Q3 2019 Earnings Call
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Later, we will conduct a question and answer session and instructions will follow at that time.
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Thank you Anthony good morning, and thanks for joining us for front yard third quarter 2019 earnings Conference call. Joining me on todays call in Georgia, Allison Chief Executive Officer, mild Adam Senior Vice President of property operation and Robin Lowe Chief Financial Officer.
I'd like to guide everyone's in third quarter earnings Slide presentation available, what really investors section of our side as Bret yard residential dotcom. These slides the created to accompany our remarks can provide additional information investors may find useful I'd also like to inform you that our comments today may contain.
Any forward looking statements relating to the future performance of our business. The Companys financial result capital allocation and other non steroidal information. He may involve risks and uncertainties that could cause the company's actual results could differ materially from those stocks in the forward looking statement.
We just got some of these risks and potential differences in our earnings release.
Well the company's filings with the FCC, including of course tends to be filed today.
We may also discuss certain non-GAAP financial measures you can find additional information on these measures, including a reconciliation to GAAP within all earnings release and earnings presentation located in the Investor section of our website I'll now turn the call over the doors, Alison Chief Executive Officer, Doris guys that we feel good morning ever.
We won.
This year than the one of the most ambitious here in our company's history reorganizing corporate governance, making changes to our board 'cause internalizing operations of 15000, though.
It's only been six month since many of these initiatives have been in place, but I'm proud to say this management team has been working nonstop to maximize shareholder value and prove the value of the company.
The third quarter has two important story.
First as organization. The second is how we're positioning for our operational performance in 2020.
On the organizational front, we've had many great successes this year.
We reorganized the management agreement between the manager and the right.
Restructured the board formed a strategic review committee and hired an advisor Deutsche Bank to explore our strategic options and ways to enhance our franchise value.
On the operational front as we discussed on last quarter's call. We completed the transition of all externally manage homes to our own platform and we discuss the opportunities and challenges that represented.
Since we last spoke our team has invested a material amount of time energy and money to address the problems that arose from a rapid transformation the internal property management.
We have been thoughtful in our approach to ensure that we implement long term solutions that enable us to operate and grow effectively the good news is that there's many improvements underway in our operations and many green shoots sprouting in the business. The downside is that on the short term some of the metrics we used to judge ourselves.
I've taken a temporary step backwards.
Occupancy rent increases and turnover metrics are again strong other measures such as cash the cash times collections and other income a rapidly improving.
The spending more to get unit turns on the control, which will accelerate leasing and get occupancy up obviously her and align AFFO.
This is only the second full quarter that we have internally managed 15000 homes and things are starting to turn around we're about halfway through this process and remains very optimistic that the results are coming and will be worth the investment. We continue to believe that the workforce housing single family rental business is as robust.
As ever and front yard residential is extremely well position to take advantage of this opportunity more and more Americans are choosing to win either because they can't get mortgage credit they want to remain mobile where they simply choose not to own workforce housing is the fastest growing segment of the rental market.
While the new supply of homes is not keeping up the demand for our products and services continues to grow.
As I said, we hit some challenges as we transition 12000 homes onto our platform. We identified these challenges and attack.
Let me now turn things over to model to walk through the incredible work he and his team are doing as we write the ship mile. Thank you George and good morning, everyone. This has been an extremely productive quarter. We've made important stride on all of our key initiatives to build an efficient scalable platform to maximize the law.
Long term performance of our portfolio.
As a reminder.
During our last earnings call. We discuss brief primary operating challenges that began to manifest at the end of Q2 that continue to impact our results for Q3.
For a long days to re resident due to excess homes in turn.
Which adversely impacted occupancy levels elevated repairs and maintenance expense and collection rates below our expectation.
Those issues were particularly pronounced in Texas and Tennessee.
I am pleased to report significant progress in each of these areas.
And I'm excited about the trajectory of several key additional operational metrics that started to show substantial progress by the end of the third quarter was even more pronounced in October as outlined on slide six of our presentation.
For unit turns and leasing we experienced a backlog in Q2 due to the transition of an elevated number of vacant homes from third party managers.
And turnover of key field based personnel and Texas and the Midwest.
This led to sub par leasing times in Q2.
Hurt our occupancy at June 30 and into July Q3.
During the quarter, we significantly lowered the percentage of homes in units turn down from 4.5% in mid July to to 52.6% as of October 30, Onest, which should benefit our rental revenues in the coming quarters.
However, this effort how to short term negative impact on our turn excess as an increase in the volume of turn completions represented additional expense in Q3 beyond our normal turnover costs.
We made a strategic decision to commit to this initiative.
Stabilized occupancy of our portfolio this effort.
And the team's hard work propelled our leasing efforts in August and September of Q3 ended October of Q4.
Resulting in an increase in occupancy from 93.8% of July 31 to 94.3 by September Thirtyth and 94.5 October 30, Onest 2019.
These gains were driven largely by continued strong performance in Atlanta, our largest market.
Which grew 80 basis points to 97.1%. Additionally.
We achieved very strong gains in occupancy in two of our key markets, including our second largest market Memphis.
Which grew 310 basis points to 93.9% and Indianapolis, our largest Midwest market, which grew 280 basis points Tonight 3.7 years.
While work remains in this area in Texas, Nashville, and other Midwest cities, we have the lease ready inventory available to can continue our progress toward our targeted stabilized occupancy levels in these markets.
While we grew our occupancy.
We did not sacrifice rental rate growth.
Demonstrating the high demand for our homes.
Our blended rental growth rate of 3.9%. During Q3 remains strong and was comprised of renewal rent growth of 4.2% and release rent growth of 3.5%.
These metrics were in line with or in excess of our public peer in almost every market where we overlap in addition.
We grew our occupancy a competitive lease over lease growth rate in the face of waning seasonal demand.
We were particularly pleased with release and renewal growth rates in Atlanta.
By far our most significant market at 7.6% and 5.2% respectively.
All collection right.
We discuss the disruption of the collection cycle that occurred with the transfer of homes.
The final transfer of approximately 7500 homes from one of our two third party property managers occurred in Q1, a 29 team.
And was primarily located in the Texas, Carolinas, Tennessee and Midwest markets.
All markets in which our operational footprint was recently established.
Our recent entry to these areas when combined with the market specific personnel issues.
Resulted in collections that did not meet our expectations for these portfolios.
And that we're not in line with the rest of our homes.
As a result, our bad debt expense was elevated slightly during Q2.
An elevated further during Q3 as we work to correct. This issue.
We made changes in property management personnel during the quarter as needed.
And worked tirelessly to improve this area.
Im very proud of the progress we may and the effort our team expanded to achieve the improvement needed here.
As a result of this work as of end of October .
Our collection rates improved 300 basis points and are now at our targets of day 30.
Which should translate to lower bad debt expense in the fourth quarter as the benefits of this progress generally translate into financial improvements one to two months after achievement.
We expect to see further marginal improvement in our collection rates as we continue to fine tune our collections processes.
Although our announcement turn costs improved controls. These expenses is being achieved through a grade greater percentage of work quarters and turns being performed in house.
During our August call, we discussed our plans to add skilled maintenance technician to our teams in certain markets to us to achieve sufficient bandwidth to meet our goals of in house performance of work orders.
We also discussed exciting improvement in efficiency, we've seen through the implementation of route optimization software for scheduling our maintenance teams.
We initially deployed the software in Atlanta.
Where we more than doubled our ability to perform cut cost saving work orders in house from June to October .
With each technicians, averaging more than five more quarters per day.
To date, we've implemented this software across nearly half of our portfolio with plans to expand this across our higher platform.
Through a combination of additional staff and route optimization.
We've seen an increase in the volume of in house performance of work orders are approximately 35% on a sequential quarterly basis and to over 50% in October .
We aim to perform approximately 50% of our work orders in house by year end, which we believe will lead to significant cost savings.
In addition.
As we have added team members, we have strategically staff skilled tax with specialties and HP AC electrical and plumbing.
That can provide us a greater opportunities and not only handle more work order volume.
But also to complete work orders that traditionally have a higher per unit costs.
From a personnel perspective, we're excited about our new market leaders in key team members in Texas and Tennessee.
We've spent a considerable amount of time to these teams over the past few months and I'm very encouraged by their energy and effort.
Confident we're positioned to perform up to our potential in those markets and and optimistic about what can be achieved by those teams.
So lets quickly recap.
Occupancy is all derive from 94.1% at June 30 up to 94.5% by the end of October .
Blended rent rate growth remained strong at 3.9%.
Turnover improved to 8.4% down from 8.7% last quarter.
Unit turn inventory is down by nearly half to 2.6%.
The reduced turnover volume combined with investments in personnel will position us to self perform a greater percentage of our unit turns which will lower our return unit costs going forward.
The number of RM work orders performed in house increased by 35% over prior quarter and we're on track to meet our goal of 50% by year end.
Collections have been dramatically improved during the quarter and in October and bad debt is expected to decline significantly going forward.
In summary.
Third quarter was challenging.
And the results were impacted by rapid growth. However.
Our team worked diligently to address those challenges additional work remains.
While I'm pleased with the progress we made during the quarter ended October .
I am confident we will ultimately realize results commensurate with our expectations and goals.
I'll now turn the call over the Robyn.
Thanks models and good morning, everyone.
Today I will cover the financial results for the quarter touch on balance sheet activity and provide an update on acquisition and disposition.
GAAP net loss for the quarter $36.4 million. This includes a $10 million net settlement of our lots remaining securities action.
Rental revenue was up 5% compared to the third quarter of 20 AC with 14311 stabilized homes, 1% of less than a year ago.
The drop in stabilized rental core NOI margin and core FFO reflected the operational challenges that miles as discussed as we've adjusted the transfer of approximately 12000 homes on to our internal platform.
Miles has indicated we are seeing stronger operating metrics in October we believe should drive better operating results in the fourth quarter.
DNA cost for the third quarter little up by two and a Hoffman and builders as non ordinary course legal and professional fees reduced by over $2.1 million, an ordinary course, DNA reduced by over $300000.
Turning to the balance sheet, 93% about financing is at a fixed rate for path with a weighted average duration of five years fixed and cap rates at 45% if caps, which means that there will be a benefit from any further potential LIBOR reduction.
During the quarter as we acquired 28 homes at the purchase price of $3.8 million or an average cost of about $136000. We sold 126 noncore homes that did not to sell rental criteria net sales proceeds were approximately $23 million with a gain of two point.
$1 million of a GAAP carrying value.
On slide 17 and 18.
We provide details of investment costs and home price appreciation by key markets.
We believe provide support for a baseline valuation of our portfolio I'll now turn the call back to George.
Thanks, Rob.
So let's summarize for the second quarter, we took control over our entire portfolio for the first time.
When 12000 homes moved onto our platform some regions of the country and procedures responded well some less so.
We quickly identify areas of concern we found that with the issues work than we attack from all of US I would like to thank the entire team for responding positively and aggressively to turn our ship around.
There is on Gerhard and his team teen India led by making sure they could touch.
Rob and his group and of course miles in every one of the property management all are working tirelessly to get our business backup to our own high standards.
As miles pointed out the results are starting to show our turnaround is well underway.
Leasing is getting stronger without sacrificing rent growth collections are improving turnovers coming down and investments in technology are already starting to reduce costs.
October numbers are strong and we look to finish 2000 2019, even better.
The adjustments we've made are working for the business is on the upswing by early next year, we should have a business back to where it's supposed to be.
But yard residential was perfectly positioned to continue to grow and remains the best investment opportunity to take advantage of the workforce housing single family rental market.
I would like to take a moment to again, thank our board and external legal and banking advisors for the six months of hard work on our strategic review.
It's been an excellent body of work and the results should be imminent.
Let's now open the call up to Q and a Tiffany I'll turn it back to you.
Thank you ladies and gentlemen, if you have a question at this time. Please press star and then if I have one on your question kind of a sound.
Second question answered why do you wish to remove care sounds funny to Q. Please press the pound key.
So first question comes from the line of San Cho with Credit Suisse.
Hi, guys.
Hi mounds figuring out today, yes, good morning.
So you guys mentioned that.
The Texas and Midwest environments.
You saw increased turnover in field staff.
What's that exactly and I guess more general way can you talk about the competition for hiring talent.
Yeah. So.
In both of those markets.
We had to replace the director of operations for for both of those regions.
There were also some.
Office based personnel that we had to switch out due to the issues that weve encountered particularly in the collections area.
We are seeing.
At least for the office based personnel, there's there's still great candidates out there that are readily available and that are eager to work in this industry I would say in the in the field for your maintenance technician and folks that perform unit turns its certainly more challenging two.
Due to find good staff, there, but we're still able to attract a good talent at rates that are that work for our business, but it's certainly more challenging for field based team members.
Great. Another one from me.
I know we saw the seasonal increase in our NIM cause, but just thinking about the inflammation implementation of technology I'm just wondering how that's been rolled out and whether I guess, just thinking about the general training process and how that affects our NIM.
Expenses over time any color on that will be great.
Sure, Yes, so and this is on a really excited about them, we spent quite a bit of time.
This was something that we.
Utilize our whole team for Bose, George mentioned, our India team and and finance and literally that you mentioned every department and this was something that we all pulled together.
To put in play.
Our India team that schedule as our technicians.
Through the use of a software overnight.
As work orders come in previous day, and that allows us to get the most efficiency to reduce drive and wait times for our maintenance technicians that are out in our field.
They.
Wake up and look at their laptops and they have their day planned for them in a Ralph as most efficient from their homes.
Yeah.
In the basic loop.
Around the city in the regions that they cover.
Yes, it's.
We've seen as I mentioned, a an almost we've doubled the efficiency of our team there in Atlanta, just by cutting down all of the.
Indeed looks weight and drive time and.
So we started there we've we've expanded at now almost a half of our portfolio.
And everywhere that we have gone we've seen tremendous success and we believe strongly in the model and.
And think of has applications.
Across the entire platform so.
Definitely excited about that.
No no no you said half the portfolio and Atlanta, I guess, how long does it typically take I know you might be market dependent but like.
It is that something that can be streamline.
Yes, no I think weekend.
Think by year end, we can have every market that is that it's feasible to do that I mean, we do we do utilized third parties for certain smaller remote locations, where we don't have.
Our own personnel performing but not work so well I don't think we'll get to a 100%, but I think we can get to 85% to 90% of the portfolio and we can have that all implemented by year end.
Okay, great color. Thank you so much.
And again, if you would like to ask your question. Please press Star then remember why now audio test can you tell a sound again, so I want to.
Your next question comes from the line up from Mike Grondahl, what the Northland Securities.
Hi, good morning, guys.
George when you see the portfolio should be back in sheet kind of early next year.
Are you seeing that your your core NOI margin.
Kind of that previous range. You had you can hit that sort of one Q2 Q is that what you mean by that.
Here's here's how I'd.
Address that question.
We can't see obviously November and December yet, but the changes that we.
We all spoke about so we really started implementing in July August September and so we did.
The July and August we're pretty tough, we're really you know slam and stuff through to get to get things back where we wanted them September Mike felt like it was starting to bottom out in October we can see a lot of a work.
In the numbers and so October looks very strong so I think when we look back.
You know and a few quarters.
This quarter that we're reporting on will be the Bob So subs first what I'd like to say and so I think the fourth quarter, we're pretty confident as long as it continues the way it started.
Next week, we'll be we halfway through.
It feels very good a lot better than threeq. So I would say for Q will look again I can't see two months was it will look more like twoq. So to give to your question more directly that means the numbers that we talked about we still believe in but I'd say, Rob probably push it out Mike.
A couple of quarters and so bye bye bye.
Your next year, we'll have a back I think we'll be back to where we were when we got hit with all the homes onto our platform last spring. So we probably when we look back we'll have lost the second quarter started to slip the third quarter will be the bottom for Q comes back one Q2 thousand 20 I think.
The number should be back on track and so there will be there will be on the same trajectory that we talked about last spring's that would you agree that yes, I would agree with that so I think to put to get back on track, Mike we sort of needs to go to that leasing cycle, which is first and second quarter next year, but to Georges 0.3rd quarter, It's definitely bottom of the cycle for us.
Fourth quarter, we better than the third quarter, maybe back to the second quarter number first quarter, we better next year second quarter, we better still and so we're on that trajectory back to achieve the potential that we know is in this business.
Got it got it.
And the 28 houses I think you acquired for a 136000 on average.
He would you see that sort of.
You set out to do or your strategic process affecting that at all.
No no the strategic review is sort of separate work stream.
Our responsibilities to run the company every day, we buy Opportunistically when we see.
Things, we like at the yield we like.
I mentioned on the last call we saw a pretty good flow. The first half of year, It's got a little bit required. So the 28, we just picked up during normal process through the Charlotte team.
And I.
I think we are.
This quarter should be closing on some more.
The other positive on the 50. So so you know we as we see them. Mike. We you know we're trying to fill in where a mild wants us.
As I've said before we're not going to go to New places right now you know.
Indeed, we need to fill in to make the numbers that he has stronger and stronger so.
We filed 28, we like through through the one we do that was fine as I said I think well small full this quarter was as the fourth quarter will now we buy when we see yields we like in cities we like.
Got it in and then lastly, you kind of implied or I think you used the words.
The strategic review results imminently.
Does that mean, we can measured in days or should we be measure you didnt.
[laughter].
Uh huh.
We're really not a position to be say, what the unit of measure would be but I would say.
We're nearing the end of the process.
Got it Okay, hey, thank you.
Sure thing like.
Your next question comes the line of Jade Rahmani KBW.
Thanks very much on the strategic review did you give any sense of the timing you said you expect through.
Report results shortly.
It was just said, we're not positioned to say exactly.
The timing of loyalty finished but as I as I said, the Mike we're nearing the end of that process.
Okay and with the in your prepared remarks, you mentioned a lot of emphasis on preparing for the long term and operational improvements that could be made over the long term does that suggest that a restructuring is more likely than a potential sale or combination of the company anything to read into those remarks.
No I wouldn't read out into it I do we.
Have the same tone every quarter for the last five years, our job is to run this thing as best we can.
And positioned for growth I mean.
We're looking to drive the best intrinsic value for our shareholders. That's the that's the bottom line. So so there's there's no implication there one thing of the other we're trying to make this thing as strong as we can for the future.
Our job to run an everyday that way, we'll see what comes out of strategic review, but there because there was no no no. They all the message.
Okay in terms of the portfolio. There's this big other category of around 3000 homes. You know what are the concentrations within that you know are there any markets you could identify and what percentage of those.
Represent legacy NPL converted to eye to eye rentals.
I think another way I'll start that I think another way to say as we used to Oh.
A few quarters back have a thousand homes. We wanted we sell those eight homes at home do unto itself now I think it's probably down to a few hundred one itself. So so Rob you can you can answer other but but.
What I would say is the percentage of things we wanted to sell out of other continues to to the.
Shrink.
And so now other which we can give you more detail either here or maybe later is really places where we are that we want to grow.
And so for example.
Saint Louis is probably in other I would guess im looking at the list here, but but its play through Jay is where we need more capital to fill in to make it more efficient.
So so were other used to be.
You've been following this for a while to your question about Npls is spot on that category other used to be a lot of things, we wanted to get out of and shrink.
That process is almost over.
Now, it's really particularly in the mid West for example, although it's true I think it all places even Florida, we want we want to grow out and keep filling in and Thats really whats in other now which would either you guys want to add some.
I agree with that.
And you can see Jay if you looked at a page in the in the unexpected we show that this 42 kind of legacy proceeds the we're looking to sell and the 220 to 29, others, which is kind of probably as you're talking about here.
We can give you more breakdown of the thing after the call, but some you know thats, but thats the big picture.
Thanks for taking the questions.
Okay. That's good.
At this time I am showing no further questions I'd now like to turn the conference back at the company for closing remarks.
Thank you all for for dialing in and and your interest will chat with.
A lot of new throughout the day have a good rest of the day.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a window for that.