Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by into welcome to the front you weren't residential first quarter 2020 earnings call.
At this time, all participants' lines are in listen only mode.
After the speakers presentation, there will be a question and answers Sachin.
To ask a question during this session you need to press star one on your telephone.
If you require any further assistance please press star zero.
I would now like to entities conference over to at least you Cherry head of Investor Relations. Please go ahead.
Thank you Stephanie good morning, and thank you for joining us for front yards first quarter 2020 earnings Conference call. Joining me on today's call is George Alison Dean Chief Executive Officer miles Adams Senior Vice President of property operations, and Robin Lowe Chief Financial Officer.
I'd like to guide everyone to the earnings slide presentation available through the investors section of our web site at front yard residential dot com. These slides were created to accompany our remarks and provide additional information investors may find useful I'd also like to inform you that our comments today may contain forward looking stay.
Mints relating to the future performance of our business the Companys financial results capital allocation and other non historical information.
These statements may involve risks and uncertainties that could cause the companys actual results to differ materially from those discussed in the forward looking statements, particularly in light of the ongoing Colvin 19 pandemic. We describe some of these risks and potential differences <unk> earnings release as well as the company's filings with the assay.
See including the form 10-Q, we 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 our earnings release and earnings presentation located in the Investor section of our website I'll now turn the call over to George Alison Chief Executive Officer George.
Thanks Lisa.
Good morning, everyone. Good to be speaking as all of you again.
All this here at the front yard family hope with those of you listening or safe and successfully weathering this terrible score.
Viruses Trust, you personally where your family or friends or prayers go out to you.
Now, let's get into todays call.
First as most of you know front yards merger agreement with them Hurst.
Then terminated.
As all of you will appreciate I can't really go into the details about why the deal ultimately you didnt close but what's important is this.
What this front yard residential look like now.
As our announcement detailed the settlement with them versus three distinct features one and I'm Hearst pay $25 million to front yard to front yard is issuing 4.4 million shares so new stock at $12.50 to Amherst. This represents a roughly 7.5% stay.
They can front yard and speaks to embarrass continued commitment to the S outdoor space.
Yes, [laughter] Buckley with front yards business model and management team.
And last Am Harris is providing a 20 million dollar.
Two year committed.
Unsecured revolving credit facility that will be drawn down at any time with no transaction fees and with very attractive pricing. All told this provides roughly an additional $100 million and liquidity.
The majority of that in equity.
This sends a clear message to the market and our lenders that we have a strong balance sheet no depends on capital markets and the opportunity to play off that's the single family rental marketplace when the opportunity presents itself.
We thank the team at Amhurst for all their hard work and effort. It was a very productive due diligence process and I think both sides learned a lot from each other in terms of best practices.
But resi shareholders, new and old being to realize that we are stronger than ever and remain focused on continuing to serve families that preferred around homes, while providing excellent returns to our stakeholders.
Of course, the safety of our families and employees continues to be the top priority during the ongoing pandemic.
Although we have experienced the same operational challenges as our peers.
Our team has demonstrated incredible resolved in the face of this crisis and the recent operating results reflect our efforts.
For this we thank them.
Obviously, we didn't do an earnings call on the fourth quarter, but on the third quarter call.
We predicted that those results would be the low point for our performance metrics. If you'll recall the third quarter showed zero cents of core FFO per share we predicted that the fourth quarter would be better.
And would approximate two Q2 thousand 19, and indeed it did.
We also predicted the Q1 2020 would be better still.
So we're pleased to report our strongest operational quarter Evan.
So, let's turn to page four look at the highlights.
Rental revenue $54 million up over 4% from the previous quarter stabilized rental in Hawaii up 8% stabilized rental core NOI margin 60%.
Core FFO of 12 cents per share more than doubling the last quarter.
You can see our quarter end balance sheet metrics, which were significantly strengthened.
By the proceeds from the settlement.
Our stabilized rent growth was a strong 3.2% in the quarter.
Stabilized lease percentage was 97%.
Our best ever and stabilized rental turned over 7.2% I'll leave the details to miles, but April numbers continued to be strong and demonstrates the resilience of our business.
Page five.
As our company snapshot.
There's a lot of strong numbers here, but as miles will discuss occupancy collections and rent growth.
All very strong and core NOI margin continues to improve.
Excellent results.
Myles.
Thank you George and good morning, everyone.
Kevin 19, as certainly resulted in many changes to our business, including where we work how we interact with the residents and prospects and the safety measures necessary to perform our daily tasks.
Resident and employee safety is Paramount.
When the impact of the pandemic became apparent our team took significant steps to maintain the wellbeing of our employees and residents.
These steps included working from home.
Closing, our offices and suspending non emergency maintenance to limit social interaction to help prevent the spread of the virus.
Our team has adapted quite well to the near normal.
And while much has changed in our wrote over the past two months the fundamentals of our business have continued to steadily improve.
I'm very excited to discuss the performance of our team and the progress we've made and our operations over the past six months.
And in this quarter in particular.
We've made considerable progress on all of our key initiatives to build an efficient scalable platform to maximize the long term performance of our portfolio.
Further as I mentioned.
We've been able to continue our operational improvements beyond the first quarter. Despite the challenges presented by the pandemic.
As a reminder, during our last earnings call. We discussed three primary operating challenges that resulted from the transition of homes onto our platform.
Occupancy collections and elevated repairs and maintenance expense.
We have particular concerns, but these matters and two of our biggest markets.
Texas and Tennessee.
We've made significant progress across our entire platform on these issues.
Last year, you heard me talking about an initiative the stabilized occupancy of our portfolio.
Once our turn team worked through the significant backlog of homes in turn.
The number of homes available for lease increased and leasing demand has been incredibly strong across all of our markets.
Our occupancy has increased substantially since September.
Let me give you a few numbers.
Stabilize leased occupancy rose from 94.3% at September Thirtyth.
Up to 97%.
By the end of March with physical occupancy of 95.7% at March 30 Onest.
Each of these metrics continue to improve to 97.7%.
And 96.2% respectively at April Thirtyth.
These gains were driven largely by improvement in our Tennessee, and Texas markets.
From September to March.
Memphis occupancy grew from 92.8% up to 97.4% with Nashville, improving from 94.2% to 98.8%.
In Texas, DFW occupancy improved from 91.3% to 96.1% and Houston grew from 91.7% to 93.6%.
Each of the Texas markets showed continued improvement in April.
Additionally.
We a tree we achieved very strong gains in occupancy in two of our key Midwest markets.
Indianapolis, our largest Midwest market grew 490 basis points to 98.6%.
As Saint Louis grew an incredible 1300 10 basis points from 84.5% all the way to 97.6% at the end of March.
In fact as of April month end.
We have reached a stabilized leased occupancy of at least 95%.
In every market, where we all more than 150 homes.
While we grew our occupancy.
We did not sacrifice rental rate growth.
Our blended rental growth rate of 3.2% during Q1 remains strong.
And was comprised of renewal rent growth of 4.5% and release rent growth of one of that percent.
Blended rent growth further improved to 3.9% in April comprised of renewal rent growth of 4.3%.
While release rent growth accelerated to 3.1%.
Since the Kevin 19 pandemic reached our shores, we've taken steps to mitigate its impact on our business, including increased use of virtual and unassisted tours of homes.
So far we've seen a demand for our homes increase in April and into May.
Total applications received and applications per market at home are up in April and May be.
Versus our historical average.
As prospects consider their families needs for safety and space. During these trying times.
We believe that SFR is particularly well positioned to meet those needs.
[noise] collections were improved during the quarter and were in line with our long term expectations for our portfolio as of March.
We previously discussed the disruption of the collection cycle that occurred with the transfer of homes from external managers.
Our team worked tirelessly and may continual progress each month, resulting in our best quarter to date.
Im very proud of the effort our team made to achieve the improvement needed here.
We first stabilized our 30 day collection rates in October of 2019.
This is the key metric to drive terminal collection rates.
This progress continued on a steady pace and resulted in collections inline with our targets for Q1.
As a result of the team's progress here.
Our portfolios rent roll is well positioned for the challenges, resulting from kind of in 19.
Although we suspended demands and the assessment of late fees in April.
Collection rates remain strong even with the current headwinds facing our country's economy.
And collection rates exceeded 99% of our historical average at day 34 April.
While it is early.
Through day eight collection rates in May we're right in line with historical averages and were 104% of April collections through day eight.
Another key area of improvement, which impacted both our revenue and expense is reducing unit turnover.
With improvement in collections retention rates have improved.
Even though March was our largest month of lease expirations turnover remained quite low for the quarter at 7.2%.
The month of April was low as well at 2.0%.
We believe turnover will remain lower than normal in the near term due to concerns related to cope with 19.
This will benefit both physical occupancy and turn costs in the near term.
During our last call. We also discussed increasing our in house performance of work orders to improve control of our NIM expense.
We discussed route optimization and exciting improvement inefficiency that resulted from that technology for scheduling our maintenance teams.
We also added skilled maintenance technicians to our teams in certain markets during Q4 to achieve sufficient bandwidth to meet our goals of in house performance of work orders.
Through a combination of additional staff and route optimization.
We've seen an increase in the volume of in house performance of work orders of approximately 22% over the fourth quarter of 2019.
As of February and prior to the suspension of non emergency work orders due to Kevin 19.
We were performing 47% of our work orders in house.
As a result of the increased efficiency.
Right and per home declined about 3.4% on a sequential quarterly basis, even though work order volume increased by 4.8% from Q4 to Q1.
Overall total arent and turn costs declined by 9.2% on a sequential quarterly basis.
So let's recap.
Demand remains incredibly strong for our homes stabilized leased occupancy is on the Ross from 94.3% at September Thirtyth.
Up to 97% at end of March.
Physical occupancy of 95.7% him at March 30 Onest.
Each of these metrics continue to improve in April to 97.7% and 96.2% at April Thirtyth.
Blended rent growth remained strong at 3.2% for the quarter with April coming in at a robust 3.9%.
Collections were improved during the quarter and were in line with our long term expectations for our portfolio as of March.
April collection rates.
At 99% of our historical average for April at day 30.
And through day, eight collection rates and May were 104% of April collections.
Turnovers low at 7.2% for the quarter.
April turnover remains low as well at 2.2, 0.0%.
In summary, the first quarter reflected significant and sustained improvement in all of our key focus areas.
The operations of our company have matured significantly since the transition of last year, and we are performing well.
Although additional work remains and we are never satisfied.
I am pleased where the progress we made during the quarter and excited about what this team can achieve going forward.
I will now I'll turn the call over to Robyn.
Thanks miles and good morning, everyone.
Today I will cover the financial results for the quota touching on balance sheet and provide an update on the activity in our portfolio.
GAAP net loss for the quarter was $20.2 million, an improvement of 21 person over the prior quarter.
Rental revenue was $54.3 million up 4.3% sequentially.
That's stabilized rental core NOI margin was 60% up from 57.6% last quarter.
[noise] core FFO was 12 cents per share an increase of seven cents over the last quarter, reflecting the very strong operating performance the mouse as discussed.
Turning to the balance sheet, approximately $812 million or 49% financing with either capsule floating meaning that we're seeing an interest expense benefit juice or the recent rate reductions.
In the first KUSA the interest expense reduction was about $800000.
If rates remain at current levels, we expect to see a savings of around $2 million in the second quarter.
The weighted average time to maturity about that is four and a half yes.
Regarding liquidity.
At the end of the first quarter, we reported $32.3 million of unrestricted cash.
As part of the termination of the merger agreement, we will be adding a 25 million dollar cash see already received from my most plus $55 million Chu from stock purchase on or before may 19th.
In addition, we have access to it so if the $20 million of revolving unsecured credit under the promissory note agreement.
We believe this puts us in a strong position not only to whether any potential short term challenges in our industry, but also to take advantage of any potential attractive acquisition opportunities.
Furthermore, our board has taken the decision to suspend the dividend until further notice we believe hit the this is a prudent and responsible measure given the uncertainties in the cover current operating environment.
During the course so.
We sold 82 noncore homes that did not fit our rent criteria net sale proceeds were approximately $12.9 million with a gain of approximately $1.5 million I forgot pairing value.
Finally on slide 16, and 17, we provide details of investment cost and home price appreciation by key markets. We believe provide support for a baseline valuation about portfolio.
I'll now turn the call back to George.
Thanks, Rob.
So it's been an interesting 12 months.
Learned a great deal about our competition as many of them met with us during our strategic review.
We finished the transitional 12000 properties onto our own platform as a result, we stumbled a bit last summer, but as promised we turn things around.
With our settlement, we significantly strengthened our balance sheet and for all we've been through we find ourselves skill as one of the best investment opportunities to take advantage of the single family rental workforce housing market.
This business held tremendous opportunity before.
Now with families who already wanted more living space desiring some increased degree of social distance the isn't even stronger investment thesis.
Demand for single family rental housing will continue to grow.
And with a lack of existing homes or new construction the supply of available homes will not keep up.
All positive for our business model in short strong operating results.
Strong balance sheet to weather the storm.
Early indications that our residents or more resilient than predicted.
And what was already a strong business case for continued single family rental demand.
That's got stronger.
I'd like to thank our board of directors for the enormous body of work and commitment during this last year as well as our bankers at Deutsche Bank, particularly the tremendous Stephen Weil Gotshal.
I'll now open the call up to questions.
Stephanie.
Thank you as a reminder, in order to ask an audio question. Please press star followed by the number one on your telephone once again I just star one for I phone question.
And your first question is from the line of Douglas Harter with credit Suisse.
Oh, Thanks, I'm, hoping you could talk about you know.
What what it would take for you to kind of you know look to kind of take advantage of acquisition opportunities of new homes, you know and kind of what you when the board would be thinking about in terms of kind of reinstating the dividend.
You know from from a liquidity perspective.
Well I. So first of all good morning, Good you know right now as I said.
Maintaining and preserving liquidity, which obviously the.
The settlement help is job number one so as Rob said the board and we recommended to to hold off on the dividend until we see how this thing plays out as miles pointed out the numbers or you know I listen to to the other calls as well.
Everybody's a little.
Surprised at how resilient the the residents are.
But we just don't know you know the we won't do all walks to say news and we don't know this things coming back you know people say, it's going to be around for two years or one year coming back in the fall. So right now protecting liquidity is job one.
As it relates to you know dividends as I said, we'll we'll spend enough for now and then we'll revisit that as we always do given all the time and every quarter as it relates to Oh.
I made a comment is that Rob about looking at opportunities I think there's going to be a when the smoke clears there's going to be a lot of dislocation. There already is and so I think there's going to be an opportunity down the road not now but down the road. So so right now job one two and three is just batten down the.
Hi, just let's see how this thing plays out as miles said may is.
Rising we off to a who is strong start even stronger than than April and so again.
We were just trying to make sure everybody say.
There were keeping up with the homes that were keeping people.
Happy as they can be.
We're focused on operations now with the merger thing behind US we're back to you know just running the business we like the assets we loved the business. So we're going to focus on operations for the next six months keep our heads down and try to get through this but.
Great. Thank you George.
Uh huh.
Your next question from lineup Anthony Cologne with JP Morgan.
Alright, Thank you and good morning.
I know you can't talk about why are they on her still didn't work out, but perhaps can you talk a minute about your decision to take a sort of the payments you did versus say a going into litigation matters are sharing them to perform.
Oh yeah.
As I said the.
There's not a whole lot we can say about good deal, but at the end of the day.
You know we thought it was the best possible result for our shareholders under the circumstances.
We took certainty over a long sustained litigation, which again you know.
<unk>, who knows how those things play out.
So we went through the maximum.
What we thought the optimal solution.
Also money and time and so that's why we made the deal I I would point out that.
There's been a lot of a dislocation in the market and.
And then some deals are falling apart that we see them.
It's studied and.
A lot of people, who have nothing to show for it.
So so we believe as I said, we got the best possible result for our shareholders.
We know how the certainty.
Focusing on our business and we have a much stronger liquidity position.
Okay.
Hi, Thanks for that.
Maybe for miles as you guys quoted being 99% or normal can you give us a sense as to why that's the normal level of collections is 30 days and for your portfolio.
[noise] yeah for.
Our minimum target is that 93% and you know we've been performing well above that over the last six months as I mentioned so.
Our March as our hot water point and typically for this asset class.
Thats a really good mod based on my experience. So so that's that's.
That's that mark.
Sure sure. When you say you know April was 99% is at 99% of the 93. So you guys got yes, something in the low ninetys basically or some other number.
Yeah about 92%.
Okay.
Okay and can you what's your sense I mean, it's the the rent spreads continue to be quite good what's your sense of being able to hold those over the next few months.
Yeah, I think what I would just say on that as it were saying a little bit of moderation on the renewal spreads we were running in the mid to upper fours.
And that sort of moderated towards that 4% level or slightly below that but only on the flip side release rates have continued to accelerate so we're we're converging where those two numbers are virtually identical right now.
So I think that we'll probably see going forward a little bit more moderation on the renewal side.
But yeah, so far we haven't seen any.
Indicators in the market in terms of demand that would make us think that release rats won't remain.
Fairly positive for for the foreseeable future so.
That's what I would say about that.
Okay and then my last question on the Capex side, and what do you think the portfolio need say over the next 12 months in terms of where you anticipate you know cost per per door on the capex side.
So for the quarter, we ran at about that 1400, 14 50 range.
On the on the Capex side for turn and you know recurring capex.
I don't have any indication that that would be materially different you know either up or down over the next.
Six to 12 months.
Okay.
Great. Thank you.
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Once again the African audio question. Please press star 100 telephone keypad.
Your next question, it's in the line of Ryan Tomasello with KBW.
Good morning, everyone. Thanks for taking the questions today.
In line to determinant in light of the termination do you expect the board to revisit the sale of the company over the next year.
And you know regarding AMC is the board evaluating the management agreement NGL <unk> post the deal termination.
Oh, well in terms of the as you know in May the board finish to the strategic review, which is.
Sort of how the whole merger process was initiated it started but what I would say is we have always been.
Open to any ideas suggestions proposals anyone who is just over the last five in out years, whose serious and strategic we've always listen to so I'll leave it to the board Oh, that's their call as to whether the strategic reviews to continue but no in some sense.
It doesn't matter, we will always listen to two or anybody who who is serious.
As a constructive idea that we think will help our shareholders and increase shareholder value. So that's you know.
Strategic review or not that as always than our stance and there will always be our stance. We will always listens all serious people who have ideas how to to increase shareholder value.
As it relates to AMC clearly the merger falling away changed a lot of things not just for us rosy, but also for those of us that AMC.
And so it's very early days. Obviously this is about a week old and so forgive us we had to scramble to kind of pull everything together in terms of speaking to all of you, but as it relates to the AMC Board and the Rosy board, but both of them. Obviously aware of this new situation and the you know we're talking to both of them about it.
Well to revisit where that whole situation stands because.
The merger was obviously, taking that down one path and that that's come to a screeching halt. So so we're very pleased with the relationship and had no intention of.
Terminating it anytime soon but obviously a lot has changed and both boards will be reviewing the relationship.
Okay and Robyn.
Inclusive of the termination payment and the Emerson investment can you clarify what the post one Q liquidity position is including cash on hand and available borrowing capacity.
Oh I'm sure. So as I said to you know basically the.
I must termination arrangement, that's about $100 million liquidity twentys that is acute unsecured borrowing asias equity, so just adding that to the a.
Cash and cash equivalents, we reported.
At the end of the course huh.
[noise], which was $32.3 million Gonna you go to getting to that kind of 100 and C plus million range.
Okay, Great and then regarding.
The current credit facility borrowings.
Can you.
Clarify if theres any.
Margin call risk a there today and what the triggers for that would be if there are.
Yes, most about debt is turned out as you know [noise] in fact I'm apart from the repo line. The earliest maturity we havent anybody that is twentytwenty to April 2022.
The.
What do you feel that the possibility of margin calls on those Oh Fussiness is destruction Pacific. This is very very low.
For various reasons just wait a structured the repo facility is obviously a little more exposed as you'd expect so you know this potentially something that but I will also say that the leverage on that line is quite low compared to the rest of our portfolio Sunny.
64% right now so again I think you know this there's a fair amount of cushion before you know, we'd even be facing any kind of motion.
And on the the repo facility is there any tangible net worth requirements or or or market capitalization requirements that would trigger that margin call there.
I'm not going into the other facilities you know we have tens you wouldn't have growth requirements and some of facilities. Let's see you know we have moved them no way more than enough liquidity to meet those so I didn't see any issues in that respect whatsoever.
Okay, great. Thanks for that color and then just lastly regarding the a the tenant profile can you can you give any color on on what the you know across the portfolio the type of employment profile or other type tenants by potentially industry group, if you track that.
[noise] Yeah. This evolves.
So I just say that the majority of our our folks work and essential business and office based operations and and and it and then industrial.
Type of businesses and so you know there's not one industry that I would say that were highly highly concentrated and but you know it's really reflective of the sub markets in which we are yeah. There were operating an idea. The other thing I would just mentioned is that we're in.
In our geographic dispersion.
Provide some safety here, where we're not concentrated too heavily in any one given market and so for that I think that that helps us as we go through this.
And just one last one miles can you clarify if any of the April and May collections have been paid out of security deposits or if that's all true collections.
Yeah, we do not do we wouldn't do that we're not applying security deposits to turn around seven zero.
As is included in either of those months.
Okay got it thanks for taking the questions are going.
Thanks, Ron.
Your next question, it's in the line of Mike Grondahl with Northland Securities.
Hi, Thanks, guys two questions one it sounded like me collections through day eight was like 104% of.
The April level.
Did you do anything to change the collection process or the outreach process.
To kind of improve it or.
What do you think led to the increase.
Well I would just I would just say this and.
Early to mid March you know we became.
Concern as everyone debt.
With what we were seeing going on and.
You know we.
Had lots of conversations internally about what we needed to do to.
To get through this as best we could so we we changed literally everything I think I told you.
We suspended late fees, we suspended demands in April.
Well, we also increased our outreach to residents and that began in mid March and so whether it was.
Through.
Calls our tax or emails, we reached out our residents in a very diligently and and very often and.
We ended up speaking to around 8% of them that had some concerns about April.
And ultimately all you know less than 1% needed any sort of payment plan or accommodation beyond April though.
I think that dialogue really helped and.
Made them even more.
You know.
Open to cut communication with us and working with US and that's I think that that led to an improvement in may and then I think.
You know there there has to be some.
You know some impact to the stimulus and and other government support that.
Took a little bit of Tom.
You know to get in place there in April the.
Those two factors I think contributed.
Greatly to to then we're seeing M&A.
Yeah, we think we're really.
Please as George mentioned in his remarks are our residents of them very resilient and.
We're thankful for that.
Got it then then secondly.
When I look at slide [laughter].
We person everywhere [laughter] really good except maybe Houston.
And then from a stabilized rental core NOI margin.
You know what it looks like Dallas Houston in Miami.
Could use a little bit a lift coming.
Maybe get up to the average what's sort of the plan for those three M.S. day.
Yes, I would say on Houston and Dallas.
We had tremendous improvement and their lease percentage and by February and March and that continued into April and so you're not really get for the quarter, you're not really getting the benefit of that full uplift and the revenues.
You know falling down into the NOI. So I think that's a little bit of Tommy We also had a little bit of.
Additional turn costs volume that was impacted there as we've we ran through a lot of that during the quarter in Texas. So I think that you know in going into Q2 will have the benefit of that being behind us higher occupancy and.
Let's turn volume in Q2 for for Texas.
Oh and Miami.
In Florida in General and then Texas as well I mean, I would just say that.
Fixed cost property taxes insurance or a little higher than some of our other markets. So on average those markets are gonna tend to run a little lower on nominal.
In our margins I'm just as a.
Just as a rule.
Okay.
Thanks.
Hi, My time.
At this time there no further questions I'll turn it back to the company for any closing remarks.
Great. Thanks, Stephanie Thank you everyone.
We will will enjoy speaking with all of you threw out today and tomorrow.
Oh government was the is safe and thank you very much for your interest in your time.
Thank you. This does conclude today's conference call you may now disconnect.
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