Q2 2021 American Homes 4 Rent Earnings Call
[music].
Greetings and welcome to the American homes for rent second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded at this time I'd like to turn the call over to Nick from Senior manager Investor Relations for American homes for rent. Please go ahead Sir.
Good morning, Thank you for joining us for our second quarter 2021 earnings Conference call. This is Nick from I recently joined the Investor Relations team at American homes for rent and excited to be here today with David <unk>, Chief Executive Officer, Bryan Smith, Chief Operating Officer, Jack Corrigan, Chief Investment Officer, and Chris Lau.
Chief Financial Officer.
Please be advised that this call may include forward looking statements all statements other than statements of historical fact included in this conference call are forward looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements.
These risks and other factors that could adversely affect our business and future results are described in our press releases and in our filings with the SEC. All forward looking statements speak only as of today August 6.2021, 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.
Sure.
A reconciliation to GAAP of the non-GAAP financial measures, we're providing on this call is included in our earnings press release and supplemental information package.
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 SEC reports and the audio webcast replay of this conference call on our website at Www Dot American homes rent dot com with that I will turn the call over to our CEO David <unk>.
Yeah.
Thank you Nick and welcome to the team.
Good morning, everyone and thank you for joining us today.
American homes for rent continues to lead the single family rental industry with strong operational performance and portfolio growth.
Robust rental demand and strong execution led to record breaking operating results that exceeded our expectations at the start of the year.
This alongside our 3 pronged growth strategy comprised of our internal development program National builder program and traditional acquisition channel.
Has driven outperformance in all areas of the business.
As such our expectations have increased across the board for the second half of the year.
As I say every quarter the single family rental market is stronger than ever as demand continues to soar.
Roughly 17 million households in the U S are making a conscious decision to rent single family homes.
Today, the national housing shortage sits at more than 4 million homes.
This coupled with our single family rental value proposition provides the backdrop for continued long term rental demand growth.
While COVID-19 did not create this trend it highlighted the benefits of single family rental living and the associated rental demand that has been building over the last decade.
As I indicated this country has a housing shortage.
At American homes for rent, we are doing our part to solve this issue.
Through our build for rent development program, we are providing beautiful class a rental homes and vibrant well located neighborhoods with proximity of quality school districts.
Our properties combined with superior property management services and customer care allow us to deliver a rental experience that is unmatched.
Now turning to the second quarter.
We achieved record breaking results and reached new milestones on both the operational and capital raising funds.
Our recent equity and debt offerings have demonstrated both the strength of our balance sheet and our ability to efficiently access capital markets.
Raising the capital necessary to fund our growth programs.
Growth remains our strategic priority.
And our performance is another area, where we have exceeded the initial expectations.
Jack will provide additional color shortly.
But here is the punch line.
We are not only raising expectations on operations and earnings we are also increasing our growth targets even further.
Altogether, the revised mid point of our 2021 core F F O represent sector, leading growth of nearly 14%.
Chris will provide you details of our guidance changes shortly.
As I close I, thank our employees across the 22 states, where we do business, who persevered. During this global pandemic enabled us to achieve record breaking performance.
After more than a year of working remotely we look forward to welcoming everybody back to the office. This fall in accordance with state and local health advisories.
Now I'll turn the call over to Brian for more details on our operations Brian.
Thank you Dave.
Our strong momentum continued through the second quarter, where we again set all time records for occupancy and rate growth.
Same home average occupied days was 97, 9%.
New lease rental rate growth was 13, 7%.
And renewal rate growth was $5.4 per cent blur.
Blending to a record growth rate of 8%.
The growing strength of demand for our homes as confirmed by our internal data.
Showings per rent ready property have more than doubled since last year and our customer satisfaction scores remain at an all time high.
Our residents are prioritizing quality of life decisions more than ever and they appreciate our best in class rental experience.
Further the incoming wave of millennials entering prime single family living years.
Coupled with the current housing shortage.
Strong demand for years to come.
In July we continued to capitalize on the outstanding demand, which drove seasonal records in both rental spreads on occupancy.
Same home average occupied days was 97, 4%.
Which represents a year over year increase of 90 basis points.
On the right side, we posted new lease spreads of over 16, 5%.
And renewal spreads of around 5.5%, which blends to a new record rate increase of 8 and a half per cent.
For context, these blended spreads for over 600 basis points higher than those from July of last year.
For the full year, we now expect same home average occupied days to be around 97 per cent.
This represents an improvement of 50 to 100 basis points over both 2020 and our estimate at the beginning of the year.
This increase includes our expectation that both seasonality and our collection practices begin to return to normal during the second half of the year.
Turning to rate for the second half of the year, we expect renewal increases to be in the 5% to 6% range.
And new lease growth to continue to see subtle records in the 8 to 12 per cent range.
Lastly, our full year expectation for same home core operating expense growth remains unchanged.
While we are seeing inflationary wage pressures and rising material costs.
The efficiency of our platform has been able to mitigate some of these increases.
Given the strength of our performance in the first half of the year. We are excited to raise our same home core NOI guidance by 200 basis points to 6% at the midpoint.
In closing I would like to thank the entire American homes for rent team for their dedication and hard work as.
As we provide high quality housing to families across the country.
This was 1 of the best operational quarters in our company's history.
And we are well positioned to deliver exceptional operating results through the second half of the year.
Now I will turn the call over to Jack.
Thank you, Brian and good morning, everyone.
Growth remains a strategic priority for American homes for rent and our differentiated 3 pronged strategy continues to prove resilient and dynamic.
Before discussing current year results I would like to recognize 1 of our development team's strong accomplishments.
We debuted at number 45 on builder magazine's recently released 2020 National Homebuilder Top 100 list.
This is an important milestone for the company that was reached on a relatively short period of time as this growth channel provides the company with the best rental home assets with the best Economics.
I congratulate our development team on this achievement.
Our development program provides a value creating growth channel that will deliver a consistent pipeline of new homes, regardless of the economic or competitive environment.
Over the last 2 years, we have face the pandemic rising land and commodity prices as well as supply chain and labor pressures and have demonstrated our ability to meet and exceed expectations on volume as well as investment returns.
Results should even get better with our increasing scale.
The combination of our season development team and best in class operating platform promises outsized returns for the foreseeable future.
Our developments are on target for the year and we reiterate the midpoint of our guidance at 2050 deliveries.
On the land front, we successfully acquired almost 1400 lots during the quarter, bringing the number of lots we control on June 30th 2 O.
Over 12000.
Our 12000 lots owned and controlled enables us to raise our guidance to 13 to 15000 lots owned or controlled by the end of the year, putting us in a position to expand our development deliveries and future years.
Well our development program remains the backbone of our long term growth plans, our national builder and traditional channels represent nimble dials it can be turned up or down depending on the environment.
Ultimately this adds to our ability to remain flexible on growth and quickly adapt to individual market opportunities.
Over the last few months, we have used that dial to increase our traditional channel investment activity by over $300 million for the year.
This brings the midpoint of our investment expectations for all 3 of our channels to $1.7 billion of total capital, including joint ventures for.
Chris will give a more detailed breakdown shortly.
In summary, I am proud of our ex Houston, So far in 2021, we continue to execute well on our differentiated 1 of a kind of M. H development program supported by our best in class balance sheet and operating platform.
We remain confident in our ability to deliver sustained and accretive growth into the future, especially as we utilize the dynamic nature of our 3 pronged growth strategy now.
Now I will turn the call over to Chris.
Thanks, Jack and good morning, everyone I'm excited to share my updates today as the second quarter was 1 of the strongest operational performances in the history of American homes for rent as well as an important quarter of new balance sheet milestones along those lines I'll cover 3 areas in my comments. This morning first a brief review of our.
<unk> quarterly results.
An update on our recent balance sheet milestones and capital markets activity and third I'll close with a summary of our updated 2021 guidance, which has been increased across the board.
Starting off with our results as I mentioned, we were we reported 1 of the strongest quarters in the history of American homes for rent with a net income attributable to common shareholders of $21 million or 6 cents per diluted share 30, <unk> of core <unk> per share and unit representing $22.9 per.
Sent growth over prior year, and 29 of adjusted <unk> per share and unit, representing 26, 4% growth over prior year.
Driving this quarter's strength was our platform's ability to translate record breaking demand into an outstanding performance within our same home portfolio, where we generated 6.6% growth in rental revenues, which was further benefited by 90 basis points of contribution from higher fees and ancillary income and 80 basis points from lower Covid related bad debt.
Net translating into an overall 8.3% core revenue growth coupled with a 2.2% increase in core property operating expenses. This translated into an impressive core NOI growth of $12.2 per cent.
Next in addition to our outstanding operating performance, our external growth programs fired on all cylinders, adding a total of 1058 homes to our wholly owned and joint venture portfolios 416 of which were delivered from our <unk> development program specifically.
Specifically for our wholly owned portfolio during the quarter. We added 898 homes for a total investment of nearly $290 million, which was comprised of 256 homes from our aim H development program and 642 homes from our other acquisition channels.
And on the disposition side, we sold 97 properties during the quarter generating total net proceeds of approximately $28 million.
Next I'd like to turn to our balance sheet and share a few updates around our recent milestone capital markets activity. This was a busy quarter for us as we executed on our strategy to Accretively refinance our previously announced $499 million series D and E perpetual preferred shares redemption as well as position ourselves for the expanded external growth.
[noise] outlook that Jack discussed, while maintaining our commitment to a best in class investment grade balance sheet with those objectives in mind during the quarter, we raised $661 million of net proceeds in an oversubscribed and upsized common equity offering.
The total net proceeds $194 million was received during the quarter with the remaining $467 million or $13.2 million shares being issued on a forward basis to minimize dilution as we match fund against capital deployment throughout the balance of 2021.
Additionally, after quarter end, we issued another $750 million and a dual tranche unsecured bond offering consisting of $450 million of 2 and 3.8 per cent 10 year bonds and $300 million of debut 30 year bonds priced at 3 and 3.8 per cent.
Both bond tranches were impressively oversubscribed and proudly makes American homes for rent the only triple B minus residential REIT in history to successfully issue 30 year bonds.
At the end of the quarter, we had $46 million of cash and $620 million outstanding on our revolving credit facility that was repaid after quarter end with proceeds from the recent bond offering at the end of the quarter, our net debt, including preferred shares to adjusted EBITDA was 5.9 times, however, as we deploy growth capital.
Throughout the remainder of 2021 using both equity forward proceeds and additional borrowings from our recently recounted 1 point to 2.5 billion revolving credit facility, we expect our leverage to trend into the low 6 times area and speaking of the strength of our balance sheet I'm happy to report that S&P also recently moved a reading outlook.
To the positive category and a recognition of the continued strengthening in our balance sheet and overall credit profile.
Finally, I'd like to provide a quick summary of our updated 2021 guidance, which has been increased across the board.
Starting with the same home portfolio as Brian already covered recognizing our strong year to date results and continued record breaking seasonal demand heading into the third quarter. We increased the midpoint of our full year core revenues growth expectations by 125 basis points to 5.5% cut.
Coupled with our unchanged core property operating expense outlook, we have increased the midpoint of our full year core NOI growth expectations by 200 basis points to 6% net.
Next with respect to our external growth since our update last quarter, we increased the midpoint of our full year aimed for capital deployment expectations by approximately $300 million to $1.5 billion, which now includes between 3000.504000 wholly owned inventory additions and when coupled with our.
Joint venture programs, we now expect to deploy total gross capital of $1.7 billion.
Putting it altogether, we have increased the midpoint of our full year 2021 core <unk> per share expectations by <unk>, <unk>, which reflects stronger NOI contribution from both our same home and non same home portfolios along with incremental partial year contribution from our expanded external growth expectations at the midpoint.
Of $1.32 per share on this now represents a year over year growth expectation of 13.8 per cent.
And finally before we open the call to your questions I'd like to share 1 more thank you with our teams and a congratulations to our finance and capital markets teams. This quarter's balance sheet accomplishments are a testament to your hard work and dedication.
Overall this was an outstanding quarter on operational performance growth program execution and balance sheet management that demonstrates the power of the American homes for rent platform and our ability to create outsized value for years to come.
And with that we'll open the call to your questions operator.
Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star 2 if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
Before pressing the star keys.
In the interest of time, we ask that you each keep to 1 question and 1 follow up thank you.
Our first question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.
Cool youre benefiting from the build to rent strategy, so far but as you've seen more and more capital come into the space. How do you think about your moat, there kind of a first mover advantages.
What is sustainable going forward at least on a relative advantage standpoint.
Yeah.
Thanks, Nick for that question being.
Being the first mover gives us several years advantage.
We are you were buying land now for 'twenty, 'twenty, 4 and 'twenty 'twenty 5 deliveries.
So people just getting in now they have to go find the land and then in scale up their team.
And we also have the benefit of AR and the national builders can do that but they don't have the benefit we do have of an outstanding operating platform.
Thanks for that.
Think about the different yields you know what day.
On the capital coming into the space.
Big change to cross I guess development the.
Third party in interest flow acquisitions.
Yep.
If I understand your question correctly the yields.
Because the rents have been going up.
Okay.
Yeah as I understand it there's you know we're under supplied and housing by 4 to 5 million units across the country. So theres going to have to be a lot of development going on to affect the yields dramatically.
We've been seeing Red hot demand on our product.
It's a great product not only for renters, but.
It's just high quality really nice product that people want to live in and in neighborhoods. They want to live in and we're seeing high demand and rents going up well above pro forma in most cases.
So no compression, even with more capital coming on.
Not at this point and I don't see any.
Pathway to that until we start building more houses than than households are being created.
Thank you Hey, Nick it's it's Chris can I ask you just mentioned going back to the maturity of our development program and the quality of what it can produce.
Just for you and the benefit of everyone else on the call. We have a great new video that's on our website actually on the for investors page.
And it gives some great visuals of the quality of our product.
Parts of what differentiate it.
In certain aspects of our communities as well as an intro to the team.
I think does a great job getting some visuals of the story. So I'd encourage everyone to take a look at that again, it's on the for investors page of our website.
Thanks.
Thanks, Nick.
Thank you. Our next question comes from the line I've see Steve <unk> with Evercore ISI. Please proceed with your question.
Yeah. Thanks, you guys.
It's called out in the press release, you know the continued acceleration of new rent growth in July and you know I know occupancy slipped a little bit which may be a bit more of a seasonal thing.
For than anything else, but could you maybe just talk about the interplay between the occupancy and rent growth and how you're sort of thinking about that in managing both aspects of that moving forward.
Christy This is Brian.
Is that the occupancy change from end of June to July. It was just really a function of seasonality on move outs.
The demand, which is supporting the exceptional releasing rate growth is still there.
When you have extra.
Extra move outs during kind of a busy move out season like like we're in right now it takes a little while to get those houses backup so that delta should get recovered soon.
The great thing that we're seeing right now is we've been able to turn our total homes much quicker we've picked up on average cash to cash for Q2 was 25 days. This year, which is in comparison to last year as a pick up of about 22 days. So there were extra move outs in July, but we're gonna be recovering those.
Quickly and you can take a look at the leasing velocity, they're just a little bit of time to get those those new renters, new residents into the homes. So I don't think theres anything to be concerned about there right.
Rate growth continues to be fantastic and that's across all of our markets as well.
Hey, Steve It's a day just let me clarify 1 point that Brian was making.
When you look at our occupancy Theres 2 occupancy numbers, there's average occupancy theres end of period occupancy in the period occupancy is always the highest number of the month. What you see is on average occupancy the move outs beginning at the beginning of the month and then they are the turns occur and then you refilled towards the end of the month.
So what you're comparing is a little bit with apples and oranges.
Demand is still as strong as we've ever seen at our rate growth is very strong and I wouldnt infer anything by looking at the end of June to occupancy.
And where we averaged out in the month of July.
Demand continues to be as strong as we saw last quarter.
Great. Thanks, Dave maybe second question, just maybe talk a little bit about land purchases I mean, we realize that our you know the housing market is under built calling for going up everywhere. So maybe just talk about how you're sourcing land how your pricing.
Pricing and you know how is that I guess, maybe impacting your outward development yields are if at all.
It's really not affecting our yields where we're.
Now getting to be known as <unk>.
Somebody who can execute and people are calling us with deals and.
And so we have access, especially in the markets that we've been established in for quite some time.
As we get started in Columbus.
That's going to take a little longer to get to to where all the brokers and.
And landholders know us but.
But in most of our markets were known and we get access and we closed our fair share of the deals at the epic.
Pro forma yields that are but we like.
So David just to quickly follow up I mean, I guess, our rent increase is just basically allowing yields on the development to stay firm, even with land prices and and you know things like lumber and labor up.
No that's exactly right.
We're getting well above pro forma rents, even though the pro forma costs are.
Or the actual cost for a little higher than than pro forma but we're also as we get more experienced and scale. This up we're getting more discounts in an access to the quality the high quality.
Subcontractors and contractors.
Great. Thanks.
So Steve this is Dave just basically summarize.
As you in.
For there is a little bit of price increases in the supply chain, but the rents have more.
More than taken care of that the increase in rent.
And as Jack indicated we're actually you know real bullish on the future that there could be a rate expansion or a yield expansion there as we become more and more efficient and get more and more scale, resulting in better supply chain economies of scale.
Got it makes sense thanks, guys.
Thanks, Steve.
Okay.
Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.
Hi, This is Adam Kramer on for Richard Thanks for the time, just wanted to touch a little bit more on the kind of quarter to date or July trends for the best that you guys can kind of disclose them and I appreciate kind of the the new renewal on blended lease figures on.
But wanted to ask a little bit more about kind of the some of the other income items that may have kind of gone away during COVID-19.
Do you see those coming back at all and maybe also kind of how is bad debt trended.
In third quarter relative to kind of on 2.5 per cent into Q on Q.
Yeah morning, Adam This is Chris I'll hop in on a couple of those and Brian can chime in if he wants to add any additional operational color.
In terms of the other income area fees ancillary income as you can see from the quarter on even really the year to date.
A number of our fee programs.
Have been are really making great progress as we continue to roll out certain things around pets pet fee programs et cetera.
You can see that contributing on a full year basis are up about 42%.
Then in this quarter in particular fees were up about 65% or so on part of that is that.
Absolutely the contribution from our fee and ancillary income programs on also recall.
And we had a little bit of a softer comp in terms of late fees on a year over year basis, as we were not charging late fees.
During those same months of the pandemic last year.
On a full year basis.
We are expecting those same trends to continue general ballpark for the full year, we see fees, adding about 40 basis points or so to same home revenue contribution and thats pretty consistent with what our expectations were at the start of the year and then in terms of bad debt I would say for starters that we continue to be real.
Happy with how strong and resilient our collections have remained throughout the entire pandemic.
As we know bad debt hovering really around that 2.5 per cent area, but.
As we look forward collections continued to be an area of uncertainty that we're focused on you a case in point the reason, you'll flip flopping and lifting and then reinstating of the eviction moratorium I think is a great example, but with that said heading into the third quarter. Our collections are continuing to remain very resilient.
And pretty steady with what we've been seeing so I think we will likely see bad debt continue to hover around the 2.5 per cent area for the third quarter and then we're optimistic that we'll begin to see further collections momentum before the end of the year and we could see fourth quarter bad debt, improving our debt maybe into the lower teens or so with real further improvement continuing.
<unk> into 'twenty 2.
I appreciate the color there. Thank you just a quick follow up.
Just on kind of cap rates on acquisitions through the through the just kind of a traditional acquisition channels.
What are you guys kind of seen a relative to maybe 3 or 6 months ago.
And then when you're thinking about kind of and I think you guys kind of referred to it as on the dial you can kind of turn on or off.
How do you kind of think about you know win win I guess right to kind of dial it on or off or was that kind of a cap rate driven decision is that more kind of on what's coming out of the kind of amey ex development program at the time, and then kind of how much you want to augment with with National builder, just maybe a little bit more color there on any kind of on.
Turning the dial on or off or it would be great.
Yeah. Thanks for the question Adam This is Jack.
<unk>.
I would say that the prices obviously have gone up on a on the MLS transactions rents have gone up so we're seeing.
Cap rate compression of about 15% to 25 basis points.
So we've seen that in terms of when we decide.
When to dial it up or dial it back it really has it's a combination of what the opportunities are for <unk>.
Investment and what are.
Cost of capital is and obviously with the the debt deals and a.
We've been able to do our cost of capital is.
<unk> has gone and then the second part of it has gone down but the second part of that is we were total return.
Investors, so even though we might see initial cap rate compression with rent growth. We expect that the total return is actually going to be better than than what we were buying in the past.
Hey, Adam let me just add 1 a couple of thoughts to that.
Question really is as Jack and first it's a balance between investment opportunity and availability and cost of capital and having 3 acquisition channels is huge for us because as time moves on those channels has become the availability of new assets.
For each of those channels are berries.
And our development channel is by far the best channel, but we supplement with very very good acquisitions in the other 2.
And as we see today, there is tremendous opportunities in our traditional channel.
There is opportunities, but not as robust as the traditional channel national builder, but theyre more limited.
But it all gets down to looking at the cost of capital the availability of capital on the investment opportunities and today are our cost of capital is significantly different than it was a year ago.
And the investment opportunities are still very very very good so we've ramped it up.
Thanks for the time guys.
Thanks, Adam.
Thank you. Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.
Great Good morning, and congratulations on the quarter on my first question is for Dave I apologize I missed I think Dave you mentioned the total number of single family rentals today and I was curious we get asked a lot about.
Future of the industry other any recent forecasts on.
On how big the pie may grow over the next few years.
Well.
Today, our the number of single family homes that are rentals.
Is essentially 17 million that is a significant increase over the last 10 years from when it was $13 million and $13 million was the number for <unk>.
Significant period of time keep in mind that the majority of those single family homes that are rentals continue to be in the hands of individuals that own 1 to 4.
96 to <unk> 97 per cent of all the homes are in that category on.
The opportunity for institutional growth is still significant cut.
Couple that with what we talked about on the housing shortage.
And the housing shortage of 4 million homes needs to be.
Resolved so.
Individuals have a quality place to live and then we are building to help.
Help that in a small way, but the other thing that we have seen and we've talked about this for many years as the.
Demographic changes too.
A little more preference of not having the current.
The current owner share.
Rent or group of 30 to 40 year old they prefer for in a much bigger way today than their predecessors and prior generations did at that same age to rent a life expect there like <unk>.
<unk> are happening later for them.
And there are choosing to rent. So I expect there is no I haven't seen any projections, but I would expect the trend that we've seen over the last 10 years going from 13 to 17 million homes to continue and I would.
To see that the institutions continue to be a big player in.
In providing that quality housing.
Okay. Thank you and then my second question is tackling affordability questions.
I believe you typically you've said in the past that you know you're at.
Applicants its dual income earners and in most cases and many times just 1 person.
It's really applying so it's 1 income I guess can you tackle that question for us affordability questions with Lynch.
Rising so fast.
Well rents are.
Are rising but home prices are rising at the same rate or in many cases.
Faster than rents or are rising.
And so when you look at affordability affordability is a relative.
Comparison as to what the various opportunities are for housing in occupancy and a against the ownership.
Equation.
The affordability remains intact, but both are as you point out have increased.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Jade Rahmani with Canada. Please proceed with your question.
Thank you very much when you allocate capital to land spend do you have an IRR for target on a return on equity target or Alternatively, do you use a stabilized cap rate.
This analysis, the homebuilders target typically something around a 20% return on capital or return on inventory. So I was wondering if your return targets are similar to theirs.
And if not whether that provides either a competitive advantage for potentially raises the risk of you're overpaying for land.
Yeah, I wouldn't say, we're we would.
We would risk overpaying for land what.
But we we have a going in what the first your yield is what the 5 year anticipated yield is and what the 10 year anticipated yield is.
Similar to what you'd run if you were buying an office building in and what the IRR is on on.
On that and if it meets our hurdle and is in the.
The market and Submarket, we want that where we expect that kind of growth.
Then then we make an offer we come up with what our Max offer would be and we tried to negotiate something better than that.
Hey, a J, let me just add a couple of.
Jay This is Dave I'll add 1 or 2 other points.
When we look at our all of our acquisition channels as Jack indicated earlier, it's it is a total.
Return proposition on the development channel is a channel that we get higher current income current cash returned but there's 1 thing that people forget.
Our investment in that house.
Compared to all of our other channels that we would buy the equivalent in house, we're investing approximately 20% to 25% less so as soon as that home is completed there is an embedded 20 to 30 per cent.
Development profit that is reflected as immediate HPA and that that in itself is valued creation on the balance sheet.
And that sometimes is forgotten piece of it we look at the cash yields on what it does tap that Boe, but we're building.
And creating value on the balance sheet every time, we build our own homes through our development pipeline.
Which is because youre not choosing to sell the home.
On an owner occupied basis and in which case you would expect to earn that 20% to 25% margin. So perhaps you're realizing it through rent growth over time, rather than an outright sale, but do you happen to know how the prices you're paying for land compared for homebuilders would you believe that there is similar to what homebuilders.
Are paying on a per lot basis for for sale housing or do you think that there may be paying a little bit more in exchange for the recurring earnings that rental housing for bats.
Yeah Jay.
I would say.
Oh, okay.
I would say that we.
We're competing with national homebuilders for parcels of land in and and sometimes we bid more on sometimes we bid less.
It's really a question of.
The value that we perceived versus what they perceive and the.
It's a competitive situation so I.
I don't think we're paying more all the time on and we're not paying less all the time.
Yeah, I mean, we do not we and every bid that we.
On the acquired lands. It is a very competitive market we are successful.
A very large percentage of the time, but.
We're.
We're also losing some of the lots that we wish we had but it is a competitive marketplace out there.
Thanks for taking the question.
Mhm.
Thank you. Our next question comes from the line of Alan Peterson with Green Street Advisors. Please proceed with your question.
Hey, everyone. Thanks for the time I was hoping to follow up a little bit on the land cost side. There in regards to Jack what you're seeing on the ground Kid day, how much do you think land costs have increased over the last year on the parcel that you guys are underwriting.
Somewhere in the 20% range.
Last year, we were paying on average 50000.
For raw lot and now it's.
Closer to 60000, we've gotten more efficient on the horizontal development. So we brought that down a little bit to make up for it. So the total on.
All in fully develop lot is relatively close to the same right around 120000.
Perfect. That's helpful and then transitioning over to operations Bryan I was hoping you can touch a little bit on the divergence between new lease rate growth and renewal rate growth as the current portfolio management strategy to limit turnover expenses instead of marketing is there some existing tenants up to market I'm just trying to understand if there's a large embedded lease.
And then you get on market you guys are operating on.
Yeah.
There's always a balance on the renewal side.
With rate and occupancy.
Preserving turn cost is a factor.
The best way to think about it where we're there's a timing difference we're sending out the renewal notices 90 days in advance.
Whereas with the re leasing.
<unk> activities on pricing, we're pushing rates as far as we can on a real time basis, we're able to capitalize on on.
Big surges in demand that we might not have anticipated.
In addition, there are there's a lot of value in retaining.
From a long tenured residents plays a little bit of a factor as well and then finally, there's a social responsibility aspect of it too.
So we're wary of the pressing pressures that exist.
Exists today in our industry and we feel that.
Strong renewal growth that we're seeing right now is good pushing it well.
Well into double digits to try to mark to market might not be the best strategy today.
Perfect. That's helpful. Thanks for the time for us.
Thanks Alan.
Thank you. Our next question comes from the line of Dennis Mcgill Zelman and Associates. Please proceed with your question.
Hello, everybody. Thanks for taking my questions.
I just wanted to clarify the comments about occupancy shifting from June to July you went through this earlier.
Through April and May the same store occupancy was 97.9 in the quarter with over 97%. The quarter was 97.9. So obviously June was the high Mark.
What we should be comparing to the 97 for correct.
Okay.
Yes, I think I think the seasonality of of occupancy youre going to see a peak in the June timeframe.
The 97 for us.
This slight reduction off of the the average obviously in the month end.
But it's just a function of a larger gross number of move outs in July and they tend to move out at the end of the month too. So you can maintain excellent occupancy would have move outs that will effect.
The following month when when the gross number of move outs is rising monthly.
And I guess, Brian just to continue on that which is where I was going with it is it to imply that those were unexpected move outs because I know you've had a lot of success being able to pre lease on move outs that you know are coming.
No it's not the keep in mind that that's occupancy not the lease rates for lease rates are sky high.
So that's actually.
Contemplating the timing difference for cash the cash timing difference of 25 days. So those move outs have been process many of them have been pre leased.
But it takes a little bit of time to get kept those subsequent move ins were were seeing no drop off in demand on theirs.
Just from functional or some frictional vacancy that we're processing through right now.
Okay.
That's helpful and then back to the MLR underwriting I think you mentioned that the compression on cap rates with 15 to 25 basis points can you just talk about what the absolute hard today, maybe or any variability that you're seeing by market and then it also would be helpful. Just to understand when you approach the underwriting on these homes.
How do you think about rent growth is there anything that you would be assuming as far as inflation from where the market is today and then also on the expense side, recognizing you're benefiting from lower than average expenses from some of the pandemic effects. How you think about the underwriting costs on those homes.
Yeah, we we underwrite to a standard.
Spence.
Thanks.
So the expenses arent really going to change due to the.
The pandemic in some cases those have gone up in some cases those have gone down but the overall I think it's.
It Hasnt really changed our margins.
Significantly on on the rental income.
We typically underwrite to whatever rents are currently at market for MLS transactions because.
So we get our first year.
NOI yield and we anticipate some growth.
Generally in the 3 to 3 and a half per cent range.
After that in terms of rent, we've been getting a lot better than that but but that's that's how we look at it.
In terms of Ah <unk>.
The annual growth and then certain markets might be a little higher growth and will pay a little more in terms of lower.
Initial yield.
Okay, and where are those yields day Jack.
On <unk>.
And I know on the extremes for market.
I would say on average slightly below 5%.
In terms of our MLS transactions there.
Closer to 6% on in terms of our.
<unk> development program.
Okay. Thank you guys.
Yes.
Thank you. Our next question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question.
Hi, guys. Congrats on a great quarter, just going back to the 642 homes between that National builder program in the traditional way just just wondering about the exact breakout between the 2 I just want to compare I guess, how much of that you capture on the traditional wide this quarter versus your guidance.
Sure Sam.
Sam it's Chris that the breakdown is using rough numbers about 570.
Through the traditional channel and about 70 through the national builder.
National builder pretty in line with what our expectations were recognizing how tight that environment is.
Expectations were relatively modest coming into the year in the quarter and then that $5.70 on their traditional channel side is definitely above what our prior expectations were.
And I think give you a good idea of that ramp up.
We're seeing as our team executes really well out in the field sharpshooting transactions as we're really leaning into that channel.
With our expanded capital into and throughout the balance of the year.
Got it that's helpful color I guess, 1 big picture thing for me.
I mean, you guys have made it clear in the past or having that local market scale for the density is it's really important for efficiency now just thinking about those smaller markets of interest to you guys like Seattle, where the scale is not there I guess those markets. I mean, you you guys have a vision for those through that.
Built for rent channel. So I'm, just curious how you're strategically mapping out the efficiency picture there because it seems like you might have some control, but just having more color on that as opposed to I guess your bigger core markets, where the build outs or different would be interesting to hear from you guys.
Yeah, Sam it's Dave.
Going back we have talked about the benefits of having 30 markets. We've also talked about the fact that we are efficient in these 30 markets.
Because our operations are highly centralized and in each of the markets. We have people on the field for maintenance, but as we continue to grow even in our large markets. We continue to add more.
Or maintenance personnel.
So we today.
Out of all 30 markets, where efficient in the vast majority of those markets and I would say the ones that were not where it's 1 or 2 of those.
Markets, we're in and we're growing in those markets and then we see that the growth in those markets will improve the efficiency in those markets. So.
We have we've always talked about the efficiencies of our platform begin with the fact that it's highly centralized.
If you look at the total cost for us to manage our operations, taking all of the cost of operations, whether its property management and G&A and.
Looking at it as a percent of revenue.
Whereas the efficient or more efficient than everybody else in residential in the residential sector.
So it's and.
I think there is some information is.
Chris can walk you through later, it's in the supplement I believe.
Got it that's helpful color. Thank you guys.
Thanks Sam.
Thank you. Our next question comes from the line of Ryan Gilbert with BTG. Please proceed with your question.
Hi, Thanks, guys I appreciate all the detail you've provided so far first question for me is just what's the.
Or do you have a sense of on.
The underlying labor and materials inflation in your in your business I think in the in the past we've talked about maybe around 5%.
And also when Youre getting our units back that are that where the previous tenant vacate it vacated on.
Are you seeing any changes in the need for turn capex or expense relative to prior years.
Okay.
Hi, Ryan this is Brian.
I'll start with the labor and materials.
We are seeing some inflationary pressures on both I think the most.
Obviously areas would be materials, such as appliances, and so forth what were seeing.
Inflation in the 10% range.
Procurement teams, our purchasing teams have done a fantastic job of helping to protect us from those those increases with national contracts.
Really exceptional processes and the most important factor really is that we are trying to do more and more in house.
Out of that and those inflationary pressures our relations to third party maintenance and turn vendors. So we've been able to handle more work in house and protect ourselves from some of those cost increases there in the marketplace.
But where we've done a great job of really mitigating that.
For those big changes.
And then in reference to any change in the term profile on.
On the homes that were receiving back now.
I haven't seen any any marked difference where we're benefiting a little bit from from fewer returns.
But the are.
The cost for the condition on those houses that are being returned to us is consistent with with prior quarters.
And Ryan its Chris just to add a thing or 2 from a numbers perspective just.
Just to frame, what Brian was saying around the inflationary piece keep them on a lot of that was also contemplated in our expectations coming into the start of the year. So between contemplating a portion of that and then just how well our teams have been executing.
You can see that.
And the fact that our expense our view on the year remains unchanged and then on the turnover piece keep them on the other thing that is also included in our guidance is as we progress throughout the back part of this year.
And as our collections continue to optimistically gain momentum as we've talked about the last couple of quarters, we would likely expect that to translate into.
A temporary period of of elevated move outs as we're working through some of those collections, which may come with some incremental.
Turn costs as a result of that volume, but all of that contemplated in our guidance at the start of the year, which remains unchanged coming into this quarter as well.
Okay got it I appreciate that on second question.
On the just in the National builder channel on when you're evaluating opportunities are you seeing a difference in yields between.
Like for purpose built build to rent communities versus spine, a series of 1 offs or it may be just a portion of the community that would otherwise be sold to the owner occupant.
Uh huh.
No, but we haven't had a lot of opportunities to buy.
And on National Homebuilder for communities, we've done a couple at most.
And none this year and those were basically at some modest discount to what they could sell them for at retail.
So the in the yields the yields were pretty pretty close to what we were seeing on the MLS.
Yeah, Hey, Brian it's Dave just to supplement.
Supplement a little bit.
Homebuilders have had a very very strong retail season in 2021.
And the pricing of those opportunities from the National Homebuilders, who have been less than what we have seen in prior years, we continue to have.
Dialogue with many.
Homebuilders, we have acquired homes in the past from many homebuilders and it's not just 1 or 2 so we have relations there, but as Jack indicated.
This year, the pricing has gotten a little tighter.
And it really is driven against their opportunities homebuilders opportunities and they have an opportunity right now to sell retail at very attractive prices.
Okay, great. Thanks, very much I appreciate it.
Thanks, Brian.
Thank you. Our final question today comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Hey, everyone on land you mentioned in the prepared comments they are buying for the 2025 deliveries right. Now can you talk about if that duration is about right. At this point like next year, you'll be buying for 2026, or what would make that longer or shorter.
Yeah, well the.
The typical time period for 1 of our let's say average sized developments of 80 to 120 homes is 18 to 24 months.
To go vertical and then.
When we're gonna go vertical we meet with our.
Our property management team and talk about what the ideal level of absorption would be and then we structure the cadence of those deliveries. Accordingly, So we might do typically 6.6 to 10 per month, and maybe cut it back in the winter and bump it up going into spring.
So that's kind of the cadence.
So you've got 2 years, let's say 2 years.
Land development and then the vertical costs over.
The vertical goes over whatever the cadences for let's say for 100 houses and and you're doing 10, a month, it's going to take 10 months.
To finalize the community.
Okay, Okay got it.
And then I was curious if you have any demographic data in terms of where new residents are moving in from and have you seen any changes in terms of maybe people like selling their homes and moving into a rental or people moving from multifamily either on a greater or lower per person they used to.
Hi, Brad This is Brian Yeah, we're seeing some some interesting trends continue on prior calls we've talked about the migration out of some of the coastal markets, specifically, California, and New York and New Jersey.
That's continued to accelerate our the applicants from non A&H day, so people coming from states outside of our footprint was up 50% year over year.
And with the.
<unk> largest most notable increase.
70% increase from people from coming from California.
The demand has just been fantastic ex especially when you look at the Western States.
On people moving from California to Nevada.
Idaho.
Arizona.
Really been been strong and it doesn't seem to be letting up at all.
Regards to Africa.
Applicants and residents coming from multifamily.
Been consistent we've seen other we've seen a slight uptick.
Of late but at the beginning of the pandemic, we saw a big boost.
It's moderated a little bit then in terms of growth, but it's still a significant feeder for for our demand pipeline.
Okay. Thank you.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Stimulant for any final comments.
Thank you Melissa and thank you everyone for your time today, we are pleased with our operational and growth execution. This quarter and are positioned for continued strong performance and growth in the quarters head on.
We'll talk with you again on next quarter's call have a good day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.