roll, tenants move out, and then that gives us the opportunity to work those homes through our disposition program.

Michael Goldsmith, Analyst

It seems like demand is really good right now, but wondering if there's any indications of increasing price sensitivity or indications that you won't be able to keep pushing rates at similar levels to what you did in the first quarter?

Bryan Smith, CFO

Michael, this is Bryan. I'm sorry. I had a hard time. We might have a bad connection.

David Singelyn, CEO

You're coming in very muted, and we could not understand the questions. Can you repeat it, please?

Michael Goldsmith, Analyst

Sorry. Yes, absolutely. It seems that demand is very good, but wondering if there's any indications of increasing price sensitivity or indications that you will be able to keep pushing rates at similar levels to what you did in the first quarter?

Bryan Smith, CFO

Okay. Yes, thank you, Michael. I got it this time. No, demand has been fantastic. As I said, it kind of peaked or started to accelerate as we expected in the first quarter. It continues to be very strong into Q2. Retention is good, and the feedback from our residents on renewal offers is strong, really no change from our expectations and where we ended Q1. Everything is pointing in the right direction, and we really like what we're seeing from the demand side.

David Singelyn, CEO

Yes, Michael, it's Dave. Let me just add a couple of items that will support that. I mean, we are, today, in a country that lacks adequate housing. The demand for our housing is significantly greater than what we can provide to residents. So we are seeing many qualified applications for every available house. With that said, there are limits on rate increases. The other thing to keep in mind, that also gives you comfort regarding the longevity of it is that we are in markets throughout the country, where we see population and employment growth greater than the national average. So not only do we have a housing shortage today in the markets that we're in, that shortage is building.

Omotayo Okusanya, Analyst

Congrats on paying down the securitization. I'm curious, if we look out 12 months from now, could you give us a better picture of what your capital stack would likely look like?

Christopher Lau, CFO

Sure. Great question, Tayo. Chris here. Look, the best way to think about it is we have one more securitization maturity this year. That technically matures in the fourth quarter. General game plan, like we talked about last quarter, is that we would see that being refinanced out into the unsecured bond market. Keep in mind that, depending on interest rate and capital markets environment, we have the ability where we could refinance and warehouse that via a combination of retained cash flow from disposition proceeds and then capacity comfortably off of our credit facility. And then we have two more securitizations that are technically 30-year maturities that have anticipated repayment date opportunities in 2025. If they're not repaid, they'll reprice to market pricing, but we're able to repay those next year with the general game plan, again, like we've been talking about, to get those refinanced into the unsecured bond market, which would move the balance sheet to a 100% unencumbered balance sheet by the end of 2025.

David Singelyn, CEO

Yes, Tayo, it's Dave. Let me address the topic of third-party developers. Historically, we have been active in using third-party developers, which is how we initiated our development program that we have today. Currently, we see two key aspects. First, our development program yields assets and new homes that are better located and constructed compared to what we can acquire from national homebuilders. We are purchasing land that is adjacent to national homebuilders, but it’s their lots that are offered for retail sale. This allows us to deliver a superior product with better yields, without incurring development fees. Our program's size positions us among the top 40 developers in the U.S., which gives us the scale and efficiencies comparable to national homebuilders without the associated profits. Consequently, our investment costs are significantly lower for similar products from national builders. We also remain open to opportunities with national homebuilders, as they can provide us with additional products when the timing is right. We are patient and disciplined in asset acquisition. Earlier this year, we evaluated 35,000 homes from national builders like Lennar, D.R. Horton, and Pulte. About 15,000 of those homes were in our markets, with half previously seen, and 7,500 to 8,000 were new listings. We bid on these homes, aiming for yields in the mid to high 5s, which reflect a 15% discount on their asking prices that typically range from the upper 4s to low 5s. Currently, we are not acquiring many homes from national builders, aside from a few small ones previously contracted that closed this quarter. Regarding your last question about third-party management, we extensively evaluated this over two years. Ultimately, we determined that this business offers low to very low margins and presents numerous distractions to our operations. The supplementary revenue was not worth the operational drawbacks. We see greater opportunities in our development program and core business, which remain our focus. I hope that clarifies things.

Anthony Powell, Analyst

I guess a question on home prices in certain markets like Tampa, Florida or whatnot. We're seeing, I guess, reports at home values falling with making housing maybe more affordable in those markets. Are you seeing any changes in your move-outs to home ownership by market as kind of this trend overall?

Bryan Smith, CFO

Yes. Thank you, Anthony. We track move-out reasons very closely. And Q1 represented our lowest proportion of move-out to buy that we've seen. It's about 27%. For context, from a historic perspective, it was in the mid-30s. It does vary region to region. But we didn't see any regions that had anything that would have surprised you. We have a lower percentage moving out in some of the areas like Las Vegas and Seattle, where there's just a huge gap between the cost of ownership and the cost of renting a comparable home. Nothing of note in Tampa lately. We have seen, in a couple of markets that Dave mentioned earlier, some prices coming down, but it hasn't been anything dramatic worthy of note.

David Singelyn, CEO

Yes, Anthony, it's Dave. You're correct that there has been considerable media attention surrounding a number of bills, primarily three: the Stop Predatory Investing Act, the End Hedge Fund Control, and the American Neighborhoods Act. It's noteworthy that all of these were introduced by individuals seeking reelection. I see them as campaigns or messaging efforts. These bills haven't even garnered votes in committee and aren't progressing. I don't anticipate any movement on them, particularly in an election year when Congress needs to prioritize essential legislation like funding bills. In contrast, significant progress has been made at the state level, where several pro-housing bills have been successfully passed over the last 3 to 6 months. These include measures that address issues like squatting and zoning to enhance housing availability. This is not limited to just one bill; there are numerous bills in about 6 or 8 states, including Georgia, Florida, and Washington, that have enacted very supportive housing legislation in the past 6 months.

Operator, Operator

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to management for closing comments.

David Singelyn, CEO

Thank you, operator, and thank you to all of you for attending today's call. We're grateful for your participation and interest in AMH. I look forward to seeing many of you at NAREIT in June. So thank you for your time today. Goodbye.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.