American Homes 4 Rent

Good morning.

Thank you for joining us for our second quarter 2021 earnings conference call. This is Nick Fromm. I recently joined the investor relations team at American Homes for Rent and I'm excited to be here today with David Sinkland, Chief Executive Officer, Brian Smith, Chief Operating Officer, Jack Corrigan, Chief Investment 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, August 6, 2021. We assume no obligation to update or revise any forward-looking statements, whether as a result of due information, future events, or otherwise, except as required by law.

The reconciliation to GAAP of the non-GAAP financial measures we are providing on this call 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.americanhomesforrent.com.

With that, I will turn the call over to our CEO, David Sinkland.

Thank you, Nick, and welcome to the team. Good morning, everyone, and thank you for joining us today. American Homes for Rent continues to lead the single-family rental industry with strong operational performance and portfolio growth. Robust rental demand and strong execution led to record-breaking operating results that exceeded our expectations at the start of the year. This, alongside our three-pronged growth strategy, comprised of our internal development program, national builder program, and traditional acquisition channels, has driven out performance in all areas of the business. As such, our expectations have increased across the board for the second half of the year. As I say every quarter, the single-family rental market is stronger than ever as demand continues to soar. Roughly 17 million households in the U.S. are making a conscious decision to rent single-family homes. Today, the national housing shortage sits at more than 4 million homes. This coupled with our single-family rental value proposition provides the backdrop for continued long-term rental demand growth. While COVID did not create this trend, it highlighted the benefits of single-family rental living and the associated rental demand that has been building over the last decade. As I indicated, this country has a housing shortage. At American Homes for Rent, we are doing our part to solve this issue. Through our Build for Rent development program, we are providing beautiful Class A rental homes in vibrant, well-located neighborhoods with proximity to quality school districts. Our properties, combined with superior property management services and customer care, allow us to deliver a rental experience that is unmatched. Now turning to the second quarter. We achieved record-breaking results and reached new milestones on both the operational and capital-raising fronts. Our recent equity and debt offerings have demonstrated both the strength of our balance sheet and our ability to efficiently access capital markets, raising the capital necessary to fund our growth programs. Growth remains our strategic priority, and our performance is another area where we have exceeded initial expectations. Jack will provide additional color shortly, but here's the punchline. We are not only raising expectations on operations and earnings, we are also increasing our growth targets even further. Altogether, the revised midpoint of our 2021 Core FFO represents sector leading growth of nearly 14%. Chris will provide you details of our guidance changes shortly. As I close, I thank our employees across the 22 states where we do business who persevered during this global pandemic and enabled us to achieve record-breaking performance. After more than a year of working remotely, we look forward to welcoming everybody back to the office this fall in accordance with state and local health advisories. Now, I'll turn the call over to Brian for more details on our operations. Brian?

Thank you, Dave. Our strong momentum continued through the second quarter, where we again set all-time records for occupancy and rate growth. Same home average occupied days was 97.9%. New lease rental rate growth was 13.7%, and renewal rate growth was 5.4%, blending to a record growth rate of 8%. The growing strength of demand for our homes is confirmed by our internal data. Showings per rent-ready property have more than doubled since last year, and our customer satisfaction scores remain at an all-time high. Our residents are prioritizing quality-of-life decisions more than ever, and they appreciate our best-in-class rental experience. Further, the incoming wave of millennials entering prime single-family living years, coupled with the current housing shortage, signals strong demand for years to come. In July, we continued to capitalize on the outstanding demand, which drove seasonal records in both rental spreads and occupancy. Same home average occupied days was 97.4%, which represents a year-over-year increase of 90 basis points. On the rate side, we posted new lease spreads of over 16.5% and renewal spreads of around 5.5%, which blends to a new record rate increase of 8.5%. For context, these blended spreads were over 600 basis points higher than those from July of last year. For the full year, we now expect same home average occupied days to be around 97%. This represents an improvement of 50 to 100 basis points over both 2020 and our estimate at the beginning of the year. This increase includes our expectation that both seasonality and our collection practices begin to return to normal during the second half of the year. Turning to rate, for the second half of the year, we expect renewal increases to be in the 5% to 6% range and new lease growth to continue to set seasonal records in the 8% to 12% range. Lastly, our full year expectation for same home core operating expense growth remains unchanged. While we are seeing inflationary wage pressures and rising material costs, the efficiency of our platform has been able to mitigate some of these increases. Given the strength of our performance in the first half of the year, we are excited to raise our same home core NOI guidance by 200 basis points to 6% at the midpoint. In closing, I would like to thank the entire American Homes to Rent team for their dedication and hard work as we provide high-quality housing to families across the country. This was one of the best operational quarters in our company's history, and we are well-positioned to deliver exceptional operating results through the second half of the year. Now I will turn the call over to Jack.

Thank you, Brian, and good morning, everyone. Growth remains a strategic priority for American Homes for Rent and our differentiated three-pronged strategy continues to prove resilient and dynamic. Before discussing current year results, I would like to recognize one of our development team's strong accomplishments. We debuted at number 45 on Builder Magazine's recently released 2020 National Home Builder Top 100 list. This is an important milestone for the company that was reached in a relatively short period of time as this growth channel provides the company with the best rental home assets with the best economics. I congratulate our development team on this achievement. Our development program provides a value creating growth channel that will deliver a consistent pipeline of new homes, regardless of the economic or competitive environment. Over the last two years, we have faced a pandemic, rising land and commodity prices, as well as supply chain and labor pressures, and have demonstrated our ability to meet and exceed expectations on volume, as well as investment returns. These results should even get better with our increasing scale. The combination of our seasoned development team and best-in-class operating platform promises outsized returns for the foreseeable future. Our developments are on target for the year, and we reiterate the midpoint of our guidance at 2050 deliveries. On the land front, we successfully acquired almost 1,400 lots during the quarter, bringing the number of lots we control on June 30th to over 12,000. Our 12,000 lots owned and controlled enables us to raise our guidance to 13 to 15,000 lots owned or controlled by the end of the year, putting us in a position to expand our development deliveries in future years. While our development program remains the backbone of our long-term growth plans, our national builder and traditional channels represent nimble dials that can be turned up or down depending on the environment. Ultimately, This adds to our ability to remain flexible on growth and quickly adapt to individual market opportunities. Over the last few months, we have used that dial to increase our traditional channel investment activity by over $300 million for the year. This brings the midpoint of our investment expectations for all three of our channels to $1.7 billion of total capital, including joint ventures. First, we'll give a more detailed breakdown shortly. In summary, I am proud of our execution so far in 2021. We continue to execute well on our differentiated, one-of-a-kind AMH development program supported by our best-in-class balance sheet and operating platform. And we remain confident in our ability to deliver sustained and accretive growth into the future, especially as we utilize the dynamic nature of our three-pronged growth strategy. Now I will turn the call over to Chris.

Thanks, Jack, and good morning, everyone. I'm excited to share my updates today because the second quarter was one of the strongest operational performances in the history of American Homes for Rent, as well as an important quarter of new balance sheet milestones. Along those lines, I'll cover three areas in my comments this morning. First, a brief review of our outstanding quarterly results. Second, an update on our recent balance sheet milestones and capital markets activity. And third, I'll close with a summary of our updated 2021 guidance, which has been increased across the board. Starting off with our results, as I mentioned, we reported one of the strongest quarters in the history of American Homes for Rent, with a net income attributable to common shareholders of $20.1 million, or six cents per diluted share, 33 cents of core FFO per share unit, representing 22.9% growth over prior year, and 29 cents of adjusted FFO per sharing unit, representing 26.4% growth over prior year. Driving this quarter's strength was our platform's ability to translate record-breaking demand into an outstanding performance within our same home portfolio. where we generated 6.6% growth in rental revenues, which was further benefited by 90 basis points of contribution from higher fees and ancillary income and 80 basis points from lower COVID-related bad debt, translating into an overall 8.3% core revenue growth. Coupled with a 2.2% increase in core property operating expenses, this translated into an impressive core NOI growth of 12.2%. Next, in addition to our outstanding operating performance, our external growth programs fired on all cylinders, adding a total of 1,058 homes to our wholly owned and joint venture portfolios, 416 of which were delivered from our AMH development program. Specifically, for our wholly owned portfolio, during the quarter, we added 898 homes for a total investment of nearly $290 million, which was comprised of 256 homes from our AMH development program and 642 homes from our other acquisition channels. And on the disposition side, we sold 97 properties during the quarter, generating total net proceeds of approximately $28 million. Next, I'd like to turn to our balance sheet and share a few updates around our recent milestone capital markets activity. This was a busy quarter for us as we executed on our strategy to accretively refinance our previously announced $499 million Series B and E perpetual preferred shares redemption, as well as position ourselves for the expanded external growth outlook that Jack discussed, while maintaining our commitment to a best-in-class investment-grade balance sheet. With those objectives in mind, during the quarter, we raised $661 million of net proceeds in an oversubscribed and upsized common equity offering. With the total net proceeds, $194 million was received during the quarter, with the remaining $467 million, or 13.2 million shares, being issued on a forward basis to minimize dilution as we match fund against capital deployment throughout the balance of 2021. Additionally, after quarter end, we issued another $750 million in a dual tranche unsecured bond offering consisting of $450 million of two and three-eighths percent 10-year bonds and $300 million of debut 30-year bonds priced at three and three-eighths percent. Both bond tranches were impressively oversubscribed and proudly makes American Homes for Rent the only BBB minus residential REIT in history to successfully issue 30-year bonds. At the end of the quarter, we had $40.6 million of cash and $620 million outstanding on our revolving credit facility that was repaid after quarter end with proceeds from the recent bond offering. At the end of the quarter, our net debt, including preferred shares to adjusted EBITDA, was 5.9 times. However, as we deployed growth capital throughout the remainder of 2021, proceeds and additional borrowings from our recently recasted $1.25 billion revolving credit facility, we expect our leverage to trend into the low six times area. And speaking of the strength of our balance sheet, I'm happy to report that S&P also recently moved our rating outlook to the positive category in recognition of the continued strengthening in our balance sheet and overall credit profile. Finally, I'd like to provide a quick summary of our updated 2021 guidance, which has been increased across the board. Starting with the same home portfolio, as Brian already covered, recognizing our strong year-to-date results and continued record-breaking seasonal demand heading into the third quarter, we've increased the midpoint of our full-year core revenue growth expectations by 125 basis points to 5.5%. Coupled with our unchanged core property operating expense outlook, we have increased the midpoint of our full-year core NOI growth expectations by 200 basis points to 6%. Next, with respect to our external growth, since our update last quarter, we've increased the midpoint of our full-year AMH capital deployment expectations by approximately $300 million to $1.5 billion, which now includes between 3,500 and 4,000 wholly-owned inventory additions. And when coupled with our joint venture programs, we now expect to deploy total gross capital of $1.7 billion. Putting it all together, we have increased the midpoint of our full year 2021 core FFO per share expectations by 5 cents, which reflects stronger NOI contribution from both our same home and non-same home portfolios, along with incremental partial year contribution from our expanded external growth expectations. At the midpoint of $1.32 per share, this now represents a year-over-year growth expectation of 13.8%. And finally, before we open the call to your questions, I'd like to share one more thank you with our teams and a congratulations to our finance and capital markets teams. This quarter's balance sheet accomplishments are a testament to your hard work and dedication. Overall, this was an outstanding quarter of operational performance, growth program execution, and balance sheet management that demonstrates the power of the American Homes for Rent platform and our ability to create outsized value for years to come. And with that, we'll open the call to your questions. Operator?

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 2 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 keys. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Nick Joseph with Citi Group. Please proceed with your question.

Thanks. Clearly, you're benefiting from the build-to-rent strategy so far, but as you see more and more capital come into this space, how do you think about your moat there, kind of the first mover advantages there? of what is sustainable going forward, at least on a relative advantage standpoint?

Thanks, Nick, for that question. You know, being the first mover gives us several years' advantage. You know, we are buying land now for 2024 and 2025 deliveries. So people just getting in now, they have to go find the land and scale up their team. And we also have the benefit of, and the national builders can do that, but they don't have the benefit we do of an outstanding operating platform.

Thanks. Then when you think about the different yields, you know, with the amount of capital coming into the space, how have they changed across, I guess, development, third party, and then just flow acquisitions?

Yeah, if I understand your question correctly, the yields, because the rents have been going up, you know, if As I understand it, we're undersupplied in housing by 4 to 5 million units across the country, so there's going to have to be a lot of development going on to affect the yields dramatically. We've been seeing red-hot demand on our product. It's a great product not only for renters, but – You know, it's just high quality, really nice product that people want to live in and in neighborhoods they want to live in. And we're seeing high demand and rents going up well above pro forma in most cases.

Thanks. So no compression even with more capital coming in?

Not at this point. And I don't see any pathway to that until we start building more houses and then households are being created.

Thank you. Hey, Nick, it's Chris. Can I just mention, going back to the maturity of our development program and the quality of what it can produce, just for you and the benefit of everyone else on the call, we have a great new video that's on our website, actually on the For Investors page. It gives some great visuals of the quality of our product, you know, parts of what differentiated in certain aspects of our communities, as well as an intro to the team that I think does a great job giving some visuals of the story. So I'd encourage everyone to take a look at that. Again, it's on the For Investors page of our website.

Thanks.

Thanks, Nick.

Thank you. Our next question coming from the line of Steve Sackwa with Evercore ISI. Please proceed with your question. Okay.

Yeah, thanks. You guys called out in the, I guess, press release, you know, the continued acceleration of new rent growth in July. And, you know, I know occupancy slipped a little bit, which may be a bit more of a seasonal factor than anything else. But could you maybe just talk about the interplay between the occupancy and rent growth and how you're sort of thinking about that and managing both aspects of that moving forward?

Sure, Steve. This is Brian. The occupancy change from end of June to July is just really a function of seasonality and move outs. The demand, which is supporting the exceptional releasing rate growth, is still there. When you have extra move outs during kind of a busy move out season like we're in right now, it takes a little while to get those houses back up. So that delta should get recovered soon. The great thing that we're seeing right now is we've been able to turn our homes much quicker. We've picked up on average cash to cash for Q2 was 25 days this year, which in comparison to last year is a pickup of about 22 days. So there were extra move outs in July, but we're going to be recovering those quickly. And you can take a look at the leasing velocity. There's just a little bit of time to get those new renters, new residents into the homes. So I don't think there's anything to be concerned about there. Rate growth continues to be fantastic, and that's across all of our markets as well.

Steve, it's Dave. Just let me clarify one point that Brian was making. When you look at occupancy, there's two occupancy numbers. There's average occupancy. There's end-of-period occupancy. End-of-period occupancy is always the highest number of the month. What you see is on average occupancy, the move-out at the beginning of the month, and then the turns occur, and then you refill towards the end of the month. So, what you're comparing is a little bit of apples and oranges. The demand is still as strong as we've ever seen it. Rate growth is very strong, and I wouldn't infer anything by looking at end of June's occupancy and where we averaged out in the month of July. Demand continues to be as strong as we saw it last quarter.

Great. Thanks, Dave. Maybe second question, just maybe talk a little bit about land purchases. I mean, we realize that, you know, the housing market is underbuilt, costs are going up everywhere. So maybe just talk about how you're sourcing land, how you're pricing and, you know, how is that, I guess, maybe impacting your outward development yield, if at all?

It's really not affecting our yields. We're now getting to be known as somebody who can execute and people are calling us with deals. And so we have access, especially in the markets that we've been established in for quite some time. As we get started in Columbus, that's going to take a little longer to get to where all the brokers and and landholders know us, but in most of our markets we're known, and we get access and we close our fair share of the deals at the pro forma yields that we like.

So, Dave, just to quickly follow up, I mean, I guess our rent increase is just basically allowing yields on the development to stay firm, even with land prices and, you know, things like lumber and labor up.

No, that's exactly right. You know, we're getting well above pro forma rents, even though the pro forma costs or the actual costs are a little higher than pro forma. But we're also, as we get more experienced and scale this up, we're getting more discounts and access to the high-quality products subcontractors and contractors. Great. So, Steve, this is Dave. Just to basically summarize, as you inferred, there is a little bit of price increases in the supply chain. But the rents have more than taken care of that, the increase in rents. And as Jack indicated, we're actually, you know, real bullish on the future that there could be rate expansion or a yield expansion there as we become more and more efficient and get more and more scale resulting in better supply chain economies of scale.

Got it. Makes sense. Thanks, guys. Thanks, Steve.

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

Hi, this is Adam Kramer on for Richard. Thanks for the time. Just wanted to touch a little bit more on the kind of quarter to date or July trends to the best that you guys can kind of disclose. I appreciate kind of the new renewal and blended lease figures. But I wanted to ask a little bit more about kind of some of the other income items that may have kind of gone away during COVID. Do you see those coming back at all? And maybe also kind of how is bad debt trended in third quarter relative to 2.5% and 2Q and 1Q?

Yep. Morning, Adam. This is Chris. I'll hop in on a couple of those, and Brian can chime in if he wants to add any additional operational color. In terms of the other income area, fees, ancillary income, as you can see from the quarter, or even really the year-to-date A number of our fee programs have been really making great progress as we continue to roll out certain things around pets, pet fee programs, et cetera. You can see that contributing on a full year basis. Fees are up about 42%. And then in this quarter in particular, fees are up about 65% or so. Part of that is absolutely the contribution from our fee and ancillary income programs. We had a little bit of a softer comp in terms of late fees on a year-over-year basis as we were not charging late fees during those same months of the pandemic last year. On a full-year basis, you know, we're expecting those same trends to continue. General ballpark for the full year, we see fees adding about 40 basis points or so to same-home revenue contribution. And that's pretty consistent with what our expectations were at the start of the year. And then in terms of bad debt, you know, I would say for starters that we continue to be really happy with how strong and resilient our collections have remained throughout the entire pandemic. With, as we know, bad debt hovering really around that 2.5% area. But as you look forward, collections continue to be an area of uncertainty that we're focused on. Case in point, the recent flip-flopping and lifting and then reinstating of the eviction moratorium, I think, is a great example. But with that said, heading into the third quarter, our collections are continuing to remain very resilient and pretty steady with what we've been seeing. So I think we'll likely see bad debt continue to hover around the 2.5% area for the third quarter. And then we're optimistic that we'll begin to see further collections momentum before the end of the year. And we could see fourth quarter bad debt improving a bit, you know, maybe into the lower twos or so with real further improvement continuing into 2022.

Great. Appreciate the color there. Thank you. Just a quick follow-up, just on kind of cap rates on acquisitions through the – you know, just kind of the traditional acquisition channels. You know, what are you guys kind of seeing, you know, relative to three or six months ago? And then, you know, when you're thinking about kind of – and I think you guys kind of refer to it as a dial that you can kind of turn on or off – you know, how do you kind of think about, you know, when, I guess, right, to kind of dial it on or off? You know, is that kind of a CAPRA-driven decision? Is that more kind of on what's coming out of the kind of AMH development program at the time and then kind of how much you want to augment with National Builder? Just maybe a little bit more color there and kind of on that, turning that dial on or off would be great.

Yeah, thanks for the question, Adam. This is Jack. I would say that prices obviously have gone up on MLS transactions. Rents have gone up. So we're seeing cap rate compression of about 15 to 25 basis points. So we've seen that. In terms of when we decide – when to dial it up or dial it back. It really has, it's a combination of what the opportunities are for investment and what our, you know, cost of capital is. And obviously with the debt deals that we've been able to do, our cost of capital has gone. And then the second part has gone down. The second part of that is we're a total return So even though we might see initial cap rate compression with rent growth, we expect that the total return is actually going to be better than what we were buying in the past. Hey, Adam, let me just add a couple thoughts to that. The question really is, Jack, and first, it's a balance between investment opportunity and availability and cost of capital. And having three acquisition channels is huge for us because as time moves on, those channels become the availability of new assets through each of those channels varies. And our development channel is by far the best channel, but we supplement with very, very good acquisitions in the other two. And as we see today, there is tremendous opportunities in our traditional channel. There is opportunities, but not as robust as the traditional channel and national builder, but they're more limited. But it all gets down to looking at the cost of capital, the availability of capital, and the investment opportunities. And today our cost of capital is significantly different than it was a year ago, and the investment opportunities are still very, very good, so we've ramped it up.

Thanks for the time, guys. Thanks, Adam.

Thank you. Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.

Great. Good morning and congratulations on the quarter. My first question is for Dave. I apologize I missed. I think, Dave, you mentioned the total number of single-family rentals today. And I was curious, we get asked a lot about the future of the industry. Are there any recent forecasts on how Big the Pie may grow over the next few years?

Well, today the number of single-family homes that are rentals is essentially $17 million. That's a significant increase over the last 10 years from when it was $13 million. And $13 million was the number for a significant period of time. Keep in mind that the majority of those single-family homes that are rentals continue to be in the hands of individuals that own one to four. 96% to 97% of all the homes are in that category. The opportunity for institutional growth is still significant. Couple that with what we talked about on the housing shortage. And the housing shortage of 4 million homes needs to be resolved. individuals have a quality place to live, and we are building to help that in a small way. But the other thing that we have seen, and we've talked about this for many years, is the demographic changes as to a little more preference of not having the current renter group of 30 to 40-year-olds. They prefer in a much bigger way today than their predecessors and prior generations did at that same age to rent. Their life events are happening later for them. and they're choosing to rent. So I expect there is no – I haven't seen any projections, but I would expect the trend that we've seen over the last 10 years, going from 13 to 17 million homes, to continue. And I would expect to see that the institutions continue to be a big player in providing that quality housing.

Okay, thank you. And then my second question is tackling affordability questions. I believe you typically, you've said in the past that, you know, your applicants, it's dual income earners in most cases. And any time just one person, you know, is really applying, so it's one income. I guess, can you tackle that question for us, affordability questions with rent, you know, rising so fast?

Rents are rising, but home prices are rising at the same rate or in many cases faster than rents are rising. And so, when you look at affordability, affordability is a relative comparison as to what the various opportunities are for housing and occupancy. And against the ownership equation, the affordability remains intact, but both, as you point out, have increased. Thank you.

Thank you. Our next question comes from the line of Dave Romani with KPDIS. Please proceed with your question.

Thank you very much. When you allocate capital to land spend, do you have an IRR target or a return on equity target? Or alternatively, do you use a stabilized cap rate-based analysis? The homebuilders target typically something around a 20% return on capital or return on inventory target. So I was wondering if your return targets are similar to theirs, and if not, whether that provides either a competitive advantage or potentially raises the risk of your overpaying for land.

Yeah, I wouldn't say we would risk overpaying for land. But we have a going in what the first-year yield is, what the five-year anticipated yield is, and what the 10-year anticipated yield is. similar to what you'd run if you were buying an office building and what the IRR is on that. And if it meets our hurdle and is in the market and sub-market we want, where we expect that kind of growth, then we make an offer. We come up with what a max offer would be, and we try to negotiate something better than that. Let me tell you a couple of things. This is Dave. I'll add one or two other points. When we look at all of our acquisition channels, as Jack indicated earlier, it is a total return proposition. The development channel is a channel that we get higher current income, current cash returns. But there's one thing that people forget. Our investment in that house, compared to all of our other channels that we would buy the equivalent house, we're investing approximately 20% to 25% less. So as soon as that home is completed, there's an embedded 20% to 30% development profit that is reflected as immediate HPA. And that in itself is value creation on the balance sheet. And that sometimes is forgotten piece of it. We look at the cash yields and what it does to FFO. But we're building and creating value on the balance sheet every time we build our own home through our development pipeline.

Which is because you're not choosing to sell the home on an owner-occupied basis, and in which case you would expect to earn that 20% to 25% margin. So perhaps you're realizing it through rent growth over time rather than an outright sale. But do you happen to know how the prices you're paying for land compare to homebuilders? Would you believe that they're similar to what homebuilders are? are paying on a per lot basis for wholesale housing, or do you think that you're maybe paying a little bit more in exchange for, you know, the recurring earnings that rental housing provides?

I would say that, you know, we're competing with national home builders for parcels of land and, and, uh, and sometimes we bid more and sometimes we bid less. Um, it's really a question of the value that we perceive versus what they perceive. And, you know, it's a competitive situation. So I don't think we're paying more all the time, and we're not paying less all the time. Yeah, I mean, we do not win every bid that we attempt to acquire land. It is a very competitive market. We are successful a very large percentage of the time, but we're also losing some of the lots that we wish we had. But it is a competitive marketplace out there.

Thanks for taking the question. Mm-hmm.

Thank you. Our next question comes from line of Alan Peterson with Green Street Advisors. Please proceed with your question.

Hey, everyone. Thanks for the time. I was hoping to follow up a little bit on the land cost side there. In regards to, Jack, what you're seeing on the ground today, how much do you think land costs have increased over the last year on the parcel that you guys are underwriting?

Somewhere in the 20% range. Last year, we were paying on average $50,000 per raw lot, and now it's closer to $60,000. We've gotten more efficient on the horizontal development, so we've brought that down a little bit to make up for it. So the total all-in, fully developed lot is relatively close to the same, right around $120,000. Perfect. That's helpful.

And then transitioning over to operations, Brian, I was hoping you can touch a little bit on the divergence between new lease rate growth and renewal rate growth. Is the current portfolio management strategy to limit turnover expenses instead of marking existing tenants up to market? Just trying to understand if there's a large embedded lease in any given market that you guys are operating in.

Yeah, there's always a balance on the renewal side with rate and occupancy. The preserving turn costs is a factor, but the best way to think about it, there's a timing difference. We're sending out the renewal notices 90 days in advance, whereas with the releasing activities and pricing, we're pushing rates as far as we can on a real-time basis, so we're able to capitalize on big surges in demand that we might not have anticipated. In addition, there's a lot of value in retaining strong, long-tenured residents, so that plays a little bit of a factor as well. And then finally, there's the social responsibility aspect of it too. You know, we're wary of the press and pressures that exist today in our industry, and we feel that strong renewal growth that we're seeing right now is good, pushing it well into double digits to try to mark to market might not be the best strategy today. Perfect. That's helpful.

Thanks for the time, guys. Thanks, Ellen.

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

Hello, everybody. Thanks for taking the question. I just want to clarify the comments about occupancy shifting from June to July. You went through this earlier. But through April and May, the gangster occupancy was 97.9, or 97.8, the quarter was 97.9, so obviously June was the high mark. That's what we should be comparing to the 97.4, correct?

Yeah, I think the seasonality of occupancy, you're going to see a peak in the June timeframe. The 97.4 is... slight reduction off of the average, obviously, and then the month end. But it's just a function of a larger gross number of move-outs in July, and they tend to move out at the end of the month, too. So you can maintain excellent occupancy and have move-outs that will affect the following month when the gross number of move-outs is rising monthly.

And I guess, Brian, just to continue on that, which is where I was going with it, is it to imply that those were unexpected move-outs because then you've had a lot of success being able to pre-lease on move-outs that you know are coming?

No, it's not. Keep in mind that's occupancy, not the lease rates. The lease rates are sky high. So that's actually contemplating the timing difference, the cash-to-cash timing difference of 25 days. So those move-outs have been processed. Many of them have been pre-released, but it takes a little bit of time to get those subsequent move-ins. We're seeing no drop-off in demand. There's just some functional or some frictional vacancy that we're processing through right now. Okay.

All right, that's helpful. And then back to the MLS underrating, I think you mentioned that the compression in cap rates was 15 to 25 basis points. Can you just talk about what the absolutes are today, maybe any variability that you're seeing by market? And then it'd also be helpful just to understand when you approach the underwriting on these homes, how do you think about both rent growth? Is there anything that you'd be assuming as far as inflation from where the market is today? And then also on the expense side, recognizing you're benefiting from lower than average expenses from some of the pandemic effects, how do you think about the underwriting costs on those homes?

Yeah, we underwrite to a standard rate. So the expenses aren't really going to change due to the pandemic. In some cases, those have gone up. In some cases, those have gone down. But overall, I think it hasn't really changed our margins significantly. On the rental income, we typically underwrite to whatever rents are. currently at market for MLS transactions because we get a first year NOI yield and we anticipate some growth generally in the three to three and a half percent range after that in terms of rent. We've been getting a lot better than that, but that's how we look at it in terms of annual growth, and then certain markets might be a little higher growth, and we'll pay a little more in terms of lower initial yield.

Okay. And where are those yields, Ajak, maybe by on average and then on the extremes for markets?

I would say on average slightly below 5%. In terms of our MLS transactions, they're closer to 6% in terms of our internal development program.

Okay. Thank you, guys.

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

Hi, guys. Congrats on a great quarter. Just going back to the 642 homes between that national building program and the traditional way, Just wondering about the exact breakout between the two. I just want to compare, I guess, how much of that you capture on the traditional way this quarter versus your guidance.

Sure. Sam, it's Chris. The breakdown is using rough numbers about 570. through the traditional channel and about 70 through the national builder. National builder, pretty in line with what our expectations were, recognizing how tight that environment is. Our expectations were relatively modest coming into the year and the quarter. And then that 570 on the traditional channel side is definitely above what our prior expectations were. And I think give you a good idea of that ramp up that we're seeing as our team executes really well out in the field sharpshooting transactions as we're really leaning into that channel with our expanded capital into it throughout the balance of the year.

Got it. That's helpful, Culler. I guess one big picture thing from me, I mean, you guys have made it clear in the past that having that local market scale for the density is really important for efficiency. Now, Just thinking about those smaller markets of interest to you guys, like a Seattle where the scale is not there. I guess those markets, I mean, you guys have a vision for those through that bill for rent channel. So I'm just curious how you're strategically mapping out the efficiency picture there because it seems like you might have some control, but just having more color on that as opposed to, I guess, your bigger core markets where the buildup story was different would be interesting to hear from you guys.

Yeah, Sam, it's Dave, and, you know, Going back, we have talked about the benefits of having 30 markets. We've also talked about the fact that we are efficient in these 30 markets because our operations are highly centralized. And in each of the markets, we have people on the field for maintenance. But as we continue to grow, even in our large markets, we continue to add more maintenance personnel. So today, out of all 30 markets, we're efficient in the vast majority of those markets. And I would say the ones that we're not, it's one or two of the markets we're in. And we're growing in those markets, and the growth in those markets will improve the efficiency in those markets. So we have always talked about the efficiencies of our platform begin with the fact that it's highly centralized. And if you look at the total cost for us to manage our operations, taking all of the cost of operations, whether it's property management and G&A, And looking at it as a percent of revenue, where is efficient or more efficient than everybody else in the residential sector? And so I think there's some information, as Chris can walk you through later, it's in the supplement, I believe.

Got it. A helpful caller. Thank you, guys. Thanks, Sam.

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

Hi. Thanks, guys. I appreciate all the detail you've provided so far. First question for me is just what's the – or do you have a sense of the underlying labor and materials inflation in your business? I think in the past we've talked about maybe around 5%. And also, when you're getting units back where the previous tenant vacated, are you seeing any changes in the need for return capex or expense relative to prior years?

Hi, Ryan. This is Brian. I'll start with the labor and materials. We are seeing some inflationary pressures on both. I think the most – obvious areas would be materials such as appliances and so forth where we're seeing inflation in the 10% range. Our procurement teams, our purchasing teams, have done a fantastic job of helping to protect us from those increases with national contracts, really exceptional processes. And the most important factor really is that we are trying to do more and more in-house. A lot of those inflationary pressures are in relation to third-party maintenance and turn vendors. So we've been able to handle more work in-house and protect ourselves from some of those cost increases. They're in the marketplace, but we've done a great job of really mitigating those big changes. And then in reference to any change in the turn profile on the homes that we're receiving back now, I haven't seen any marked difference. We're benefiting a little bit from few returns, but the cost and the condition on those houses that are being returned to us is consistent with prior quarters.

And, Ryan, it's Chris. Just to add a thing or two from a numbers perspective, you know, just to frame what Brian was saying around the inflationary piece, keep in mind a lot of that was also contemplated in our expectations coming into the start of the year. So between contemplating a portion of that and then just how well our teams have been executing, I think you can see that, you know, reflected in the fact that our expense view on the year remains unchanged. And then on the turnover piece, keep in mind the other thing that is also included in our guidance is as we progress throughout the back part of this year and as our collections continue to optimistically gain momentum, as we've talked about the last couple of quarters, you know, we would likely expect that to translate into you know, a temporary period of elevated move outs as we're working through some of those collections, which may come with some incremental turn costs as a result of that volume. But all of that contemplated in our guidance at the start of the year, which remains unchanged coming into this quarter as well. Okay. Got it. Appreciate that. Second question. Just in the National Builder Channel, when you're evaluating opportunities, are you noticing a difference in yields between, like, full purpose-built, built-to-rent communities versus buying a series of one-offs or maybe just a portion of a community that would otherwise be sold to the owner-occupant?

No, but we haven't had a lot of opportunities to buy – homebuilder full communities. We've done a couple and none this year and those were basically at some modest discount to what they could sell them for at retail. The yields were pretty close to what we were seeing on the MLS. Hey, Ryan, it's Dave. Just to supplement a little bit, the homebuilders have had a very, very strong retail season in 2021. And the pricing of those opportunities from the national homebuilders have been less than what we have seen in prior years. We continue to have dialogue with many homebuilders. We have acquired homes in the past year. from many home builders. It's not just one or two. So we have relations there, but as Jack indicated, this year the pricing has gotten a little tighter, and it really is driven against their opportunities, the home builders' opportunities, and they have an opportunity right now to sell retail at very attractive prices.

Okay, great. Thanks very much. I appreciate it. Thanks, Ryan.

Thank you. Our final question today comes from the line of Brad Heffern with RBC Capital Markets. Please sit here with your question.

Hey, everyone. On land, you mentioned in the prepared comments that you're buying for the 2025 deliveries right now. Can you talk about if that duration is about right at this point, like next year you'll be buying for 2026, or what would make that longer or shorter?

Yeah, the typical time period for one of our, let's say, average size developments of 80 to 120 homes is 18 to 24 months to go vertical. And then when we're going to go vertical, we meet with our property management team and talk about what the ideal level of absorption would be, and then we structure the cadence of those deliveries accordingly. So we might do typically six to 10 per month and maybe cut it back in the winter and bump it up going into spring. So that's kind of the cadence. So you got two years, let's say two years land development, and then the vertical costs over, the vertical goes over whatever the cadence is. So let's say it's 100, houses and you're doing 10 a month, it's going to take 10 months to finalize the community.

Okay. Okay. Got it. And then I was curious if you have any demographic data in terms of, you know, where new residents are moving in from and have you seen any changes in terms of maybe people like selling their homes and moving into a rental or people moving from multifamily either in a greater or lower proportion than they used to?

Hi, Brad. This is Brian. We're seeing some interesting trends continue. On prior calls, we've talked about the migration out of some of the coastal markets, specifically California and New York and New Jersey. That's continued to accelerate. The applicants from non-AMH states, so people coming from states outside of our footprint, was up 50% year over year. And with the largest, most notable increase, 70% increase from people coming from California. The demand has just been fantastic, especially when you look at the western states, people moving from California to Nevada, Idaho, Arizona. It's really been strong and doesn't seem to be letting up at all. With regards to applicants and residents coming from multifamily. It's been consistent. We've seen a slight uptick of late, but at the beginning of the pandemic, we saw a big boost. And it's moderated a little bit then in terms of growth, but it's still a significant feeder for our demand pipeline.

Okay. Thank you.

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, Melissa, and thank you, everyone, for your time today. We are pleased with our operational and growth execution this quarter and our position for continued strong performance and growth in the quarters ahead. We'll talk with you again on next quarter's call. Have a good day.

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