American Homes 4 Rent (NYSE:AMH) Q4 2022 Earnings Call Transcript

American Homes 4 Rent (NYSE:AMH) Q4 2022 Earnings Call Transcript February 24, 2023

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: 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: 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 topline 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. As today, it remains difficult to acquire properties in an accretive and responsible manner with expected return 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 continue 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?

Bryan Smith: 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, streamline 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 the 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 was fully rolled out. With that, I’ll turn the call over to Chris.

Christopher Lau: 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, and 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?

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Q&A Session

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: 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: Yes. Nick, it’s Dave. Good afternoon. The capital plan and the investment plan are intertwined and it’s really about where is your cost of capital today and where is the growth opportunities. 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. And the development program gives us the best assets and in the long-term, the best yields in the acquisition channels are the 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 that’s — if the market changes, we will be ready to acquire in an opportunistic manner.

Nick Joseph: Thanks. That’s very helpful. And then just maybe on the expense growth guidance, obviously, real estate taxes continue to have an impact. Do you view that as a 2023 catch-up from all the home price appreciation? Or is that something that we should kind of expect in the next — over the next two or three years, just given how different municipalities handle real estate tax assessments?

Christopher Lau: 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 middle of last year or so. And 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 multiyear 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 home-set 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: Thank you. And our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.