American Homes 4 Rent

Greetings. Welcome to the American Homes for Rent third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A 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. Please note this conference is being recorded. I will now turn the conference over to your host, Nick Fromm, Senior Manager, Investor Relations. Thank you. You may begin.

Good morning. Thank you for joining us for our third quarter 2021 earnings conference call. With me today are David Singlen, 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, November 5th, 2021. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. A reconciliation of GAAP to non-GAAP financial measures is included in our earnings press release and supplemental information package. As a note, our operating and financial results, including GAAP and non-GAAP measures, are fully detailed in our earnings release and supplemental information package. You can find these documents, as well as SEC reports and the audio webcast replay of this conference call, on our website at www.americanhomesforrent.com. With that, I will turn the call over to our CEO, David Singleton.

Thank you, Nick. Good morning, and thank you for joining us today. American Homes for Rent delivered a strong third quarter consistent with what we have seen throughout 2021. We continue to set ourselves apart from our peers with a platform that is unmatched in its totality, highlighted by our 2021 core FFO growth expectation exceeding 17%. As we begin to turn our focus to 2022, our diversified portfolio is well positioned to benefit from the country's migration patterns. America remains in the midst of a housing crisis that will last for many years to come. It is estimated that more than 5 million households need housing that is not available today. As one of the largest home builders in the United States, we continue to address this issue through our innovation of the SFR space by building new Class A owned communities. With our superior property management and customer care, we're delivering an exceptional single-family home experience while contributing to the appeal and character of local communities. We continue to invest in our home building operations to expand this significant growth channel in future years. Our 2021 build-to-rent delivery target outlined at the beginning of the year remains unchanged. Through advanced planning and strategic sourcing, we have successfully navigated the well-publicized supply chain headwinds to maintain our new home development and delivery schedule. Jack will elaborate more on this later. Given that all areas of the business are performing extremely well, we are raising guidance for the remainder of 2021. As I close, I remind you of what I said at the beginning of the year. Our top strategic priorities are to deliver strong and consistent operating results and sustained growth. While we are about to close out arguably the best year in company history, I am even more optimistic about our future in 2022, 2023, and beyond. Robust rental demand and our pipeline of more than 16,000 development lots positions us for predictable industry-leading growth. I thank our teams across the 22 states we operate in for their commitment to providing quality housing for our residents and making our growth strategy a reality. Your continued hard work and dedication have earned the trust of our residents while enabling the company to deliver superior results. Now I'll turn it over to Brian for more details on our operations. Brian?

Thank you, Dave. Our outstanding momentum continued through the third quarter, where we achieved same-home core revenue growth of 7.3% and core NOI growth of 8.2%. These impressive operating results were driven by robust demand and solid execution, which resulted in strong occupancy and rate growth. Same home average occupied days for the third quarter was 97.4%, representing a 40 basis point improvement over the same period last year. As expected, we saw a sequential uptick in move-outs in the third quarter, but faster cash-to-cash turn times enabled us to maintain occupancy. This year, demand showed little sign of slowing as we set records for new lease rate growth at 15.9%, renewal rate growth at 5.7%, and blended rate growth at 9.1% in the third quarter. On the collections front, our practices are returning to normal, and we expect our bad debt to return to pre-pandemic levels over the course of 2022. Our team has done a great job supporting our residents when they needed it most, including helping them access nearly $14 million in government rental assistance over the course of the pandemic. Looking forward to the balance of the year, we continued to see strong demand in leasing results in October. Staying home average occupied days held steady at 97.4%. And on the rate side, we posted new lease spreads of 12.7% and renewal spreads of 6.6%. This equates to blended rate growth of 8.9%, which represents an improvement of 400 basis points over last October. we expect this strong blended rate growth to continue through the end of the year. For the full year, we now expect same home average occupied days to be around 97.5%. This represents an improvement of 120 basis points over 2020 and 100 basis points over our estimate at the beginning of the year. Quickly touching on expenses, there is little debate that inflationary wage pressures and rising material costs are prevalent. However, the efficiency of our platform coupled with favorable property tax changes has helped offset these incremental costs. And our full year expectation for same home core operating expense growth remains unchanged. With the strong momentum from our outstanding third quarter operating results, we are raising our 2021 same home core NOI guidance by 200 basis points to 8%. In closing, Our team has done a great job producing strong, consistent results in this rapidly changing environment. This is a testament to the hard work and dedication you can expect from American Homes for Rent for years to come. I'll now turn the call over to Jack.

Thank you, Brian, and good morning, everyone. I am happy to report another solid quarter of external growth. During the third quarter, we added nearly 1,600 homes to our wholly owned and joint venture portfolios for a total investment of over $550 million. This marks our strongest external growth quarter since 2016 and demonstrates the power of our three prongs growth strategy, which enables us to nimbly deploy capital across multiple channels and our diversified national portfolio. Taking a step back, I've overseen our growth programs at American Homes for Rent since our inception, and I've never seen a more attractive time to invest. The combination of one, our country's national housing shortage, two, shifting consumer preferences towards the freedom of rental living, and three, today's stellar operating landscape have created the optimal environment to lean into our external growth programs. With that in mind, and considering our current attractive cost of capital, coming into the third quarter, we made the strategic decision to reduce going-and-yield targets across our growth channels by 25 to 50 basis points. This decision enables us to capture more of today's growth opportunities, and because of our superior outlook for cash flow growth going forward, total returns for these investments are expected to be in line with historical levels. Given our strong year-to-date performance and recent strategic decisions, we now expect to acquire approximately 2,600 properties through our traditional and national builder channels for a total investment of $900 million this year. Our AMH development program delivered 569 homes in the third quarter and remains on track to deliver between 2,000 and 2,100 homes this year. Even with the well-known supply chain and labor issues impacting construction across the country, we are proud of our ability to maintain our delivery guidance from the start of the year. Our differentiated build-to-rent strategy allows us to control costs through effective inventory management, standardized floor plans, and creative solutions. Our diversified footprint allows us to manage availability of materials across different markets. And our predictable production cadence and lack of change orders has created loyalty from preferred trades. On the land front, we continue to feed our growing development program with the acquisition of high quality land across our footprint. During the quarter, we added 1,051 lots to our pipeline, which was ahead of our expectations. And now believe we're on track to owner control approximately 16,000 lots through the end of 2021. As I mentioned at the start, I've never seen a more attractive time for external growth. Although I'm very proud of our accomplishments this year, I'm even more excited for the future as we accelerate our growth programs further. 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 programs. Second, an update on our balance sheet and recent capital markets activity. And third, I'll close with a summary of our updated full-year 2021 guidance. Starting off with our results, we reported another strong quarter with net income attributable to common shareholders of $36.9 million, or 11 cents per diluted share. 35 cents of core FFO per share and unit, representing 17.8% growth over prior year, and 30 cents of adjusted FFO per share and unit, representing 20.7% growth over prior year. Driving our results was another quarter of consistent operational execution within our same-home portfolio, where we generated 6.6% growth in rental revenues, which was further benefited by 60 basis points of contribution from higher ancillary income and 10 basis points from lower bad debt, translating into an overall 7.3% core revenue growth. Coupled with a 5.7% increase in core property operating expenses, this translated into an impressive core NOI growth of 8.2%. And now turning to our external growth programs, during the third quarter, we added a total of 1,583 homes to our wholly owned and joint venture portfolios, 569 of which were delivered from our AMH development program. Specifically for our wholly owned portfolio, during the quarter, we added 1,382 homes for a total investment of approximately $494 million, which was ahead of our expectations and included 368 homes from our AMH development program and 1,014 homes from our other acquisition channels. And on the disposition side, we sold 90 properties during the quarter, generating total net proceeds of approximately $27 million. Next, I'd like to turn to our balance sheet and share a few brief updates. As we discussed on our last earnings call, during the quarter we closed a $750 million dual-trunch unsecured bond offering comprised of both 10- and 30-year bonds. And then during September, we settled 11.4 million common equity forward shares from our May 2021 offering for net proceeds of $399 million. At the end of the quarter, we had 1.8 million forward shares remaining, representing approximately $65 million of net proceeds that we expected to utilize during the fourth quarter to fund a portion of our growth programs. Additionally, at the end of the quarter, we had $64 million of cash, our $1.25 billion revolving credit facility was fully undrawn, and our net debt, including preferred shares to adjusted EBITDA, was 5.9 times. Finally, I'd like to share some additional color on our revised 2021 guidance, which continues to reflect the robust demand environment and consistently strong execution from our operating platform. Starting with the same home portfolio, recognizing our year-to-date results and record-breaking seasonal demand heading into the fourth quarter, we've increased the midpoint of our full-year core revenues growth expectations by 125 basis points to 6.75%. Additionally, the midpoint of our core property operating expense growth expectations remains unchanged at 4.75% and contemplates a few puts and takes as we now expect full-year property tax expense growth of approximately 4% and a 5.5% combined increase on all other expenses. Coupling together our updated same-home expectations, we have increased the midpoint of our full-year core NOI growth guidance by 200 basis points to 8%. Next, with respect to external growth, for full year 2021, we now expect to deploy approximately $1.7 billion of total AMH capital, which now includes between 3,700 and 4,100 wholly owned inventory additions. And when coupled with our joint venture programs, we now expect to deploy total gross capital of approximately $1.9 billion. Putting all the pieces together, we have increased the midpoint of our full year 2021 core FFO per share expectations by 4 cents to $1.36 per share, which represents 17.2% year-over-year growth and continues to lead the residential REIT sector. And in closing, I'd like to quickly reiterate our bullishness looking forward. 2021 has been one of the best years in American Home Sprint history, but the true excitement lies ahead. Our portfolio is already positioned for today's migration patterns. Our operating platform is performing at the highest levels in company history. And when coupled with the power of our three-pronged growth strategy, differentiated by AMH development, American Home Sprint is positioned for an exciting and long runway of outsized shareholder value creation ahead. And with that, we'll open the call to your questions. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would 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 would 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. Our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.

Thanks. I was hoping you could give some more information on the supply chain and labor cost pressures that you're seeing across the business, particularly on the development side. Obviously, the rent growth is probably more than offsetting that, but just if you can frame what you're seeing on the ground there.

Yeah, thanks, Nick. This is Jack. Yeah, we definitely are seeing some inflationary pressures on construction costs and on land. But we're also seeing similar inflationary pressures on rent, which is offsetting the construction costs in terms of yield. But what I would say also is that while we're seeing some costs go up, we're seeing lumber prices come way down. So lumber prices peaked at $1,700 in the third quarter. So what we delivered in the third quarter and part of the fourth quarter will be at the peak. But lumber prices currently are between $600 and $700. So you're going to see some tailwinds as far as lumber offsetting some of the other costs.

Thanks. And let me blend that all together with the movement in rents. How does that change kind of the current pipeline expected yields?

The current pipeline expected yields are going in yields are probably 25 basis points lower for stuff we're underwriting today. But I don't expect to see, you know, those Those projects that we're underwriting today won't come to fruition until 2023, 2024. The ones that are coming into existence today were underwritten three years ago, so the land prices were lower, the rents are higher, and it's basically offsetting in terms of yield. what we expected. So we're basically yield neutral on those houses.

Thank you very much.

Thank you.

Thanks, Nick.

Our next question comes from the line of Steve Sacaba with Evercore ISI. Please proceed with your question.

Yeah, great. Thanks. Chris, I was just wondering if you could talk about, you know, the guidance and where you have sort of implied 4Q you know, based on the acceleration that you saw in leasing spreads in the third quarter, you know, I think you've got sort of flat revenue, you know, in the fourth quarter against the nine months. And, you know, NOI, I guess at the midpoint, I think is down slightly from the nine months. So, you know, maybe just talk about sort of what's in there and, you know, the pressure points, maybe both positively and negatively.

Sure. Morning, Steve. Good question. Yeah, I mean, just to take you through the general points of what's included in the guide, you know, keep in mind midpoint from a revenue perspective is now 675 on a full year basis. You know, general components for the fourth quarter that Brian largely covered in his prepared remarks. Our view is that we think we'll probably hold the line and continue to see occupancy in the 97.4 or so area in the fourth quarter, pretty similar to what we saw in the third quarter. We see nice opportunity from a rate perspective, both from where spreads are going in the fourth quarter, but also the pull through from the strong spread environment we've seen recently, especially in the third quarter. So in terms of the pull-through of that to average monthly realized rent, I could see that tick up a little bit from 3Q into 4Q. And then also keep in mind fees are – and ancillary income is contributing nicely this year as well. From a full-year perspective, we could see those contributing in the area of call 50 basis points or so on a full-year basis. And then bad debt, to your point around kind of puts and takes, I think bad debt is going to be an area that we're watching closely, as I think we all can tell. We saw some improvement this quarter. Bad debt actually tracked a little bit better than what our prior expectations were, as we're beginning to see some modest improvements in our collections as our practices and tools have started returning to normal. And as we've shared recently in our last investor update, and then, of course, this quarter, we saw an uptick in rental assistance payments in the third quarter. And so all that contributed to bad debt coming down a touch in the third quarter to the 1.7% area. And as we think about the fourth quarter, you know, so far collection trends have been pretty consistent into October. And so, you know, best view right now is that we could see fourth quarter bad debt looking fairly similar to third quarter. But hopefully, you know, there might be opportunity to do a little bit better than that. But all in all, Steve, those are the components. And, you know, actually when you essentially squeeze the fourth quarter delta between year-to-date and full year, you'll see that that actually implies some modest top-line acceleration from from 3Q into 4Q.

Great. And then just maybe one question on sort of the land and your desire to continue to replenish. I'm just curious, I guess, how is the footprint changing or how much more challenging is it to find land parcels in the submarkets that you want them Are you being sort of forced to go further afield to find the land at the right price to continue to replenish the lots?

Well, we're definitely not sacrificing location. So we're buying similar land that we've been buying in our footprint. So that has not happened as far as sacrificing location. And it is competitive. We're out there competing with all the national builders. But, you know, you can tell from our activity we're getting our share of the pie. And, you know, it's competitive and we're competing. Steve, this is Dave. One other thing I would mention is you go back and you look at our last investor deck that we have posted on the investor page of our website. You will see a few maps in there as to where the communities that we are building are physically located. And you will see that they are in the communities in the areas that we have existing homes and actually all of our peers have existing homes. So it's not that we are building far out. We are building where the residents and our prospective residents want to be. where the better schools are, et cetera. But you can actually physically see on the map where we are building today.

Great. Thanks. That's it for me. Thanks, Steve.

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

Hey, thank you. Good morning, guys. I was wondering, you know, we've had some recent news here with Zillow making an announcement about their exit from the iBuying space and starting to sell off their portfolio of homes. Open questions whether or not other iBuyers might be running into trouble as well. I'm just wondering if – those types of homes that iBuyers control, whether it's Zillow or other players, would those be of interest to you? How do you think about, you know, going into the market for those? Or, you know, do you think that, you know, if those iBuyers are getting into trouble, that could create inventory challenges out there?

Yeah. Buck, this is Dave. Good morning. I don't want to speak about other iBuyers at this point, but with respect to Zillow, absolutely, there's opportunities there. And we have been in contact with Zillow, are evaluating the opportunities that are available today, and hopefully we will find a large number of those homes that fit our buy box. Those would be incremental to the normal buying patterns, but they do have quality homes in their portfolio, and we will evaluate all of those opportunities and make bids as we see fit. So, one other thing I would mention about Zillow that's a positive for us is the is we have talked about the labor market is a tight labor market today. And there are a number of individuals that have reached out to us in the last couple of days looking for opportunities at American Homes for Rent. So that's going to be beneficial to us as well as to the prospective employees as they look for new employment. Very interesting. Thank you for that. Appreciate the call.

And with the strength of rental demand out there and the increases you guys are getting, I was wondering if you could add any extra data or color you have on household income trends in terms of, you know, whether it's your new applicants or you can break it out between new lease applicants versus existing tenants. Are the households able to keep up with these rent increases? And, you know, to the extent you've got any data on out-of-market renters, anything extra that you could add there?

Hi, Buck. This is Brian. We're really pleased with the applicant profile and the improvement in their income through this year. So year to date, our approved applicant incomes, documented incomes are up about 10%, which is pretty close to our new lease rate growth. So the incomes are keeping pace with this fantastic growth. And a little bit has to do with exactly what you said in the second part of your question, and that is the migration trends. We're still seeing strong migration from California into the western markets like we've talked about before. We haven't seen that slow down at all. If you look at the number of applications from California, they're up about 60% to what they were pre-pandemic levels for the last quarter. Similar trends on the east coast with New York and New Jersey. And then the other thing that's interesting, too, we took a very close look at move-outs for the year. and to figure out whether the people who are moving out, whether there are any changes as to where they're going. For the third quarter, move outs to buy new homes was down slightly in the low 30% range. But we're encouraged that we're not seeing any change in behavior and patterns of people returning to these coastal cities. So that outward migration is very consistent to what it was pre-COVID levels and is relatively low. So net-net, we're seeing really good migration into our markets and not seeing a corresponding outflow that some people have alluded to.

That's great. Awesome, Colin. Thank you, guys. Good luck.

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

Hey, good morning. My afternoon. Hey, guys, I wanted to maybe get a little bit more disclosure from you about loss to lease across the various different markets that you're in. I'm really asking the question from a perspective of, you know, your turnover is only 25%, which is a great thing. And it just leads me to believe that you have quite a sustained runway for same-store revenue growth, all else being consistent. So I'm just wondering if there's any differences between loss to lease and maybe if you can comment on your ability to capture that as some of your apartment cousins had mentioned that, you know, they can only capture, call it 60 to 70% of loss to lease in a given year.

Hi, Rich. It's Brian. Very good question. We're obviously seeing a divergence between renewal rates and releasing rates. I would estimate that our loss to lease for the portfolio right now is somewhere in the low double-digit ballpark. It's exactly as you said, though. It gives us a lot of confidence going into next year that we can continue these really nice rate growth, both on the renewal side and on the releasing side. exactly how much of it we're going to be able to capture next year. I don't have a great estimate for you there. Our retention is a little bit better than the multifamily peers, so it may not be as quick to catch up. But you'll notice, too, that we've seen some nice improvements in our renewal rates sequentially as well. So in a nutshell, we're really excited and optimistic about our abilities to push rents next year. Lost lease will have some contributing effect to that.

Got it. Maybe I can just follow up. Just a bigger, more strategic question. As you think about the dynamics, there are obviously a ton of tailwinds right now. But as you think about what could make this an even better environment versus maybe a little bit of a weaker environment, what are you looking for? How much does home price appreciation matter? I'm just trying to frame the environment, you know, how much more upside there is versus this just is the new stable normal versus a potential slowdown.

Yeah, I think the upside is really a function of being able to sustain these record levels of demand. And HPA is a factor of that. There are supply constraints in our market. There's a shortage of housing, as we've talked about. We don't see any quick fix to that in the short run. So the expectations are that if demand holds, we're going to have fantastic runway. The upside would be a continued appreciation for our value proposition. We've talked about that at length. The pandemic accelerated some trends that we saw going into the pandemic that really talk to the benefit of our platform, the convenience of the leasing lifestyle and the changing demographics. So I think the upside would be to have demand maintain or even accelerate from where it is today.

Great. Thank you, guys. That's really helpful. I'll jump back in the queue.

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

Hey there, thanks for taking my question. So Brian, you mentioned It's now the widening spread between new and renewals. Good for the loss-release. But I'm curious about some of the deceleration we're seeing here, the blended rate in October. A little bit below the third quarter is a contrast to your resi peers, cousins, seeing acceleration. So maybe can you talk about pricing power, renewal pricing strategy? Obviously, renewals are a key piece of the story with retention being so high. And maybe share some color on what you're sending out for November, December, and if you're capping renewals anywhere. Thanks.

Sure. Thanks, Handel. Yeah, the acceleration that you're talking about is, I think, 9.1% to 8.9%. It's still extremely strong. The October numbers that we posted show a 400 basis point improvement over last year. So we're still seeing really good pricing power, especially into a time of year where traditionally we've seen some seasonality. We've been able to buck that trend with the robust demand. But you're exactly right. The position that we're in with strong occupancy and good execution on turns and excellent demand has given us confidence to continue to push renewal rates. In terms of absolute caps, I don't think there are any specific data points to provide there, but we've been thoughtful on our renewal process. We're managing to optimize revenue. That's one component of it. Releasing rate growth is another component, but Putting all those together, we're really happy with the progress that we showed in the third quarter and still the strong results that we posted for October.

Great. That's helpful.

Can you actually share what the renewals that you're asking for for November, December are? Yeah, sorry about that. The renewals for the remainder of the year are going to be consistent with October, and the renewal offers that we're mailing out for the beginning of next year or a slight increase, but nothing dramatic. Got it. Thank you.

And maybe one on the cost outlook, given the inflationary pressures you talked about. I'm curious, you know, how you guys are feeling about your ability to contain some of the costs of the chunkier, more controllable, like the R&M, the wages, the materials? And then maybe on the real estate side, given the rise in values, particularly the run in the Sunbelt, expectations that real estate taxes are heading up. So any color on that? I think you mentioned that you had some recent successes here, but I think into next year, there's a general expectation that, well, taxes should be, at least real estate taxes should be going up, right?

Yeah, Hando, I'll start with that and maybe pass it to Chris for the tax commentary. We're really happy and proud of the execution that we've had in this current environment. Our scale and our platform efficiencies have allowed us to continue to turn homes quickly despite supply pressures. The focus that we have on self-performance has allowed us to mitigate some of the really inflationary increases on third-party vendor work. So there are a number of things in place that are protecting us from those issues that I think most people are feeling. We're going to continue to focus on it. We're doing this in an environment, too, where we're still working out some of the COVID-related distress residents. Those are turning at this time. We've talked about that in the past. So overall, I think we've done an excellent job being efficient and in a challenging environment. I would expect that to continue for us, but we're paying close attention to it. It's really a testament to the strength of our platform that we've been able to mitigate a lot of these increases.

Yep, Handel, and then this is Chris. I'll jump in on the property taxes, and I'll talk a little bit about what we're seeing this year and then tie it into next year as well. But as I'm sure you'll recall, the third quarter is typically a really active period for us for receipts of property tax information. In particular, on the assessed value front, we now have information on pretty much the majority of our portfolio. And I'm pretty happy to report some good updates almost all the way around. Assessed values have come back modestly better than what our expectations were at the start of the year. We've actually seen a couple municipalities end up reducing rates that they actually were not expecting. And then the appeals program is going really well. So all of that combines into the new full year expectation that we've been talking about around 4% or so, which as a reminder is about 50 basis points better than our expectations at the start of the year. And then on 2022, look, it's definitely the right question. Of course, I'll tread a little bit carefully here as we're still in the middle of our 2022 property tax budgeting and forecasting process. But in general, look, we agree with you and recognize that we're in a strong HPA environment. And that's great for asset values, but it's obviously also a factor for property taxes. So, again, I can't comment with specific numbers just yet, but given the strength we've been seeing in HPA this calendar year, and the fact that property taxes commonly run in arrears. We could see 2022 taxes being a touch higher than our 21 estimate of 4%, but I wouldn't really expect them to be in a materially different ballpark. And as always, we'll leverage our robust appeals machine to make sure we aren't leaving any dollars on the table. And then just to tie all this together, obviously, your question was around expenses, but I would just remind us all to think about expenses, you know, coupled against, as we're thinking about 22, coupled against what we expect to be another really strong year from a top-line perspective for all the reasons that Brian was talking about, you know, setting up real nicely for another year of occupancy and rate performance. And then you couple that with all the good stuff to come from our growth programs and the AMH machine is set up real nicely for another strong year in 22.

That's really helpful, Chris.

Thank you.

Thanks, Mandel.

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

Hello, everybody. Thanks for taking the question. I think the first one is there are a couple of comments about preferences for single-family rentals. And I just wanted you to maybe elaborate a little bit on what you guys look at to assess that, because obviously from the outside looking at the homeownership rate data that's been going up for several years, particularly among young adults. So how do you guys think about that when you talk about the preferences?

Yeah, Dennis, it's Dave. And what we have seen, we have mentioned, as you will recall, each and every quarter we've talked about how the demand for single-family rentals has continued to get stronger and stronger. If you go back Ten years ago, when we had 13 million single-family homes, what we had seen at that time is demand that was in the 90s but much lower than it is today. And today we have many more homes that are single-family rentals. It's 17 million by most accounts. And the demand is far, far stronger. And I attribute that to basically the education, the value proposition of residents and prospective residents understanding what single-family rental living is today versus what it was more than a decade ago. A decade ago, it was in the hands of mom and pops. American Homes and some of our peers have elevated the quality of the single-family rental experience, both the quality of the housing as well as the quality of the customer service. And we see that driving demand. That's the tailwind that we continue to talk about. We do not see that getting any softening up at any time in the future. And then the other piece that really drives this strong demand is the fact that there is a shortage of quality housing in the United States. We talked about in prepared remarks, depending on which survey you want to look at, they're all in the same area, but there's somewhere between four and six million households looking for quality housing. And we are building quality housing and solving part of that problem, but the demand for it is extremely strong today, and I expect it to be extremely strong for many years into the future.

we could probably debate the shortage another day. But I think what you're saying from a demand side, I'm not sure we would disagree with, but there's also an incredible demand for for sale single family too. So I guess what I'm trying to get at is, Is there a mixed shift between owned single family and rented single family? And the macro data would suggest that owned is gaining share because the ownership rate is going up. So that's what I was trying to understand, recognizing that there's demand, strong demand for all housing, how you would maybe articulate that there's a preference for rental over owned.

Well, there's two groups of individuals, and those that are looking to buy and those that are looking to rent. And we are in markets where people are moving to, where they're migrating to. We hear about some of our multifamily peers repositioning to where the migration patterns are. We're already there. And the other piece here is that When you think about 17 million single-family rentals and you think about us owning between 50,000 and 60,000 and our peers, institutional peers also owning thousands but not millions, and we have a better product, we are going to continue to see very, very strong demand. And we are in the markets where the demand is extremely strong. All of our markets, I think other than one, are the employment growth and the population growth exceed the national average. And so that's going to provide strong demand for us for a long time going forward.

Okay. I appreciate it. Maybe switching gears just a little bit to the development program. I realize this will vary quite a bit by geography and so forth, but if you just looked at all of the development completions this year, what's the average rent on those units, and what would you say the average rent would be next year on deliveries?

Well, the average rent for the third quarter is in the supplement at $2,120. It's actually higher than that, but... But if we hadn't rented it yet, we used the pro forma rents, and we're exceeding pro forma rents by about 5% to 10% on average. For the year, I would say it's probably in the $2,000 to $2,100 range, but I don't have that statistic in front of me.

And then for next year, just based on how you've underwritten what's coming to market?

Based on underwriting pro forma rents, probably in the same range, $2,000 to $2,200. But, again, we're achieving higher than pro forma rates in almost every development.

Okay. Thanks. Good luck, guys. Thanks, Dennis.

Our next question comes from the line of Jade Romani with KBW. Please proceed with your questions. Jade Romani, you may proceed with your question. There is no response from Jade, so we will move to the next question. Our next question comes from the line of Sam Chell with Credit Suisse. Please proceed with your question.

Hi, guys. Most of my questions have been answered, but I did want to circle back to collections. I mean, it was good that you guys provided that guidance for normalizing next year, but I'm just trying to understand the remaining tenants that are trying to get current. How do they differ from your normal base? That's the... 100,000 income earning households, the dual income, I'm just trying to compare what's different with the remaining tenants that need to kind of get back to normal.

Yeah, Sam, I don't know if, I think what you're getting at is whether there's a different profile between the cohort who's current and the cohort who is under some distress. Right. I think you could look at it. The COVID-related distress hit some of our markets hard. I don't know if there's a dramatic difference in incomes, but I do think that those are the ones that have been affected in employment. If you take the hospitality industry in Las Vegas as an example, But it's not a case of the people who are under distress had lower incomes than those who didn't. I think it's probably more isolated into whether their industry was affected by COVID and whether it's been able to recover.

Got it. Okay. So is it more market-specific at this point in terms of what you need to get in terms of collections?

Yeah, there is variability across the markets. The real goal for us is, as you mentioned before, we alluded to in our prepared remarks, is to get everything back to normal. And part of that process is work out to some of the distressed tenants and working them through the system, getting those houses turned and put back into normal conditions. in-line bad debt delinquencies and so forth. The good news is we're making really good progress on that. We've talked about that before. The full suite of collection tools have been returned to us now, so that's in process. We're happy that we've made really good movement on that. We think it's going to take into next year, as I mentioned in the prepared remarks. But our goal is to work those tenants out, re-tenant these homes, turn these homes, re-tenant them, taking advantage of the nice rate growth that we've gotten and get those back to kind of normal operations. And that's going to be occurring, you know, through the first half of next year into 22.

Got it. Appreciate the call. Thank you.

Thank you. Our next question comes from the line of John Palowski with Green Street. Please proceed with your question.

Thanks. My first question is on the trajectory of development deliveries. And so in past investor presentations, you've got some bars going from 2,000 homes delivered roughly this year up to 3,000-plus beginning of 2023. The question is, have you sourced enough supplies given the supply chain bottlenecks to step that trajectory, or is there anything in the supply chain right now that's going to make the increase from here?

Yeah, thanks for that question, John. It's a good question. As far as 2023, I don't know if we'll have the same supply chain bottlenecks. I hope not. We've been pretty creative and have a built-in advantage in that we don't offer options to our renters in building our houses, and we have standardized floor plans. So we have a built-in advantage over our national builders. But I can't tell you about supply chain issues in 2023, but we're definitely ordering stuff well in advance. I can't even tell you for sure what the supply chain issues will be in 2022, but we're monitoring them. We've had them. There's really three areas nationally that we've had supply chain issues appliances windows and and trusses as far as the others are more local and market and we've been able to because we're in so many markets if one market is suffering we've been able to move some supply over to the other market so we've been creative hopefully we'll be able to continue to be creative and achieve our goals for 2022, which I can't give you for sure what we're targeting until I get through all the unit delivery plans for each of the markets, and I haven't fully gotten through those yet.

Okay. Well, I may not be understanding the lag of when you've got to collect your inventory on – inventory of materials to deliver homes next year, but have you sourced enough supplies to make you confident you can deliver more homes next year than you did this year?

I'm fairly certain that we'll deliver more. How much more, I'm not prepared to tell you. Hey, John, it's Dave. Supply chain issues have been an issue of all of 2021, and As you can see, we have delivered exactly what we expected. And I think what Jack is saying is, yeah, there is a supply chain issue out there. But with the ability to order much earlier in the life cycle of building homes than our home building friends have because of owner options, and the ability to source in many markets because we have very standardized plans and we can move those materials around. We have successfully delivered exactly what we thought we would deliver this year. And going into the early part of next year, we don't see that changing. Our deliveries in the early part of 2021 on land that we acquired two years ago Three years ago, we were on target for. And we have very, very good loyalty with our trades as well. And so we are not seeing issues with trade holding up deliveries at this time. And I don't expect it will hold it up next year either. So, yes, we are confident in our ability to deliver the homes that we have the land for, that we have done the horizontal work on next year and work through the supply chain issues.

Okay, great. Last question for me, either for Brian or Chris. Obviously, kind of R&M and turnover costs from a dollar amount have benefited from lower turnover rate this year. I wonder if you could give us a sense for how the cost per individual turn has increased, and just so we can understand the magnitude of acceleration that's going to come once the turnover rate starts normalizing.

Sure, John. It's Chris here. You know, on average – I think turn costs bounce around a little bit. But on a trailing 12-month basis through the end of the third quarter, I think the average turn for a unit that actually turned was about $1,000 or so. And that typically runs in that area. It's probably up a touch. But I would say, you know, on the turn side, as Brian spoke to in his prepared remarks and also in a question earlier in the queue, What we're seeing there is a little bit more volume-driven than cost-per-turn-driven, just given, you know, two factors, where our lease expirations fall in the year and the fact that we have a larger proportion of leases expiring in the third quarter. And then also, as Brian spoke to, you know, the fact that we're now making progress working through some of the COVID-affected households in the portfolio. But I would think the – I would – Think about it in context of, you know, average cost to turn a home that turns being about $1,000 or so.

Okay. Thank you. Thanks, John.

Our next question comes from the line of Jandy Luther with Golden Tax. Please proceed with your question.

Hi, this is Chandni Luthra from Goldman Sachs. Thank you for taking my question. I'd like to talk about sort of increasing interest in the SFR space as we think about institutional capital, as we think about home builders. Could you all talk about, you know, what sets you apart and how are your communities different as we think about sort of more institutional investors looking to get a bite at the apple? And what doesn't worry you as you think about this increasing competition?

Yes, it's Dave. That's a set of good questions there. There is definitely more capital flowing into the space, especially into the build-to-rent area. than in prior years. And that, to me, is a validation of what we are doing in Build to Rent. It is working, and people are looking to capitalize on that opportunity. But the opportunity that American Homes has, I believe, is very different than others. And that is because we're the only ones that are building and managing the same assets. And so we are building them with the thought or with the view that we will be the long-term owner. We are creating a better home for maintenance long-term, and that has a secondary benefit that it's a higher quality home and has more value in the value proposition for prospective residents. The ability... to have that feedback loop from Brian's operations group into Jack's development group and be able to make changes in a very, very quick manner really provides us a unique opportunity to differentiate the product that we're delivering. We were able to, early in the COVID pandemic period, change some of our floor plans to provide – work from home cubes and little areas that you could create for in-home offices and additional office space. And so that's a modification that our architects were able to implement very, very quickly, providing now a product that's a little different. We also look at building communities a little different maybe than others. Maybe some are copying what we're doing. And we're looking at the best of single-family living and the multifamily living with respect to the amenities that are offered. So we are building communities. With high-quality amenity centers, again, there is information. There's a video on our website that you can actually see what these amenity centers look like. And these communities are proving to be in very, very high demand. We are pre-leasing these communities at a rate greater than 50%. Fifty percent of the homes are leased prior to them being completed. That's the demand that we're seeing for these homes.

Got it. That's helpful, Kala. And as we think about the expense outlook for the year and sort of, you know, look at the implied fourth quarter guide, it appears that your expense outlook has a wide range. range in there for the fourth quarter, you know, about 400 plus bits or so. So could you talk about what the contours are there, you know, as we sort of are left with just two months into the year? What are the drivers?

Thank you. Morning, Johnny. It's Chris here. You know, I would remind you that The shape of expenses this year have largely been playing out consistent with what our expectations were at the start of the year, really being driven by the timing of the R&M and turn line, where we knew we were going to see some back-half weightedness this year, just, again, as I was mentioning a couple minutes ago, based on the timing of move-outs where lease expirations fall and and the fact that collection tools have now – and practices have returned to normal, and we're cycling through some of the COVID-affected households in the portfolio. And the timing of that is translating into, you know, what we're seeing and expecting in our R&M intern cost line. But, again, I would remind you, very consistent with the, you know, shape and timing that we're expecting at the start of the year. And the midpoint of our expense guidance has remained unchanged from the start of the year at 475. Got it.

Thank you for all the detail.

Sure. Thanks, Tony.

Our next question comes from the line of Keegan Carl with Barenburg. Please proceed with your question.

Hey, guys. Thanks for taking the questions. Just one for me, given where we're at time-wise. Please give us some more color on your ancillary revenue streams and how you plan to grow them going forward.

Hi, Keegan. This is Brian. Yeah, we're really pleased. Go ahead, Brian. Oh, sorry. Keegan, we're really pleased. You've seen some really nice increases in contribution from from other interns this year. We put a PEP program into place as one example, and we're continuing to roll that out through the program. If you look at it from a long-term perspective, we're very excited about the opportunities we're going to have for ancillary revenue on the communities, the way that we're going to connect those communities, smart home technology, some really nice features that the residents are looking forward to getting. So we see great opportunity in that as we continue to roll that into the new community development. Chris can speak to any other contribution that we're seeing today.

Brian, I think that's great. Keegan, the only thing that I would add is, you know, ancillary income via the feed line is contributing nicely. I mentioned this earlier in the Q&A, but for this year alone, we're expecting at the midpoint about 50 basis points of same home revenue contribution from that feed line. Now, part of that is to keep in mind the fact that we had late fees turned off for a couple of months last year, but a big contributor is that ancillary income that Brian's referring to, and we see a long runway for that ahead.

Great. Thanks, guys.

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

Hey, everyone. Just a question on land. So, you know, looking so far in 2021, the number of lots acquired has been about three times the number of deliveries. And so I'm curious, at what point we'll see those numbers look more equal? And is that really going to be just the deliveries going up? Or is there a chance that at some point the land purchases will start moving lower?

Hi, this is Jack. Thanks for that question, Brad. When we stop growing the program, you'll see it equal out. So, you know, today we're buying land for maybe the end of 2023, 2024, and 2025 deliveries. So we still expect to be growing at that point. And if we feel like 3,000, 4,000, 5,000 deliveries is the right number to flatten out at, then you'll see that that's how many we'll be buying a year.

OK. That's it for me. Thanks.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Dave Singlen, CEO, for closing remarks.

Thank you, Alex. Thank you for your time today. We are pleased with our operational and growth executions this year and remain excited and well-positioned for what lies ahead in 2022 and future years. Talk again next quarter. Have a good day.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.