American Homes 4 Rent (NYSE:AMH) Q3 2023 Earnings Call Transcript

American Homes 4 Rent (NYSE:AMH) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Greetings, welcome to American Homes 4 Rent Third Quarter 2023 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. [Operator Instructions] Please note this conference is being recorded. I would now turn the conference over to Nick Fromm, Investor Relations. Thank you. You may begin.

Nick Fromm: Good morning. Thank you for joining us for our third quarter 2023 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, November 3rd, 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: Welcome, everyone, and thank you for joining us today. Consistency, stability, and predictability continued into the second half of the year as we posted another strong quarter. Robust rate growth and healthy occupancy remain above historical levels, which is a testament to the fundamentals of single-family rentals and the team-strong execution of our operational initiatives. For the third quarter, we delivered $0.41 of core FFO per share, or 6.6% growth over the same period last year. Due to these strong results and outlook for the rest of the year, we have raised our full-year 2023 core FFO per share guidance by $0.01 at the midpoint to $1.65, representing 7.1% growth on a full-year basis. Chris will add more details later in the call From a macro perspective, as we near the end of 2023 and begin looking towards next year, there is no question that the U.S. economic outlook remains uncertain.

Over the past year, we have had the sharpest rise in interest rates in recent memory. The challenging inflationary environment continues to persist, and the pressure on consumer pocketbooks does not appear to be subsiding. However, this year, the single-family rental sector once again proved its resiliency. It continues to have some of the best fundamentals of all real estate sectors, supported by the ongoing national housing shortage, challenging home affordability dynamics, and growing demand for the single-family rental lifestyle. Furthermore, thanks to our diversified portfolio footprint, superior operating platform, and one-of-a-kind integrated development program, AMH has produced impressive results over the course of 2023. We are confident that next year will provide another mark of cyclical durability for the asset class and strength for the AMH platform.

Turning to the investment front, our disciplined and patient approach to growth remains unchanged. We are on track to deliver around 2,300 homes as this stable and predictable channel remains the backbone of our growth strategy. Conversely, acquisition market opportunities remain limited given resilient home values and the high cost of capital environment. Our teams are continuously assessing acquisition opportunities, and we’re acquiring only when the economics make sense. We are prepared to take advantage of any opportunities in a more material way when conditions change. To capitalize on the current housing environment, we continue to be active on the disposition front. Our teams have done a terrific job executing sales through the first three quarters of the year.

In addition to the portfolio optimization benefit, disposition proceeds represent a highly attractive form of funding in today’s cost of capital environment. Overall, this was a great quarter that demonstrates the power of the AMH platform. And thanks to consistent execution from our teams and resiliency of the single-family rental sector, we look forward to a strong close to 2023. Now I’ll turn it over to Bryan for an update on our operations.

Bryan Smith: Thank you, Dave. Q3 was another solid quarter for AMH. Demand for our high-quality, well-located homes continue to drive seasonally strong occupancy and rate growth. Our team has done an excellent job navigating this year’s peak turnover season, and we are well-positioned as we finish 2023 and head into next year. For the third quarter, we posted new, renewal, and blended rate growth in the same-home pool of 7.2%, 7.1%, and 7.2% respectively. Same-home average occupied days remained healthy at 96.4%, which drove 5.8% core revenue growth for the quarter. These results were in line with our expectations and continue to remain significantly above historical averages for our portfolio. On the expense side, same-home core operating expense growth of 10.7% came in slightly better than our expectations.

Because of these results and our revised outlook on the fourth quarter, we have modestly reduced our full-year expense growth guidance by 25 basis points. Please remember that the third quarter represents this year’s final period of elevated property tax growth resulting from the timing of last year’s accruals. All of this drove same-home core NOI growth of 3.2% for the quarter. Heading into the fourth quarter, both rate and occupancy in the same-home pool are trending as expected. October’s new, renewal, and blended spreads were 5%, 6.1%, and 5.8% respectively, and average occupied days was 96.2%. These blended spreads are more than 200 basis points higher, and occupancy is more than 100 basis points better than our long-term averages for this period.

Before I wrap up, I would like to provide a quick update on our Resident 360 program. The rollout is continuing as planned, and our fully-staffed teams are completing the training and implementation stages. Although the program is still in its early phase, we are already starting to see the benefits of our resident-focused investments. Both internal and third-party resident surveys have shown marked improvement in maintenance satisfaction scores. In addition, our Google Review scores across the portfolio have improved. We look forward to realizing the extensive benefits of this program over time. In closing, we’re very pleased with the results from the first three quarters of 2023 and are well positioned for a strong close to the year. Now I’ll turn the call over to Chris for an update on the financials.

Chris Lau: Thanks, Bryan and good morning, everyone. I’ll cover three areas in my comments today. First, a review of our quarterly results. Second, an update on our balance sheet and capital plan. And third, I’ll close with an update on our 2023 guidance, which was increased again in yesterday’s earnings press release. Starting off with our operating results, the AMH platform produced another quarter of solid operational execution. Our teams did a great job navigating peak turnover season while continuing to capture ongoing robust demand for single-family rentals into seasonal occupancy and leasing spreads that remain above long-term historic averages. On an FFO per share and unit basis, we generated $0.41 of core FFO, representing 6.6% year-over-year growth, and $0.35 of adjusted FFO, representing 7.1% year-over-year growth.

Underlying this quarter was 3.2% year-over-year core NOI growth from our same home portfolio, as well as consistent execution from our development program, which delivered a total of 714 homes to our wholly owned and joint venture portfolios. Outside of development, as Dave mentioned, our traditional and national builder acquisition programs continued to remain largely on hold. And we had another active disposition quarter, selling 224 properties at an average cap rate in the mid-3% area, generating approximately $72 million of net proceeds. Next, I’d like to share a quick update on our balance sheet and capital plan. At the end of the quarter, our net debt, including preferred shares to adjusted EBITDA, was 5.4 times. We had approximately $70 million of cash on the balance sheet, and our $1.25 billion revolving credit facility was fully undrawn.

And from an overall 2023 capital plan perspective, we remain on track to deliver between 2,200 and 2,400 total AMH development homes, and invest between $900 million and $1 billion of total AMH capital, which contemplates this year’s newly constructed home deliveries, as well as ongoing investments into our development pipeline, joint ventures, and property enhancing CapEx programs. Before we open the call to your questions, I’ll cover our updated 2023 guidance, which was increased again in yesterday’s earnings press release. Simply put, the AMH machine is performing at a high level. Our technology-centric leasing platform continues to capture the robust demand for single-family rental housing, sustaining occupancy and leasing spreads well above long-term historic averages.

And despite the ongoing inflationary environment, the AMH operating platform and our focus on innovative investments are producing controllable expense results that are tracking better than our previous expectations. With that in mind, coupled with our unchanged full-year property tax outlook, we have lowered the midpoint of our full-year same-home core operating expense growth by 25 basis points to 9.5%. And in turn, we’ve also increased the midpoint of our full-year same-home core NOI growth expectations to 4.9%. Contemplating our improved controllable expense outlook across the entire portfolio, along with slightly better-than-expected interest income on cash generated from our robust disposition activity, we have increased the midpoint of our full-year 2023 core FFO expectations to $1.65 per share, which now represents a year-over-year growth expectation of 7.1%.

To close, I’d like to reiterate that this has been another solid quarter, underscored by seasonally strong occupancy and rate growth. And despite the uncertain U.S. economic outlook, AMH continues to be in a great position as we close out 2023, thanks to our diversified portfolio footprint, superior operating platform, and one-of-a-kind integrated development program. And with that, we’ll open the call to your questions. Operator?

Operator: Thank you. [Operator Instructions] Our first question is from Juan Sanabria with BMO Capital Markets. Please proceed.

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Q&A Session

Juan Sanabria: Hi. First question, just curious on thoughts on your 2024 debt maturity. I know your balance sheet is in great place with the unused line. But just what you’re contemplating in terms of refinancing those expirations in 2024? And if you could just give us a sense of when that happens throughout the year.

Chris Lau: Yes, perfect. Great question, Juan. Morning, its Chris here. As you can imagine, topic, very top of mind for us, something that we’re watching very closely. And in general, I would say that our message is pretty similar to our message from prior quarters in that our plan all along has been to refinance our securitizations out into the unsecured bond market, really working our way towards a fully unencumbered balance sheet. The additional consideration at this point, however, is given some of the recent success we’ve been seeing in the disposition market, especially relative to today’s cost of debt, we may have an opportunity to address a portion of next year’s maturities with some level of disposition capital, but realistically, this will depend on some of our disposition volumes over the next quarter or two.

And then to your question from a timing perspective, keep in mind that our 2024 maturities, they open up for repayment without penalty starting this fourth quarter of this year, but don’t actually mature until the end of 2024. So we have a very nice wide window to be opportunistic, but also find the right timing over the course of next year so that we’re not unnecessarily pushing our timing too close to actual maturity.

Juan Sanabria: Great. And then just I think you kind of commented on this a little bit on the prepared remarks with regards to the investments in the systems, etcetera. Just curious on how we should think about the growth off of the 23 base, just to think about what kind of cost inflation we should expect in 2024 for G&A and other operating expense line items.

Bryan Smith: Hi, Juan. This is Bryan. Very good question. The major investment that we made this year was into our Resident 360 program. And that just as a reminder was an investment into doing more of our own work in the field. As an example, improving customer service from our property managers. A lot of it had to do with operational initiatives. And that program is fully staffed. We’re finalizing the training and implementation phases. But the majority of the costs, at least from the personnel side, are in 2023 numbers. So I wouldn’t expect a major increase in 2024 for that program.

Juan Sanabria: Thank you.

Bryan Smith: Thanks, Juan.

Operator: Our next question is from Josh Dennerlein with Bank of America. Please proceed.

Joshua Dennerlein: Hey, guys. Thanks for the time. Appreciate all the comments on the elevated taxes through 3Q this year, given the accruals from last year. But any kind of color or insights you can give on where tax bills are coming in now?

Chris Lau: Sure. Morning, Josh. Chris here. Taking a step back, general update, and I kind of touched on this at a high level in my prepared remarks. But no different than past years. At this point now, we have values, including post-appeal information, for the majority of the portfolio. And then, although we’re still waiting on official tax bills for a majority of the portfolio, we’re beginning to receive initial indications on millage rates in a number of locations, including certain counties in some of our largest markets, like Texas and Florida and Georgia. So keep in mind, we still need to receive final information over the next couple of months. But at this point, we’re not seeing any data outside of our range of expectations, which, as a reminder, has a 9% midpoint, that just as a reminder, is developed on a county-by-county basis all across the portfolio.