Q3 2021 American Homes 4 Rent Earnings Call
[music].
Greetings and welcome to the American homes, four rent third quarter 2021 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I will now turn the conference over to your host Nick from senior manager of Investor Relations. Thank you you may begin.
Good morning, Thank you for joining us for our third quarter 2021 earnings Conference call with me today are 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 could differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in our press releases.
And in our filings with the SEC.
All forward looking statements speak only as of today November five 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.
A reconciliation of GAAP to non-GAAP financial measures is included in our earnings press release and supplemental information package.
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 SEC reports and the audio webcast replay of this conference call on our website at Www Dot American homes for rent Dot com with that I will turn the call over to our CEO David <unk>.
Yeah.
Thank you Nick.
Good morning, and thank you for joining us today.
American homes for rent delivered a strong third quarter consistent with what we have seen throughout 2021.
We continue to set ourselves apart from our peers with a platform that is unmatched in its totality highlighted by our 2021 core <unk> growth expectation exceeding 17%.
As we begin to turn our focus to 2022 our diversified portfolio is well positioned to benefit from the country's migration patterns.
American remains in the midst of a housing prices that will last for many years to come.
It is estimated that more than 5 million households need housing that is not available today.
It's one of the largest homebuilders in the United States. We continue to address this issue through our innovation of the asset bar space by building New class a communities.
With our superior property management and customer care, we're delivering an exceptional single family home experience, while contributing to the appeal and character of local communities.
We continue to invest in our homebuilding operations to expand this significant growth channel in future years.
Our 2021 build to rent delivery target outlined at the beginning of the year remains unchanged.
Through advanced planning and strategic sourcing, we have successfully navigated the well publicized supply chain headwinds to maintain our new home development and delivery schedule.
Jack will elaborate more on this later.
Given that all areas of the business are performing extremely well, we are raising guidance for the remainder of 2021.
As I close I remind you of what I said at the beginning of the year.
Our top strategic priorities are to deliver strong and consistent operating results and sustained growth.
Well, we are about to close out arguably the best year in company history, I'm, even more optimistic about our future in 2022 'twenty 'twenty three and beyond.
Robust rental demand and our pipeline of more than 16000 development launch positions us for a predictable industry leading growth.
Yeah.
I think our teams across the 22 states, we operate and for their commitment to providing quality housing for our residents and making our growth strategy a reality.
Your continued hard work and dedication have earned the trust of our residents while enabling the company to deliver superior results.
Now I'll turn it over to Brian for more details on our operations.
Brian.
Yeah.
Thank you Dave.
Our outstanding momentum continued through the third quarter, where we achieved same home core revenue growth of seven 3%.
And core NOI growth of eight 2%.
These impressive operating results were driven by robust demand and solid execution, which resulted in strong occupancy and rate growth.
Same home average occupied days for the third quarter was 97, 4%.
Representing a 40 basis point improvement over the same period last year.
As expected we saw a sequential uptick in move outs in the third quarter, but faster cash the cash turn times enabled us to maintain occupancy.
This year demand showed little sign of slowing as we set records for new lease rate growth at 15.9%.
Renewal rate growth at five 7% and.
And blended rate growth at nine 1% in the third quarter.
On the collections front, our practices are returning to normal and we expect our bad debt to return to pre pandemic levels over the course of 2022.
Our team has done a great job supporting our residents when they needed it most.
Including helping them access nearly $14 million in government rental assistance over the course of the pandemic.
Looking forward to the balance of the year, we continued to see strong demand and leasing results in October.
Same home average occupied days held steady at 97, 4%.
And on the right side, we posted new lease spreads of 12, 7% and renewal spreads of six 6%.
This equates to a blended rate growth of eight 9%, which represents an improvement of 400 basis points over last October.
We expect a strong blended rate growth to continue through the end of the year.
For the full year, we now expect same home average occupied days to be around 97, 5%.
This represents an improvement of 120 basis points over 2020, and 100 basis points over our estimate at the beginning of the year.
Quickly touching on expenses.
There's a little debate that inflationary wage pressures and rising material costs are prevalent.
However, the efficiency of our platform coupled with favorable property tax changes has helped to offset these incremental costs.
And our full year expectation for same home core operating expense growth remains unchanged.
With the strong momentum from our outstanding third quarter operating results we.
We are raising our 2021 same home core NOI guidance by 200 basis points to 8%.
In closing our team has done a great job producing strong consistent results in this rapidly changing environment.
This is a testament to the hard work and dedication you can expect from American homes for rent for years to come.
I'll now turn the call over to Jack.
Thank you, Brian and good morning, everyone.
I am happy to report another solid quarter of external growth.
During the third quarter, we added nearly 600 homes to our wholly owned and joint venture portfolios for a total investment of over $550 million.
This marks our strongest external growth quarter since 2016 and demonstrates the power of our three pronged growth strategy, which enables us to nimbly deploy capital across multiple channels and our diversified national portfolio.
Taking a step back I've always seen our growth programs that American homes, four rent since our inception, and I've never seen a more attractive time to invest.
The combination of one our country's national housing shortage.
Ooh shifting consumer preferences towards the freedom of rental living and three today's stellar operating landscape have created the optimal environment lean into our external growth programs.
With that in mind, and considering our current attractive cost of capital coming into the third quarter. We made the strategic decision to reduce going in yield targets across our growth channels by 25 to 50 basis points.
This decision enables us to capture more of today's growth opportunities and because of our superior outlook for cash flow growth going forward total returns for these investments are expected to be in line with historical levels.
Given our strong year to date performance and recent strategic decisions. We now expect to acquire approximately 2600 properties through our traditional and national builder channels for a total investment of $900 million this year.
Yeah.
Our a M. H development program delivered 569 homes in the third quarter and remains on track to deliver between 2000, and then 'twenty 100 homes. This year.
Even with the well known supply chain and labor issues impacting construction across the country. We are proud of our ability to maintain our delivery guidance from the start of the year.
Our differentiated build to rent strategy allows us to control costs through effective inventory management standardized floor plans and creative solutions.
Our diversified footprint allows us to manage availability of materials across different markets.
And our predictable production cadence and lack of change orders is created loyalty from preferred trades.
On the land front, we continue to feed our growing development program with the acquisition of high quality land across our footprint.
During the quarter, we added 1051 lots to our pipeline, which was ahead of our expectations.
And now believe we're on track to own or control approximately 16000 lots through the end of 2021.
As I mentioned at the start I've never seen a more attractive time for external growth.
Although I'm very proud of our accomplishments this year I'm, even more excited for the future as we accelerate our growth programs further now.
Now I will turn the call over to Chris.
Yeah.
Thanks, Jack and good morning, everyone I'll cover three areas in my comments today first a brief review of our quarterly operating results and growth programs second an update on our balance sheet and recent capital markets activity and third I'll close with a summary of our updated full year 2021 guidance.
Starting off with our results we reported another strong quarter with net income attributable to common shareholders of $36 $9 million or <unk> 11 per diluted share 35 of core <unk> per share and unit, representing 17, 8% growth over prior year and 30 of adjusted <unk> per share and unit representing.
27% growth over prior year.
Driving our results with another quarter of consistent operational execution within our same home portfolio, where we generated six 6% growth in rental revenues, which was further benefited by 60 basis points of contribution from higher ancillary income and 10 basis points from lower bad debt translating into an overall seven three.
<unk> core revenue growth, coupled with a five 7% increase in core property operating expenses. This translated into an impressive core NOI growth of eight 2%.
And now turning to our external growth programs during the third quarter. We added a total of 1583 homes to our wholly owned and joint venture portfolios 569 of which were delivered from our A&H development program.
Specifically for our wholly owned portfolio during the quarter. We added 1382 homes for a total investment of approximately $494 million, which was ahead of our expectations and included 368 homes from our aim H development program and 1014 homes from our other acquisition channels.
On the disposition side, we sold 90 properties during the quarter generating total net proceeds of approximately $27 million.
Next I'd like to turn to our balance sheet and share a few brief updates as we discussed on our last earnings call. During the quarter, we closed a $750 million dual tranche unsecured bond offering comprised about 10 and 30 year bonds and then during September we settled 11 4 million common equity forward shares from our main.
2021, offering for net proceeds of $399 million at the end of the quarter. We had $1 8 million forward shares remaining representing approximately $65 million of net proceeds that we expect to utilize during the fourth quarter to fund a portion of our growth programs.
Additionally, at the end of the quarter, we had $64 million of cash or 1.25 billion revolving credit facility was fully undrawn and our net debt, including preferred shares to adjusted EBITDA was five nine times.
Finally, I'd like to share some additional color on our revised 2021 guidance, which continues to reflect the robust demand environment and consistently strong execution from our operating platform starting with the same home portfolio, recognizing our year to date results and record breaking seasonal demand heading into the fourth quarter, we've increased the midpoint of our.
Full year core revenues growth expectations by 125 basis points to 675%.
Additionally, the midpoint of our core property operating expense growth expectations remained unchanged at $4 75 per cent and contemplates a few puts and takes as we now expect full year property tax expense growth of approximately 4% and a five 5% combined increase on all other expenses.
Together, our updated same home expectations, we have increased the midpoint of our full year core NOI growth guidance by 200 basis points to 8%.
Next with respect to external growth for full year 2021, we now expect to deploy approximately $1 $7 billion of total A&H capital, which now includes between 3700 4100 wholly owned inventory additions and when coupled with our joint venture programs. We now expect to deploy total gross capital of approximately one.
One $9 billion, putting all the pieces together, we have increased the midpoint of our full year 2021 core <unk> per share expectations by <unk> to $1 36 per share, which represents 17, 2% year over year growth and continues to lead the residential REIT sector.
And in closing I'd like to quickly reiterate our bullishness looking forward 2021 has been one of the best years in American homes for rent history, but the true excitement lies ahead our portfolio is already positioned for todays migration patterns. Our operating platform is performing at the highest levels in company history, and when coupled with the power.
Each of our three pronged growth strategy differentiated by image development American homes for rent is positioned for an exciting and long runway of outsized shareholder value creation ahead, and with that we'll open the call to your questions operator.
Thank you.
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Our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.
Thanks, I was hoping you could give some more information on the supply chain and labor cost pressures that.
That you're seeing across the business, particularly on the development side obviously.
Obviously, the rent growth is probably more than offsetting that but just if you could frame what youre seeing on the ground there.
Yeah.
Thanks, Nick this is Jack.
Yeah, we definitely are seeing some inflationary pressures on construction costs.
And on land.
So.
But we're also seeing similar inflationary pressures on rent which is offsetting.
The construction costs in terms of yield, but what I would say also is that while we're seeing some cost go up we're seeing lumber prices come way down so lumber prices peaked at $1700 in the third quarter. So what we delivered in the third quarter.
And part of the fourth quarter will be at the peak, but lumber prices currently are between six and $700. So youre going to see some tailwind as far as lumber offsetting.
Some of the other costs.
And when you blend that altogether with the movement in rents so how does that change.
Kind of the current pipeline expected yields.
The current pipeline expected yields are.
Going in yields are probably 25 basis points.
Lower for four stuff, we're underwriting today.
But I don't expect to see those.
Those things so the projects that we're underwriting today won't come to fruition until 2023 2024.
So.
Are the ones that are coming into existence today were underwritten three years ago. So the land prices were lower the rents are higher.
And it's basically offsetting in terms of yield.
What we expected so we're basically yield neutral one on those houses.
Thank you very much.
Thank you thanks Nick.
Our next question comes from the line of Steve Chicago with Evercore ISI. Please proceed with your question.
Yeah, great. Thanks, Chris I was just wondering if you could talk about the.
The guidance and where you have sort of implied for Q you know based on the acceleration that you saw in <unk>.
Leasing spreads in the third quarter.
You've got sort of flat revenue.
In the fourth quarter against the nine months and NOI I guess at the midpoint I think is down slightly from the nine months. So maybe just talk about sort of what's in there and you know the pressure point, maybe both positively and negatively.
Sure Good morning, Steve Good question.
I mean, just to take you through the general points of.
Of what's included in the guide you know keep in mind mid point from a revenue perspective is now 675 on a full year basis.
General components for the fourth quarter that Bryan largely covered in his prepared remarks.
Our view is that we think will probably hold the line and continue to see occupancy in the 97.4 or so area in the fourth quarter pretty similar to what we saw in the third quarter.
We see nice opportunity from a rate perspective, both from where spreads are going in the fourth quarter, but also the pull through.
From the strong spread environment, we've seen recently, especially in the third quarter.
So in terms of the pull through of back to average monthly realized rent I could see that tick up a little bit from <unk> into <unk>.
And then also keep in mind our fees are in ancillary income is contributing nicely. This year as well from a full year perspective, we could see those contributing in the area of call. It 50 basis points or so on a full year basis.
And then bad debt you know to your to your point around.
Kind of a puts and takes I think bad debt is going to be an area that we're watching closely as I think we all can tell we.
We saw some some improvement this quarter bad debt actually tracked a little bit better than what our prior expectations were as we are beginning to see some modest improvements in our collections as our practices and tools have started returning to normal and as we've shared recently at our last Investor update and then of course this quarter we saw.
The uptick in rental assistance payments in the third quarter and so all of that contributed to bad debt coming down a touch in the third quarter to the one 7% area and as we think about the fourth quarter. So far collection trends have been pretty consistent into October and so best Best view right. Now is that we could see fourth quarter bad debt looking fairly similar to third quarter, but.
Hopefully you know there might be opportunity to do a little bit better than that but all in all it's Steve those are the components and actually when you essentially squeezed the fourth quarter Delta between year to date and full year, you'll see that that actually implies some modest topline acceleration from <unk> into <unk>.
Yeah.
Oh, Great and then just maybe one question on sort of the land and your desire to continue to replenish and I'm. Just curious you know how.
I guess, how does the footprint changing or how much more challenging is it define you know land parcels in the Submarkets that you want them you being sort of forced to go further afield to define you know the.
The land at the right price to to can you replenish the lot.
Well, we're definitely not sacrificing location, so we're buying similar lag.
But we've always but we've been buying in in our footprint.
So that has not happened as far as sacrificing location the and it is competitive we're out there competing with the with all the national builders and but you know you can tell from our activity, we're getting our share of the.
Of the.
Of the pie and.
It's you know, it's competitive and and we're competing.
Hey, Steve This is Dave one other thing I would mention if you go back and you look at our last investor deck that we have posted.
Posted on the Investor page of our website you.
You will see a few maps in there as to where the communities that we are building are physically located and you will see that they are in the communities in the areas that we have existing homes and actually all of our peers have existing hubs. So it's not that we are building a far out.
We are building where the.
Residents in our prospective residents want to be where the better schools are et cetera, but you can actually physically see on.
On the map, where we are building today.
Great. Thanks, that's it for me.
Thanks, Steve.
Thank you. Our next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.
Hey, Thank you good morning, guys I.
I was wondering you know we've had some recent news here with Zillow, making an announcement about their exit from the eye buying space and starting to sell off their portfolio of homes.
Yeah.
Open questions, whether or not other eye buyers might be running into trouble as well I'm just wondering if.
Those types of homes that I buyers' control, whether it's zillow or other players would those be of interest to you how do you think about.
Going into the market for those or.
Do you think that that the you know if it was <unk>.
The buyers are getting into trouble that could create inventory challenges out there.
Yeah, but this is Dave good morning.
I don't know about I don't I don't want to speak about other eye buyers at this point, but with respect to Zillow, absolutely theres opportunities there and we have been in contact with Zillow or.
We are evaluating the opportunities that are available today.
And hopefully we will find a large number of those homes that fit our buy box.
Those would be incremental.
Two the normal buying patterns, but they do have a quality homes are in their portfolio and we will evaluate all those opportunities and make up.
Bids.
As we see fit.
So one other thing I would mention about Zillow, that's a positive for us as a as we've talked about are the labor market is a tight labor market today and there are a number of individuals that have reached out to us.
In the last couple of days are looking for opportunities at American homes for rent, so that's going to be beneficial to us as well as to the prospective employees as they look for new employment.
Very interesting. Thank you for that appreciate the color.
And.
With the strength of rental demand out there.
And the increases you guys are gambling was wondering if you could add any extra data or color. You have on household income trends in terms of you know whether it's your new applicants or if you can break it out between new lease Africans versus existing tenants or the household and able to keep up with these rent increases and.
To the extent you've got any data on out of market renters anything extra that you could add there.
Hi, Buck this is Brian.
We're really pleased with the applicant profile and the improvement in their income through this year so year to date.
Our approved applicant incomes documented incomes are up about 10%.
Which is pretty close to our new lease rate growth. So the the incomes are keeping pace with this with this fantastic growth and a little bit has to do with exactly what you said in the second part of your question and that is the migration trends, we're still seeing strong migration from California into the West Wes.
Stern markets like we've talked about before.
We haven't seen that slow down at all.
Look at.
The number of applications from California, Theyre up about 60% to what they were pre pandemic levels for the last quarter similar trends on the on the East Coast with New York and New Jersey.
And then the other thing that's interesting to we took a very close look at move outs for the year and to figure out whether.
The people who are moving out whether there are any changes as to where theyre going.
For the third quarter move outs to buy new homes was down slightly.
Low 30% range, but we're encouraged that we're not seeing any change in behavior and patterns people returning to these coastal cities. So that that outward migration is very consistent to what it was pre COVID-19 levels and is relatively low so net net whereas we're seeing really good migration into our <unk>.
Markets and not seeing a corresponding outflow that that some people have alluded to.
That's great awesome color. Thank you guys. Good luck.
Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.
Hey, Good morning, My afternoon, Hey, guys I wanted to maybe get a little bit more disclosure from you about loss to lease across the various different markets that you're in and really asking the question from a perspective of your turnover is only 25%, which is great thing and it just leads me to believe that you have.
Quite a sustained runway for.
Same store revenue growth.
All else being consistent so I'm just wondering if there's any differences between loss to lease and maybe if you can comment on your ability to capture that as some of your apartment cousins had mentioned that.
They can only capture call it 60% to 70% of loss to lease in a given year.
Hi, Richard it's Brian.
Very good question, we're obviously seeing a divergence between renewal rates and re leasing rates I would estimate that our loss to lease for the portfolio right now is somewhere in the low double digit ballpark.
It's exactly as you said, though it gives us a lot of confidence going into next year that we can continue these these really nice.
Really nice rate growth, both on the renewal side and on the releasing side.
How much of it we're going to be able to capture next year I don't have a great estimate for you there our retention is a little bit better than the multifamily peers. So it may not be as quick to catch up, but but you'll notice too that we've seen some nice improvements in our renewal rates sequentially as well so.
In a nutshell, we're really excited and optimistic.
Optimistic about our abilities to push rents next year loss to lease will have some contributing effect to that.
Got it and maybe if I can just follow up.
Just a bigger more strategic question as you think about the dynamics there obviously a ton of tailwind right now.
But as you think about what could make this an even better environment versus maybe maybe a little bit of a weaker environment. What are you looking for how much does home price appreciation matter.
I'm just trying to frame the environment, how much more upside there is versus this just the new stable normal versus a potential a potential slowdown.
Yes, I think rich side.
Go ahead go ahead.
The upside is really a function of being able to sustain these these really.
Record levels of demand and HPA is a factor of that there are supply constraints in our market. There is a shortage of housing as we've talked about we don't see any quick fix to that in the short run so the expectations are that if.
If demand holds we're gonna have fantastic runway.
The upside would be a continued appreciation for our value proposition, we've talked about that that links the pandemic accelerated some trends that we saw going into into the pandemic that really talk to the benefit of our platform the convenience of the leasing lifestyle and the changing demographics. So.
I think the upside would be to have demand maintain or even accelerate from where it is today.
Yeah.
Great. Thank you guys. That's really helpful I'll jump back in the queue.
Thank you. Our next question comes from the line of Hondo. Thank you with Mizuho. Please proceed with your question.
Hey, there.
Thanks for taking my question.
Brian You mentioned just.
Now the the widening spread between new and renewals good for the loss to lease, but I'm curious about some of the deceleration. We're seeing here the blended rate in October a little bit below the third quarter is the contrast to.
Your your resi peers cousins seeing acceleration. So maybe you can you talk about pricing power our renewal pricing strategy. Obviously renewals are a key piece of the story with retention being so high and maybe share some color on what you're sending out for November December and if youre capping windows anyway. Thanks.
Sure Thanks and all.
Yeah the.
The deceleration that Youre talking about is I think nine 1% to $8 nine it's still extremely strong.
Tomer numbers that we posted.
Show up 400 basis point improvement over last year. So we're still seeing really good pricing power, especially into at the time of year, where traditionally we've seen some seasonality we've been able to buck that trend with the robust demand but.
But youre exactly right.
Position that we're in with strong occupancy and good execution on turns and excellent demand.
It has given us confidence to continue to push our renewal rates.
In terms of absolute caps.
I don't think there are any specific data points to provide there, but we've been we've been thoughtful on our renewal process. We are managing to optimize revenue that's one component of it.
Re leasing rate growth is another component but.
Putting all this together, we're really happy with our with the progress that we that we showed in the third quarter and still the strong results that we posted for October.
Great. That's helpful can you actually share what the renewals that you are asking for for November December.
Yeah, Yeah, sorry about that.
We are.
The renewals for the remainder of the year going to be consistent with October.
And the the renewal offers that we're mailing out for the beginning of next year or a slight increase but nothing nothing dramatic.
Got it got it thank you.
And then maybe one on the cost outlook given the inflationary pressures.
Pressures you talked about I'm curious how you guys are feeling about your ability to contain some of the cost of the chunkier more controllable like the R&M the wages the material and then maybe on the on the real estate side, given the the rise in values and particularly the run in the sunbelt.
Expectation is that real estate taxes are heading up so any any color on that I think you mentioned that you had some recent successes here, but I think into next year, there's a general expectation that well.
Taxes should be at least real estate taxes should be going up right.
Yeah, and I'll start with that and maybe pass it to Chris for the for the tax commentary.
We're really happy and proud of the execution that we've had in this in this current environment.
Our scale and our platform efficiencies have allowed us to continue to turn homes quickly.
Despite the supply pressures.
The focus that we have on on soft performance has allowed us to mitigate some of the really inflationary.
Increases on third party vendor work. So there are a number of things in place that are protecting us from from those.
Those issues that I think most people are feeling.
We're going to continue to focus on it where we're doing this in an environment to where we're still working out some of the COVID-19 related distressed residence those are turning.
At this time, we've talked about that in the past. So overall I think we've done an excellent job.
Being efficient.
In a challenging environment I would expect that to continue for us, but we're paying close attention to it.
It's really a testament to the strength of our platform that we've been able to mitigate a lot of these increases.
Yep handle and then this is Chris I'll jump on the jump in on the property taxes, and I'll talk a little bit about what we're seeing this year and then tie it into next year as well.
I'm sure you'll recall the third quarter is typically a really active period for us for receipt of property tax information.
In particular on the assessed value front, we now have information on pretty much the majority of our portfolio.
And I'm pretty happy to report some good updates are almost all the way around.
Best values have come back.
Modestly better than what our expectations were at the start of the year.
Actually seen a couple municipalities end up reducing rates that we actually were not expecting.
And then the Appeals program is going really well so all of that combines into the new full year expectation that we've been talking about around 4% or so which as a reminder, is about 50 basis points better than our expectations at the start of the year and then on 2022 look it's definitely the right question of course, I'll tread a little bit carefully here as we're still in the middle.
Of our 2022 property tax budgeting and forecasting process, but in general look we agree with you that and recognize that we're in a strong HPA environment.
Thats great for asset values, but is obviously also a factor for property taxes. So again I can't comment with specific numbers, just yet, but given the strength we've been seeing in HPA. This calendar year and the fact that property taxes, commonly run interiors, we could see 2022 taxes being a touch higher than our 21 estimate of 4%, but I wouldn't really expect.
To be in a materially different ballpark and as always we will leverage our robust appeals machine to make sure we aren't leaving any dollars on the table and then just to tie all this together. Obviously your question was around expenses, but I would just remind us all to think about expenses coupled against as we're thinking about 'twenty two coupled against what we expect to be.
Another really strong year from a top line perspective for all the reasons that Brian was talking about.
Setting up real nicely for another year of occupancy and rate performance and then you couple that with all the good stuff to come from our growth programs and the Anh machine is set up real nicely for another strong year in 'twenty two.
That's very helpful. Chris Thank you.
Thanks, Andrew.
Our next question comes from the line of Dennis Mcgill Zelman <unk> Associates. Please proceed with your question.
All right. Thanks for taking my question.
I think the first one is on there are a couple of comments about preferences for single family rentals and I just find you to maybe elaborate a little bit on what you guys look at to assess that because obviously from the outside looking at the homeownership rate Dan Thats been going on for several years, particularly among young adults. So how do you guys think about that when you talk about the preferences.
Yes, Dennis it's Dave and what we have seen we have mentioned.
You will recall each and every quarter, we've talked about how the demand for single family rentals has continued to get stronger and stronger.
If you go back.
10 years ago, when we had 13 million single family homes, what we had seen at that time is demand that was in the ninety's, but much lower than it is today and today. We have many more homes that are single family rentals, it's $17 million by most accounts and the demand is far far straw.
And I attribute that to basically the education the value proposition of our residents and prospective residents understanding what single family rental living is today versus what it was more than a decade ago.
A decade ago. It was in the hands of mom and Pops American homes, and some of our peers have elevated the quality of the single family rental experience both the quality of the housing as well as the quality of the customer service.
And we see that driving demand that's the tailwind that we continue to talk about.
I do not see that getting.
Any.
Softening up at any time in the future and then the other piece that really drives. This strong demand is the fact that there is a shortage of quality housing in the United States. We talked about in prepared remarks, there is depending on which survey you want to look at their all in the same area, but there's somewhere between four and six.
Million households, looking for quality housing.
Uh huh.
We are building the quality housing and solving part of that problem and but the demand for it as well.
Extremely strong today and I expect it to be extremely strong for many years.
Into the future.
We could probably debate the shortage another another day, but I think what you're seeing from a demand side I'm not sure. We would disagree with but there is also an incredible demand for for sale single family too. So I guess, what I'm trying to get at is is there a mix shift between single family and rented single family in the macro data would suggest.
That owned is gaining share because they ownership rates going up so that's what I was trying to understand.
Recognizing that theres demand strong demand for all housing.
You would maybe articulate that there is a preference for rental over one.
Well there is two there is two groups of individuals and those that are looking to buy and those that are looking to rent.
And we are in markets where.
People are moving to where they're migrating to we hear about some of our multifamily peers repositioning to where the migration patterns are we're already there.
And the other piece here is is that when you think about 17 million single family rentals, and you think about <unk>.
<unk> between 50, and 60000 and our peers institutional peers also.
Owning.
Thousands, but not millions.
And we have a better product we are going to continue to see very very strong demand.
And we are in the markets where the.
The demand is extremely strong.
All of our markets I think other than one or.
The employment growth in the.
Population growth exceed the national average.
So that's going to provide strong demand for us.
For a long time going forward.
Okay, No I appreciate that and maybe shifting gears, just a little bit to the development program.
What was really a very quite a bit by geography, and so forth, but if you just looked at all of the development completions. This year, what's the average rent on those units and what would you say the average rent would be next year on deliveries.
Yes.
Well the average rent for the third quarter was in is in the supplement.
$2120, that's actually slightly higher than that but.
But if we hadn't rented it yet we use the pro forma rents and we're exceeding pro forma rents by about 5% to 10% on average.
On the <unk>.
For the year I would say, it's probably in that 2000 2100 dollar range, but I don't have that statistic in front of me.
And then for next year, just based on how you've underwritten what's coming to market.
Yeah.
So based on underwriting pro forma rents.
Probably in the same range 2000 to $2200, but again, where we were.
We're achieving higher than pro forma rates in almost every development.
Okay. Thanks, Good luck guys.
Thanks Dennis.
Our next question comes from the line of Jade Rahmani with K B W. Please proceed with your question.
Jade Rahmani you May proceed with your question.
There is no response from G. So we will move to the next question. Our next question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question.
Hi, guys. Most of my questions have been answered, but I did want to circle back to collections.
I mean it was good that you guys provided guidance for normalizing next year, but I'm just trying to understand the remaining tenants that are trying to get correct.
Do they differ from your normal pace.
100000 income, earning households to dawn com I'm just.
Trying to compare.
What's different.
I guess the remaining.
The remaining tenants that needs to kind of get back to normal.
Okay.
Yes, Sam.
I don't know if.
I think what youre getting at is whether there's a different profile between the cohort, whose current and the cohort who is under some distress.
Right.
I think you could look at it.
The COVID-19 related distress hit some of our markets hard I don't know if theres, a dramatic difference and incomes, but I do think that those are the ones that have been affected and unemployment if you take the.
The hospitality industry in Las Vegas, as an example, but it's not a case of the people who are under distress had lower incomes than those who didn't I think it's probably more isolated into whether theyre industry was affected by COVID-19 and whether it's been able to recover.
Got it okay. So is it more market specific at this point with in terms of what you need to get in terms of collections or yes.
Yes. There are there are there is variability across the markets.
The.
The real goal for US is as you mentioned before.
We alluded to in our prepared remarks is to get everything back to normal and part of that processes.
Work out to some of the distress tenants and working them through the system getting those houses turned and put back into.
And to normal.
<unk>.
In line bad debt delinquencies and so forth, but the good news is we're seeing we're making really good progress on that.
We've talked about that before the full suite of collection tool has been returned to US now so thats in process. We're happy that we've made really good movement on that we think it's going to take into into next year as I mentioned in the prepared remarks, but our goal is to work those tenants out re tenant. These homes turn these homes re tenant them taking.
Advantage of nice rate growth that we've gotten and get those back to kind of normal operations and thats going to be occurring.
Through through the first half of next year.
Into 'twenty two.
Got it appreciate the color. Thank you.
Thank you. Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.
Thanks. My first question is on the trajectory of development deliveries and so on past investor presentations, you've got some bars going from 2000 homes delivered roughly this year up to 3000 and <unk> in 2023 and the question is have you sourced enough supplies given the supply.
And bottlenecks too.
To stair step that trajectory or is there anything in the supply chain right now that's going to temper that.
Increase from here.
Yes, Thanks for that question John It's a good question.
Who.
As far as 2023, I don't know if we'll have the same supply chain bottlenecks I hope not.
Ben.
Pretty creative and have built an advantage in that we don't offer options to our renters and.
In building our houses and we have standardized floor plans.
So we have to have a built in advantage over our national builders.
But.
I can't tell you about supply chain issues in 2023, but we are definitely ordering stuff well in advance.
I can't even tell you for sure what.
The supply chain issues will be in 2022, but we're.
We're monitoring them, we've had them there's really three areas nationally that we've had supply chain issues appliances windows and.
And trusses.
As far as the others are more local in market.
And we've been able to because we're in so many markets. If one market is suffering we have been able to move some supply over to the other market.
So we've been creative hopefully, we'll be able to continue to be creative and achieve our goals for 2022.
Which I I can't give you for sure what we are.
Targeting until I get through all the unit delivery plans for for each of the.
Markets and I haven't fully gotten through those yet.
Okay.
May not be understanding the lag of when you got to collect your inventory on.
Inventory of materials to deliver homes next year, but have you sourced enough supplies to make you confident you can deliver more homes next year and you did this year.
I'm fairly certain that we will deliver more.
Okay.
How much more.
Not prepared to tell us Hey, John it's Dave.
Supply chain issues have been an issue all of 2021 and.
As you can see we have delivered exactly what we expected and I think what Jack is saying is yes. There is a supply chain issue out there but.
With the ability to order much earlier in the life cycle of building homes than our homebuilding friends have because of owner options and the ability to source in many markets.
Because we have very standardized plans and we can move there.
Those materials around.
We have.
SaaS fully delivered exactly what we thought we would deliver this year and going into the early part of next year, we don't see that changing.
We.
Our deliveries in the early part of 2021 on land that we acquired two years ago three years ago, we were on target for and we have very very good loyalty with our trades as well and so we are not seeing.
Issues with trade holding up.
Deliveries at this time and I don't expect it will hold it up next year either so yes.
We are confident in our ability to deliver the homes that we have the land for that we have done the horizontal work on next year and work through the supply chain issues.
Okay great.
Last question for me either for Brian or Chris.
Obviously kind of R&M and turnover costs from a dollar amount have benefited from lower turnover rate. This year wondering if you could give us a sense for the how the cost per individual tern has increased and just so we can understand the magnitude of acceleration that's going to come once the turnover rates starts normalizing.
Sure John It's Chris here.
On average I would say turn costs bounce around a little bit.
But on a trailing 12 month basis through the end of the third quarter I think the average turn for a unit that actually turned it was about $1000 or so.
It typically runs in that area, it's probably up a touch but I.
I would say on the turn side as Brian spoke to.
In his prepared remarks and also in a question earlier in the Q what were seeing there is a little bit more volume driven than cost per ton driven just given to.
Two factors were where our lease explorations fall in the year and that the fact that we have a larger proportion of leases expiring.
In the third quarter and then also as Brian spoke to the fact that we're now making progress working through some of the COVID-19 affected households in the portfolio, but I would think the I would think about it in context of average cost to turn a home that turns being about $1000 or so.
Okay. Thank you.
Thanks, John.
Our next question comes from the line of Janney Luther with Goldman Sachs. Please proceed with your question.
Hi, This is Tom Miller charge from Goldman Sachs. Thank you for taking my question I'd like to talk about sort of increasing interest in the <unk> space as we think about institutional capital as we think about homebuilders.
Could you talk about you know what sets you apart and how are you all communities.
Frank as we think about sort of you know more institutional investors looking to get a bite at the Apple.
And what doesn't what do you as you think about this increasing competition.
Yes. It is.
Dave.
That's a set of good questions there.
<unk>.
There is definitely more capital flowing into the space, especially into the build to rent area than in prior years and that to me is a validation of what we are doing build to rent is working and people are looking to capitalize on that opportunity.
But the opportunity that American homes has I believe is very different than others and that is because we're the only ones that are building and managing the same asset.
So we are building them.
With the.
Thought with the view that we will be the long term owner, we're creating a better home.
For maintenance long term and that has a secondary benefit that it's a higher quality home and has more value than the value proposition for prospective residents.
The ability to.
To have that feedback loop from Brian's operations group into Jack's.
Development group and be able to make changes in a very very quick manner really provides us a unique opportunity to differentiate the product that we're delivering we were able to early in the COVID-19 pandemic period.
<unk> changed some of our floor plans to provide.
Work from home cubes, and a little areas that you could create for in home offices and additional office space.
And so we are.
That's a modification that are architects, we're able to implement very very quickly providing now a product that's a little different we also look at building communities.
A little different maybe than than others may be summer copying what we're doing and we're looking at the best of single family living and the multifamily living with respect to the amenities that are offered so are we are building communities with high quality amenity centers.
Again, there is information there is a video on our website that you can actually see what these amenity centers look like.
These communities are proving to be very very high demand. We are pre leasing these communities at a rate greater than 50%.
50% of the homes are leased prior to them being completed that's the demand that we're seeing for these homes.
Got it.
Helpful color and as we think about the expense outlook for dealer incentive if you don't look at the implied fourth quarter guide it appears that your.
Sure.
Outlook has a wide.
Range in there for the fourth quarter, you know about 400, plus bps or so so could you talk about what the contours are there sort of are less than two months into the yard.
What are the drivers thank you.
Good morning, John It's Chris here.
I would remind you that.
<unk>.
The shape of expenses this year.
Have largely been playing out consistent with what our expectations were at the start of the year.
Really being driven by the timing of the R&M and turn line where.
Where we knew we were going to see some back half weighted in this this year.
Again as I was mentioning a couple of minutes ago based on the timing of move outs, where our lease explorations fall and the fact that collection tools have now and in practices have returned to normal and we're cycling through some of the COVID-19 affected households in the portfolio and the timing of that is translating into what we're seeing and expecting.
In our R&M and turn cost line, but again I would remind you very consistent with the shape and timing that we're expecting it started the year in the midpoint of our expense guidance has remained unchanged from the start of the year at $4 75.
Got it thank you for all the detail.
Sure. Thanks Toni.
Our next question comes from the line of Keegan Karl with Bahrenburg. Please proceed with your question.
Hey, guys. Thanks for taking the questions just one for me given given where we're at time wise could you just give us more color on your ancillary revenue streams and how you plan to grow them going forward.
Again this is Brian.
Yes.
And I can get your semi.
Go ahead, Brian.
Sorry.
We're really pleased that <unk> seen some really nice increases.
And contribution from from other income this year we've been.
We put a program into place. One example, and we're continuing to roll that out through the through the program I think if you look at it from a long term perspective, we're very excited about the opportunities we're going to have for ancillary revenue on the communities.
The way that we're going to connect.
Those communities Smart home technology. Some really nice features that the residents are looking forward to getting so we see great opportunity in that as we continue to roll that into the new community development.
Chris can speak to any other contribution that we're seeing today.
Brian I think thats, great Keegan, the only thing that I would add is.
Ancillary income via the fee line is contributing nicely I mentioned this earlier in the Q&A, but for this year alone.
<unk> at the midpoint about 50 basis points of same home revenue contribution from that fee line now part of that is keep in mind. The fact that we had late fees turned off for a couple of months last year, but a big contributor is that ancillary income that Brian is referring to and we see a long runway for that ahead.
Great. Thanks, guys.
Thank you.
Final question comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Hey, everyone. Just a question on land so looking so far in 2021. The number of lots acquired has been about three times the number of deliveries and so I'm curious at what point, we will see those numbers look more equal and is that really going to be into the deliveries going up or is there a chance that at some point the land purchases, we will start moving lower.
Hi, This is Jack.
Thanks for that question Brad.
When we stop growing the program Youll see it equal out.
So.
Today, we are buying land for 2000, and maybe the end of 2023, 2024 and 2025 deliveries so.
We still expect to be growing at that point.
And if we feel.
Feel like the <unk>.
345.
Deliveries is the right number to flatten out at.
Youll see though.
That's how many will be buying a year.
Okay. That's it for me thanks.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Dave singer CEO for closing remarks.
Thank you Alex Thank you for your time today.
We are pleased with our operational and growth execution. This year and remain excited and well positioned for what lies ahead in 2022 and future years.
Again next quarter have a good day.
Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.