American Homes 4 Rent

And welcome to the American Homes for Rent second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Nick Fromm, Senior Manager, Investor Relations for American Homes for Rent. Please go ahead, sir.

Good morning. Thank you for joining us for our second quarter 2022 earnings conference call. With me today are David Sinkland, Chief Executive Officer, Brian Smith, Chief Operating Officer, and Chris Lau, Chief Financial Officer. Please be advised that this call may include forward-looking statements. All statements other than statements of historical fact included in this conference call are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in our press releases and in our filings with the SEC. All forward-looking statements speak only as of today, August 5, 2022. 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 financial results, including gap and non-gap 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 Sinklin.

Thank you, Nick. Good morning, and thank you for joining us today. This quarter we continued delivering strong, consistent results with $0.38 core FFO per share, representing 16% year-over-year growth. This once again demonstrates the durable and consistent earnings power of the AMH platform. Before Brian and Chris dive into the quarter's results, I want to walk through three areas. First, a macro view of the housing market. Our growth programs and how they differentiate American Homes for Rent from other housing companies. And finally, how are we doing as a socially responsible company? Starting with some thoughts on the macro housing environment. First, it is estimated that our country is anywhere from three to five million housing units short. No small number. And this is not likely to get any better as the latest numbers from the U.S. Census Bureau marked the fourth consecutive monthly decline in single-family starts. Second, while single-family rentals were deemed the housing option of last resort 15 years ago, today they are desired as a premium housing option of choice. American Homes for Rent has been at the forefront of changing the narrative by providing high-quality homes in new communities with best-in-class amenities. Additionally, our professionally managed platform and services have elevated the resident experience. In the last year alone, our residents have gone on record in media outlets like CNBC, USA Today, and the Orlando Business Journal to voice their support of our rental homes, which gives them access to a simplified single-family lifestyle. Third, not only is single-family rental living more convenient, than home ownership today, it is also more affordable. And finally, the American Homes for Rent portfolio is located where Americans want to live. Our assets are strategically positioned in high quality of life markets, benefiting from migration patterns fueled by long-term demographic shifts and changing lifestyle preferences. All in, the current housing environment supports sustained single-family rental demand for the foreseeable future. and American Homes for Rent continues to be well positioned. Now turning to our growth programs. Our in-house development program is the backbone of our growth strategy and now more than ever is demonstrating the benefit we envisioned when we launched the program over five years ago. We continue to add high quality assets to our operating platform while at the same time retaining full control of the development process. This results in a consistent and predictable growth channel that we can rely on throughout all economic cycles. Further, our internal development program differentiates us in two ways when compared against other housing business models. First, we are the only public single-family rental owner and operator with a fully integrated development program. This means we do not depend exclusively on the MLS markets or third party home builders to drive external growth. Second, we build homes for our own portfolio. Therefore, we are not subject to for sale market risk like traditional home builders. And as a reminder on the economics, our internal development program delivers premium yields over our open market and national builder acquisition channels. and creates shareholder value, as we do not incur builder profits, which enables us to add homes at a significant discount to market value. Now turning to our investment strategy more broadly. Interest rates have risen, while home prices have yet to react in a meaningful way. In addition, these are uncertain times in the capital market. As such, we have temporarily scaled back one-off MLS transactions to allow the market time to recalibrate and stabilize. This will preserve dry powder for future investment, and when better opportunities become available, we'll be ready to act. This revision reflects our disciplined investment approach and highlights the competitive advantage of our three-pronged growth strategy. Lastly, I would like to touch on a few ways American Homes for Rent is focused on social responsibility. Through our differentiated development program and strategic investments, we are doing our part to help solve the critical housing shortage in America. With AMH development, we are not only adding high quality homes to the nation's housing stock, we are providing homes in high demand, safe communities with good schools where families want to live. Additionally, In the face of an ownership affordability crisis, we are providing an attractive rental solution for households across the country. Separately, we are also investing in partnerships with innovators at the intersection of technology and sustainability. Through our recent PropTech collaborations, we are funding initiatives to reduce carbon emissions in the industry and enhance the resident experience by developing new amenities. both of which will unlock the next era of housing. In closing, I am excited about these initiatives and optimistic about our future. The single-family rental demand tailwinds, combined with our differentiated AMH growth strategy, puts us in a great long-term position to remain the leader in residential housing. Now, Brian will provide an update on our operations. Brian?

Thank you, Dave. Our industry has evolved dramatically over the past decade. During that time, American Homes for Rent has transformed single-family rentals by offering a premium housing option with an unmatched level of convenience, service, and quality. And given all the points Dave mentioned, the demand for our homes continues to be outstanding. In the second quarter, we had over 285,000 inbound leasing inquiries. Nearly 50% of these were digital, highlighting the importance of our strong technology systems. At the house level, showings per rent-ready property are nearly double pre-pandemic levels. These robust metrics drove strong quarterly results that modestly outperformed our expectations. Same home average occupied days finished at 97.4%, and rental rate growth showed continued strength with new, renewal, and blended spreads of 14.2%, 7.4%, and 9.3% respectively. This led to same home core revenue growth of 9.4% for the quarter. Core operating expenses were in line with our original projections, and our expectation for expense growth rates to moderate for the balance of 2022 remains unchanged. All of this resulted in 10.2% same home core NOI growth representing consecutive quarters of double digit growth. Looking forward to the third quarter, July demand remained robust, driving same home average occupied days of 97.2%. New and renewal spreads were 13.2% and 8.1% respectively, resulting in blended rate growth of 9.7% for the month. As a reminder, Our original guidance contemplated elevated move outs around the middle of the year and included the workout of COVID impacted homes. July's results were directionally as expected, but we are seeing less seasonality than we originally anticipated. Therefore, we are increasing the midpoint of our same home core revenues guidance by 25 basis points to 8.5%. This translates into an increase in our same home core NOI guidance by 50 basis points to 10% at the midpoint. As I close, I would like to thank all our team members for their consistent execution. Our second quarter results and the outstanding demand for our homes sets us up for a strong finish to 2022. I will now turn the call over to Chris.

Thanks, Brian, and good morning, everyone. I'll cover three areas in my comments today. First, a brief review of our quarterly results Second, an update on our balance sheet and strategically revised capital plan for this year. And third, I'll close with a few comments around our updated 2022 guidance. Starting off with our operating results, once again, the AMH platform delivered another quarter of strong and consistent performance with a net income attributable to common shareholders of $56.6 million, or 16 cents per diluted share. On an FFO share and unit basis, we generated 38 cents of core FFO, representing 16% year-over-year growth, and 34 cents of adjusted FFO, representing 16.8% year-over-year growth. Driving our results was another quarter of strong operational execution, generating 10.2% same-home core NOI growth, as well as another quarter of consistent performance from our three-pronged external growth strategy. During the quarter, we added a total of 928 homes to our wholly owned portfolio and 214 homes to our joint venture portfolios, some of which included 529 homes delivered from our AMH development program. And on the disposition side, we sold 197 properties during the quarter, generating total net proceeds of approximately $61 million. Finally, during the quarter, we grew our owned and optioned land pipeline to over 15,000 lots, including lots that have been optioned through our various land banking relationships, which strategically enable us to continue growing our pipeline while also prudently managing land risk. Additionally, at the end of the quarter, we had approximately 7,000 additional lots undergoing due diligence and escrow. Next, I'd like to share a few updates around our balance sheet and revised 2022 capital plan. For starters, I'm very happy to share that we were recently upgraded by S&P to BBB with a stable outlook. is a great testament to our best-in-class balance sheet and continually improving credit profile, which is especially important during these uncertain times in the capital markets. In terms of other balance sheet updates, at the end of the quarter, our net debt, including preferred shares to adjusted EBITDA, was 6.2 times. Our $1.25 billion revolving credit facility was fully undrawn, and we had approximately $490 million of available forward equity shares that remain outstanding from our January equity offerings. Additionally, as we discussed on our last quarterly call, during the quarter, we closed our $900 million dual-trunch unsecured notes offering, as well as the redemption of our $155 million 5.78% Series F perpetual preferred shares. Now turning to our capital plan for the remainder of 2022, I'd like to share two updates with you. First, as Dave mentioned in his prepared remarks, we recently began moderating our traditional channel acquisition activity, and now expect to acquire between 1,500 and 1,900 total properties during full year 2022. This represents an estimated total AMH capital investment of approximately $700 million at the midpoint, and for context, represents a reduction of about 500 properties or $200 million from our previous full year expectations. And second, given recent market changes to our new issue cost of capital, we've also made the decision to not redeem our $115 million 5.78% Series G perpetual preferred shares at this time. As a reminder, our redemption option on this series of preferred shares has no expiration date. In total, these capital plan modifications have reduced our 2022 AMH capital needs to approximately $1.6 billion. Relative to our previous capital plan, which was already externally funded, this now strategically creates between $300 and $400 million of dry powder capital capacity. As Dave talked about, this will enable us to be highly opportunistic as we evaluate all forms of potentially emerging growth opportunities during this changing economic environment. Finally, I'd like to provide a quick update on our 2022 guidance, which was modestly revised in yesterday's earnings press release. Starting with the same home portfolio, as Brian discussed, we continue to experience robust levels of demand and now expect full-year leasing performance to be slightly ahead of our prior expectations. With that in mind, we've increased the midpoint of our full-year core revenues expectations by 25 basis points to 8.5%. Coupled with our unchanged core property operating expense outlook, we've increased the midpoint of our full-year core NOI growth expectations by 50 basis points to 10%. For context, the revisions to our same-home portfolio outlook represent approximately one penny of full-year core FFO benefits. However, we expect the near-term impact of our strategically reduced 2022 capital plan to have a similar core FFO impact in the opposite direction. With that in mind, our 2022 core FFO expectations have remained unchanged at $1.56 per share, which as a reminder, continues to represent SFR industry leading growth of 14.7%. And before we open the call to your questions, I wanted to quickly reiterate our bullishness as we head into the second half of 2022. Fundamentally imbalanced single-family supply and demand remains a tailwind at our back. Our internal development program continues to differentiate us with a pipeline of consistent and predictable external growth, and our balance sheet is incredibly well positioned to take advantage of potentially new emerging growth opportunities moving forward. 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 Nicholas Joseph with Citi. Please proceed with your question.

Thanks, and appreciate the comments on the updated capital plan. So as you think about the $300 and $400 million, I think you talked about being highly opportunistic and evaluating all forms of potentially emerging growth opportunities. Can you elaborate on that? And is there anything that you're considering outside of acquisitions or land purchases?

Yeah, good morning, Nick. It's Dave. Yeah, the first thing I just wanted want to mention is having three different acquisition channels allows us to be flexible in times like this these uncertain times so we still have a very strong growth channel going today in our development program delivering high quality assets and the yields are getting better and better as we see the input cost coming down in our construction With respect to other opportunities, as you know, the MLS markets and the national home builders, the inventories are growing. We're starting to see some price discovery happening, but we're still early in that process. So I'm pretty confident we will see the opportunity to get back into both of those acquisition channels later this year when The yields that those opportunities offer match up well with our cost of capital. With respect to other acquisition channels, it is a very interesting time. We are receiving many inbound telephone calls that we were not receiving previously, whether it's from owners of small portfolios or even national home builders with excess inventory. Where we are, though, in that process is we still have a gap in our bid-to-ask expectations between buyer and seller. So I see all of that coming together. One of the things that's interesting about this industry, I just want to rewind a little bit on history here. In 2011 and 2012, as we were in difficult economic times and a little bit of uncertain times, and maybe even called a housing recession back then. That's when we built our company. That's when we saw tremendous opportunities. I expect the same is going to occur. Going forward, I think we need to be patient. We need to be strategic. We need to be disciplined. And we're going to come out sometime next year with tremendous opportunities going forward.

Hey, Dave, it's Michael Bowman. So when you're talking about emerging growth opportunities, it sounds like it's much more the sources of buying homes rather than some extension of your business into related residential things or maybe a larger services angle. It really is how to get access to a variety of channels and homes. Is that fair or were you trying to put emerging growth opportunities in something else?

No, I think that's, Michael, that's the primary opportunity. I would never foreclose out other opportunities. But today, I believe that to be the primary opportunity, and I believe we're going to see some very, very attractive opportunities as we get through the price discovery phase of resetting and stabilizing the marketplaces.

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

Hey, everyone. Thanks. So can you talk about on the acquisitions, are you entirely out of the market on MLS and the home builder program right now? Or can you, if not, can you talk about the criteria for homes that are still meeting the hurdle? Is that just a higher cap rate target or being more selective on markets or something else?

Yeah, thanks. Thanks, Brett. We're not 100% out. We're still acquiring, but it is at a very significant or very reduced level, probably more than 80% reduction from what we were seeing earlier this year. It is based on what the attractive opportunities are. When you're underwriting... many homes and we're starting to see a growing list of opportunities on the MLS. The MLS has many more homes today available. The times that they're sitting there is much greater. We're starting to see opportunities. I would say we're sharpshooting right now. We are seeing some declines on average in the MLS. If you look in markets like mainly on the West maybe today, Seattle is down about 6%. Denver and Portland, probably about 2%. Austin, maybe 3%. But one-off homes here and there, we are finding opportunities. We are obviously buying at higher yields than we were. But the opportunity set today is still very, very limited compared to what it was first quarter of this year and And what we closed in the second quarter, a good majority of that is stuff that we put under contract late in the first quarter.

And Brad, it's Chris here. Just to frame that with a few capital dollars for you in terms of what that means on the year. As Dave mentioned, we're still buying. We're being very precise and selective in sharpshooting opportunities year to date through our acquisition channels. We've deployed, call it rounded, about $550 million of capital, assuming we stay at this pace for the balance of the year. And if nothing changes, expectations is that we'll deploy about $700 million of total capital through our acquisition channels, which means, you know, call it remaining about $150 million of capital deployed through our acquisition channels in the back half of the year.

Okay. I appreciate that, Collar. And then is the slowdown extending to the land side at all? And can you talk about what you've seen in terms of changes in land pricing?

Yeah, it has extended to the land side. Again, I think it will follow a very similar suit. Maybe even to a greater extent, we'll see better opportunities. Land owners that are looking to sell are still going through their price discovery no different than the MLS side. But one thing that's different on the land side is land is a commodity used primarily by people that are building homes. And we are seeing the national home builders significantly reduce their land acquisition as they are slowing down and seeing their sales orders slow down. So we've already seen some price reductions. We have been opportunistic in being able to get some very attractive deals so far. The volume of what we have done over the last couple of months is a little bit less than what we saw at the beginning of the year, but no different than the MLS. And what we are seeing is more opportunities coming our way. One thing I would add, to you on this is we have a number of relationships with land banking firms, and that's really good to have a lot of options when you're land banking. But the more important piece may be what we will see is the opportunities coming from them. They control a lot of land, and we are getting a lot of inbound calls from them about our interest in various parcels. that are in very, very attractive locations that are coming back to them from other parties. And so we're going to see some really good land opportunities going forward. I think it's going to follow the same suit of MLS. And it's, again, a story of needing to be patient and disciplined as you go through this time period.

Thank you. Our next question comes from the line of Brian Spahn with Evercore ISI. Please proceed with your question.

Hey, thank you. I was wondering if you could talk about affordability and, in particular, the impact that in-migration has had on your tenants' affordability screenings. Presumably the average income is up quite a bit, but are you seeing a wider range of incomes, or are there any concerning signs you're seeing just from an affordability standpoint, maybe for the previously in-place renters?

Thank you, Brian. This is Brian. The affordability piece, it's very interesting. If you take a look at our business, I think the affordability gap between renting and owning is at its greatest, at least that I've seen. It's about 17% cheaper or less expensive to rent right now in our markets than it is to buy. That being said, migration patterns, and we're tracking those very carefully, as you know, paying very close attention to our applicants' incomes. The best metric that I can give you for this year is through the first six months, our applicant incomes have risen about 9% year over year. And the rents that they're applying for have risen a little bit less than 8%. So not only are we maintaining that really strong income to rent ratio, it's actually improved a little bit. And I think part of that's due to the migration patterns, the strong out migration from California and the Northeast. The other part of it is due to just really high demand for our product and an appreciation of the value proposition.

Got it. Thanks, Brian. And I guess just as it relates to bad debt in the quarter, it ticked down nicely, but maybe could you just touch on expectations for that in the back half of the year and what impact, if any, you expect from the reduction of the rental assistance payments?

Yeah, sure. Morning, Brian. Chris here. You know, look, taking a step back, generally speaking, I would say consistent with our expectations that we talked about last quarter and at the start of the year, collection trends overall are holding nice and strong. In fact, we actually saw a couple of markets that received a few catch-up payments this quarter, resulting in second quarter same-home bad debt that landed at that 90 basis points. In reference to rental assistance, as expected, as compared to call it the second half of 2021, we've continued to see a reduction in rental assistance payments. But that's really been paralleled by just a broader improving collections landscape. So as we head into the back half of this year, I'm not sure we'll see some of those catch-up payments we saw like this quarter. But we definitely expect collections to remain strong and likely expect bad debt to run in the 1% to maybe low 1% area, which is what is contemplated in guidance.

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

Yeah. Hey, guys. Appreciate some of those comments on the land bank and how you're starting to see some opportunities there. I think last time we spoke, you mentioned that there were potentially more partnerships on that side. What's the latest on those conversations?

Yeah. We're in discussions with between five and six parties that are very, very interested and have done deals with a few of them. Not all six, but those discussions, as I said earlier, There's opportunities. They each have a little bit different criteria. But all of them are in discussions with us now on some of their land opportunities. So it's going to be a good partnership both ways. We're going to be able to get some high-quality land that's going to help them out. And that's going to help us out indirectly in having better terms and better relationships with our land banking parties.

Got it. And then one quick one, what percent of your residents sign leases longer than one year? I was thinking like two year leases in particular.

Hi Josh, it's Brian. The lease term on initial lease is almost all, in all cases, one year. The extended lease terms, I think it runs at about 10% of our portfolio. are two-year lease renewal offers to establish residents who have really been asking for it. So I would think about it more in terms of renewal extension rather than an initial lease term.

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

Hey, guys. Good morning to you. I was hoping you could speak to the yield on the development projects breaking ground today and what the rent growth and construction cost embedded within those assumptions are. Thanks.

Yeah. So instead of talking about exactly what the yields are today, I will tell you that our yield expectations continue to move as we evaluate our cost of capital on a monthly basis. So there's a relationship there. But the second part of your question I think is very important. That's where the cost of construction is going. Today we have seen the early components of the construction lifecycle, the foundation work, the concrete that goes into foundations, the framing, the lumber. All of those costs are coming down. The costs from drywall on are still pretty steady. But the reason for that is the home builders are still completing homes that they had started prior to March. And so the earlier trade that we indicated, they are through that part of the life cycle, and we are seeing the favorability of lower demand on those vendors resulting in favorable pricing. To date, we are seeing about 5% favorable pricing. And those components, with maybe the exception of lumber, which is much more significant, as you may recall, we were in the mid-thousands of dollars per thousand board feet, $1,500, $1,600 for a thousand board feet. We are back now down to about $500 per thousand board feet. The other costs are down about 5%. And I would expect they may fall a little bit more. Put all of this into context. A 5% reduction in the vertical construction cost results in a 20 basis point improvement in our yields. And that is over and above any improvement in yields that you would get from rising rental rates. So we are seeing some very, very favorable economics right now in our development program.

Okay. I understand where you're the context you're providing. I was hoping to get a bit more quantification of that. The other question I wanted to ask was on expenses. Brian, you expected some relief in the back half of the year. Maybe can you talk to some of the bigger pieces of what you've seen in this quarter, where you expect to see the release, and then more broadly, real estate taxes. Are we early innings, mid-innings? When do we get to peak headwinds on the real estate taxes? Thanks.

Thanks, and I'll start, and I think Chris can finish with commentary on the tax side. Expenses are largely playing out as we expected this year. The first half, we expected them to be maybe more front-weighted, at least in terms of the increases due to the comp set and our work through some of the COVID-related households. But it's playing out as we expected. There's an inflationary component in there You know, specifically with the property management line item, you can see the timing effect through the first six months. It's about 6.6% over a comparable period last year. And that's right in line with our expectations.

And then, Hendale, Chris here, just to hop in on property taxes. I can start with just a general update on where we're at for this year. Today, we're about halfway through the assessment calendar. We've received assessed values on a little over 50% of the portfolio at this point. And so far, we've seen a couple of offsetting puts and takes. A couple of data points, for example, Georgia came in a little bit higher than what our original expectations were, but then that was largely offset by some slightly better than expected news in a couple of other states. So with that said, we still have about 50% of our assessments left to go for this year. And then as I'm sure you probably recall, We don't receive news on updated tax rates until towards the end of the year. But at this point, we're really not seeing anything that materially changes our full year view of 5% property tax growth. And then to your question around kind of the crystal ball of where we are from a broader property tax cycle, it's really too early to speculate. But, you know, I think our view in general is that there are certain parts of the portfolio in the country where we're likely to see, you know, some slowdown in home price appreciation that will, you know, eventually trickle its way through property taxes as well. Exactly the timing and the lag effect of that is hard to predict, but our expectation is that, you know, that will be on the horizon.

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

Good morning, everyone. Thanks for taking the question. Dave, I just wanted to touch on the emerging growth opportunities and particularly the portfolio inbound calls that you've had. Can you share a range of cap rate expectations for where you think those portfolios would trade and how those cap rates have trended over the last year? Yeah.

You know, in many situations, the inbound telephone calls today still have expectations of pricing that you would have seen in March. And so people are realizing in my mind that the market's changing and they are seeing if they can still get a deal done based on the old pricing. So they're still on the assembled portfolios in many cases, still some time necessary to get those repriced into the more, you know, the current pricing arena. with the current interest rates, et cetera. So, you know, that is the good part of that is that people are starting to call. So there is some, you know, some desire to sell, but they, the pricing that we are seeing today is still March pricing and that needs to be adjusted. So I would say that the bid ask is still too wide to really talk about that the expectations are market. So the numbers are not that relevant until we actually start having transactions trade. And we haven't seen that yet. And I'm sorry, Alan, what was the second part of your question?

Just where cap rates have trended. But your commentary on March was fair enough. I appreciate that. Yeah. Okay. Maybe a second question for me. Chris or Brian, CapEx is starting to trend towards 20% year-to-date. Just wondering if you could provide some additional commentary on what's driving that CapEx increase this year that we're seeing for your portfolio.

Thanks, Alan. This is Brian. You're seeing a couple of different impacts on the increase that we saw in the quarter. First, there is the impact of those COVID-related move-outs. Those turns are more costly, especially on the CapEx side as we work through that cohort. And then there's general inflation, too, with that line item. So it is slightly elevated. But again, we're hoping to get some relief as we work through the COVID move outs.

And then, Alan, it's Chris here. I would just also add, Part of what you're seeing, too, has a little bit to do with how the timing of our 2021 comps fell, if you go back and look at last year by quarter. And there's a little bit of a different picture, first half versus second half of 21, really with kind of the defining line being our collection practices beginning to return back to normal. And so as we head into the back half of 22 and we're comping against the second half of 21 comps, Our expectation is that that Catholic's growth rate will moderate a touch into the back half of this year.

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

Hey, guys. Good morning out there, and thanks for taking the question. Just wanted to ask about kind of expectations built into the guide for lease growth, you know, second half of the year and then kind of where we might kind of finish 22 and enter 23. You know, whether it's new or blend, I think it would be helpful just to kind of understand how you guys are thinking about, you know, lease growth, you know, over the next little while.

Yeah.

Chris here. Oh, go ahead, Chris.

Yeah, I can frame it a touch, and then Brian can share some more details if helpful. As we mentioned in our prepared remarks, we're actually beginning to see a touch less seasonality in the back half or coming into the back half of this year than was originally contemplated in our prior guidance. And so with that, that's giving us the opportunity to lean in a little bit more into rate growth as we're coming into the back half of the year. So just to kind of help you with the components, Generally speaking, I would say on a full year basis, renewals we see being in the high sevens or so. That kind of implies about 80% area in the back half of the year. New leases we see in the double digit area on a full year basis. So that's low double digits to high singles in the back half of the year. But overall blending to a blended spread on a full year basis in the mid eights. And that's up about a quarter point from our prior expectation, which was in the low eights. And then you can see that pull through into the revenue guide and then couple that with, again, our unchanged expense outlook on a full year basis. And that translates into the revised 10% NOI growth outlook on a full year basis.

That's really helpful, guys. Thanks. And just along similar lines, are you able to kind of remind us where your loss to lease is currently?

Yeah, Adam, this is Brian. Our loss to lease still is in the low double digits that we talked about last quarter. We're seeing some really nice kind of sequential improvement on the renewal side, which we find very encouraging. You can see the results in July where were quite positive, but I would think of it in the low double digits.

Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Thank you. Can you elaborate on what you mean when you say being less seasonality in July than you expected? Is that on a turn of or demand? And why do you think that's occurring?

Thank you, John. This is Brian. There are a couple of components to seasonality, at least when we talk about it. One, there's just the distribution of the move-outs. So we have more move-outs during the peak summer season, which adds a little bit to the vacancy pressure because it does take time to turn and release those properties. That's been relatively consistent and as expected. The other piece of seasonality has to do with the demand backdrop. And traditionally, we've seen a little bit of a slower drop-off as you get towards the back half of summer. We're not seeing that right now. The demand has remained extremely strong. We look at a bunch of different demand indicators, and they're all pointing towards continued strength. I talked about it in my prepared remarks, about 285,000 inbound leasing inquiries last quarter. It's a fantastic volume on that side. Website Users are up 28% year over year. Web sessions are up 30%. Our API leads from the aggregators into our system and through our website are way up as well. And that's coupled with the migration patterns, which continue to hold. So we're seeing outstanding demand, which is really causing the results of the seasonality to be muted.

That's a great color. Thank you. And following up on the recurring CapEx, which has been increasing, is there a way to quantify the difference between CapEx on your developed versus purchased homes?

Yeah, I think if you were in the early stages of getting the CapEx and expense results on the newly developed homes, but keep in mind those are new homes, so the CapEx burden in the initial years is very, very light. And what we're seeing on the limited number of turns that we've processed is that it's right in line with our expectations. Those are brand new homes built to be durable, and that's how it's playing out in the limited experience we've had.

Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Hi. Thank you for taking my questions. I look forward to continuing a relationship and, you know, glad to be here. First one, you know, I was hoping you could give maybe, Brian, a bigger picture of how you go about training and maintaining best practices with regional managers because those are the renter or people facing parts of the business and such a crucial part in maintaining high brand standard and things along those lines, particularly when you have those sort of sister markets that are proximate to markets where you have larger exposures. If you could just share how you guys go about doing that, obviously in the era we live in now, Yelp, other things are important. So I'd love to get your thoughts on that.

Sure. Thank you, Neil. The center of our business is the high-quality resident experience. And one of the key components to that is the way that we communicate with our residents and the level of personal customer service that we provide. That's what our training is based on. We have very specific training modules, incentive programs, and we're seeking out the type of people who can provide excellent customer service. Our technology system is allowing us to manage this at scale. You talked about the sister markets. Despite the fact that we might not have a property manager, for example, living in that city, they're still assigned kind of on a hub-and-spoke system, so there's a very personalized care whether you're close to an office or not. But our training focuses on the way that we communicate, the frequency, setting expectations. We talk about it from the very initial contact on the leasing side all the way through the move-in and at any of the customer contact points. And we're monitoring that as a company by having a pretty extensive internal survey system that surveys the residents at each of these contact points. And we follow closely on feedback We're also paying very close attention to the Google scores, which is a pretty good indicator of how well we're administering that program. And we're taking all that feedback and reincorporating it into our training programs. So it's a pretty robust loop with good feedback, very clear objectives for our team members, and I think we're doing a really good job of administering a high level of customer service.

Neil, it's Dave. Let me just add a couple of things. One is training is not a one-time thing. And the way we are organized is below the regional managers, we have districts. So we have many, many districts. And each district has a monthly training module that is sent to the district. They go through it, and it's all about role playing. It's all about, as Brian indicated, improving and making sure that we maintain high quality resident experiences. And then the feedback loop is very important with all the surveys. We are in the process of trying to develop for ourselves a net promoter score, very similar to what you would see in other industries. This industry is new, but we are working on net promoter scores for us as well as our peers.

I really appreciate all that insight. Thank you. The other one for me is just on development. You talked a lot about that today, particularly with some potential upside. It sounds like you could or are seeing with land bank providers and just parcels that have fallen through. Can you talk about what you expect your sort of or what level of deliveries do you see kind of by 2024? I think before you talked about trying to reach a five-year or something like that to complete the 20,000 or so parcels, including escrow. I think it would be helpful for modeling and just accretion to understand how you see that program ramping again over the next 12, 24 months. Yeah. Yeah.

You know, Neil, in the long term, you're absolutely right. It continues to ramp up and it continues to ramp up each and every year over the prior year based on the land availability of what we really acquired three to five years prior. The last three years as we've come out of our test phase of the building program, we've focused significantly on land acquisitions. We own or control more than 20,000 lots. It's closer to 22,000 lots. That's going to be the fuel for future years. We're in 15 markets today that we are building. The infrastructure is in place that we can do 4,000 and 5,000 homes with little additions other than some construction superintendents. And The land is coming through the pipeline as expected on its horizontal and infrastructure improvements. And while 2023 will still be a year that we will be ramping up, as we get into 2024, as you indicate, we're going to start seeing numbers that are more akin to where our purchasing levels are. And so 4,000 and 5,000 homes should be the expectations in those outer years.

Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Hi. Maybe just following up on that last question. I'm not sure if the answer was buried in there. Can you remind us the time it takes after you have new locks added to the time it takes to be delivered? So to the extent that you're purchasing more locks from land banking firms now when those get delivered?

Yeah. Linda, it's That answer is conditioned on a couple of things, and I'll give you the general rule. Generally, if you're buying raw land, you need to improve that land, put the infrastructure, the roads, the sewers, all the utilities in. And the process of going through the planning department and getting your permits and all of your inspections, that can take a couple of years, two to three years, depending on which marketplace you're in. If you're fortunate enough to be able to buy the property that's already been horizontally developed, you get to skip that phase. When you get to the phase of building homes, you can build homes anywhere from 120 days to 150 days on a typical average. We will build a community out over an extended period of time. So we may have the land ready to go, and we will build at a pace of 6 to 12 homes per month. And it's really determined and guided by property management more than it is by the development team. homes at a cadence that we feel we can absorb without having any impact to rental rates or occupancy going forward. So we do it at a pretty consistent cadence. If you have a community of 120 homes and you're doing 10 a month, it's going to take you a year to deliver all of them. And that's not because you can't build faster, you can't get permits, you can't get supplies. It's due to being disciplined in how you are delivering those homes for operational reasons. So it's a four- to five-year process before you start delivering homes. And besides the community, it may stretch it out a couple more years to get them all delivered.

For that detailed response. And then just on the regulatory environment, are you seeing any notable changes in any specific markets?

No, I would say the regulatory market is kind of where it was last quarter when we talked. It really hasn't changed. It hasn't improved. It hasn't gotten worse. There's still a lot of inquiry, a lot of attention being paid to single-family rentals. When we got into this business 10 years ago, we knew the regulatory piece was going to be a significant piece of this industry. It's an industry that we are providing a necessity to every American, and so it's going to be in a high visibility area. For us, it's noise around the edges. We are not in the middle of any significant investigations and You know, it's something that we deal with from time to time.

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

Hi, thank you all. Dave, I just want to go back to a couple of comments you made earlier and tie them together. On one hand, you've got what you believe to be a three or four or five million unit shortfall in housing. Rent growth is still very strong. Your cost of capital is probably lower than all of your peers or most of your peers. But yet you're pulling back on acquisitions because you think there's going to be an opportunity. And you drew a parallel to last cycle. And that, to me, implies that you think home prices are going to go down a lot. So I'm trying to understand how those two things can potentially coexist.

Yeah, Dennis, I think they – two comments that I have out there actually are consistent with one another. We did not talk about the fact that we are slowing down our development program or our acquisition program in the long term. In fact, I have expectations and hopes that it will improve and get larger. What we're talking about is price discovery. And price discovery and resetting of prices on an upward market are immediate. And You have a bidding war and you get to a place where you know where the new market is. On the downside, when rates are going up and prices are coming down, it takes time. And that is the period of time or period that we are in. We are seeing inventories expand. We are seeing the length of time that homes are on the market. We are seeing national home builders inventories increased. And we've been seeing this over the last two to three months. It's only been in the last two to three weeks we have actually seen any price declines. We have seen price declines, as I think I previously indicated, in the MLS markets. Mainly on the West Coast is where those price declines are occurring. In Seattle, Denver, and Portland, and Austin, it's 2% to 5%, 2% to 10%. We're just starting to see the price declines in the national home builder offerings. Again, it's driven more by the West Coast, but not entirely. And we're seeing some of those declines in the 10 to 15% in markets like Seattle and Denver. And so the statement of slowing down acquisitions is not a statement that we don't believe in acquisitions, we do. It is a statement that we need to be patient and allow the market to reset. And those opportunities will be available to us as we move forward. It's all about the fact that capital costs for us, as well as for the individual homeowner, has changed. And that's got to get reflected in the marketplace. And it's getting there, but it's not there yet.

Yeah, and I think I would agree with all of that, Dave, actually, and I think you're right in that values are probably going down and trends are likely to get worse before they get better. I think where I'm struggling is if there were three or four or five million households waiting for product on the sidelines, that price discovery wouldn't have to happen.

Well, you can have people on the sidelines, but they also have to be able to afford the offerings. And when you think about interest rates rising and you go with a home mortgage and you go from 3% to 5.5%, it's a significant increase in the payment, reducing affordability. And this is not about demand. I mean, I'll give you a comment on demand in a second. But it's all about the pricing of the homes based on affordability to me. You know, you mentioned 10 years ago the concept of recession, at least a housing recession back then. And that's when we built this company, when we had tremendous opportunities. There was dislocation in the housing market. I think you're going to see dislocation in this housing market as well, giving us tremendous opportunities. It will be driven by different factors. But when I look at demand, I guess it's demand on two sides. Demand for rentals, you know, demand for rentals has always been strong. You know, over 40 years, I do not know of a year in those 40 years where there has been a decline in rental rates on a national basis. And occupancy has always been strong in the 90s. We came through a pandemic very, very strong. Affordability, as Brian indicated today, is tilted towards the single-family rentals. And if you look at our platform and you look at American Homes, it's a diversified platform. It mirrors much better to a national average, but it's also better than the national average because we are in the markets where the migration trends, where the population is growing, where the Employment is growing. It's where America wants to live. And we're going to see very, very strong demand. And that's the long-term view of this opportunity. All we are talking about right now is a very short period of time to allow the market to recalibrate. And as it recalibrates, all the demand functions that you talk about, Dennis, are going to play in and it's going to facilitate a very, very strong growth for this industry, for American Homes for Rent in the long term. But we're in just a reset period of time, a very short temporary thing, and it's got nothing to do with the long-term future. The long-term future is fantastic in this industry.

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

Hi, guys. I just wanted to go back to the renewal spreads. I mean, you guys disclosed in May, I mean, with the June update, that May quarter's date renewals were 7.5 and then ended up at 7.4, which kind of suggests there was some sort of deceleration in June before it going back up to 8.1. Just trying to understand your comment about seasonality, the changes on how you think about that. and kind of readjusting your expectations of renewal spreads to the high sevens?

Hi, Sam. This is Brian. You know, I wish we could be as nimble as you're suggesting with renewals, but keep in mind that those renewals are priced way in advance, in excess of three months out. I think what you're seeing on the adjustment in Q2 is probably just a market mix. You know, it's a very slight adjustment. I'd point your attention more towards our results for July and the continued trend, like I mentioned earlier, six consecutive quarters prior to Q2, which was relatively flat to Q1, of improvement on the renewal side, and then acceleration into July. I think the seasonality piece plays in more so to the releasing spreads. But we're really excited about the momentum we have on renewals and expect to continue that through the end of the year.

Got it, got it. Okay, that's helpful color. And then I guess, have you guys noticed any changes in the characteristics of the tenants moving out of the properties or has it stayed pretty much the same?

Yeah, Sam, I think it's pretty consistent to what we talked about last quarter. We track their reasons for move out. As we've talked about in the past, the biggest reason for move out is to buy a home. We've seen a slight decrease there, but we would expect that to continue to decline as the affordability gap changes. So we're just starting to see the effects of that, but I would expect the percentage of moving out to buy a home to decrease throughout the back half of the year.

Thank you. Our next question comes from the line of Austin Werschmitt with KeyBank Capital Markets. Please proceed with your question.

Great. Thank you. Just want to go back to sort of prioritizing capital commitments and just thinking about the extent, you know, capital markets remain volatile. I guess I'm curious how or if that could impact the pace of, you know, the development deliveries ramping or if you're kind of pacing that ramp with, you know, your ability to self-fund. development.

Yeah, this is Dave Austin. Yeah, we self-fund our development from day one. And one of the things that you may recall is earlier this year, we raised just short of $1.8 billion between equity and debt offerings. Much of that is still available on an equity-forward In addition, we have liquidity provisions through a $1.25 billion line of credit. So we have the ability to manage through short-term liquidity times. Our development program today is – I have no expectations that deliveries are going to be anything different than what we talked about at the beginning of the year. And that's approximately 2,200 homes, 2,250 homes between our balance sheet and those that are designated to go into joint ventures that we had set up a couple of years ago. But we do have the ability to do it and finish out what we have in our pipeline. One of the other pieces here is, Chris did go through a couple of facts. We've seen an improvement in our credit rating. The debt markets are tough today. I don't disagree with that. But we have the capacity to do that. We have the capacity to do equity and do it accretively today. But we also have good relationships, as evidenced by the fact we have a couple of joint ventures. And those always remain a possibility, an option, decide to go that route as well. So we have many avenues in which we can fund future growth. The success of future growth is being able to do it accretively and for the benefit of all the investors involved. And I see that being available to us for many, many years to come.

That's really helpful. And then you guys have talked in the past about the opportunity to scale up the business It certainly seems to be a focal point with some of the excess dry powder and focus on acquisitions. But I'm curious what drove the above average increase in property management expense this quarter, both year over year and as a percentage of total revenue.

Yeah, Austin, I think it's more of a timing issue. If you look at the year-to-date increase in property management expenses, they're about 6.6%. although the second quarter was 15.2. There's a little bit of a timing aspect there, a little bit of wage inflation to get to the 6.6. And then the good news is our property management teams are fully staffed for the peak busy season this year. We're in a really good position to continue to execute towards the back half of the year. Hey, Austin, it's Dave.

Let me just add one thing that might help you there. If you look at 2021, this is a story about 2021 more than 2022. The timing of our expenses is a little skewed to the back half of the year. Recall last year, we recognized the fact that salary inflation and salary adjustments were moving in the middle of the year. We made a decision to increase salaries in August of last year. Those are now rolling through and being comped against the first and second quarter of 2021 where they were not in place. But we will have much better comps going forward in Q3 and Q4 as a result.

Thank you. Our next question comes from the line of Tony Luthra with Goldman Sachs. Please proceed with your question.

Hi, thank you for taking my question. So looking out to the next 12 to 24 months, how should we think about margins as you begin to deliver homes on land that was purchased, say, a year ago versus land that was acquired three to five years ago? And therefore, perhaps the cost consideration that is higher, plus when you couple that with the fact that there's potentially some moderation in rents in a tougher economic setup. So how should we think about margins going ahead?

Yeah. John, it's Dave. You're 100% right. The margins on our development home are much more favorable than the margins of similar properties in the same markets. We build our homes with the thought or the design to reduce our maintenance costs. We have higher quality plumbing fixtures in these homes. We build them with durable flooring, durable patios, and all of that is going to facilitate two things. One is lower repairs and maintenance, and the second is quicker turn times, both beneficial to operations. So as we see more and more of these homes end up in our same home portfolio, as they've seasoned, they take a year to season. We need to have a year of operations to in the comp period before they can move into same home. So today we have very few in the same home. We are delivering right now 2,000 homes or so per year against our portfolio of 65,000 homes. It's still a small percentage, but that will, as time moves on, have a benefit to our margins.

Got it. If I could ask my second question about the land banking JV opportunities that you talk about. As you're evaluating these partners, is there anything different in terms of the geography or perhaps micro locations or the price point that you'd be willing to target with these newer partners down the line? Thank you.

The land banking is more a means to de-risk land on your balance sheet. At the end of the day, these homes are going to come into our inventory and be operating assets on American Homes' balance sheet. So we underwrite these opportunities no different than we underwrite homes that are presently on our balance sheet. This is basically a technique or a means to fund the land acquisitions and de-risk the company in doing so. That's what land banking is. It's more that than it is that we are going to go into different markets. If we're going to do the different markets, and I'm not saying we're doing this, but it would be a straight-up joint venture with a partner. Land banking is not that.

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning. It's a question on, I guess, longer-term rent growth. It sounds like you're going to exit the year with renewal growth in the 7%, 8% range, which is great. I'm curious about next year. You're not seeing kind of the step down in growth that some of the multifamily companies are seeing. So is it reasonable to expect to see that kind of renewal growth to persist into next year Or should we moderate our expectations given kind of the overall macroeconomic environment?

Hi, Anthony. This is Brian. That's a great question. I can speak to the current demand environment and our expectations going forward. And as I talked about before, the demand backdrop is fantastic. I don't see any supply relief. I don't see any new supply coming into the market that's really going to eat into that. So I anticipate having pricing power through the balance of this year. And my expectations operationally are to be able to enter next year in a position of strength, strong occupancy, good momentum to take advantage of the spring leasing season when it arrives. So everything's really lined up nicely to have continued growth.

Great. That's it for me. Thank you. Thanks, Anthony.

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

Thank you very much. In the last couple weeks with the mortgage rate having dipped below 5%, have you seen any change in the market in terms of cadence of closings, in terms of pricing, home prices?

No, Jade, no, we haven't. The inventories are still extended on MLS. The time on market remains extended from what we saw in March. We're starting to see some of these statistics getting back to more normalized levels, but then the frenzy that we had in March But that's in part due to the fact that while there may be a little bit more affordability today than there was two weeks ago, affordability is nowhere where it was in March of this year or even towards the latter part of last year, even with a little pullback. So we still have a fair amount of price discovery in time. to get the markets to stabilize, but they're volatile. There's no doubt about it. And, you know, you see them go up and you do see them come down, but we're still significantly higher than we were in March.

And a follow on to Dennis's question about the outlook in terms of a clearing event or price discovery, are you just waiting for prices to stabilize or is it that you are

waiting you're solving for a cap rate that's higher than you've underwritten in the past or targeted in the past yeah i would say it's a little bit of both um quite honestly you know with our cost of capital a little higher you know for us to have the same accretive benefits in our growth program that we enjoyed last year we're going to need to see the prices at a slightly, or the yields at a slightly higher level. And you can get there either through rent growth or through price declines. It's going to be a combination of the two. So, you know, for us to be, you know, doing the right thing for, you know, you and our shareholders, yeah, it is prudent to be disciplined and to be patient and wait for those numbers to come into line. And the fact that it takes time is just part of the process. It doesn't mean that the opportunities won't be there. They will be there. And they will be there in the good markets that we operate in.

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

Hey, guys. Just a couple quick follow-ups. Brian, I was hoping we could first get your perspective on, did you expect your low double-digit loss to increase, decrease, or stay the same over the reign of the year? And then I'm not sure if I missed it earlier, but did you provide an estimate of your 2023 earnings? Thanks.

I'm sorry, Hendo, I didn't hear it. 2023 what? Earnings. Oh, yeah. Okay. So, loss to lease, as we talked about earlier, still estimated to be in the low double digits. I would expect through the remainder of the year to have it remain the same if we don't need to do it a little bit. So, it might come down just a hair towards the back half of the year. because of our strength in our renewal rates. If you want to talk about the earn-in, what's in place right now in the next year, I'd probably think about it in the 4% to 5% range as we get into 2023. Thank you.

This concludes today's Q&A session. I'd like to turn the floor back to Mr. Singleton for any final comments.

Thank you, Operator, and thank you to all of you for your time today. As you heard, I'm excited and optimistic about our future, and with the single-family rental demand tailwinds combined with our growth programs, it's going to put us in a great position for long-term, strong future results. With that, we will talk to you again next quarter, and have a good day. Bye-bye.

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