Q4 2020 American Homes 4 Rent Earnings Call
Greetings and welcome to the American homes, four rent fourth quarter and full year 2020 earnings conference call.
At this time all participants are in a listen only mode.
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.
I would now like to turn the conference over to your House and Mcguinness. Please go ahead.
Good morning, Thank you for joining us for our fourth quarter and full year 'twenty 'twenty earnings Conference call.
I'm here today with David <unk>, Chief Executive Officer, Bryan Smith Chief.
Operating on that day.
Jack Corrigan, Chief investment Officer, and Chris Lau, Chief Financial Officer of American homes for that.
At the outset.
It seems 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 to differ materially from those projected in these statements.
Risks and other factors that could adversely affect our business and future results are described in our press releases and in their filings with the SEC.
Current and expected future economic impact of the Covid.
19, pandemic, including extraordinary increases the national unemployment may pose headwinds to our future results.
All forward looking statements speak only as of today February 'twenty, six 'twenty and 'twenty, one 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're 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 C. C reports and the audio webcast.
Replay of this conference call on our website at American homes for rent Dot com with that I will turn the call over to our CEO David think line.
Thank you Anne and good morning, everyone.
Thank you for joining us today.
I hope, you're safe and well.
We are thinking of those in Texas and other states impacted by the recent winter storm.
Our top priority is the safety and wellbeing of our employees and our residents.
We are working with our residents who had been impacted while there are many homes with minor damage. There are relatively few homes with significant damage, we maintain insurance for such events and do not expect the financial impact to be material to the company.
2020 was not the year, we envisioned 12 months ago.
The pandemic has impacted all aspects of our lives our business and our homes.
For our residents our homes became their offices their schools their gyms their vacation destinations and their safe havens.
I am very proud of our company's performance during these unprecedented times and I'm excited about 2021 as we continue the path of 2020 with record breaking success.
Our ability to grow profitably and deliver operational excellence in such a challenging year as a testament to the unique company. We have built our experienced leadership team and the strength of our platforms.
Well 2020 was a difficult year for many in the real estate sector or business model truly set us apart.
For American homes for rent the pandemic shined, a spotlight on the resiliency of our industry and the quality of our platform.
The demand for single family rental homes is stronger than ever before and we expect this strong rental demand to continue.
Not accelerate in 2021 and beyond.
Our differentiated investment and growth strategies are paying off and continue to be validated.
These strategies combined with our investment grade balance sheet keep us flexible and nimble.
This enables us to succeed grow and every market cycle take advantage of opportunities and adapt and respond to changes.
Our development and operational platforms provide our residents with a quality housing experience.
But they also embrace environmental sustainability.
The homes built by a M H development, our energy and water efficient.
The durability of the products and materials, we use provide a well functioning and easy to maintain homes.
In addition to providing housing for our residents. We are also focused on our communities and our employees.
We continue to give back to the communities, where we live and work.
Through corporate and employee volunteering and charitable activities.
And as the industry leader, we strive to maintain a diverse workforce and are attracting and developing the best talent in the industry.
During 2020, we continued our focus on corporate governance through our board of trustees refreshment process.
When will he was named independent chairman of the Board last May.
Looking forward to 2021, we recognize it will be another unique year of opportunities and challenges.
The impact of the Covid pandemic remains.
We do not know when life will return to normal.
But what we do know is that we are well prepared for the challenges that we will face.
So what should we expect in a post pandemic world, we do not know for certain.
What the housing data and trends do tell us is that migration to suburban single family rental homes was occurring before the pandemic is accelerating and is here to stay.
The pandemic did not change these trends, it's simply shined, a spotlight on the value proposition that single family rental homes living offers.
Now more than ever people value extra living space private yards and a sense of neighborhood community.
We are starting 2021 with more positive momentum across all disciplines that at any time in our history.
From an operations standpoint.
We are positioned to have a strong year.
While rental demand for our homes is stronger than we've ever seen this demand continues to grow.
Our occupancy is at an all time high our rental rate growth is robust.
And our collections remained consistently strong during these pandemic times, resulting from our outreach to and good relationships with our residents.
And from an investment standpoint.
This is where the opportunity is truly lie.
2021 will pick up where 2020 left off with a program designed around growth growth growth.
There has been and remains a national housing shortage.
The number of household formations the past decade has consistently outpaced new housing stock.
This combined with the desire of families to migrate to single family rental homes has created excess demand for our available inventory.
This demand creates a need for additional quality rental homes.
Our strategic priority is to meet this need through significant growth.
As the nation's leading builder of single family rental homes communities, we have the unique ability through our development function to add new rental homes supply that generates the best economic return of all of our available growth channels.
The expansion of our development program in 2020 resulted in US opening a new community nearly every week.
2021, we'll continue the acceleration of development deliveries and in the acquisition pace of land.
Our target is to have our investment in land be less than 5% of total assets.
Today, we control nearly 10000 lots and have capacity for more.
By the end of 2021, we expect to control between 11013 thousand lots.
These lots will become future home deliveries over the next four to five years.
And lastly from a financial standpoint.
We built our strong balance sheet and capital structure for times like these.
It provides us the ability and flexibility to make long term investments and enable growth through all economic cycles.
Given these positive trends and our confidence in our platforms. We have initiated guidance for 2021 with the industry, leading core <unk> growth per share of nearly 8% at the midpoint.
This builds on our four 5% growth in 2020.
Furthermore.
While we strive to maintain much of our operating cash for reinvestment into our growth programs.
Our cash flow and taxable income growth dictates the need to increase our distribution level.
Beginning with the March distribution, the quarterly distribution rate on our common stock will double from five cents per share to <unk> 10 per share.
And as our cash flow and taxable income continue to grow it will necessitate further increases in our distribution rate.
At 10 per quarter, or <unk> 40 per annum, our payout ratio will be approximately 40%, which still prioritizes. Our continued objective of retaining cash flow for accretive reinvestment.
But also provides a long runway for continued future dividend growth.
My hope is that 2021 returns us to our normal theres more akin to pre pandemic times.
Regardless of the environment, we operate in American homes for rent will always provide our residents with quality homes that meet their housing needs.
I am excited about the year ahead as we continue to successfully execute on the company's strategy to drive growth create value and advance our plans to deliver greater shareholder value.
And now I'll turn the call over to Bryan to provide greater operational details.
Thank you, Dave and good morning, everyone.
Our operational finish to 2020 can best be summarized in two words record breaking.
Demand for single family rentals continues to impress.
Covid has highlighted the benefits of suburban living and people are prioritizing quality of life decisions like never before.
As an example, virtual meeting tools have created a fundamental shift from any professionals.
Allowing them to choose where they live regardless of the location of their office.
This coupled with the incoming wave of millennials, who are entering prime single family living years has created unprecedented demand for our well located homes.
Within our portfolio.
Portfolio demand continues to accelerate.
In the fourth quarter, our showings per rent ready property were up almost 60% from the fourth quarter of 2019.
Notably we saw a 30% year over year increase in applicants coming from states outside of our portfolio footprint.
Our people empowered by our innovative technology platform continue to turn this demand into all time highs in occupancy and rate growth.
I could not be more proud of the team's accomplishments over the past 12 months, which has created great momentum entering the new year.
Okay.
As mentioned earlier, we continued to set new company records in the fourth quarter.
For the same home pool.
Average occupied days hit an all time high of 97, 3%.
Which is 210 basis points higher than it was in the fourth quarter of 2019.
New lease spreads also set a record at seven 6% for the quarter.
Which is over 600 basis points higher than those of the prior year.
Looking ahead, we entered 2021 with a sense of confidence and preparedness.
Our team and best in class operating platform are well positioned to tackle the opportunities challenges and uncertainties that may arise in the coming year.
First we believe that demand dynamics fueled by migration population trends and changing customer preferences are here to stay.
We say this with confidence based on the tremendous amount of information we capture.
Whether through market and application data.
Moving surveys or on the ground feedback.
Second our team is continuing to innovate on the technology side.
From platform enhancements to our new website that will be released soon.
We're constantly bringing new features into production that efficiently enhance the resident experience.
That said the current economic and regulatory environment is affecting our normal leasing and collection practices.
However, we are confident in our ability to continue to capture the wave of demand and quickly adapt to any changes that may come.
Lastly.
While Chris will provide more details later.
I would like to share a few thoughts on our 2021 operational guidance.
Our outlook is bullish.
But it is also balanced with caution given the lingering COVID-19 uncertainty.
Demand and occupancy continue at record levels with January same home average occupied days of 97%.
However, as we progress through the year, our physical occupancy may be affected when our collection practices returned to normal.
With that in mind, we expect 2021 same home occupancy to be equal to or slightly ahead of 2020 on a full year basis.
For rental rates January continued to set records with new lease spreads of over 8%.
Renewal lease spreads in excess of 5%.
And blended lease spreads in the mid 6% range.
And we expect our pricing power to continue throughout 2021.
With full year blended leasing spreads in the 5% range.
Please note that the pull through of our record leasing spreads will be muted until we burn off last year's April to July zero percent renewals.
As such we expect our leasing spreads to translate into full year average monthly rental rate growth in the four to four 5% range.
For baseline repairs and maintenance and turnover expenditures, we expect increases in the 4% range.
On top of this we expect continued impact to chargeback collections as well as slightly elevated near term turnover costs when our collection practices returned to normal.
I'm excited about our future.
Our superior operating platform uniquely positions us within our industry to capitalize on this surging demand and the growth opportunities that come with it.
Now I will turn the call over to Jack.
Thank you, Brian and good morning, everyone as David mentioned.
External growth is a top strategic priority of ours growth to help address the ongoing national shortage of housing growth to satisfy the demand for rental housing brought on by changing home preferences and migration will shift.
And growth that is cash flow accretive and generates long term value for our shareholders.
While we focus on growth, we expect the 2021 transactions market presents both opportunities and challenges.
From an opportunity perspective, new investment possibilities may arise from changes to MLS market conditions or closure activity and distressed market outcomes strategically our three pronged growth program combined with our balance sheet strength allows us to be nimble flexible and opportunity.
The attractive deals arise.
From a challenge perspective, although pricing on traditional MLS inventory and national builder opportunities is driven higher by surging demand and record low interest rates, we continue to buy opportunistically from these channel.
But most importantly, our A&H development program continues to provide superior returns relative to these other channel.
Years of strategic investment into our program has given us full control and protection from near term market conditions.
The built for rental opportunity gets caught fire over the past few quarters, many investors and homebuilders have rushed into this space further validating in recognizing the investment opportunity.
While others are playing catch up we had the foresight and thought leadership to pursue this concept many years ago.
Importantly, not only does it provide full control uncertainty around a significant source of portfolio growth.
Also has several unique advantages that are difficult if not impossible to replicate.
First <unk> is the only national homebuilder with a unique combination of both the best in class operating platform and industry, leading development program.
Our vast amounts of data captured from all sides of the business allow us to continuously analyze and strategize to build our product and run our business in the most efficient way.
Lastly to pursue development in a significant way it takes a fortress balance sheet and a clear vision for long term capital that others may not have.
We are proud of our development program and its growth to date.
More importantly, we are excited about its future and benefits it will bring to our company and shareholders.
Outstanding fourth quarter is a great example of our momentum we added 563 homes to our wholly owned portfolio exceeding our overall expectations for the year.
On a full year basis. Despite some COVID-19 delays, we added over 2100 homes to our wholly owned portfolio of which over 50% were from our <unk> development program.
The a M. H development program delivered a total of 647 homes for the full year of 2020 exceeding the midpoint of overall expectations by nearly 100 homes and demonstrating explosive growth of nearly 80% over 2019.
In 2021, we expect the ramp to continue as we plan to deliver between 90 and 100 2200 homes from our A&H development program to our wholly owned and joint venture portfolio.
This represents approximately 25% growth over 2020 deliveries.
To round out our other.
Growth channels, we continue to be active but have reasonable expectation Chris.
Chris will provide more details in a moment.
In closing I am proud of our execution in 2020, we continue to take advantage of the differentiation from our one of a kind <unk> development program and we are well positioned in 2021.
Opportunistic and accelerate growth tremendously.
Now I will turn the call over to Chris.
Thanks, Jack and good morning, everyone.
Cover three areas in my comments today first a brief review of our quarterly results second an update on our balance sheet and third I'll close with an overview of our 2021 guidance starting off with our quarterly results. We closed out 2020 and record breaking fashion generating net income attributable to <unk>.
When shareholders of $27 1 million or <unk> <unk> per diluted share 31 cents of course <unk> per share and unit, representing seven 3% growth over prior year and 28 of adjusted <unk> per share and unit, representing seven 9% growth over prior year.
Underlying this quarter strength was the record breaking leasing results that Brian discussed, which drove an impressive performance within our same home portfolio will be generated four 8% growth in rental revenues, which was further benefited by 30 basis points of contribution from higher fees, and partially offset by 160 basis points of drag.
<unk> from Covid related bad debt.
Translating into an overall three 5% core revenue growth coupled with a four 2% increase in core property operating expenses. This translated into core NOI growth of three 2%.
Normalizing for Covid related bad debts, our same home core NOI growth would have been over five 5%.
And on the topic of bad debt, our collections remained consistently resilient throughout the fourth quarter, resulting in quarterly bad debt of two 5%, which was right in line with our expectations.
Next I'd like to turn to our balance sheet, which has never been stronger ideally positioning us as we step on the gas for growth into 2021.
At the end of the quarter, our net debt to adjusted EBITDA was just four four times, which is meaningfully below our internal leverage target of five five times, providing us with nearly $700 million of incremental debt capacity to fuel our growth programs throughout 2021.
Additionally, at the end of the year, we had $137 million of cash and our $800 million revolving credit facility was fully undrawn.
Also during the quarter, we sold 188 properties generating approximately $45 million of net proceeds.
Next I'd like to share an overview of our initial full year 2021 guidance, which reflects our bullish outlook balanced by conservatism given our expectation for continued COVID-19 uncertainty.
With that in mind for full year 2021, we expect to generate between $1 22.
And $1 28 of <unk> per share and unit at the midpoint, we're expecting an industry, leading annual increase of nearly 8%, which also represents our strongest full year growth since our operations have stabilized in 2016.
Supporting our range are the following assumptions for our same home pool, which will include between 47040 8000 properties. We expect core revenue growth between three 5% and 475%, which as Brian already covered is based on our expectation for continued strong occupancy similar to or.
Slightly better than 2020, and average monthly rental rate growth in the four to four 5% range.
Within our core revenue growth range is a full year 2021, bad debt assumption of 2.5% to 3%, which contemplates our expectation for ongoing COVID-19 uncertainty surrounding the macroeconomic and regulatory environment.
Additionally, please remember that our revenue growth will likely be lumpy throughout 2021 based on the timing of prior year bad debt comps. The waiving of late fees between April and July of last year, and the muted pull through of leasing spreads to revenues as we burn off last year's April to July zero percent renewal period.
On the expense side, we expect the same home core property operating expense growth of 4% to five 5% driven by property tax growth of 4% to 5%, which is roughly consistent with 2020 and $4, 5% to 5.5% combined increase on all other expense line items, which reflects Brian's earlier commentary.
Surrounding our expectation for continued COVID-19 impacts to tenant reimbursement bad debt and turnover costs and to the bottom line. We expect 2021 same home core NOI growth to be between 275% and $4 two 5%.
Additionally, as Dave covered in his comments external growth is one of our top strategic priorities and a key driver of our industry, leading 2021 core <unk> growth expectations of nearly 8%.
Executing on that objective, we expect to invest between $1 2 billion and $1 6 billion of total capital into our combined growth programs. This year, adding approximately 3500 homes to our wholly owned and joint venture portfolios, including 1900 to 'twenty 200 homes do we expect to deliver through our <unk>.
Development program.
And some additional color at the midpoint of our expectations. This represents $800 million or 2700 homes added to our wholly owned portfolio, which we expect to be split roughly 50 50 between our A&H development program and our other acquisition channels $300 billion of continued investment into our wholly owned development pipeline.
It's $300 million of joint venture investment activity of which we hold a 20% economic interest that will consist of approximately 750 homes delivered through our <unk> development program as well as continued investment into our joint venture development pipeline.
To recap as part of our total 2021 capital deployment plan, we expect to invest between $1 1 billion and $1 3 billion of <unk> capital consisting of our wholly owned inventory additions and development pipeline investments as well as our pro rata share of our joint venture investment programs.
And from a funding perspective, we expect to fund this year's capital program through a combination of balance sheet cash routine cash flow approximately $100 million of recycled capital from our disposition program and leverage capacity from our balance sheet and.
And before we open the call to your questions I'd like to reiterate our excitement heading into 2021 over the years. We've remained committed to our differentiated strategy focused on cultivating a diversified portfolio in high growth markets building, a best in class operating platform with industry, leading fully adjusted EBITDA margins.
Multichannel growth program, which now leads the industry as the largest builder of single family rental homes, and a fortress investment grade balance sheet, our strategy and years of investments continue to pay off as we enter 2021 positioned to deliver another year of industry, leading core <unk> growth and with that we'll open the call to your questions.
Operators.
Thank you we will now be conducting a question and answer session.
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Ask that you please limit yourself to one question and one follow up question one.
One moment, please while we poll for your questions.
Okay.
Yes.
Our first question is coming from the line of Nick Joseph with Citi. Please proceed with your questions.
Thank you.
Do you think about the stickiness of your tenants.
The vaccine has rolled out people start to return to the office and there may be a retail participation.
Hi, Nick its Brian.
We're getting great feedback from our residents, especially those that are moving across state lines, we talked a little bit in my opening remarks about the migration patterns. The feedback that we're getting is that they're very happy with the extra space.
I see a lot of this is a fundamental shift.
Comments from we just outgrew apartments, we didn't see that.
There was such a quality of life difference so I think.
The work from home is going to be here to stay in some shape or form but.
But the people are really excited about kind of this new product that they may not have had access to in California, but they can't find in Nevada as an example.
Thanks, Chris.
Chris just on the balance sheet, our capital plan.
A couple preferreds that are able to be redeemed.
'twenty one so what's the plan for the series G and series E preferred.
Yes.
And then.
How do you prefer to play into the capital stack going forward.
Sorry, Nick I think we may have cut out just a bit but I think you were asking about the preferreds.
Others may fit into the capital stack and thoughts there. If that's right is that your question specific to the ones that are actually coming due in 2021.
Cable to be redeemed.
Got it yes, sorry about the technical difficulty, yes, youre exactly right.
We have two series of preferred.
For approximately $500 million.
Become callable during the second quarter of this year.
Both of those series our series D and series E have coupons in the low to mid sixes.
Which means that if you step back and think about it virtually all forms of our cost of capital screen very attractively relative to those coupons.
That said.
Our decision on that front would be very much market dependent.
And probably a little bit too early for us to speculate at this point on what the strategy there will be but again I would say that virtually all of our cost of capital screen.
Screen attractively and we will keep everyone updated as we get closer to those call dates.
Thanks.
Thanks, Nick.
Thank you. Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your questions.
Hey, good morning, everybody. Thanks for taking the question here.
So I wanted to just talk about input costs.
On the development pipeline I think last quarter.
Given the spike in lumber prices, you mentioned that it adds around $15000.
Per home.
When that sort of a spike happens just curious if there's a rule of thumb that we could think about in terms of how to forecast that going forward and the impact on <unk>.
And yields how you guys think about it thanks.
Yes. It is.
Recently spiked again, and we're seeing about the same.
Cost increase Fortunately, we've been in the rental rate.
Growing environment and that's.
That has kept us yield a neutral.
So.
The yields have stayed about the same.
Okay great.
And just a follow up on development.
As we think down the road.
Five years 10 years, what have you is there anything unique about these homes that might make them say less desirable to an end user.
Traditional home purchase anything about the communities of the homes that we should consider.
No I don't think so if we if we decided that at some point to sell them individually and they're individually plaid. It. So we could but if we decided to sell them I think they'd be very desirable.
Desirable to ramp I think they'd be desirable to acquire.
If cap rates stay the same.
We're cmo's.
A couple of the communities have traded in the.
Mid 4% range on cap rates.
I don't foresee them.
That occurring where we'd be selling them, but.
Anything is possible and the other thing is we have a an older community.
And our Winston Salem market.
And it's very desirable for both.
Was originally a rental community and we own I think 165 of the 186 homes and.
And we try to buy the other 21 from individuals.
And it's they don't want to sell so I don't I really don't see.
Uh huh.
It would be an undesirable to somebody who wants to live there.
Hey, Richard.
Let me just add a couple of things so when we talk about how we build our rental homes, we actually build up to a better standard than an entry level home would be built we do that because of the long term maintenance.
And the long term wear and tear on the house.
We are putting in.
Enhanced features we're putting in better countertops better plumbing fixtures.
And the way we build the house is slightly better all of those.
All of those are construction.
Guess adjustments that we've made to a typical entry level homes are going to make these homes as desirable, but more likely more desirable than the traditional housing stock.
Great. Thank you guys.
Mhm.
Thank you. Our next question is coming from the line of Rich Hill with Morgan Stanley. Please proceed with your questions.
Hey, good morning, guys.
Chris maybe this is a question for you and I appreciate your prepared remarks about bad debt.
In the disclosure last night, but I wanted to maybe just understand a little bit more.
Because there.
There was a lot of bad debt last year and so for it to remain elevated this year.
That maybe it's even building a little bit more so as we think about the cadence of that bad debt could you could you maybe just break down a little bit more how we're supposed to think about it in the first half versus the second half of the year because I got to think at some point that that is no longer a headwind.
Yeah good.
Good question rich and not only is it.
Eventually going to not be a headwind, we would expect it to flip and eventually become a tailwind right.
And again I would just reiterate that.
The business is performing phenomenally.
I'd view.
Our view on guidance on bad debt as being a reflection of the fact that there's still plenty of Covid uncertainty ahead right.
Deep potential to continue to headwind collections that none of us can predict right.
And so our view there is that we are prudently and conservatively building in that two 5% to 3% on a full year basis I would reiterate also that so far collections are continuing and continuing to remain resilient and on track with prior pandemic periods through the fourth quarter and even into the beginning of 'twenty one.
In terms of the shape of that bad debt in 'twenty, one again, I think I reiterate my point that none of US No force certain we do think that there will be a return to normal at some point and that will.
Create less of a headwind and eventually flip to a tailwind.
At this point now as I think about that shape of bad debt on a full year basis, I could envision a scenario where wherever bad debt land on a full year.
We can envision a scenario where there is more weighted Miss if you will to that bad debt in the first half of the year than the second half of the year, but again at this point.
It's just impossible to speculate on that exactly to timing.
I appreciate that welcome to our World Chris.
We have to model it out.
But no. Thank you Hey, Dave I wanted to come back to you real quickly.
One of the things that I think the equity market is.
Trying to understand a little bit more is the demand side of the equation and frankly, how many how many homes is realistic.
We live in a really weird weird equity market, where it wants acceleration and therefore.
Really great, but stable growth isn't isn't good enough anymore. So I'm really asking a question about your <unk> growth, which looks really attractive in 2021 versus 2020, how sustainable is that and how much how much is that going to driven be driven by you're just increasing the pie and how much do you think you can increase the pie.
The year over year basis over the next several years.
Yeah.
Thanks Rich.
There's a number of factors that go in to growth and what we have been focused on for many many years as we've had previous discussions is looking far out into the future.
And so growth is basically dependent on access to capital and then access to product and we have been putting ourselves in position for significant growth down in future years.
When we went through the prepared remarks, we talked about the fact that we are significantly building our inventory and land.
We went through a period of time that we tested the build for rent concept.
Comfortable with the build for rent concept and now we are starting to acquire land today, we control 10000 lots, we're going to control many more lots.
By the end of the year, that's our future deliveries, we can't do a lot about 2021 deliveries from development. We can from the other acquisition channels and we have the balance sheet to take advantage. If those channels open up more than they are today today.
There is a supply limitations in that area.
We do underwrite many many homes, but as COVID-19 unwind and people start showing their houses in more normalized numbers.
And if the retail side of the homebuilders softens, a little bit and more become available. We are there to be able to take advantage of those opportunities, but we have the balance sheet that we can expand our.
We have very good currency, we have $700 million or more of capacity on our debt facilities today before we can before we are concerned about hitting our inter.
Internal target of five five times EBITDA, we have significant amounts of retained cash flow. So we have the capital. We have we are building the the land inventory for accelerated growth in future years, So youre going to see more acquisition or more development in 2021 and 2002.
But the real excitement to me is what we are seeing in the 2023 2024 areas. That's where we are we're going to have very very significant.
Inventory that is going to come to market.
But we will we'll be very active between now and then as well.
Great. Thank you guys I appreciate the additional dialogue and disclosure.
Thanks Rich.
Thank you. Our next question is coming from the line of Jeff Spector with Bank of America. Please proceed with your questions.
Great. Thank you and first congratulations on a great year.
I wanted to focus on.
Development the growth and it feels like each week, we continue to hear about a new entrant into the into the sector and again, specifically on the development side and David I very much appreciate the disciplined approach you Your company has had.
On the limit.
How much you want to.
Develop as a percentage of the balance sheet I think you mentioned you know 5%.
But I.
I guess can you share with us your thoughts on potentially expanding that.
Internally or with your board.
<unk> talked about increasing that at this point or bottom line. You just you really feel strongly about staying disciplined.
Yeah, Let me clarify the 5% to start with the 5% was not a what we're targeting for our growth Thats. What we are targeting to hold on our balance sheet in the form of land.
That is basically an inventory as land.
That is the.
It's just kind of an asset allocation from the assay nonproductive assets that we're holding as fast as we can build them, we're going to turn them through and there's a number of different ways that we can actually control more land than what we actually hold on our balance sheet, although we're not there yet.
The growth side is.
It was really a couple of phased process, we had proof of concept proof of ability to do it and now we are in what we talked about is the grow grow grow phase and it starts with acquiring land and and we have targets for our land acquisition, but if our teams can find additional.
<unk> land then what.
The targets are.
We will be taking all good land that we can find for future deliveries for future growth. So we're not putting a limitation on that we will find.
Means to acquire that.
The <unk>.
The second part of your question I think was about many other entrants coming into this market.
There is it's a I guess, it's a little bit of a validation of what we have done to date that it's working and people want to copy it.
But it's a very difficult thing to copy we're the only company right now that has both an operating platform that tied to its development platform.
And we had that as a feedback circle, that's very very important to the the development process because that feedback circle allows us to build a better house for rental and without that.
Some of the things that we have done you may Miss but it's also.
It gives us the ability to just synergistic.
Benefits it helps our maintenance side from our development side et cetera. So we're the only company that combines the two we have a many year head start on others and building the land inventories and the infrastructure necessary to build homes and I just like.
Our position, where we are today and.
As you as you indicate we are looking to not just not be at 600 or 2000 homes. We're looking to really build this but it's really exciting about the years ahead 2021 to a great year with 8% growth.
But I think the years passed that will be even more exciting.
Thank you and then my one follow up question is on rental rates covered COVID-19.
Covered the sector for many years.
Initially.
You and your peers were somewhat sensitive to.
How far you can push rate and I think the past year you've exceeded expectations.
Are you still is there still a level where you.
You need to be somewhat sensitive to how far you're pushing rate or at this point.
That's no longer a concern.
Hi, Geoff it's Brian.
I think theres a couple of parts to that question.
A fantastic rate growth that we've seen is a function of the demand that we've been talking about.
It's extremely pronounced.
Normally we were very seasonal and saw great demand during certain months around the summertime.
Thats extended throughout the entire year.
Our retention has improved so the market has gotten even tighter and we really capitalized on that on our re leasing rates. So theres no internal kind of cap on how we're going to do how we're gonna handle re leasing rates, it's really a function of the market.
Pre marketing efforts and the quality of the turns that we're putting up.
The re leasing rates are fantastic, they're continuing to accelerate into 2021.
And we're seeing really really good growth there.
On the renewal side.
There's a slight difference.
And there's a little bit more sensitivity in terms of what youre offering on the renewal rates to the existing residents we've seen fantastic growth there we're looking at.
At really high rates compared to historical.
But theyre not being pushed quite to the same limit for.
For a number of different reasons. So I hope that answers. Your question. We're very excited about the growth that we're seeing.
And the re leasing rates and also pretty happy with the renewal rates on the retention rates that accompany them.
Great. Thank you.
Thanks, Jeff.
Thank you. Our next question is coming from the line of time Dallas St. Louis with Mizuho. Please proceed with your questions.
Hi, there.
So I guess first going back to the development guidance in the 2000 homes you are planning to deliver this year.
You mentioned that yields.
Stay the same.
It looks like you've been getting a well north of a 6% yield target on this latest batch of delivery. So can you speak to the.
The yields are more specifically what was achieved here.
In fourth quarter of 2021, overall, and a 6% still the right bogey.
And then a bit of color a bit more specificity into what level of cost.
Cost inflation built into your underwriting for labor and material costs from 2021 deliveries. Thanks.
Okay.
Thanks have a good question.
Yes, we are.
We are seeing great growth as Brian mentioned, so we're leasing above our pro forma.
Rental rates. So we are likely getting higher yields are right now I can really only talk to the gross yields because the expense part of it hasn't totally played out generally in the first year or two you'll get a little benefit because we underwrite property taxes.
If they've already gone up to the value of the house.
And sometimes it takes a year or two or even sometimes three for the.
This capacity to catch up.
So I'd be overstating the yields if I said, but they were plus you are not going to five turns.
So you don't have turn costs and so you really have a.
Probably three or four years before you have actually really good data.
On the cost side or on the expense side on the cost side, we're seeing like I said lumber going up.
In terms of labor and other costs are going up but pretty much with inflation, but we're actually seeing a slight decrease.
Because we've got more efficient the larger that we've gotten in.
And so we're we're actually seeing a little bit of benefit on that on.
The cost side other than lumber and the.
And obviously land is going up but none of the land the land has accelerated recently.
And we haven't really produced any houses with that land on it but we underwrite at the at the land cost because thats, what we pay.
Got it thanks, Jack I appreciate that and what is the average ticket.
Jim.
In the the lease up of these new.
These new homes, you understand that could vary by market, but just curious overall, what's a good rule of thumb here.
The average concession is zero.
Easy math.
[laughter], though this is Bryan we've had we've had fantastic results on the new communities, we haven't had to resort to concessions or.
Or any excess commissions or incentives to to lease these up there.
In fact.
Then the opposite of that.
These communities are pre leasing at a pretty pretty rapid pace.
We have in the past.
When we werent quite as educated on how to build these things we were building some front or back to front end.
We're having to drive through construction.
Construction zone to get to their homes and so we did offers from pioneer pricing at that point, but.
We've learned our lesson and everything.
Since probably 2017 has been a front to back.
And.
Not not creating those problems for our residents.
Got it thank you and a follow up on.
Turn times and data release homes can you talk.
Talk about where those sit.
And what do you think that opportunity to get those two by the end of 2021. Thank you.
And Joe This is Brian we've seen really nice improvement on our on our turn times.
We call it cash to cash from.
Payment on move out to payment on move in.
We're in the in the high <unk> now.
Down from the fifties.
And comparable periods in the past a big gain there is on the compressed marketing period because of the heightened level of demand, but we have become more efficient and preparing these homes for re leased as well. So we're sitting in a time like I said in the in the high <unk>.
Has some room for improvement, but not a ton.
There is a function too that we are pushing rates pretty hard on re leasing at the start. So that's why they are not even into the low <unk>.
To summarize there is there is opportunity for improvement, but we've made fantastic gains over over the past year or so.
Got it got it thank you.
Thank you.
Our next questions come from the line of Rick Skidmore with Goldman Sachs. Please proceed with your questions.
Hi, Good morning, Thank you Hey, Chris just I appreciate all the color on the guidance, but just trying to figure out how much conservative is built in to the expectation because if you build off that 31 fourth quarter number.
Essentially the midpoint of guidance and you're talking about 2000, new homes and the development pipeline all of the rent rate can you just talk a little bit about what would be.
Incorrect in sort of Annualizing that fourth quarter number or what doesn't repeat in the fourth quarter that puts that core <unk> guidance and that $1 22 to 128 range. Thanks.
Yes, good question Rick.
I think you used the right word.
Our guidance is intentionally conservative given the uncertainty ahead.
Largely.
In the in the bad debt area and the fact that we are assuming 2.5% to 3% on a full year basis.
And look I'm hopeful and optimistic.
We will be able to beat that but we.
You just don't know at this point and given the uncertainty you could think that thats the prudent position to take and so really that is the primary area of conservatism built into our guidance and the fact that we're holding that on a full year basis.
Hey, Rick it's Dave and the other thing to keep in mind. When you are doing modeling and trying to annualize the fourth quarter.
The business is still seasonal maybe not as seasonal as we saw in their early days, but still seasonal.
And expenses do not flow.
Equally through the year, because they are tied to more of the the leasing in turn activity, which is heavier in the second and third quarter. So.
Fourth quarter and first quarter, historically has always been much stronger than second and third just because of the normal seasonality keep.
Keep that in mind, our annualized the fourth quarter doesn't necessarily give you the right results for the entire year.
Got it. Thank you and then just on the development just a follow up there just in terms of the pacing of deliveries how should we think about the pacing of that delivery of those 2000 homes through 2021.
Yes, it's going to be more ratable.
Over each quarter, there will be a <unk>.
Little more delivered in the second and third quarter or so so we meet the high demand for that period of time and probably a little less.
In the first and fourth so.
But not.
There is not going to be the spikes that we've seen in the past or or valleys.
Thank you.
Thanks, Rick.
Thank you our next questions come from the line of Jade Rahmani with <unk>. Please proceed with your question.
Thank you very much.
With all the time effort.
Knowledge expertise experience that's been put into not only the operational platform, but also the build to rent business.
Are you interested in adding a new dimension to the revenue stream, which could include a.
A for sale homebuilder operations, where you develop and sell these communities.
And then last quarter. They are important so they build to rent communities for something like a 44% gross margin very high return on capital and secondly.
Along with that could you attach property management and create a long duration stream of revenues that's asset light because I know that the homebuilders have explored this business and one thing they do not have is the in place where we.
Workforce that amex has.
I believe <unk>.
About 65% of work orders at this point are done in house. So two revenue streams that would add value to shareholders and be balance sheet light to make them more efficient operations and accelerate growth is that something that youre looking at.
I would say, yes, we are considering a number of different avenues of ancillary business.
And until that until we're ready to launch it.
Don't think we're prepared to talk about what they are but I think you did a very good summary of what the opportunities are out there.
And it's kind of the same way, we would see it as well.
Thank you very much certainly seems like an attractive opportunity second question would be.
Discrepancy between bad debt expense and high rent growth do you just consider that to be a latency effect, which would mean in essence that you're upgrading your tenants the newer tenants and more resiliency in terms of their ability to pay because they are coming in post COVID-19 with the higher.
Demand level for these homes and it's just a matter of turning over this portfolio, which has about a 30% turnover ratio so over a three year period.
It may be more based on the economy bad debt would normalize is that really what explains.
The distinction between the bad debt and the high rent growth or what else would you attribute it to.
No I think directionally, that's the right way to think about it I don't know that I would use necessarily the word upgrade but you can absolutely keep in mind that for each new resident household that's coming into the portfolio they are being freshly underwritten.
And coming into the portfolio new so.
Absolutely considerations there I think we're optimistic that it's not going to be.
Three years churn if you will to work through this level of bad debt headwind.
And keep in mind.
We are very very intentional about working with each one of our residents.
<unk> the right outcome for them, if they've experienced any type of COVID-19 impacts and so we're doing everything they can.
Brian and Brian and team are doing a great job working through each one of our residents to get through that churn.
Again, I don't see it being a three year time line and I think that that's the right way to think about it as we continue to work through this year or so ahead, we will work through those regimens comprising but above average above normal levels of bad debt and should see that come down over time with new freshly underwritten tenants coming into the portfolio.
Jade, it's Dave I would add that the elevated bad debts are not a this is a temporary in a unique situation tied to the pandemic and this is not in the long term ongoing EBITDA.
And it will reverse and it will revert back to the levels that we saw pre pandemic and in the.
The 1% or sub 1%.
And the tenants that are affected by the pandemic arent all necessarily.
Lower grade tenants many of them are just had some unfortunate situations.
Situations.
And we are working with them and I would expect a number of them will remain tenants and be very very strong tenants.
But there has been a huge benefit.
That the pandemic has also given us and that is what you have seen in this enhanced demand. It's not that anything has changed it's just the spotlight has been on the value proposition that you get from.
From single family rental living.
And now more people understand that benefits. So I expect the demand to remain very very strong.
I do expect the bad debts to remain.
Levels that they are today until we have.
The pandemic kind of starts unwinding and that bad debt will naturally unwind as well.
So I see it though this is more of a speed bump.
And an opportunity for us in the future is that unwind it will benefit the bottom line.
Thank you very much.
Thank you. Our next question is coming from the line of Sam Choe with Credit Suisse. Please proceed with your questions.
Hi, guys, congrats on the quarter and the year.
Just following up on the rental rate growth I think Brian mentioned on one of the questions that there are factors on the renewal side that caps. The amount you can raise on rent. So despite strong leasing activity I'm just curious to know if there are potential limitations such as HOA rental risk.
Frictions or some other factors, we need to be mindful of.
Okay.
Hi, Sam it's Brian.
The only restriction on renewals that is legislative isn't in the.
The state of Washington, which is capped at zero percent.
What I was referring more to was really the way that we're interacting with our residents are long term relationships that we have with them.
The reasonableness of these annual increases there is a big benefit to our improved retention.
And we're not marking our renewals to market that would.
That would dramatically increase our or our move outs we've tested.
And things on the renewal side, but there is a little bit of a GAAP right now between renewal and re leasing rate growth.
Got it okay, that's really helpful color.
Just on the property additions that you did in 2020 I'm seeing that you added 120 homes in your all other category, which makes up around 50 markets I think.
What are your plans going forward on thinking about building density in.
In those areas because from what I'm seeing.
Portfolio additions have been mostly making the strong scale markets better.
Yeah. This is Jay.
Jack.
For that question, we are growing some of the other markets that we didnt gain as much scale in early on.
<unk>.
Is a perfect example, there they're seeing a lot of in migration.
And.
And good rate growth in property value growth then.
I think.
We didn't add that many last year.
<unk> through the development program that was is about 25.
But we have 503 lots there for future development.
Development, So I expect that to come out of the other category eventually.
And Theres a couple of other markets, where I would expect them to.
Come out of the other category eventually.
Okay. Thank you so much for the color.
Thank you. Our next question is coming from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.
Thanks, Jack or days on some of your competitors build to rent knees do you expect over the next few years to be a consolidator of the of the early vintages of these build to rent communities or is pricing too aggressive.
Yes, John its Dave.
I will.
Say, that's a wait and see as to what the pricing will be.
We are we are acquirers of.
All opportunities that makes sense for our portfolio both from a location standpoint, and a quality of assets standpoint, but also a pricing.
Standpoint.
And if I.
I do know that there are a number of people looking at build to rent and that they are building homes and they are finding it difficult to manage so.
Those are opportunities may become plentiful in the future and if they are priced.
At a reasonable price, yes, we will be looking at acquiring those.
Okay.
And then Brian a question for you on re leasing spreads I will take a look at markets like Phoenix up 17%.
It is revenue enhancing capex do you seen any of these markets or can we.
Corporate this is organic growth.
John That's a good question most of it is organic growth the revenue enhancing capex component.
It's still small probably contributing in the neighborhood of 20 to 30 basis points to that to that rate growth.
But we are very very happy with the results of that from that program.
Fantastic outsized rate growth in Phoenix is still continuing into this year. We have other markets that are that are equally.
Equally hot so to speak.
The organic growth that was the major contributor to that.
Okay. Thanks.
Okay.
Thank you. Our next question comes from the line of Dennis Mcgill Zelman <unk> Associates. Please proceed with your question.
Hello, Thank you guys.
First question just on the land side, you had mentioned I think controlling about 10000 lots a day and then that was going to go to I think 11% to 13000 by the end of the year.
Can you just provide a little detail on the structure of the control to how much of that zone versus option and what you're finding with respect to them.
Also in developed versus broad et cetera, just what you're finding with respect to bidding on incremental or signing those incremental contracts today from Atlanta inflation standpoint.
Yes.
Oh do you want to take a draft to go ahead.
Sure.
Yes.
So in terms of the additional 3000, we show 7000 that we own on the balance sheet. There is an additional 3000.
Homes in escrow we.
Have not used options yet.
We.
Probably will at some point.
So we expect two out of those 10000 lots controlled we expect to deliver about 2000 and bring it down to 8000 by another 4000.
During the year.
I expect that we will get more sophisticated on our lot acquisitions.
Or controlling lots.
As necessary.
Yeah.
What's been the hesitation with using option contracts thus far.
Okay.
To date, we haven't needed to we've had capacity on our balance sheet, but.
Now that we and we were in more of a early phase of.
Doing proof of concept and proof and getting the infrastructure in place now that its being ramped up option contracts are being we are a number of discussions today about option contracts. So I think it's not a hesitation, it's just where we are in the lifecycle.
Okay understood and then a separate question I think the number you had mentioned an applicant from out of state was up I think you said up 30%, but I wanted to clarify that and then if you have also the share of application.
From out of state, but this year in the year ago period.
Hi, Dennis this is Brian Yeah, I mentioned, so I kind of add it.
A new metric on my prepared remarks, the growth from 30% were from people coming from non <unk> portfolio States.
To kind of eliminate the noise of someone moving from South Carolina, and North Carolina.
And that's up that's up 30% year over year. So it's over 10% of our applicants are coming from non A&H states.
And Brian was that at least our sand.
How would that have compared to a year ago the share.
A year ago in the Sevens.
Thank you guys over 10%.
Yes.
Thank you. Our next question is come from the line of Ryan Gilbert with <unk>. Please proceed with your question.
Alright, Thanks, everyone. Just one question from me.
Regarding turnover and Brian I appreciate the commentary you made around the stickiness to get tenants.
I think in the prepared remarks.
You mentioned that turnover expenses might pick up a day in 2021 and it looks like the January average occupied days did tick down a bit from the fourth quarter 2020. So I'm. Just wondering you know year to date, what you're seeing regarding turnover in and move outs in your in your portfolio and how you think that trends as we go through the year.
Sure Yeah the first.
At the start of 2021, it's really a continuation of fourth quarter.
Any movement that would be very slight in terms of occupancy retention remains strong I think specifically from the prepared remarks, the I was referring to the additional turnover cost when collection practices returned to normal so you're gonna be trading.
Little bit of occupancy in some heightened costs for improvements in bad debt in the long term.
We're not exactly sure when that's going to happen, but we wanted to make sure that we were being cautious and including that in our in our expectations.
Yes.
Okay, great. Thanks very much.
Okay.
Thanks, Brian.
Thank you. Our next question is coming from the line of Kagan Karl with Baron Burke. Please proceed with your question.
Hey, guys. So just a quick one from me.
Curious on your thoughts and eviction moratoriums long term there is some news flow last night about the CDC moratorium.
Tori and being unconstitutional and that states should have the final say if this kind of happened.
See any specific states in your portfolio that would have a material impact as a result of this.
Yes, Keegan it's Dave.
They're very up to date on what's occurring.
Yesterday, the eastern district of Texas.
The district Judge did declare the CDC event or the CDC moratorium unconstitutional. It only impacts the eastern district, which actually we have very very few properties and its really in northern Dallas in the Plano market. That's the only place we have properties doesn't impact Dallas doesn't.
Impact Fort worth Austin or San Antonio at this time.
But.
Regardless.
If you the overall eviction discussion is evictions for our entire.
Time that we've been a company had been a means of last resort and we talked about in prepared remarks, and Brian talked about here and some of the comments about having good relationships with your tenants and being able to work out the issues and hopefully we can do that with anybody who has got a valid COVID-19.
Impacted.
Tenancy.
And so I think there will be a time where the.
The Covid period starts to unwind in many ways in this economy, and we will get back to normal and how the evictions play into it we'll see at that point, but.
I don't really foresee any major changes in the short term and maybe not even in the long term, we will use eviction very very sparingly and.
In collection process.
Okay. That's it from me thanks for your time.
Thank you.
Thank you there are no further questions at this time I would like to turn the call back over to David <unk> for any closing comments.
Thank you operator, and thank you to all of you for your time today I am excited about the opportunities we talked about to drive.
Growth for our shareholders this year and more importantly for the years to come and we will talk to you next quarter on this call. Thanks again bye bye.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day.