American Homes 4 Rent

So the first question is, how do you compare the investment opportunities in front of the company today with that of the post-09 era? And secondly, if you believe investment opportunities are increasing in the SFR space.

Greetings, and welcome to the American Homes for Rent third quarter 2020 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Anne McGinnis, Manager of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for our third quarter 2020 earnings conference call. I am here today with David Singlin, Chief Executive Officer, Brian Smith, Chief Operating Officer, Jack Corrigan, Chief Investment Officer, and Chris Blouse, Chief Financial Officer of American Homes for Rent. At the outset, I need to advise you 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. The current and expected future economic impacts of the COVID-19 pandemic, including extraordinary increases in national unemployment, may pose headwinds to our future results. All forward-looking statements take only address today, November 6, 2020. 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 to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings credit release. 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 AmericanHomesForRent.com. With that, I will turn the call over to our CEO, David Jinglin.

Thank you, Ann. Good morning, and thank you all for joining us today. During one of the most challenging periods in the country's history, I am so proud of how resilient our business has been and how we have continued to grow profitably. Demand for single-family rental homes is stronger than ever, and we expect this trend to continue. Since our inception, we intentionally set out to create outsized shareholder returns through consistent operational excellence and long-term growth. Before the team reviews this quarter's results, I will review how our prior strategic decisions have been the foundation to today's strong operating performance and growth and what we expect for our future. Our strategic plan is anchored by four objectives or cornerstones. First, our high quality and diversified portfolio is the foundation of our operating resiliency and growth potential. We intentionally created a portfolio diversification strategy that targets key markets with less economic volatility, above average population and job growth, and lower unemployment rates relative to the national average and our peers. This diversification strategy with no single market representing more than 10% of our footprint, provides a more stable long-term performance with lower risk. In addition, our broader footprint delivers more growth opportunities across a wider array of markets in contrast to our peers. Second, our best-in-class operating platform delivered leading customer service and consistent strong results. we have utilized technology to scale an industry that was previously believed to be unscalable. Our highly efficient, technology-driven platform enhanced our ability to adapt quickly to COVID's unforeseen conditions with few disruptions or additional costs. During these challenging times, we continue to deliver timely maintenance with no deferred work orders. That is what our residents need and count on. Third, Our financial flexibility enables us to succeed and grow in every market cycle. We have the only investment-grade balance sheet in the sector. We have demonstrated consistent ability to access capital through all capital channels. The latest examples of our financial liquidity are our $400 million upsized common stock offering in August, our joint venture with institutional investors advised by J.P. Morgan Asset Management, and our unsecured bond offerings. This financial flexibility allows us to continue investing and growing through all economic cycles. And finally, our fourth cornerstone is our multi-channeled investment approach anchored by our development platform. We have a three-pronged growth strategy that allows us to control our investments and be opportunistic. We can tap one or more of our growth channels at any time to take advantage of the best opportunity within a market cycle. First, by pursuing our unique internal built-for-rent development program. Second, by capitalizing on our deep national home builder relationships. And finally, by purchasing homes in the traditional manner. AMH Development is now America's leading builder of new communities of single-family homes for rent. This growth channel provides the highest quality single-family rental homes at the best economic return, both now and in the future. This fourth cornerstone includes the development of single-family rental home communities that are revolutionizing the housing industry. This is evident by the number of companies attempting to replicate our success. There are five competitive advantages that make our development program difficult to duplicate. First, we combine our development of single-family rental homes with the leading operating platform. Second, we are developing in 15 markets and continue to evaluate our other 20 markets for additional opportunities. Third, we have confidence in our ability to raise capital. to commit to our growth programs. Fourth, our development platform is more than four years in the making. And finally, we continue to acquire and develop land, providing the inventory for future year deliveries. To date, we have opened more than 60 new home communities located within our existing footprint with dozens more under development. we see our external growth and development pipeline increasing for years to come. More details on our 2021 plan will be outlined on our February call. As we look forward, our differentiated strategy is paying off, and we are positioned to deliver significant cash flow and FFO growth for years to come. While demand for single-family rental is not new, COVID has further highlighted the value of our high-quality, modern homes in well-located communities. People appreciate single-family homes for rent and view it as an attractive alternative to multifamily living and homeownership. In fact, the number of rental homes has increased from 13 million to 17 million in the last 10 years. with occupancy on those 17 million homes representing a significant increase in demand compared to a decade ago. This is an extremely exciting time for us. We have achieved significant growth in the past, but the future looks even more promising as we continue to capitalize on the strong single-family rental demand. Our corporate strategy has paid off and has delivered outsized risk-adjusted returns for our shareholders this year. and positions us to continue to do so in future years as well. Before I turn the call over to Brian, let me highlight a recent change to our Board of Trustees. Since the beginning of 2019, our Board's ongoing refreshment process has added five new independent trustees, including, most recently in September, Michelle Carrick, former Deloitte West region market leader, and Los Angeles Managing Partner. Our board, including its nine independent trustees, brings diverse skills that focuses on delivering superior performance and enhancing value for our shareholders. And now I'll turn the call over to Brian.

Thank you, Dave, and good morning, everyone. Single-family rental fundamentals are as strong as we have ever seen. and our best-in-class operating platform is translating this demand into superior results. Our success is directly related to the strategic operational investments that we have made over the past 10 years as we revolutionize the single-family rental industry. One of our original goals was to combine the inherent benefits of single-family living with the best parts of the Class A multifamily experience. For years, we've been offering quick and easy leasing excellent service, high-quality assets, and great locations. Our platform is empowered by a foundation of integrated technology and a focus on constant data-driven innovation. Our proprietary property management systems, including our fully digital leasing experience and maintenance platform, balance an efficient centralized approach with a local touch. All of this enabled us to deliver a best-in-class resident experience while generating the highest fully adjusted EBITDA margins in our industry. Turning now to third quarter operating results. For the quarter, we achieved impressive same-home core NOI growth of 4%, driven by 3.6% growth in core revenues and 3% growth in core property operating expenses. If we exclude incremental COVID-related bad debt, same home core NOI growth would have been nearly 6%. Again, because of the strength and quality of our platform, we've been able to capture the surging demand and buck the typical seasonal trends. As a key example, rather than the typical end of summer leasing slowdown, we were able to drive an acceleration in same home average occupied days throughout the quarter. from 96.4% in July to 97% in August and 97.2% in September. And this trend is held into the fourth quarter, with average occupied days of 97.2% in October. And on the rental rate side, our proprietary pricing system translated this record demand into our highest ever third quarter new lease spread of 6.1% for the portfolio. In the fourth quarter, we expect to continue this trend with the new lease rate growth in excess of 6%, about 500 basis points higher than the fourth quarter of last year. Effective renewal rate increases for the third quarter were 1.1%. As a reminder, this reflects the socially responsible 0% renewal increases that we offered during the beginning of the COVID-19 pandemic. we began returning to normal operating practices in August. And based on renewal increases set today, we expect fourth quarter effective renewal rate spreads to be around 4%. As we look forward, it's important to understand that the underlying drivers of our current results are much more than a pandemic phenomenon. Structural and demographic changes have been in motion for a long time and were simply accelerated by the pandemic. As we witness a suburban renaissance, America's families have gained a newfound appreciation for the advantages of suburban living, such as extra living space, private yards, high-quality schools, and a sense of neighborhood community. Our own migration data continues to support these trends. We are seeing in real time multifamily to single-family migration, urban to suburban shifts, And most significantly, we've seen dramatic increases in migration from areas like California to higher quality-of-life markets such as Phoenix, Las Vegas, and Seattle. Notably, the distance of these moves indicates the permanency of these shifts. I am excited about our future. Our superior operating platform uniquely positions us within our industry to capitalize on the surging demand and the growth opportunities that come with it. Now I will turn the call over to Jack.

Thank you, Brian, and good morning, everyone. As we capture the wave of demand using our superior operating platform, we are also translating strong fundamentals to fuel our outside external growth. We strategically designed our growth programs based on a three-pronged approach, which positions us for consistent growth and to be able to take advantage of the most attractive growth opportunities through various points in the cycle. Today, I want to focus on our overall strategy, and Chris will provide specific details around our third quarter investments later in the call. As Dave mentioned in his opening remarks, we are actively deploying capital through all three of our external growth channels. First, our one-of-a-kind Build for Rent AMH Development Program, which I will expand on in a moment. Second, our National Builder Program, which provides acquisition access to new construction homes from home builders and is a growth supplement to our AMH Development Program. And third, our traditional channel, which consists of experienced in-market acquisition teams that sharpshoot existing inventory opportunities, adding additional market scale and density. Many years ago, when we began to formulate the prongs of our growth programs, we knew that internal development was a key discipline that was necessary to unlock our ability to grow throughout various points in the cycle. And right now, historically low MLS and home builder inventories are creating a challenging acquisition environment, further reinforcing the value proposition of our internal AMH development program and our strategic foresight on the opportunity. We began our AMH development program four years ago. It took us years to create and nurture the land pipeline we have today. Using our proprietary data, we strategically selected and are active in 15 of our high-growth markets. We have assembled a team of accomplished industry leaders, built a strong infrastructure, and still have ample room for growth in delivery capacity. Further, our long-term land acquisition strategy continues to fuel the engine as we acquire land to facilitate growth in future deliveries. Today, we have become the nation's leading builder of purpose-built single-family rental home communities and the only one with a complementary and highly efficient property management platform. The long-term advantages of our development program are tremendous. We are building homes and communities that are tailored to the way residents want to live and that are designed to be efficient from a maintenance and management perspective. These efficiencies translate to ongoing margin benefit and combined with our lower all-in investment costs result in enhanced yields when compared to other growth channels. Adding new construction homes also hardens our asset base as we reduce our average portfolio age and can be even more strategic in adding density with our new community concepts. Importantly, we continue to identify opportunities that leverage the size and scale of our high-quality, diversified footprint and best-in-class operating portfolio. Our AMH development program is a game-changer and a unique competitive advantage for us. To pursue this plan takes a fortress balance sheet and clarity for long-term capital that others may not have. Additionally, our complementary and highly efficient property management platform is difficult to replicate. I am proud of our execution so far in 2020, which has been right on plan. We are running full speed ahead and continue to utilize our three-pronged external growth strategy to capture and take advantage of the strong fundamental environments. Thanks to our visionary long-term strategy and outstanding execution, AMH is well-positioned to continue outperforming. Now I will turn the call over to Chris.

Thanks, Jack, and good morning, everyone. I'll cover three areas in my comments today. First, a brief review of our quarterly operating results and growth activity. Second, an update on our balance sheet and recent capital markets activity. And third, I'll close with some final thoughts around our corporate strategy. And to kick off the quarterly discussion, I'd like to reiterate that our strategy and its foundational cornerstones have required years of investment, but those investments have now been made and they are paying off, as demonstrated by this quarter's results. For the quarter, we generated net income attributable to common shareholders of $22.6 million, or 7 cents per diluted share. And on an FFO sharing unit basis, we generated 29 cents of core FFO, representing an impressive 6.7% growth over prior year, and 25 cents of adjusted FFO, representing 4.7% growth over prior year. A key driver of this quarter's results was our best-in-class operating platform that produced a strong performance within our same-home portfolio. where we generated 4.4% growth in rental revenues, driven by a 160 basis point increase in occupancy and a 270 basis point increase in average monthly realized rent, which was further benefited by 10 basis points of contribution from higher fees and partially offset by 90 basis points of drag from COVID-related bad debt this quarter, translating into an overall 3.6% poor revenue growth. On the expense side, we reported a modest 3% growth in core property operating expenses, comprised of 3.5% growth in property taxes, which was lower this quarter due to the timing of prior year quarterly comps, 7% growth in R&M and turnover costs, comprised of an underlying 3.8% inflationary increase, and approximately $600,000 of COVID-related bad debt on tenant utility reimbursements. and a 1.1% combined decrease on all other core property operating expense line items, all of which translated into core NOI growth of 4%. However, normalizing for COVID-related bad debts in the quarter, our same home core NOI growth would have been nearly 6%. As an update on collections, for the third quarter, we recognized revenue equivalent to 98% of our quarterly rental billings, which is comprised of one percentage point or nearly $3 million of second quarter rollover receipts recognized as revenue in the third quarter and 97% revenue recognition on our third quarter rental billings. And finally, before I turn to our growth programs, I'd like to remind everyone that our financial results do not reflect any add-backs related to the COVID-19 pandemic. In particular, this quarter's results include $5.9 million, or approximately two cents per FFO-shared unit, of increased COVID-related bad debts, which was partially offset by the $3 million, or approximately one cent per FFO-shared unit, of second quarter rollover cash receipts recognized as revenue in the third quarter that I just discussed. Additionally, keep in mind that our financial results still reflect various other pandemic operating protocols that remained in place through the end of July, such as the waiving of late fees and the socially responsible decision to offer flat increases on newly signed renewals. And now turning to our growth programs, in the third quarter, we added 664 total homes to our platform, of which 508 were added to our consolidated portfolio, representing a total investment of approximately $140 million, and 156 homes were added to our new construction joint ventures. We've been making great progress, and now that we have all three of our growth channels reopened for full year 2020, we expect to invest between $700 million and $800 million of on-balance sheet capital into our consolidated growth programs. At the midpoint of our expectations, this consists of 1,150 AMH development homes for $300 million, 950 homes acquired through our traditional and national builder program channels for $250 million, and $200 million invested into our land and development pipeline. On our overall development program, including deliveries to our development joint ventures, we are on track to deliver a total of 1,500 to 1,600 new to constructed AMH development homes, which represents the high end of our previous expected range. Next, I'd like to turn to our balance sheet, one of our four cornerstones that has been a top strategic priority since the earliest days of American Homes for Rent. After years of hard work and investment, we've cultivated the only investment-grade rated balance sheet in our sector, which has uniquely positioned us with the flexibility to make long-term investments into our AMH development program, unlike anyone else in our sector. Additionally, recognizing the tremendous external growth opportunity ahead of us, in August, we raised nearly $412 million in a highly attractive, oversubscribed, and upsized common equity offering, which is currently being deployed to fund high return opportunities across all three of our growth channels. At the end of the quarter, reflecting the recent equity raise, our net debt to adjusted EBITDA was just 4.2 times. However, moving forward, we expect our leverage to trend closer to our internal target of 5.5 times as we deploy the cash currently on our balance sheet and utilize our leverage capacity to fund our growth programs. And speaking of liquidity, at the end of the quarter, we had $316 million of cash on hand, and our revolving credit facility, which provides $800 million of total capacity, was fully undrawn. Additionally, during the quarter, we generated approximately $71 million of retained cash flow and sold 233 properties, generating approximately $56 million of net proceeds. And to close, I'd like to leave you with a few wrap-up thoughts around the American Homes for Rent strategy. Since our founding nearly 10 years ago, we have remained steadfastly dedicated to our mission of becoming the leading provider of single-family rental housing in our country while delivering consistent, industry-leading cash flow growth and shareholder returns. Our strategy and investments into its foundational cornerstones are paying off just in time as our industry is entering a new renaissance of suburban demand. First, from a portfolio perspective, our market composition positions us for outsized benefit from today's migration patterns. Second, our operating platform is firing on all cylinders after years of investment into our technology systems, people, and infrastructure. Third, our three-pronged growth strategy, led by our internal development program, uniquely positions us for continued outsized growth, while historically low MLS and home builder inventories are creating a challenging acquisition environment. And fourth, our balance sheet has never been stronger, providing us with access to investment-grade capital and meaningful leverage capacity to fuel our growth programs. It's an exciting time for American Homes for Rent, as our strategic vision has now become a reality, which, of course, would not have been possible without the tireless efforts of our amazing team members. And with that, thank you to the team, and we'll open the call to your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star Q if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Our first question comes from the line of Nick Joseph with Citigroup. Please proceed with your questions.

Thanks. Let me just start on operations. How many of your markets are back to normal in terms of late fees and other charges, maybe just outside of the CDC eviction moratorium? But just try to get an idea of how much of a return to normal you've seen from an operating perspective.

Hi, Nick. It's Brian. We went back to normal operating procedures for late fees and month-to-month premiums across all markets in August. There are a couple of markets that have some specific rules, but they're very small in nature. So probably best to consider that we're operating normally, at least from that perspective, across the whole portfolio.

Okay, so the fourth quarter should be fully back to normal outside of just the eviction moratorium.

Yes, yes.

Perfect. And then maybe just on development, how many days is it between a completion on average and somebody actually moving in, and then how does that compare to a turn time on somebody on a lease expiring and a new resident moving in?

Hi, Nick. This is Jack. Thanks for the question. It's a little different. They both have about nine to ten days from lease sign to move in, and the days on market is pretty similar, 15 to 20 days. The only difference from move out to rent ready, there obviously is no move out, so you're automatically rent ready, and you have probably – 9, 10, 11 days for getting the house rent ready on a turn. So that's really the major difference.

Thank you.

Thanks, Nick.

Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.

Hey, you got Ron Cannon on the line for Richard. Just going back to sort of the 400 homes issue, that were delivered in the quarter, any sort of early read or anything performance-related that we can get on those homes who sort of want more color in terms of how are they leasing up? You know, did they come on target? Is it going according to plan? Thanks.

Yeah, Ron, this is Jack Corrigan. Yeah, everything's leasing up as fast as we could hope for, so That's on target. We're probably slightly ahead of where we projected the rents to be and the amount of time to lease up. So as far as costs, costs are pretty close to what we expected. Under rote, we have some variation occasionally. We expect to see more variation towards the end of the year due to a lumber spike, but that appears to be coming back down.

Got it. That's helpful. And then if I could just turn to the same store revenue growth and, you know, the 90 basis points from uncollectible rents. When does that normalize? Does that become a tailwind in 2021? Also, sort of similar question on late fees. I know it was only at higher fees, only 10 basis points, but the same question is, does that also become a tailwind potentially in 2021 as you sort of come?

Yeah, more to Ron, it's Chris. Let me start with that one. Maybe first on the Fed debt, Look, you're exactly right. There will come a point where bad debt normalizes and the headwind will flip to a tailwind. The trick there is obviously none of us have a crystal ball on being able to predict exactly when that slip happens, but as we're thinking about it going forward, there will come a point, collections will normalize, and that will slip into a tailwind. And then on the fee side, you're correct as well. Keep in mind late fees and things like month-to-month premiums, were only turned off for about four months or so. But as we think about that in the April to July context going into 21, that will be a favorable tailwind comp as we're thinking about things on a year-over-year basis.

Got it. That's helpful. That's all for me. Thank you. Thanks, Ron. Thanks, Ron.

Thank you. Our next question comes from the line of Handelson Just with Mizuho. Please proceed with your question.

Hey, good morning out there. Good morning. Hey, so I wanted to talk a little bit about your development on balance sheet, I guess your development platform here. You added another 400 homes via your platform this quarter, putting you on track to hit your full year 2020 goals as you outlined. And most of this was started pre COVID and built through the COVID period. So, Sitting here today with the added momentum in the Sun Belt and a new capital source, I guess I'm curious how you think about the opportunity set over the next few years there. I assume we can easily match this year's production again next year and see that as the minimum. But I guess I'm more interested in perhaps what the upside limit is here, how much you'd be willing to push the lever, that lever here, given more experience, as you pointed out, and more capital sources with the new JV and what looks to be a very supportive demand backdrop that you discussed.

Good question. I'll lead off on this one and then Jack can come in with some additional color. You're exactly right. We've been, as we all know, investing heavily into our own development program and land pipeline for years at this point. And you also have another good point. Our teams have been doing a great job keeping us on track to deliver between 1,500 and 1,600 homes this year, which importantly is the high end of the range that we were expecting just last quarter. And when you look at it on a year-over-year 19 into 20 basis, This year's production represents a nearly 70% increase over last year, so we're on a great trajectory. And as we all know, our objective is to continue growing our annual production volumes for years to come. You know, specifically when we think about 2021, it's probably a little bit too early to be talking hard numbers at this point. But I think we'd like to see our total production volume and call it the 2,000 homes area or so, which is a nice increase over this year, as a total program number, including both homes on balance sheet and then to our development ventures. And then, as we're thinking about overall growth, of course, we'll continue supplementing our development program deliveries with complementary acquisitions through our traditional national builder programs.

Yeah, Handel, this is Jack. I would echo what Chris says, but as far as our infrastructure, we could handle probably 3,000 to 4,000 over 15 markets with the infrastructure that we have, 3,000 to 4,000 deliveries. If we expand the number of markets, which we're, you know, always looking at the possibility of doing, then that could go higher.

Got it, got it. Okay, thanks. Thank you for that. And just a question of operating strategy here. Clearly, you guys have a pretty favorable tailwind here. All-time high occupancies, retentions are very strong, favorable demand. So I guess, you know, here we are in November. I'm curious how much more aggressively and how much longer do you think you continue to push pricing here, or are you starting to get a sense that it's time to pull back a bit? So I guess the question is, you know, how much occupancy would you be willing to trade this year if you had to, as you push for rate, or do you think you can achieve both, you know, getting continued rate increases and maintaining occupancy?

Hi, Handel. This is Brian. We're really, really pleased with the demand levels that we're seeing in the marketplace. Our record high occupancy is and record rate growth is an example of that. We saw fantastic increases in applications per ready property in the third quarter, up almost 100% from 2019, and that's translating into some really good pricing power. Our expectations are that this is going to continue. If you look at the expected difference in rate growth, 2020 to Q4-19, We're expecting a really large increase. So we see that pricing power continuing in the next year. We've never been in a position of occupancy at these levels going in or closing at a year before. So I'm very optimistic about having that ability to push rents into the first quarter.

Got it. Thanks for that, Brian. If I could follow up, I see that October renewals were, I think, 3.5%. I'm curious, what were you asking to get that 3.5% and then What's the early read on November and December renewal?

Thanks. Yeah, our difference between ask and sign is usually pretty tight, somewhere in the neighborhood of 10 and 20 basis points. There's not a ton of negotiation. We're pretty precise, I think, in our renewal pricing offers. The offers for November were up from October, slightly into the low to mid-fours, and then So in our offers for December and January, there's a slight increase off of the November asks as well.

Got it. Very helpful. Thank you, guys. Thanks, Jacob.

Thank you. Our next question comes from Buckhorn with Raymond James. Please proceed with your question.

Hey, thanks. Good morning. Congratulations on the results. I'm curious if you could dive a little bit further into the discussion about the migration patterns you're seeing or picking up in your leasing traffic. To the extent you have it, I'm just curious what percentage maybe of new leases are you seeing? seeing from Addis versus maybe, you know, a more typical year prior or any other indication, you know, what percentage upticks are you getting from former apartment renters? Any sort of quantification, you know, in terms of these macro trends I think would be really interesting.

Thank you, Buck. This is Brian. Yeah, we're still seeing increased application activity from people coming from multifamily. It's probably most pronounced in a couple of states, Arizona, Georgia, and Colorado come to mind, where the increases are in the 25% to 30% range year over year. Again, as I mentioned in my prepared remarks, probably the most dramatic increases are the interstate movement that we're tracking. As an example, our applications for prospects coming out of California into Arizona is up 91% year over year. California to Nevada is in excess of 100%. And California to Texas is up over 90% as well. So we're seeing a lot of increased demand for people moving out of state into what we think may be higher quality of life markets, certainly from a financial perspective. And then on the flip side, you get to the East Coast, and we're seeing a big uptick in migration out of New York and New Jersey into Florida with applications up. into the state of Florida over 120% year-over-year. So those are probably the most dramatic changes. We're really pleased with the activity, and our expectation is that this is going to continue.

Yeah, wow. Those are huge statistics. Those are really helpful. I'm curious now, with this shift in lifestyle, these shifting migration patterns, and a lot of it driven by this work-from-home culture that we're all living through, does that change how you think about the product you're building development-wise? Are you getting... requests from customers that they need more space or need a dedicated kind of work-from-home area? Are you building stuff like that in to the product now? How are you adapting the needs into the development platform?

Hi, Buck. This is Jack. Thanks for the question. Yeah, we're building in extra bedrooms. We're building in office nooks and office areas inside the home. We started, and when I say we're building in, you know, this thing really started in March, and it took us a little bit, maybe a month or two, to build. kind of get the plans redrawn to have these things in it. And so we're just starting to deliver homes with these additional features.

Great. All right. Thanks, Jack. Appreciate that. And real quick, is the land market changing at all in terms of pricing for the communities or maybe, you know, locations that you can build these communities at?

Yes. The I mean, there's a lot of competition. A lot of the national builders and local builders kind of shut down their land acquisitions for three to six months from March, and now they're trying to catch up. So we're definitely seeing a lot of competition. One of the advantages that we have is that we have a highly diversified portfolio, including where we have our development platform. And so we're able to get the number of lots that, you know, we may have to buy more in Columbus and less in Florida, but we're definitely getting the number of lots that we're anticipating.

Great. Thank you, guys. Congrats.

Thanks, Buck.

Thank you. Our next question comes from the line of Jade Romani with KBW. Please proceed with your question. Okay.

Thank you very much. A couple of big picture questions. You all formed the company during the housing crisis in the 2009 era, and at the cusp of the formation of the single-family industry for rent in terms of institutional development, institutionalization. So the first question is, how do you compare the investment opportunities in front of the company today with that of the post-09 era? And secondly, if you believe investment opportunities are increasing in the SFR space, what strategies will AMH employ to differentiate itself and accelerate that growth?

Hi, Jade. It's Dave. Good morning. There is a lot of comparisons between the two. There are some differences, but the one thing that differentiates American Homes today is that we have three different acquisition channels so we can be nimble and we can take advantage of any opportunities that come about, and we have the capital in place and access to capital that we need to take advantage of those opportunities. Today, the The acquisition market of existing homes as well as those from national builders is a little more challenging, a little tighter. The build-per-rent is our best product, but we're still getting opportunities through the other channels. As things change in the future for any reason, we're in position to take advantage of those opportunities.

And secondly, not a related question, but what are your expectations for bad debt expense in the coming one to two quarters? Do you expect a continued downward trend, or should we be thinking about something similar to what we saw in the third quarter?

Yeah, Jade, morning. It's Chris. Really good question. Difficult answer. You know, there are just a number of factors outside of our control as we think about November and December. What we do know, however, is that the fourth quarter is off to a really good start. You probably caught this in my prepared remarks earlier. But October collections are actually running at 101% of second quarter payment patterns. With that said, as we're thinking about the fourth quarter, I would probably expect to see slightly less rollover revenue into the fourth quarter compared to what we saw in the third quarter, just given comparisons in revenue recognition third quarter versus second quarter. And like I said, it's really difficult to speculate. If I had to and I was holding everything constant with today, you know, I could see fourth quarter bad debt kind of in the twos if I were hypothetically holding everything constant with today. But, again, it's a really difficult area to predict. But what we do know is that so far collections are trending well and October is looking good.

Hey, Jade, it's Dave. Let me just follow up with a couple thoughts on that. I agree with Chris. It's very difficult to predict the future, and there's a lot of factors outside our control, obviously. But if you look at our portfolio and our tenant underwriting, our portfolio being well diversified, it's in markets. I think we presented this in a couple of our slide decks previously. With our underwriting of the markets looking for high job growth as well as high population growth, we have seen significantly below national average unemployment in the markets that we have our homes. In fact, it's better than the rest of the residential public companies with the exception of one multifamily company. So our underwriting is very strong. Our market underwriting is strong. Our tenant underwriting is strong. And all of those are going to benefit us as we navigate these uncertain waters.

Thanks for the update. Yep. Thank you.

Thank you. Our next question comes from the line of Alua Oscarbeck with Bank of America. Please proceed with your question. Hi, everyone. So just going back to markets a little bit again, I know things are much better in the Sun Belt and things are outperforming, but are there any markets that are new to your watch list or any markets that are off of your watch list? And then are there any markets that surprised you with their performance this quarter that you did not expect?

Hi, Lou. It's Brian. We're really pleased with the performance of all of our markets on the occupancy side. We've seen gains in each of the markets and occupancy year over year. And the demand that we talked about earlier is really throughout the entire portfolio. If you want to talk about the markets that may be a little bit more challenged from a collections perspective, it's similar to what we saw last quarter, a little bit in Las Vegas, Houston, and to a certain extent our Chicago markets. but they're still holding up well. They would be kind of at the lower end of the pack from a collections perspective.

Got it. Thank you. And then also looking at the utility reimbursements, I know the bad debt has decreased from QQ, but how are the collections in terms of the utility reimbursements compared to the rent collections? Because I think I remember you guys saying there was a bit of a difference.

Yeah, directionally, Louie, this is Chris. Directionally, we've seen, you know, continued strength on both sides. We obviously saw some nice continued collections on both fronts into the third quarter, you know, kind of this concept of rollover receipts from the second quarter. But directionally, I would say they're both trending very similarly from a quarter-over-quarter perspective.

Okay, thank you.

Thanks, Louie.

Thank you. Our next question comes from the line. Everett Goodmore with Goldman Sachs. Please proceed with your question.

Good morning. Brian, if I could just follow up on the migration pattern question that you answered. What's sort of the absolute delta that you're saying? Those 100% increased numbers, is that off the base of 100, off of 1,000, in terms of the application numbers?

Hi, Rick. Yeah. I don't have the exact numbers in front of me, but all of the statistics that I cited were significant increases off of a significant base. So thinking in terms of doubling off of 100 for a particular market would be appropriate.

Okay. And then, Brian, just on occupancy, how much further do you think you can raise occupancy? What sort of that frictional number for your portfolio do you think?

We've seen fantastic improvements in retention. We still think there's a little bit of room there. Our pre-leasing efforts are starting to really pay dividends. We've reduced our turn times dramatically year over year. So I think there still is a little bit of room. Obviously, it's a different scenario when you're in the 97s as when you're in the 95s. But we're optimistic that we can maintain and maybe pick up a little bit of incremental growth. occupancy as we go forward with this robust demand.

Great. And then, Chris, one question for you. How do you think about or how should we be thinking about real estate taxes as we go into 2021? Thanks.

Yeah, more to Rick. Good question. I'll start by saying it's a little bit early to provide any hard quantitative thoughts at this point. Remember that this is the exact time of year where we're working very closely with our team of property tax experts and in-market advisors to form a view on property taxes, including assessed value trajectories and even rates going into next year. And next quarter, I'll be able to provide more precise and quantitative thoughts on it. With that said, from a high level where we stand now on the valuation side, I think it's no surprise that we continue seeing strong home price appreciation. And so I'd expect that to likely continue to pressure property tax values into next year. However, I would remind everyone that You know, we have one of the best property tax teams in the industry and a super robust appeals process that, you know, each and every year files upwards of 25,000 individual property tax appeals. And so in this environment of home price appreciation, we will definitely plan to continue leveraging and utilizing that into next year's And then on the rate side, it's just a little bit too early to speculate on that, quite frankly. But we're watching the situation very closely with our dedicated team of experts. And like I said, we'll be able to provide another update with more formal thoughts on property taxes next quarter.

Thanks, Chris.

Thanks, Rick.

Thank you. Our next question comes from the line of Douglas Harder with Credit Suisse. Please proceed with your question.

Thanks. I was wondering if you have or could share with us any kind of early results of the initial build-to-rent portfolio, kind of how retention looks and, you know, the ability to get, you know, rent renewals, how that looks relative to kind of the, you know, the other parts of the portfolio.

Yeah, thanks for the question, Douglas. It's pretty early to tell. We have a relatively small group that we can compare to same home or that are in our same home portfolio. But as far as that group is, we're seeing similar retention rates and similar increases, and it's market-specific. So if we had a development in Arizona, we're seeing significant increases in retention you know, more significant than maybe other areas. The one area that we're seeing that's very positive is that the turn and maintenance costs are running about 25% of what our same home portfolio is running. Great. Thank you.

Thank you. Our next question comes from John Polofsky with Green Street Advisors. Please proceed with your question.

Thanks for your time.

Just a few questions for me. Dave, on your portfolio market footprint, is the amount of capital flowing into this space make you take a step back and evaluate maybe more meaningful market shifts, market dispositions as you see it today?

At this time, we've looked at our markets. If you go back a couple of years ago, we had more than 40 markets, and we have done a little bit of printing. Today, we're very happy with our footprint. Not only is it performing very well, as you see in the numbers, but it also gives us a lot of growth opportunities throughout the portfolio. So at this time, I don't see us doing any meaningful pruning of markets. There will be properties here and there consistent with our past as to how we do our asset management, and there will be properties in each of the markets that will get identified for a number of reasons to be disposed of, but it will be minimal against the total number of homes that we own.

Okay. And then second question, Jack, could you give us a sense for how cap rates have trended in some of just your top few sound ball markets in recent months or recent quarters?

Yeah, that's a good question because you're seeing increased prices for acquisitions, but you're also seeing increased rents. So we're trying to be in how we're underwriting and acquiring the properties, but I would say there's a little pressure downwards, but not a lot because of the rate increases. All right, thank you.

Thanks, Joan.

Thank you. Our next question comes from the line of Dennis McGill with Zellman & Associates. Please proceed with your question.

All right, thank you. Dave, a similar question just on the cost of capital. When you look at all the interest in the space now, just in general, acquiring portfolios, how would you describe what cost of capital has done over the last year? And if you had to speculate, what do you think it would do over the next year or two?

Yeah, you're absolutely correct, Dennis. There is more capital looking at the single-family full-rent concepts. In particular, a lot are looking at the built-for-rent concept specifically. Today, we're sitting in a place that we've got good currencies for ourselves, both in all of our channels, whether it's the common, the debt, and there is a lot of JV interest that is expressed to us by a number of parties. The difference between American Homes for Rent and our peers is those cornerstones that we talked about in our prepared remarks. We can marry the development program with an operating program, and as Jack previously said, discussed, we have the ability to basically have a feedback loop as to what's going well, how do we need to modify, whether it's home designs or marketing programs because we control all the different platforms ourselves. But there is more capital. Keep in mind that this is a very fragmented market. We own less than 1% of the assets, less than half a percent, and all our peers own, with us, all the institutional peers, own less than 3%. So there's a lot of opportunity out there. I am very... I'm very pleased with where we are sitting today. The investments of the prior years are really putting us in a great position going forward.

How likely would it be, David, that you do more joint ventures over the next year or two versus growing organically or with partners you already have?

Yeah, look, the joint ventures are one channel. And joint ventures... at times bring more than just capital to the table. And there are reasons to do joint ventures. We have a very high, our joint venture partners today have been very high quality, and they've brought more to the table than just capital. They bring opportunities, et cetera. So teaming up with them is a lot more than what you see in the financial statements. At the end of the day, our preference is to do as much as possible on our own balance sheet. But there are times that there will be other reasons that we'll consider joint ventures as well.

Okay. And then just one more, I'm not sure if it's for Chris or Brian, but Just looking at recurring capex this quarter and thinking about the pressure on usage of the home with work from home, if that does end up becoming more permanent, how are you thinking internally about underwriting those expenses on a go-forward basis? And also, any additional color you can provide on the increase that you did see this quarter, are you seeing that geographically concentrated at all or fairly distributed?

Hi, Dennis. This is Ryan. Overall, the CapEx for the third quarter came in line with our expectations as we signaled in prior quarters and through some of our presentations. I don't think it's specifically prevalent in any markets, but as an example, we anticipated extra stress on the systems with people working from home, with remote learning, people not going on vacations in the summer. And it tracks with our data on the utility side, too. So, for example, we saw increases in electricity bills in Arizona of 30% this summer. And then there's subsequent replacements on HVAC that follow that. So we did anticipate it. It came in line with what we expected. The difference between the second quarter and the third quarter, there was an increase in some appliance replacements as part of those systems. And there's been some pricing and supply pressures on appliances nationally. So that contributed a little bit to that increase. But, again, it was expected. We made a commitment at the onset of COVID to provide excellent service to our residents. We've implemented, we've executed the maintenance program from the beginning, as Dave mentioned, with no deferred work orders. And there's been a little bit of a premium in some cases on the replacements.

Chris, if I could just add, you know, sorry, I was just going to add, you know, if you hold aside the COVID piece of recurring CapEx, which you can see disclosed in the footnotes to the table, underlying CapEx is running, you know, right around the 5% area, which is, you know, much closer to inflationary increases and actually very consistent with what we were expecting at the start of the year as well.

Sorry, guys. Go ahead. I cut you off. No, it's okay. We can follow up offline. I appreciate it. Thank you. Okay. Thanks, Dennis.

Thank you. Our next question comes from the line of Tyler Vittori with Janine Capital Markets. Please proceed with your question.

Hey, good morning. Thank you. Just to tie together a number of the prior questions, and I appreciate you can't give specific guidance, but, you know, as we look at the fourth quarter and really into 2021, what are your thoughts about the seasonality of this business? I mean, should we just throw out the historical because this is a new normal, or how should we think about that in terms of occupancy and rent growth, but also curious on the cost structure as well? Yeah, morning, Tyler.

It's Chris. You know, definitely for this year, you know, as Brian talked about in his prepared remarks, you know, I think the theme of the fourth quarter is that we are bucking the typical seasonal trends, right? As we know, traditionally our business, our leasing activity, et cetera, begins to taper and slow as we enter the end of the summer. Certainly as we cross over Labor Day, kids go back to school and things definitely seasonally slow down in the fourth quarter. As you can tell, we're not seeing that this year with occupancy continuing to hold in at record high levels. Brian mentioned this in his prepared remarks. We've held our 97.2% average occupancy into October. And we are seeing acceleration in blended spreads as renewals are returning to normal levels throughout the fourth quarter. And we're continuing to push on new lease rates. And our expectation there for the fourth quarter is that we'll see 6% plus. I don't think we've ever seen that before. And so clearly, you know, I think... our expectations are demonstrating that the seasonal trends, you know, are being bucked for this year. What that means for next year and beyond, you know, honestly difficult for us to speculate. And, you know, it is likely that some portion of the seasonal trends may return, but we really don't know. Obviously the world is different these days with work from home and everything else that the pandemic has brought on. And so hard to say, but clearly for this year, we're definitely bucking that seasonal trend heading into the fourth quarter.

Tyler, it's Dave. Let me just add a couple of items to that. The trends that you are seeing are not new. When we got into this industry or into this sector 10 years ago, there were 13 million single-family rentals. Today there are 17 million single-family rentals, and the occupancies are stronger today than they were. Institutionally, I mentioned that we have a very small percentage, less than 3%. But we did, as an institutional group, shine a spotlight on the value proposition that single-family rentals brings. And COVID has actually increased that awareness of single-family rental, whether it's the social distancing ability, et cetera. Brian discussed migration trends. And migration trends from one state to another are pretty permanent in most cases. People are not going to move to another state, and then when the COVID crisis is back, all move back. So we're seeing a lot of migration trends into our markets. The demand that we see today is totally insatiable. And it's continually growing. Whether next year there's a little bit more seasonality than this year, as Chris said, that's a wait-and-see call. But the demand in this industry is getting stronger and stronger. It's a continuum of eight to ten years. COVID has just accelerated it.

Okay, great. This is a follow-up question. Can you elaborate a little more on input costs specifically in the bill-to-rent channel? I'm just curious if that's influencing your underwriting at all.

Yeah, there's really only been one item that's caused any disruption to to our projections of costs, and that's lumber. Lumber began to have a shortage and started spiking in July. A year ago, it was about $375 per 1,000 board feet, and July started moving up, peaking in September at $950, which added about $15,000 per home to our costs. That has now started to come back down as more of the plants or mills got online. This morning it was at $567, so we expect it to come back down to normal, and we expect the price disruption or the cost disruption to be relatively minor over just a very short period of time. Okay, great. That's all from me. Thank you.

Thank you. Our next question comes from the line of Ryan Gilbert with BTIG. Please proceed with your question. Ryan Gilbert Hi.

Thanks. Good morning, everyone. First question for me is on the, you know, another one on the Build to Run portfolio. I guess looking across your markets, you know, how do you feel like the portfolio competed against comparable new construction for sale in the third quarter and maybe anything that you feel like differentiates your product against, you know, for sale new construction, aside from, you know, the fact that it's a rental.

Yeah, I'll take that, Ryan. Thanks for the question. You know, I think we competed very well. I think whether you're in the market to buy a home or to rent a home, they're both competitive. I mean, the builders are selling as fast as they can build them, and we're leasing them as fast as we can build them. So it's hard to say we're doing better, but we're doing just as well.

Okay. Great. And then, you know, looking at deliveries from the National Builder Program was a bit better than, you know, I expected given the strength in the market that, you know, you just talked about. Was that all, you know, pre-COVID or I should say, I guess, pre-early spring or spring backlog? And how should we think about deliveries from that program going forward? I think in the prepared remarks, you said that, you know, sourcing acquisitions in both National Builder and traditional channels were getting a little more challenged.

Yeah, well, I'll answer the first part of the question. Most of our Homes that we build are, you know, we're planning two to three years out because there's horizontal development and getting all the permits and then the vertical construction. For the National Builder Program, you know, we kind of shut that down for a while from March until – I believe June or July is my recollection, and just didn't in the last quarter or so pick that back up. And we're getting some response, but it is very competitive. And, you know, the builders are seeing a lot of retail buyers out there, but I think they still like the guaranteed sales. purchases of an all-cash buyer. So we're still getting our share of those products.

Okay, got it. And then just very quickly, property management expense went down the quarter. How should we think about the growth rate on that expense line item going forward?

Yeah, morning, Ryan. It's Chris. You know, there are a couple of small drivers on the margin. Realistically, it has more to do with the timing of prior year quarterly comps. And if you look at it on a full year basis, we're running 2% to 3%. And that's probably the right way to think about it on a full year, something in the inflationary environment with just some timing quarterly comps, which is what we saw this year. I'm excited this quarter.

Okay, great. Thanks very much.

Thank you. Our next question comes from . Please proceed with your question.

Hey, thanks for taking my questions, guys. So, first off, could you give us any color in the demographics of new applicants and residents? Maybe what jobs and industries are they skewed to, and how would their rental coverage compare to your existing residents?

Hi, this is Brian. It's a very good question. The profile of the applicants is remarkably consistent pre-pandemic to current. We've seen a slight uptick in income, but the credit scores, for example, are right on top of each other. So the quality of the applicant has remained high, and there really isn't any major differences between the applicants who were getting approved prior to the pandemic as to those that are getting approved currently.

Okay, thanks. And just to switch gears a little bit, I mean, given the potential for a second lockdown in certain markets, what sort of plans do you guys have in place? Would you expect to see softness in rental increases again or maybe not as much just given where you're seeing demand at and kind of the strength of your residents?

Yeah, it's a good question. Again, it's difficult to predict the future on this. I think the initial shock and all of the uncertainty that came with it is going to be unique. Subsequent changes that we're seeing, there's some pressure in Illinois, for example, on bars and restaurants and some shutdown that we've noticed. But in terms of predicting as dramatic of an effect, if there happens to be a second wave, I think it will be muted. a little bit. Our resident base has been extremely resilient. We talked about the benefits of diversification and also we're very pleased with the fact that we're not susceptible to any specific industries necessarily. So I don't know exactly how dramatic or to the extent of a second wave would be on performance, but my instincts tell me that it won't be as dramatic as the first.

Okay, that's it for me. Thanks, guys.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Singleton for any final comments.

Thank you, Operator. This quarter has been a very strong quarter in light of the COVID headwinds. It's really a testament to there's insatiable demand, as I indicated, for single-family rentals, and we see that actually increasing. As strong as this quarter is, the management team here is actually more excited about our future and what potential lies with this demand and the fact that all of our systems are in place and ready to take advantage of any opportunities that present themselves. I thank you for your time, and we'll talk to you guys next quarter. Take care. Bye-bye.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.