Q3 2020 American Homes 4 Rent Earnings Call
Greetings and welcome to the American homes for rent third quarter 2020 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.
At this time I'd like to turn the call over to end Maginnis manager of Investor Relations. Please go ahead.
Good morning, Thank you for joining us for our third quarter 2020 earnings Conference call I'm here today with David Singelyn, Chief Executive Officer, Brian Smith, Chief Operating Officer, Jack Corrigan, Chief Investment Officer increased Lowery, Chief Financial Officer of American homes four rent.
At the outset I need to advise you that this call may include forward looking statements all statements other than statements of historical facts included in this conference call are forward looking statements that are subject to a number of risks and uncertainties that could cause actual results could 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 our filings with the SEC.
The current and expected future economic impact of the curve in 19 pandemic, including extraordinary increases in national unemployment may pose headwinds to our future results.
All forward looking statements to speak only as of today November six 2020, 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 to GAAP of the non-GAAP financial measures. We are providing on this call is included in our earnings press release as a note our operating and financial results, including GAAP and non-GAAP measures are fully detailed in our earnings release and supplemental information package you can find these documents as well as a theme course.
And the audio webcast replay of this conference call on our web site at American homes, four rent dot com with that I will turn the call over to our CEO David Singelyn.
Thank you I am.
Good morning, and thank you all for joining us today.
During one of the most challenging periods in the country's history I am so proud of how resilient our business has been and how we have continued to grow profitably.
Demand for single family rental homes is stronger than ever and we expect this trend to continue.
Until inception, we intentionally set out to create outsized shareholder returns through consistent operational excellence and long term growth.
Before the team reviews. This quarter's results I will review our prior strategic decisions had been the foundation to todays strong operating performance and growth.
And what we expect for our future.
Our strategic plan is anchored by four objectives or cornerstones.
First.
Our high quality and diversified portfolio is the foundation of our operating results and growth potential.
We intensely created a portfolio diversification strategy that targets key markets with less economic volatility.
Above average population and job growth.
And lower unemployment rates relative to the national average and our peers.
This diversification strategy with no single market, representing more than 10% of our footprint.
To provide a more stable long term performance with lower risk.
In addition, our broader footprint delivers more growth opportunities across a wider array of markets in contrast to our peers.
Second our best in class operating platform delivered leading customer service and consistent strong results.
We have utilized technology to scale in the industry that was previously believed to be on scalable or.
Our highly efficient technology, driven platform enhanced our ability to adapt quickly to covance unforeseen conditions.
With few disruptions or additional cost.
During these challenging times, we continue to deliver timely maintenance with no deferred works.
That is what our resident Lee and count on.
Third our financial flexibility enables us to succeed and grow in every market cycle.
We have the only investment grade balance sheet in the sector.
We have demonstrated consistent ability to access capital through all capital channels.
The latest examples of our financial liquidity, our $400 million Upsized common stock offering in August.
Our joint venture with institutional investors have been advised by JP Morgan asset management.
And our unsecured bond offerings.
This financial flexibility allows us to continue investing and growing through all economic cycles.
And finally, our fourth cornerstone is our multichannel investment approach anchored by our development platform.
We have a three pronged growth strategy that allows us to control our investments and be opportunistic we can tap one or more of our growth channels at any time to take advantage of the best opportunity within a market cycle.
First by pursuing our unique internal built for rent development program.
Second by capitalizing on our deep national Homebuilder relationships.
And finally by purchasing homes in the traditional manner.
M- development is now America's leading builder of new communities of single family homes per Rep.
This growth channel provides the highest quality single family rental homes at the best economic return.
Now and in the future.
This fourth cornerstone includes the development of single family rental home communities that are revolutionizing the housing industry.
This is evidenced by the number of companies attempting to replicate our success.
There are five competitive advantages that make our development program difficult to duplicate.
First we combine our development of single family rental homes with the leading operating platform.
Second we are developing in 15 markets and continue to evaluate our other 20 markets for additional opportunities.
Third.
We have confidence in our ability to raise capital to commit to our growth programs.
For our development platform is more than four years in the making.
And finally, we continue to acquire developed land, providing the inventory for future year deliveries.
To date, we have opened more than 60, new home communities located within our existing footprint with dozens more under development.
We see our external growth and development pipeline increasing for years to come.
More details on our 2021 plan will be outlined on our February call.
As we look forward our differentiated strategy is paying off and we are positioned to deliver significant cash flow and FFO growth for years to come.
While demand for single family rental is not new.
So that is further highlighted the value of our high quality modern homes in well located communities.
People appreciate single family homes for rent and view it as an attractive alternative to multifamily living and homeownership.
In fact.
The number of rental homes has increased from 13 million to $17 million in the last 10 years with.
With occupancy on those 70 million homes, representing a significant increase in demand compared to a decade ago.
This is an extremely exciting time for us we have achieved significant growth in the past.
But the future looks even more promising as we continue to capitalize on the strong single family rental demand.
Our corporate strategy has paid off.
And has delivered outsized risk adjusted returns for our shareholders. This year and positions us to continue to do so in future years as well.
Before I turn the call over to Brian let.
Let me highlight a recent change to our board of trustees.
Since the beginning of 2019, our board's ongoing refreshment process has added five new independent trustees, including most recently in September the shale pyrrhic.
Former Deloitte West region market leader and Los Angeles managing partner.
Our board, including a nine independent trustees.
Brings diverse skills that focuses on delivering superior performance and enhancing value for our shareholders.
And now I'll turn the call over to Brian.
Thank you, Dave and good morning, everyone.
Single family rental fundamentals are strong as we have ever seen.
And our best in class operating platform that is translating this demand in the superior results.
Our success is directly related to the strategic operational investments that we've made over the past 10 years.
As we revolutionized the single family rental industry.
One of our original goals was to combine the inherent benefits of single family living puts us parts of the class a multifamily experience.
For years, we've been offering quick and easy leasing.
Excellent service.
Hi quality assets in great locations.
Our platform is empowered by foundation of integrated technology.
And a focus on constant data driven innovation.
Our proprietary property management systems, including a fully digital leasing experience than maintenance platform.
Alex and efficient centralized approach with a local touch.
All of this enabled us to deliver best in class resident experience.
While generating the highest fully adjusted EBITDA margins that are industry.
Turning now to third quarter operating results.
For the quarter, we achieved impressive stable core NOI growth of 4%.
Driven by 3.6% growth in core revenues.
And 3% growth in core property operating expenses.
If we exclude incremental coded related bad debt.
Same home core NOI growth would have been nearly 6%.
Again, because of the strength and quality of our platform.
We've been able to capture the surging demand and but the typical seasonal trends.
As a key example, breadth.
Rather than the typical end of summer leasing slowdown.
We were able to drive an acceleration in sales on average occupied days throughout the quarter trend.
From 96.4% in July.
The 97% in August.
The 97.2% in September.
And this trend has held into the fourth quarter, which at with average occupied days of 97.2% in October.
And on the rental rate side, our proprietary pricing system translated this record demand into our highest ever third quarter, new lease spread of 6.1% for the portfolio.
In the fourth quarter, we expect to continue this trend with the new lease rate growth in excess of 6%.
About 500 basis points higher than the fourth quarter last year.
Effective renewal rate increases for the third quarter were 1.1%.
As a reminder, this reflects the socially responsible zero percent renewal increases that we offered during the beginning of the COVID-19 pandemic.
We began returning to normal operating practices in August and.
And based on renewal increases sent today we.
We expect fourth quarter effective renewal rate spreads to be around 4%.
As we look forward, it's important to understand that the underlying drivers of our current results are much more than a pandemic phenomenon.
Structural and demographic changes have been in motion for a long time, and we're simply accelerated by the dynamic.
As we witness a suburban Renaissance.
America's families gave a newfound appreciation for the advantages of suburban living such as extra living space.
Private yards.
Hi quality schools.
In a sense of neighborhood community.
Our own migration data continues to support these trends.
We are seeing in real time.
Multifamily to single family migration.
Urban to suburban shifts.
And most significantly we've seen dramatic increases in migration from areas like California.
To higher quality of life markets, such as Phoenix, Las Vegas and.
From Seattle.
Notably the distance of these moves that indicates the permanency of these ships.
I am excited about our future our.
Our superior operating platform uniquely positions us within our industry to capitalize on the surging demand then the growth opportunities that come with it.
Now I will turn the call over to Jack.
Thank you, Brian and good morning, everyone as we capture the wave of demand using our superior operating platform. We are also translating strong fundamentals into to fuel our outside external growth.
Strategically designed our growth programs based on a three pronged approach, which positions us for consistent growth and to be able to take advantage of the most attractive growth opportunities through various points in the cycle.
Today I want to focus on our overall strategy and Chris will provide specific details around our third quarter investment later in the call.
As Dave mentioned in his opening remarks, we are actively deploying capital through all three of our external growth channels first our one of a kind built bahram MH development program, which I will expand on in a moment.
Second our National builder program, which provides acquisition access to new construction homes from homebuilders and as the growth supplement to our Amethyst development program.
Third our traditional channel, which consists of experience in market acquisition teams, but shark through existing inventory opportunities, adding additional market scale and density.
Many years ago, when we began to formulate the prongs of our growth programs. We knew that internal development was a key this plan that was necessary to unlock our ability to grow throughout various points in the cycle and right now historically low MLS and homebuilder inventories are creating a challenging acquisition and.
Wireline further.
Further reinforcing the value proposition of our internal ambitious development program and our strategic foresight awning opportunity.
We began our MH development program four years ago. It took us years to create and nurture the land pipeline we have today.
Thing our proprietary data, we strategically selected and are active in 15 of our high growth markets.
We have assembled a team have accomplished industry leaders built a strong infrastructure and still have ample room for growth in delivery capacity.
Further our long term land acquisition strategy continues to fuel the engine as we acquire land facilitate growth and future deliveries.
Today, we have become the nation's leading builder of purpose built single family rental home communities and the only one with a complementary and highly efficient property management platform.
The long term advantages of our development program our tremendous.
We are building homes and communities that are tailored to the way resident sponsor with and that are designed to be efficient from a maintenance and management perspective.
These efficiencies translate to ongoing margin benefit and combined with our lower all in investment costs result in enhanced yields when compared to other growth channel.
Adding new construction homes also hardens, our asset base as we reduce our average portfolio age you can be even more strategic in adding density with our new community concept import.
Importantly, we continue to identify opportunities that leverage the size and scale of our high quality diversified footprint and best in class operating portfolio.
Our Amethyst development program is a game changer and a unique competitive advantage for us to pursue this plan takes a fortress balance sheet and clarity for long term capital that others may not have additionally, our complementary and highly efficient property management platform is difficult to replicate.
I am proud of our execution so far in 2020, which has been right on plan. We are running full speed ahead and continue to utilize our three pronged external growth strategy to capture and take advantage of the strong fundamental environment.
Thanks to our visionary long term strategy and outstanding execution, and H. is well positioned to continue outperforming.
Now I will turn the call over to Chris.
Thanks, Jack and good morning, everyone.
Number three areas in my comments today first a brief review of our quarterly operating results in growth activity second an update on our balance sheet and recent capital markets activity and third I'll close with some final thoughts around our corporate strategy in.
And to kick off the quarterly discussion I'd like to reiterate that our strategy and associational cornerstones has acquired years of investment, but those investments has now been made and they're paying off as demonstrated by this quarter's results for the quarter. We generated net income attributable to common shareholders of 22.
$6 million or seven cents per diluted share and on an FFO share and unit basis, we generated 29 cents of core FFO, representing an impressive 6.7% growth over prior year and 25 cents of adjusted FFO, representing 4.7% growth over prior year.
A key driver of this quarter's results with our best in class operating platform that produced a strong performance within our same home portfolio, where we generated 4.4% growth in rental revenues driven by a 160 basis point increase in occupancy and a 270 basis point increase in average monthly realized rent.
Which was further benefited by 10 basis points of contribution from higher fees, and partially offset by 90 basis points of drag from cobot related bad debt this quarter translating into an overall, 3.6% core revenue growth on the expense side, we reported a modest 3% growth in core property operating expenses.
Comprised of 3.5% growth in property taxes, which was lower this quarter due to the timing of prior year quarterly comps, 7% growth in Oregon, and turnover costs comprised of an underlying 3.8% inflationary increase in approximately $600000 of coated related bad debt on tinder.
Utility reimbursements and a 1.1% combined to decrease on all other core property operating expense line items, all of which translated into core into why growth of 4%. However, normalizing for qubic related bad debts in the quarter, our same home core into why growth would have been nearly 6%.
As an update on collections for the third quarter, we recognized revenue equivalent to 98% of our quarterly rental buildings, which is comprised of one percentage point or nearly $3 million of second quarter rollover receipts recognized as revenue in the third quarter and 97% revenue recognition on our third call.
Order rental buildings and.
And finally before I turn to our growth programs I'd like to remind everyone that our financial results do not reflect any add backs related to the coated making pandemic. In particular this quarters results include $5.9 million or approximately two cents per FFO share unit of increased corporate related bad debts, which was paid.
Mostly offset by the $3 million or approximately one cents per FFO share unit, a second quarter rollover cash receipts recognized as revenue in the third quarter that I just discussed Additionally, keep in mind that our financial results still reflect various other pandemic operating protocols that remained in place through the end of July.
Such as the weighting of late fees in the socially responsible decision to offer flat increases annuity signed renewals.
And now turning to our growth programs in the third quarter. We added 664 total homes to our platform of which 508 added to our consolidated portfolio, representing a total investment of approximately $140 million and 156 homes were headed to our new construction joint ventures.
We've been making great progress and now that we have all three of our growth channels reopened for full year 2020, we expect to invest between $700 million and $800 billion of owned balance sheet capital into our consolidated growth programs.
At the midpoint of our expectations. This consists of 1158, Mitch developed homes for $300 million 950 homes acquired through our traditional and national builder program channels for $250 million and $200 million invested into our land and development pipeline on our overall device.
Shipment program, including deliveries towards development joint ventures, we are on track to deliver a total of 1500, two 1600 newly constructed amax development loans, which represents the high end of our previous expected range.
Next I'd like to turn to our balance sheet one of our four cornerstones that has been a top strategic priority since the earliest days of American homes four rent.
After years of hard work and investment we've cultivated the only investment grade rated balance sheet in our sector, which has uniquely positioned us with the flexibility to make long term investments into our image development program. Unlike anyone else in our sector addition.
Additionally, recognizing the tremendous external growth opportunity ahead of us in August we raised nearly $412 million in a highly attractive oversubscribed and upsized common equity offering which is currently being deployed to fund high return opportunities across all three of our growth channels.
We ended the quarter, reflecting the recent equity raise our net debt to adjusted EBITDA was just 4.2 times. However, moving forward, we expect our leverage to trend closer to our internal target of five and a half times as we deploy the cash currently on our balance sheet and utilize our leverage capacity to fund our growth programs.
And speaking of liquidity at the end of the quarter, we had $316 million of cash on hand, and our revolving credit facility, which provides $800 million of total capacity was fully undrawn. Additionally, during the quarter, we generated approximately $71 million of retained cash flow and sold 200.
33 properties generating approximately $56 million of net proceeds.
And to close I'd like to leave you with a few wrap of thoughts around the American homes for in strategy since our founding nearly 10 years ago. We have remained steadfastly dedicated to our mission of becoming the leading provider of single family rental housing in our country, while delivering consistent industry, leading cash flow growth and shareholder returns.
Our strategy and investments into a foundational cornerstones are paying off just in time as our industry is entering a new Renaissance suburban demand first from a portfolio perspective, our market composition positions us for outsized benefit from today migration patterns second our operating platform is firing on also.
Cylinders after years of investment into our technology systems people and infrastructure.
Third our three pronged growth strategy led by our internal development program uniquely positions us for continued outsized growth, while historically low MLS and homebuilder inventories are creating a challenging acquisition environment and fourth our balance sheet has never been stronger providing us with access to investment grade capital and.
Meaningful leverage capacity to fuel our growth programs. It's.
It's an exciting time for American homes, four rent as a strategic vision has now become a reality, which of course would not have been possible without the tireless efforts of our amazing team members and with that thank you to the team and we'll open the call to your questions.
Thank you at this time, we'll be conducting a question answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line into question can you.
Would you expect if you 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 key.
To allow for as many questions as possible, we ask that you each keep to one question and one follow up.
Our first question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.
Thanks, maybe just start on operation how many end markets are back to normal in terms of late fees and other charges, maybe just outside of the CDC eviction moratorium, but just trying to get an idea of kind of.
How much of a return to normal you've seen from an operating perspective.
Hi, This is Brian.
We went back to normal operating procedures for late fees and month to month premiums across all markets in August.
There are a couple of markets that have some specific rules, but it's it's very small in nature. So probably best to consider that we're operating normally at least from that perspective.
Across the whole portfolio.
Okay. So the fourth quarter should be fully.
Fully back to normal outsiders jurisdiction moratorium.
Yes, yes.
Perfect and then maybe just on development.
What is.
How many days it between the completion on average somebody actually moving in and then how does that compare to a turn time on somebody I don't lease expiring in the rest of it will be net.
Hi, Nick this is Jack thanks for the question.
It's a little different.
They both have about nine to 10 days from lease sign to move in.
And the days on market is pretty similar 15 to 20 days the only differences from move out.
Two.
To rent ready there obviously is no move outs, so you're automatically rent ready and you have probably 910 11 days for getting the house rent ready on the turn so thats really the major difference.
Thank you.
Thanks, Nick.
Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.
Okay, you gosh you.
You got it wrong Cam and online for Richard.
Just.
Going back to sort of the 400 homes.
Valerie deliver in the quarter any sort of early read or.
Anything performance related that we can get on those homes, just sort of want more color in terms of higher they leasing up.
Did they come on target.
Is is gone a carton grades.
Okay.
Yes, Ryan this is Jack Corrigan.
Yeah, Everything's leasing up as fast as we could hope for so.
That's on target were probably slightly ahead of where we projected the rents to be.
And the amount of time to lease up.
No.
As far as costs.
Costs are pretty close to what we.
Underwrote, we have some variation the.
Occasionally we expect to see more variation towards the end of the year due to a lumber spike but that appears to be coming back down.
Got it Thats helpful. And then if I can just turn to the the same store revenue growth than the 90 basis points.
Uncollectable grants land.
When does that when does that normalize does that become a tailwind in 2021.
Also sort of similar question on late fees I know with all in it.
Seems like 10 basis points, but.
The same question is does that also become a tailwind potentially.
And that 21 as you sort of comps.
Yes, good morning, Ron It's Chris let me start with that one maybe first on the bad debt.
Lets you are exactly right there will come a point, where bad debt normalizes and the headwind will flip to a tailwind.
The trick there is obviously none of us have a crystal ball on being able to predict exactly when that flips happens but thinking.
Thinking about it going forward there will come a point collections will normalize and that will flip into a tailwind.
And then on the fee side Youre correct as well keep in mind late fees and things like month to month premiums.
We're only turned off for about four months or so but as we think about that in the April to July context going into 21 and that will be a favorable tailwind comp as we're thinking about things on a year over year basis.
Got it that's helpful. I left off me. Thank you.
Thanks, Ron.
Thank you. Our next question comes from the line of handle some just with Mizuho. Please proceed with your question.
Hey, good morning out there.
More in the morning.
Hey, So I wanted to talk a bit about your development on balance sheet I guess your development platform here you added another 400 homes.
Your your platform this quarter could you on track into your full year 2020 codes you outlined.
And.
Most of the started pre covidien built through the comment period. So sitting here today with the added momentum in the Sunbelt and the new capital source I guess I'm curious how you think about the opportunity set over the next few years. There I can we can easily matched this year's production again next year and see that as as the minimum but I guess I'm more interested in perhaps what the the upside than it is here where how much.
You'd be willing to push the lever.
That lever here.
Given more experience as you pointed out a more capital sources with the new JV and what could be a very supportive demand backdrop as discussed.
Yes. Good question Haendel, it's Chris why don't I I'll lead off on this one and then Jackie come in with some additional color on.
You're exactly right what.
Weve been as we all know investing heavily into our own development program in land pipeline for years at this point.
And you also have another good point, our teams have been doing a great job keeping us on track to deliver between 1500 1600 homes. This year, which importantly is the high end of the range that we are expecting just last quarter and when you look at it on a year over year 19 into 20 basis.
This year's production represents a nearly 70% increase over last year. So we're in a great trajectory and as we all know our objective is to continue growing our annual production volumes for years to come so.
Specifically, when we think about 2021, it's probably a little bit too early to be talking hard numbers at this point, but I think we'd like to see our total production volume in call. It the 2000 homes area or so which is a nice increase over this year that the total program number including both homes owned balance sheet inventory development ventures in.
Then as were thinking about overall growth of course, we'll continue supplementing our development program deliveries with complimentary acquisitions through our traditional national builder programs.
The yen Hemdale this is Jack.
I would echo what Chris says, but.
As far as.
Our infrastructure, we could handle probably three to 4000 over 15 markets.
With the infrastructure that we have through the 4000 deliveries if.
If we expand the number of markets, which were always looking at the possibility of doing than than that could go higher.
Got it got it okay. Thanks, Thank you for that.
And just a cost operating strategy here clearly you guys have had a habit.
We have a pretty favorable tailwind near all time high occupancy retention. There are very strong favorable demand. So I guess you know here we are in November I'm curious how much.
More aggressively and how much longer do you think you continue to push pricing here or are you starting to get a sense that it's time to pull back a bit. So I guess the question is.
How much occupancy would you be willing to trade to see if you had to push for rate will do you think you can achieve.
She both.
Getting.
Renewed rate increases and maintaining occupancy.
I handle this is Brian.
We're we're really really pleased with the demand levels that we're seeing in the marketplace.
Our record high occupancy and record rate growth is is an example of that.
We saw fantastic increases in applications per ready property in the third quarter up almost 100%.
From from 2019.
Thats translating into some really good pricing power.
Expectations are that this is going to continue.
If you look at the expected difference in rate growth Q4 to 2020 as of Q4 19.
Were expecting.
Really large increase so.
So we see that that pricing power continuing into next year and we've never been in a position of.
Occupancy at these levels going in for closing out a year before.
So I'm very optimistic about.
Having that ability to push rents into the first quarter.
Got it thanks for that Brian if I could follow up but see that October renewals were at 3.5% period, where were you asking.
To get that 3.5% and then what's the early read on November December renewals. Thanks.
Yeah art, our difference between asking sign it's usually pretty tight so were in the neighborhood of 10, and 20 basis points theres not a ton of negotiation.
We're pretty precise I think in our in our renewal pricing offers.
We the offers for November were up from October slightly in the low to mid fours.
Then on our offers for December and January there is a slight increase offices of the November asked as well.
Got it very helpful. Thank you guys.
Thanks.
Thank you. Our next question comes from Buck Horne with Raymond James. Please proceed with your question.
Hey, Thanks, good morning, congratulations on the results.
Hey, I'm curious if you could dive a little bit further into the discussion about.
The migration patterns, you're seeing are picking up in your your leasing traffic.
To the extent you have it I'm just curious what percentage maybe of new leases are you.
Moving from Addus versus maybe.
More typical year prior or any other indication what percentage upticks are you getting from from former apartment renters any.
Any sort of quantification.
Terms of these these macro trends I think could be really interesting.
Thank you Buck this is Brian.
Yeah, we're still seeing increase application activity from people coming from multifamily.
It's probably most pronounced in a couple of states Arizona.
George on Colorado come to mind, where the increases are in the 25% to 30% range year over year.
Again as I mentioned in my prepared remarks, probably the most dramatic increases are the Interstate movement that we're tracking.
As an example.
Our applications for.
Prospects coming out of California into Arizona that 91% year over year.
California, Nevada is in excess of 100%.
In California to Texas is up over 90% as well so we're seeing a lot of.
Increased demand for people moving out of state and to what we say maybe higher quality life market certainly from a financial perspective.
On the flip side, you get to the East coast and we're seeing a big uptick in migration out of New York, New Jersey into Florida.
With applications up into the state of Florida over 120% year over year. So those are probably the most dramatic changes.
We're.
Really pleased with with the activity and our expectation is that this is going to continue.
Yes, well those are great huge statistics as it really helpful.
Curious now with this this shift in lifestyle. These shifting migration patterns and a lot of it driven by this work from home culture that we're all living through.
Does that change how you think about the product you are building development wise are you getting.
Request from customers that they need more space or need a dedicated and a work from home area are you building stuff like that in to.
To the product now or how are you adapting to the guidance.
Need then to the development platform.
Hi, Buck this Jack thanks, Thanks for the question.
Where we're building in extra bedrooms, we're building in office, Merx and and the office areas inside the home we started.
And when I say, we're building in this.
This thing really started in March and it took us a little bit maybe a month or two to.
Kind of get the plans redrawn to have these things in it and so we're just starting to deliver homes with these additional features.
Great all right. Thanks, Jack I appreciate that and as the Israel Craig is the land market changing at all in terms of price.
Pricing for the communities or maybe low.
Locations that you can build a community that.
Yes, the the.
I mean, there is a lot of competition a lot of the national builders and local builders tend to shut down their land acquisitions for.
Three to six months.
From March and now they're trying to catch up so we're definitely seeing.
A lot of competition Thats one of the one of the advantages that we have as it were we have a highly diversified portfolio, including where we.
Where we have our development platform and so we're we're able to get the number of lots that we may have to buy more in Columbus and lesson in Florida, but we're definitely getting the number of lots that were anticipated.
Okay. Thanks, guys congrats.
Thanks Buck.
Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Thank you very much a couple of big picture questions Steel farm the company during the housing crisis in the.
The 2009 era and at the cost for the formation of the single family industry have for rent in terms of the institutional.
Institutionalization. So the first question is how do you compare the investment opportunities in front of the company today with that as the post nine era and secondly, if you believe investment opportunities are increasing in the SFR space, what strategies will MH employ to differentiate itself and accelerate that growth.
Hi, Jade its Dave did.
Good morning.
The there is some a lot a comparison between the two there are some differences, but the one thing that differentiates American homes today is that we have.
Three different acquisition channel. So we can be nimble and we can take advantage of any opportunities that come about and we have the capital in place and the access to capital that we need to take advantage of those opportunities.
Today, the the acquisition market of existing homes as well as those from National builders is this a little more challenging a little tighter.
The build program is our best product, but we're still getting a.
Opportunities through the other channels.
So things that change in the future for any reason.
We're in position to take advantage of those opportunities.
And secondly, none.
Not a related question, but what are your expectations for bad debt expense.
In the coming out one to two quarters do you expect continued downward trend or should we be thinking about something similar to what we saw in the third quarter.
Yes, Jade good morning, it's Chris really.
Really good question.
Difficult to answer.
Yeah.
Just a number of factors outside of our control as we think about November and December.
What we do know however is that the fourth quarter is off to a really good start you probably caught this in my prepared remarks.
October collections are actually running at 101% second quarter payment patterns.
[music].
With that said as we're thinking about the fourth quarter I would probably expect to see slightly less rollover revenue into the fourth quarter compared to what we saw in the third quarter, just given comparisons and revenue recognition third quarter versus second quarter.
And like I said, it's really difficult to speculate if I would if I had to and I was holding everything constant with today I could see fourth quarter bad debt kind of in the twos.
If I were hypothetically holding everything constant with today, but again, it's a really difficult area to predict but.
But what we do know is that so far collections are trending well hand october's looking good.
Hey, Jade its Dave let me just follow up with a couple of thoughts on that I agree with Chris. It is it's very difficult to predict the future and there is a lot of factors outside our control obviously, but if you look at.
Our portfolio and our tenant underwriting our portfolio be well diversified it its end market. So I think we presented this in a couple of our slide decks previously.
With our underwriting of the market's looking for height job growth as well as high population growth.
We have seen.
Significantly below national average unemployment in the markets that we have our homes in fact, it's better than the rest of the residential.
Public companies.
The exception as one multifamily company.
So our underwriting is very strong our tenant underwriting or market underwriting strong or tenant underwriting strong and all of those are going to benefit us.
As we navigate these uncertain waters.
Thanks for the update.
Yes.
Thanks Jade.
Thank you. Our next question comes from the line of Luke.
Good luck with Bank of America. Please proceed with your question.
Hi, everyone.
I would just go back to market growth and again.
I know things are much better and some uncertainties outperforming but are there any markets that are new to your watch list or any market that off of your lifestyle and on either end market that surprise you with that performance this quarter. Thanks.
Okay.
Hi, Louis Brian.
We're really pleased with the performance of all of our markets on the occupancy side.
We've seen gains.
In each of the markets in occupancy year over year.
And the demand that we talked about earlier is really throughout the entire portfolio.
She will talk about the markets that may be a little bit more challenged on that from a collections perspective.
Similar to what we saw last quarter.
Little bit Las Vegas.
Houston and to certain extent, our Chicago markets, but.
But there is still holding up well.
They would be kind of it.
Lower end of the pack from a collections perspective.
Got it. Thank you and then also looking at the utility reimbursement I know the bad debt has decreased from Q, but how are the collections in terms of the utility reimbursements compared to that Frank collection.
I think I remember you guys, saying I was a bit of a difference.
Yes, Directionally. Louis this is Chris.
Directionally, we seeing continued strength on both sides.
We obviously saw some nice continued collections on both fronts into the third quarter, you're not going to this concept of rollover receipts from the second quarter, but Directionally I would say there are both trending very similarly from a quarter over quarter perspective.
Okay. Thank you.
Thanks Lou.
Thank you. Our next question comes from the line effort did more with Goldman Sachs. Please proceed with your question.
Good morning, Brian.
Brian if I could just follow up on the migration pattern question that you answered what sort of the absolute delta that you're saying those 100% increase numbers, it's not off a base of 100 off of 9000.
In terms of the application numbers.
Hi, Rick.
I don't have the exact numbers in front of me, but all of the statistics that I cited where significant increases offer a significant base so thinking in terms of.
Doubling off of off of 100 for a particular market would be would be appropriate.
Okay, and then Brian just on occupancy how much further do you think you can raise occupancy occupancy.
What sort of that searching on lumber for your portfolio do you think.
What weve seen fantastic improvements in retention, we still think there is a little bit of room there.
Our pre leasing efforts are starting to really pay dividends.
What weve reduced our turn times dramatically year over year price I think there is still is a little bit of room. Obviously, it's it's a different scenario when you're in the 90 sevens as well during the 90 fives, but.
But we're optimistic that we can maintain and and maybe pick up a little bit of incremental.
Occupancy as we go forward with this robust demand.
Great and then Chris one question for you how do you think about or how should we be thinking about real estate taxes as we go into 2021. Thanks.
Yeah, Mark Warner Rick.
Good question.
It is yeah, I'll start by saying, it's a little bit early to provide any hard to quantitative thoughts at this point.
Remember that this is the exact time of year, where we're working very closely with our team both property tax experts in market advisers to form a view on the property taxes, including assessed values trajectory is any kind of rates going into next year.
Next quarter I'll be able to provide more precise in quantitative thoughts on it.
With that said you know from a high level, where we stand now on the valuation side.
I think it's no surprise that we continue seeing strong home price appreciation in that expect that's unlikely continue to pressure property tax values ended next year. However, I would remind everyone that we have one of the best property tax teams in the industry in a super robust appeals process fit each and every year files upward.
As a 25000 individual property tax appeals and so in this environment of home price appreciation, we will definitely plan to continue leveraging and utilizing that into next year and then on the rate side is it a little bit too early to speculate on that quite frankly, but we're watching the situation very closely with our dedicated team of experts like I said, we'll be able to provide another.
Dave.
With more formal thoughts on property taxes next quarter.
Thanks, Chris.
Hi, Eric.
Thank you. Our next question comes from the line of Douglas Harter with Credit Suisse. Please proceed with your question.
Thanks, I was wondering if you have or could share with us any kind of early results of the initial.
Build to run portfolio kind of how retention box and.
The ability to pick up.
Renewals, how that looks relative to kind of the.
The the other parts of the portfolio.
Yeah. Thanks.
Thanks for the question Douglas.
It's pretty early to tell we have a relatively small group that we can compare to same.
Same home or or that are in our same home portfolio.
But as far as.
That group is we're seeing similar.
Similar.
Attention rates and similar increases and it's it's market specific so if we had a development in Arizona, we're seeing significant increases in.
[music].
More significant than that maybe other areas.
The.
The one area that we're seeing that's very positive is that the turn and maintenance costs are running about 25% of what our same home portfolio.
Is running.
Great. Thank you.
Thanks, Doug.
Thank you. Our next question comes from the line of John Glass with Green Street Advisors. Please proceed with your question.
Hey, Thanks for the time, just a few questions for low days on that your portfolio market footprint is the amount of capital flow space make you take a step back in.
Evaluate.
The more meaningful market shifts market dispositions educate let.
No at this time, we're very on we've looked at our markets. So if you go back a couple of years ago, we have more than 40 markets and we have done a little bit of printing today, we're very happy with our footprint.
Not only is it performing very well as you've seen in the numbers.
We also it also gives us a lot of growth opportunities throughout the portfolio. So at this time I don't see us.
During any meaningful pruning of markets.
There will be properties here and they're consistent with our past as to how we do our asset management and there will be properties in each of the markets that will get identified for a number of reasons to be disposed of but it will.
It will be it will be minimal against the total number of homes that we are.
Okay. Then second question Jack could you give us a sense for how cap rates have trended.
Someone just popped few sound all markets in recent months.
A recent quarters.
Yes, that's that's a that's a good question because you're seeing increased prices for acquisitions, but you're also seeing increased rent. So we're we're trying to be balanced in how we're underwriting and the and acquiring the properties, but I would say there is a little pressure.
Sure downwards.
Not a lot because of the because of the rate increases.
All right. Thank you.
Thanks, John Thank.
Thank you. Our next question comes from the line of Dennis Mcgill with Zelman Associates. Please proceed with your question.
Hi, Thank you.
Jamie. So my question is on the cost of capital when you look at all the interest in the space now for energy in general acquiring portfolios.
Could you describe what cost of capital is down over the last year and then secondly, when you think it would do over the next year or two.
Yes.
There is obviously you are absolutely correct Dennis there is more capital looking at the single family.
Brant concepts.
Particular, a lot are looking at the built or brand concept specifically.
Today, we are sitting in a place that we've got good currencies for ourselves.
Both in the <unk> in all of our channels, whether it's the the comment the debt and there is a lot of JV interest that is expressed to us buying a number of parties.
The difference between American homes for rent and our peers is those those cornerstones that we talked about in our prepared remarks, we can marry the development program with an operating program and it's broader as Jack previously.
Discussed we have the ability to basically have a feedback loop as to what's going well, how do we need to modify whether it's a home designs or or marketing programs, because we we control all the different.
Platforms ourselves.
But there is more capital keep in mind that this is a very fragmented market, we own less than 1% of the assets less than half a percent and and and all our peers zone.
With us all the institutional peers, so in less than 3%.
So theres a lot of opportunity out there I am very I'm very pleased with where we are sitting today the.
The investments of the prior years are really putting us in a great position going forward.
How likely would it be David do more joint ventures over the next year or two versus growing organically or with partners you already have.
Yes look the joint ventures are A.R., one channel and joint ventures at times, bringing more than just capital to the table and there are reasons to do joint ventures, we have a very high margin.
Our joint venture partners to date have been very high quality and they've been they brought more to the table than just capital they bring opportunities et cetera, so teaming up with them.
There's a lot more than what you see in the financial statements.
At the end of the day, we our preference is to do as much as we.
As much as possible on our own balance sheet.
But there are times that there will be other reasons that we'll consider.
Ventures as well.
Okay and.
And then just one more mature if that's your question Brian but.
Looking at recurring Capex this quarter and thinking about the pressure on usage of the home with them if that.
As end up becoming more permanent how were you thinking internally about underwriting those expenses on a go forward basis.
Also any additional color you can provide on anchors. They did this quarter are you seeing that geographically concentrated at all are fairly distributed.
Hi, guys. This is Ryan yes.
Overall, the Capex for the third quarter came in line with our expectations as we as we signaled in prior quarters and.
Through some of our presentations.
I don't think its.
Specifically prevalent in any markets.
As an example, we anticipated extra stress on the system.
With people working from a homeless remote learning people that going on vacations in the summer.
The tracks with our data.
The utility side too. So for example, we saw increases in electricity those in Arizona, 30%. This summer and then their subsequent replacements on hvdc that that follow that.
So we did anticipated it came in line with what we with what we expected the difference between.
The second quarter with third quarter.
There was an increase in some of the appliance replacements as part of the systems.
And there's been some pricing and supply pressures on appliances nationally.
So that contributed a little bit to that to that increase but again. It was it was expected we made a commitment.
At the onset of covert to provide excellent service to our residents we've.
We've implemented we've executed the the maintenance program from the beginning as Dave mentioned with no deferred work orders and there has been a little bit of a of a premium and in some cases on the on the replacements.
Right when you can get as good Chris if I could just add the keynote.
Sorry, I was just going to add.
Hold aside the Kobe piece of recurring Capex would you you can see disclosed in the footnotes to table. So underlying capex is running right around the 5% area.
Which is much closer to inflationary increases next year consistent with what we were expecting it started the year as well.
Sorry go ahead I cut you off.
Thats, Okay. We can we can help offline I appreciate it thanks guys.
Dennis.
Thank you.
Our next question comes from the line of Tyler refinery with Janney Capital markets. Please proceed with your question.
Hi, Good morning, Thank you Justin tied together number on a prior question I. Appreciate you can give us some guidance.
Fourth quarter and really into 2021, what are your thoughts about the seasonality of this because I mean should we just throw out the historical because this is a new normal or or how should we think about that in terms of occupancy and rent growth, but also curious on the cost structure as well.
Yes, good morning, Tyler Chris.
Definitely for this year.
Brian talked about in his prepared remarks.
The theme of the fourth quarter is that we are we are bucking the typical seasonal trends right as we know traditionally our business our leasing activity et cetera begins to taper and slow as we enter the into the summer certainly as we cross over Labor Day Kids go back to school and things definitely seasonally slow down in the fourth quarter.
As you can tell we're not seeing that this year with occupancy continuing to hold in at a record high level as Brian mentioned this in his prepared remarks, we held our 97.2%.
Average occupancy into October.
We are seeing acceleration in blended spreads as renewals are returning to normal levels throughout the fourth quarter and were continuing to push on new lease rates in our expectation there for the fourth quarter is that we'll see 6% plus I don't think we've ever seen that before in so clearly.
I think our expectations are demonstrating that the seasonal trends are being bucket for this year, what that means for next year and beyond honestly, it's difficult for us to speculate.
And it is likely that some portion of the seasonal trends may written may return, but we really don't know obviously the world has different these days with work from home and everything else, but the pandemic has brought on.
So hard to say, but clearly for this year, we're definitely bucking seasonal trends heading into the fourth quarter.
Hey, Tyler.
Tyler Dave Let me just add a couple of.
Items to that.
The trend that you are seeing or not.
When we got into this industry or into this.
Sector 10 years ago, there were 13 million single family rentals.
Today, there are 17 million single family rentals, and the occupancy are stronger today than they were in.
Institutionally I mentioned that we have a very small percentage of less than 3%, but we did as an institutional group shine a spotlight on the value proposition that single family rentals brings.
And co that has actually increased that awareness of single family rental whether it's the social distancing ability et cetera.
Yeah sure Brian.
Discuss migration trends in migration trends from one state to another are pretty permanent in most cases people are not going to move to another state and then when the coated prices back all move back. So we're seeing a lot of migration trends into our markets.
The the demand that we see today.
Is totally inpatient.
And it continually growing whether in next year, there's a little bit more seasonality than next year as Chris said that you know.
That's a wait and see call, but the demand in this industry is getting stronger and stronger it's a continuum of eight.
Of eight to 10 years, so that has just accelerated it.
Okay, Great just as a follow up question can you elaborate a little more on input costs specifically.
The Bill current channel just curious what that.
Influencing your underwriting at all.
But.
Yes, there is there's really only been one.
Item, that's that's caused any disruption to that.
To our projections of cost and Thats lumber lumber began to have a shortage and started spiking in July.
A year ago, it was about $375.
Per thousand board feet and.
July started moving up peaking in September at $950, which added about $15000.
Per home.
Two our costs that.
Has now started to come back down as more of the plants.
Our mills got online.
This morning, it was at $567. So its we expect it to come back down to normal and we expect the price disruption or the cost disruption.
To be relatively minor over just a very short period of time.
Okay, Great. That's all for me. Thank you.
Thank you. Our next question comes from the line of Ryan Gilbert with Deutsche Bank. Please proceed with your question.
Hi, Thanks, good morning, everyone.
First question on Remy.
Hey, Good morning first question for me is on the on.
Another one on on the bulk of our portfolio.
I guess looking across your markets.
How do you feel like the.
The portfolio competed against comparable new construction for sale in the third quarter and maybe anything that you feel like differentiates your product against no for sale and destruction aside from the fact that the rental.
Yes, I'll take that Ryan Thanks for the question.
I think we competed very well I think the weather in your in the market to buy a home or to rental home.
They are both there and in the builders are selling as fast as they can build them and we're leasing them as fast as we can build on so.
It's hard to say were doing better, but we're doing just as well.
Okay.
Great.
And then looking at deliveries from the National builder program.
A bit better than I expected given the strength in the market.
You've just talked about.
Was that all pre cove, it or I should say I guess pretty early spring or spring backlog.
And how should we think about deliveries from that program going forward I think in the prepared remarks, he's with that so.
Sourcing acquisitions in both national builder in traditional channels for example were challenged.
Yes.
Well I'll answer the first part of the question most of our homes that we build our you know we're planning two to three years out because there is horizontal development and getting all the permits.
And.
And then.
The night verticals within that number is over.
Oh, no filter program.
For the National builder program we.
We kind of shut that down for a while from March until.
I believe June or July as my recollection, and just in the last quarter or so.
Pick that back up and we're getting some response, but it is very competitive.
In the.
You know the the builders are art.
Seeing a lot of.
Retail buyers out there, but I think they will still like the guaranteed.
Purchases of an all cash buyers. So we're still getting our share of those.
Those products.
Okay got it and then just very quickly on property management expense was down in the quarter on how should we think about birth.
Birth rate on that on.
On that expense line item going forward.
Good morning, Ryan its Chris.
There are a couple of small drivers on the margin, but realistically it has more to do with the timing of prior year quarterly comps.
You look at it on a full year basis were running 2% to 3% net.
Thats, probably the right way to think about it on a full year 10, something any inflationary environment, but just some timing quarterly comps, which is what we saw this year our mix sorry this quarter.
Okay, great. Thanks very much.
Thank you.
Our next question comes from the line of Ki Harte with Sandler. Please proceed with your question.
Hey, Thanks for taking my questions guys. So first off can you give us any color on the demographics of new applicant residence, maybe what jobs in industries are they skewed to and how would their rental coverage compared to your existing rent resident.
Hi, This is Brian.
It's a very good question.
The the.
The profile of the applicants is remarkably consistent pre pandemic to the current we've seen a slight uptick in an.
An income.
The credit scores for example are right on top of each other so the the quality of the applicant has remained high and.
There really isn't any.
Major differences between what we are doing.
Between the the applicants who were getting approved prior to.
The pandemic.
As to those that are getting approved currency.
Currently.
Okay, Thanks, and just to switch gears, a little bit I.
I mean, given the potential for a second locked down in certain markets. So it's sort of plan do you guys have in place when you expect to see softness in rental increase and again or maybe not as much just given where where you're seeing demand at kind of the strength president.
Yes, it's a good question again, it's difficult to predict the future on this I think the the initial shock and all the uncertainty that came with it.
It's going to be unique.
Subsequent changes that we that we're seeing there is some pressure in Illinois for example, in bars and restaurants and some shutdown.
That that we've noticed button.
But in terms of predicting as dramatic of an effect if.
If that happens to be a second wave I think it will be muted.
A little bit are.
Resident base has done extremely resilient, which.
We talked about the benefits of diversification and also.
We're very pleased with the fact that.
We're not susceptible to any specific industries necessarily.
So I don't know exactly.
How dramatic or to the extent of the second wave would be on performance, but.
My.
My instincts tell me that it won't be as dramatic as the first.
Okay Thats it from me thanks, guys.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Franklin for any final comments.
Thank you operator.
This quarter has been a very strong quarter in light of the co bid headwind.
It's really a testament to their is insatiable demand as I indicated for single family rentals, and we see that act.
Actually increasing.
As strong as this quarter is the management team here is actually more excited about our future.
And what potential lies with this demand and the fact that all of our systems are in place and ready to take advantage of any opportunities that present themselves I. Thank you for your time and we'll talk to you guys next quarter take care Bye bye.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.