Q4 2021 American Homes 4 Rent Earnings Call
Okay.
[music].
Reading welcome to the American homes, four rent fourth quarter 2021 earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the final crazy.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This conference is being recorded I will now turn the conference over to your host Nicholas from Thank you you may begin.
Good morning, Thank you for joining us for our fourth 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 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 filing.
As with the SEC.
All forward looking statements speak only as of today February 25 2022.
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 he 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>.
Thank you Nick good morning, and thank you for joining us today.
During 2021 we again delivered consistent outsized earnings growth, resulting in a record year headlined by sector, leading core <unk> growth of 17.4% per share.
At the onset of the pandemic it was hard to imagine how dramatic the world would change.
The hybrid work model is likely here to stay and millions of people no longer need to live close to the office and now have the ability to relocate to more desirable locations.
Our diversified footprint is positioned in high quality of life markets, where long term demographic shifts and changing preferences have been taking place.
Simply put the a M H portfolios located where Americans want to live.
Considering this and our country's housing shortage the fundamental backdrop for our portfolio could not be better before we dive into our 2021 results and outlook for 2022.
I want to take a moment to point out that this year marks the 10 year anniversary of the first home purchased by American homes for rent.
During the past 10 years a M. H has demonstrated thought leadership that changed the SF our industry with us at the forefront renting has become more desirable in a home is no longer centered around ownership.
Over the last decade, our dedicated team is strategically accumulated a portfolio of more than 57000 homes in 30, plus markets building, a leading operational platform in pioneering and unrivaled growth engine.
When you take a step back.
Bound Dacian. This company has built is nothing short of remarkable.
Upon this foundation the real work now begins.
Our focus is on what the next 10 years will look like as we reinforce our position as the market leader in delivering consistent and outsized earnings growth.
Strategically we are focused on three areas that build upon our existing foundation.
The first area is technology.
As most of you know we pioneered some of the earliest technology improvements in the single family rental industry.
Solutions, such as let yourself in and our proprietary inspection and maintenance apps have allowed us to scale and industry that many thought was on scalable.
As we look forward, we will continue to optimize our operational infrastructure by investing in next generation systems.
Second we remain committed to growth specifically, our internal development program.
Our self developed homes offered the best risk adjusted returns across the S up our sector and will transform our portfolio over time by improving the quality of our asset base.
Additionally, as the 45th largest homebuilder in the country. Our internal development program now plays an important role in addressing the nation's housing shortage by contributing new high quality housing stock.
Our last focus area is ESG.
This year, we were honored to be named one of America's most responsible companies by Newsweek.
And a top ESG performer in the real estate sector by sustained <unk>.
Our organization is continually focused on improving how we deliver sustained value to our residents shareholders and employees.
Another example is that we were recently named a 2022 great places to work company.
This meaningful recognition represents our people first culture and is instrumental in recruiting and retaining our valued employees.
In closing this is an exciting time at American homes four rent as we expect our strong performance to continue in 2020 two and beyond.
We recently announced an 80% increase in our dividend rate and expect another year of double digit core <unk> growth per share.
Okay.
Through the combined efforts from our technology investments growth initiatives and ESG focus this strong momentum should continue and further strengthen our position as the differentiated market leader in delivering consistent and outsized earnings growth.
Now I'll turn the call over to Brian Smith for more details on our operations.
Brian .
Thank you Dave.
2021 was an excellent year for American homes four rent.
Occupancy gains and record rate growth drove same home core revenue growth of seven 3%.
And core NOI growth of eight 7% for the year.
Which was above the high end of our most recent guidance.
Demand remained high and solid execution drove strong leasing results across our entire portfolio for.
For the year distinct shoppers per rent ready homes were up over 60%.
Cash to cash turn times improved by 10 days.
And new lease rate growth was 13%.
Up nearly 800 basis points from 2020.
Fundamentally the American homes, four rent diversified portfolio is well positioned to continue delivering consistent outsized earnings growth.
And our vertically integrated platform provides the foundation to create even more value over the coming years.
Turning to the fourth quarter, we delivered a strong close to the year.
Same home core NOI growth was nine 8% driven.
Driven by solid same home core revenue growth of eight 9%.
On the expense side same home core operating expenses were up seven 4% during the quarter.
Despite elevated costs from Covid related move outs and general inflation.
Our full year 2021 same home core operating expense growth came in as expected at four 7%.
Chris will lay out formal guidance shortly but before that I want to share operational updates for January and provide commentary on several several drivers underlying our full year outlook.
As expected average occupancy for the same home portfolio came in at 97, 5% during January .
And new renewal and blended rate growth was 12, 4%.
Six 9%.
And eight 3% respectively.
On a full year basis, we expect our 2022 same home core revenue growth to accelerate by nearly 100 basis points to 8.25% at the midpoint.
Underlying expected growth next year, the same home average occupancy in the low 97% range and blended rate growth in the high 7% area.
For same home core operating expenses, we expect a 575% growth at the midpoint.
Growth drivers include higher property taxes inflation and modestly elevated COVID-19 related move outs.
Finally, please note that because of timing with prior year comps same home expense growth will not be linear.
And we expect to see a higher percentage increase during the first half of the year.
Looking forward to 2023, one of our key areas of focus is on modernizing the resident experience through the expanded use of technology.
Innovation has always been at the center of our strategy in our next generation services platform will drive additional efficiencies.
This system will improve the logistics scheduling and communication functions of our maintenance platform.
More importantly, it will provide our residents with a 360 degree view of their account and give them access to multichannel real time communications.
As an example for a resident to connect with our maintenance diagnostics team.
Or any of the 4000 plus service providers across our internal and external networks. It will be as simple as using your favorite ride sharing app.
We look forward to updating you on these innovations as we continue their development throughout 2022.
Hard to see the related benefits in 2023 and beyond.
Overall I'm proud of what we've been able to accomplish at American homes threat.
I would like to thank our team for continuing to do a great job delivering consistent outsized earnings growth.
I can't wait to see what the next 10 years will bring.
Now I'll turn the call over to Jack.
Yeah.
Thank you, Brian and good morning, everyone.
System growth remains a strategic priority for us.
I am happy to report that 2021 with another strong year for American homes four rent.
We added approximately 4600 homes to our wholly owned and joint venture portfolios during the year.
Was made possible by our three pronged growth program and diversified footprint that enables us to cast a wider net than other single family rental platform.
Homes under construction and land purchases, we deployed an impressive $2 billion of total capital in 2021.
As we've discussed many times before one of the major benefits of our three pronged approach to growth is that we have the ability to nimbly adjust her channels due to changes in the housing market.
As an example, we finished the year with robust activity through our traditional acquisition channels.
Competition is elevated our platform gives us the ability to integrate homes onto our platform.
And capture efficiencies that many cannot driving incremental value for shareholders even at today's prices.
On the other hand due to elevated prices and other market dynamics, we have scaled back commitment to the national builder pipeline.
During 2021 we acquired 2500 53 homes between our traditional and national builder channels.
<unk> $900 million.
And we are targeting a similar capital investment through these acquisition channels in 2022.
From a timing perspective, we expect our acquisition activity to be generally balanced throughout the year.
Also please keep in mind that average renovation times, commonly run 90 days or longer on our platform is acquiring homes at these elevated volumes and may be subject to additional supply chain delays.
Now turning to our one of a kind internal a M H development program.
Despite broad market challenges surrounding labor and supply chain team team did a tremendous job meeting the expectations outlined at the start of the year and delivered 2054 homes.
Our commitment to scale. This program remains unchanged our deliveries in 2022 are likely to be impacted by inspection supply chain labor delays. However.
However, despite these broad market challenges, we expect to grow our annual deliveries by approximately 10% at the midpoint in 2020 to deliver.
Delivering 2100 2400 homes.
More importantly, future growth in our E. M. H development program will be made possible by continued investment in our high quality land pipeline consisting of class eight locations within our existing footprint.
On that front I'm happy to report that we successfully increased our land pipeline to approximately 18000 lots owned or controlled via option or escrow contracts at the end of 2021 .
In summary, we remain in great position to capitalize on growth opportunities.
American homes for rent has a unique ability to create consistent shareholder value in both.
Open market acquisitions and through our one of a kind development program.
Our team executed at a high level in 2021 and we will keep our foot on the gas moving forward.
Now I will turn the call over to Chris. Thanks.
Thanks, Jack and good morning, everyone I'll cover three areas of my comments today first a quick review of our year end results second an update on our balance sheet and recent capital markets activity and third I'll close with an overview of our 2022 guidance.
Starting off with our operating results, we delivered another quarter of consistent and outsized earnings growth with net income attributable to common shareholders of $48 $1 million or 14 cents per diluted share.
On an ethical share and unit basis, we generated 37 of core <unk>, representing 24% year over year growth and 34 cents of adjusted <unk>, representing 29% year over year growth.
And for full year 2021 we generated net income attributable to common shareholders of $135 $3 million or 41 cents per diluted share.
And $1 36, a court that's pressuring unit, which was in line with our expectations representing industry, leading earnings growth of 17, 4%.
Next I'd like to turn to our balance sheet and share a few updates around our recent capital markets activity as we continue to fuel a robust external growth programs. During the quarter. We settled the remaining 1.8 million common equity for chairs from our main 2021 offering for net proceeds of approximately $65 million and we also issued approximately.
One 7 million shares under our ATM program raising over $70 million of net proceeds.
End of the year, our net debt, including preferred shares to adjusted EBITDA was 6.2 times, which is roughly in line with our targeted leverage level, we had $48 million of cash on the balance sheet and our one in a quarter billion dollar revolving credit facility had a $350 million drawn balance subsequent to year end and as we prepare to fund another.
Year of outsized external growth, we raised $864 million of net proceeds in an oversubscribed common equity offering.
The total net proceeds of $376 million was received during the first quarter with.
With the remaining $488 million being issued on a forward basis to minimize dilution as we match fund against the capital deployment throughout the remainder of 2022.
Next I'd like to share an overview of our initial 2022 guidance, which reflects our expectation for another year of consistent and outsized earnings growth for full year 'twenty 'twenty. Two we expect core <unk> per share and unit of $1.53 to $1.59, which at the midpoint represents year over year growth of 14.
One, 7% and some additional color or expectations contemplate the following assumptions for our same home pool, which will include between 48040 9000 properties at the midpoint of our ranges. We expect core revenue growth of 8.25%, which reflects the strong occupancy and rate growth environment that Brian discussed a few minutes ago.
Along with our expectation that bad debt continues its gradual return to normal over the course of 2022 .
On the expense side, we expect the same home core property operating expense growth of 575% driven by property tax growth in the 5% area, which reflects our expectation for higher valuation increases compared to 2021 and a 6% to 7% combined increase on all other expense line items, which reflects Brian's earlier commentary.
Surrounding the current inflationary environment and modestly elevated COVID-19 related move outs and to the bottom line. We expect 2022 same home core NOI growth of nine 5%, which reflects an acceleration over our 2020 one growth rate as well as continued core NOI margin expansion.
From an investment standpoint, we expect to deploy one seven to $2 $2 billion of total capital into a combined growth programs. This year, adding over 4400 homes for our wholly owned and joint venture portfolios.
Specifically for our wholly owned portfolio at the midpoint of our ranges, we expect to invest approximately $1 $8 billion of A&H capital consisting of 1.35 billion or 3600 homes added through our acquisition and development channels, along with $350 million of continued investment activity into our wholly owned.
The pipeline and $100 million of pro rata investment into our genius and property enhancing capex programs.
In addition to our external growth programs, we expect to redeem $270 million of preferred shares that become callable during the second and third quarters.
This brings our total 2022 English capital needs to approximately $2 $1 billion, which we expect to fund through a combination of retained cash flow approximately $100 billion of recycled capital from dispositions $864 million of attractive equity capital already raised earlier this year and leverage capacity from our bound.
Shoot.
And that brings us to the end of our prepared remarks, but before we open the call to your questions I'd like to reiterate that 2021 was undoubtedly a record breaking year, but more importantly, it represented another year of consistent and outsized earnings growth from the A&H platform.
And as we look forward to 2022 we expect a consistent image outperformance to continue with another year of double digit core growth accelerating core NOI growth from our same home portfolio.
Tenet expansion and A&H development deliveries and an 80% increase in our distribution.
And with that thank you for your time and we'll open the call to your questions operator.
Thank you at this time well be conducting a question and answer session. He would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is my question. Kim You May press star two lithium by trying to live in a question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the psyche.
Yeah.
We ask that you limit yourselves to one question and one follow up per person.
One moment. Please I'll then call for a question.
Hi, first question is from Nicholas Joseph of Citi. Please proceed with your question.
Thank you I think you mentioned a high 7% blended rent growth embedded in guidance, how does that break down between your assumptions around new and renewal lease rate growth and then maybe in the first half of the year versus the second half of the year.
Good morning, it's Brian .
Yeah. Good question D.
You saw that the AR increase.
Increases that we got in January were consistent with Q4.
We're feeling really good about the demand backdrop.
The metrics that I spoke about in the prepared remarks, continuing to hold very strong. So we're seeing excellent demand that gives us confidence that we're going to continue to be able to push new lease rate growth.
Break out for the year I think about it in the high 90 percents for re leasing.
And then on the renewal side somewhere in the Sevens.
The if you look back at the history. We've had continued improvement in renewal rates over the past six quarters, coupled with really good turnover rates reductions there of nearly 10 percentage points over the past four years. So everything is lining up very nicely to continue this really nice momentum that we have on the rate side.
Thank you and then I'm just I guess a follow up maybe just on the regulatory environment. Overall. It seems like there is increased scrutiny on single family rentals broadly. So is there anything youre doing differently or that we should be mindful off just given the overall environment.
Yeah. Nick This is Dave you know, let me start.
By saying, yes, we our mission is to provide safe quality housing are in good school districts, and we're providing that housing where America wants to live and as we've mentioned before you know we operate in and then in an industry. That's.
Because it's providing housing with a significant level of growth as you. Just mentioned, we are garnering more regulatory attention in this industry, but.
But also as we've previously discussed during various federal hearings. So both in the Senate as well as in the house, we've been called out a number of times as an example of how to be a single family rental company that does the right thing.
So you know I can't specifically talk about other companies, but you know at this point are you know we don't have any regulatory matters that are you know we are we're not in the same places others.
Our next question is from Joshua <unk> of Bank of America.
Proceed with your question.
Yeah, everyone everyone's doing well.
Kind of wanted to touch base on that moderate modernizing the user experience.
What kind of benefit should we expect to kind of see over the long term would it be better expense control from you guys or maybe higher revenue growth.
The combination of both.
Yeah. Thanks, Josh is it's a very good question.
Modernizing of the resident experience has benefits really across our entire business.
We're very focused on that that experience contributing to extended stay improvements on retention.
Our ability to continue to push renewal rates because of a very strong value proposition that people are realizing so from the residents perspective, it's going to change the way that they communicate with us by modernizing I'm talking about putting.
Putting a premium on mobile having all the information really available at their fingertips whats the status of my maintenance request, what's the status of the technician when are they going to arrive some more things that you'd see with a lot of the other monitoring companies and then the other thing that we're doing to from the resident perspective, as we're working backwards from all the data and information that we.
Have them on the customer service side, what are they calling in and asking about and how can we provide that information to them kind of ready real time. So they don't have to make a phone call. All they need to do is open up their app to see exactly where that particular she stands.
From our perspective, the efficiencies that well gain outside of better retention and better customer service to the resident there'll be improvements in our inventory management system. Our scheduling system are the way that we communicate with our vendors the way that we communicate with our residents.
We're adding some pretty robust video diagnostics tools too.
The maintenance request side, which allows our our internal teams to properly diagnose maintenance issues as an example, and send US a single track with the right equipment out to remediate that particular issue. So there are a lot of a lot of benefits. What we're really excited about is this platform will.
We'll be we'll be able to build on it into perpetuity. It gives us great flexibility.
But again benefits to both the revenue side and to the the cost control side as well.
So thanks for that color.
Kind of on a related topic I guess, how should we think about potential margin improvements in the years ahead.
Hum.
Crescent Barton growth in the past.
Oh sure morning, Josh It's Chris here, you know I think our view on margin potential quite frankly remains exactly the same Ah you see nice potential you know with an extended runway on it we've been capturing a portion of that in 'twenty, one and as I mentioned in my prepared remarks, we're expecting to see more of that captured in.
'twenty two as well so we're really thinking about the drivers of it.
Candidly a lot of it is coming from the top line, we see a lot of opportunity from an outsized rate growth perspective for an extended runway to think of everything that's Bryan Bryan is talking about from a strength of demand standpoint.
[noise] that will contribute nicely.
We see nice potential from ongoing fee and ancillary income our programs for.
For 2022 that would be contributing you know call. It about 20 basis points or so to two same store revenues.
For this year in particular as I mentioned in my prepared remarks.
We're expecting to see you know gradually returned to normal on bad debt that will contribute back into margins as well and then longer term the investments that we're making now from a technology standpoint, and everything Brian just walked through will help us to become more and more efficient on the expense side, especially as the portfolio continues to grow and leverage those costs over a larger asset base also.
Contributing to margins.
Thank you.
Thanks, Josh.
Our next question is from Richard Hill of Morgan Stanley . Please proceed with your question.
Hey, guys. Good morning, your bathroom Kramer on for rich.
That's on a good quarter and a really strong guide here relative to Kinder Morgan Stanley estimates.
Wanted to just ask for a little bit more color. If you could then kind of the the 12, two new lease rate growth in the quarter I'm kind of person. That's 15, nine and <unk> and then it would be kind of in line with our it or in light of kind of what you've disclosed for January maybe just talk a little bit about kind of you know how much you can push new lease rate growth.
Occupancy is up I think it was a little bit more color there would be really helpful.
Yeah. Thanks, Adam this is Brian .
We're looking just those kind of step back for a second and just remind you that of our revenue optimization strategy. We're looking at all the different components new lease rate growth is one of them.
Occupancy obviously is another and when we got into the fourth quarter, we saw a little bit of seasonality like we have traditionally the difference now is all of the seasons are good but there is a difference that we saw coming into the fourth quarter, a little bit of a slowdown off the 15, 9%. The other thing to consider too is look at the.
Fantastic rate growth that we had in 'twenty 'twenty, 113% new lease growth for the year.
And then think forward to this to this year and where we are in a position now where.
Because of that fantastic growth last year, we're not assuming that we're going to have 15% over 15%.
What we're what we're talking about now is still really strong growth that's.
Made possible by this fantastic demand backdrop, we spoke of.
But I don't see 12% as being anything other than positive.
Yeah, and Adam This is Chris if I could just punctuate one point that Brian made which is a really good one in terms of the holistic approach that we take to revenue optimization, but the discussion around rate growth is a good one and very important but that's the only one variable and we manage all of the variables to what translates into the best outcome overall for the revenue.
And I would just remind you and everyone of you know what I and all of those mentioned in our prepared remarks. When you look at Holistically the decisions that we're making to the top line, we're expecting to accelerate revenue growth by nearly 100 basis points off of what was already a really really strong year in 2021.
That's really helpful. Thank you guys for that color, they're just maybe kind of similar question, but kind of shifting to renewals.
Are you able to give any any further disclosure on whether its February renewals are kind of you know the renewals you're sending out for March or April .
Yeah.
Yeah, that's the way we in my prepared remarks, I talked about the January results February is not done yet.
But again, what I was talking about before you've seen six quarters of consecutive renewal.
Growth of renewal rate growth acceleration.
And we expect that to continue with through the first quarter and even into the second quarter of 'twenty two.
Got it congrats again on the Oh, I mean, great results guys. Thank you.
Thanks, Adam.
Our next question is from Brian span of Evercore ISI. Please proceed with your question.
Hey, Thank you, Chris you talked about capital allocation, a bit and the recent equity raise as well as the forward component.
Could you talk a bit about the debt market and any appetite there to issue debt near term to get that leverage ratio, where it is now around that 60 or that you've talked about.
Yep. Good morning, Great question appreciate that the simple answer is yes. There is definitely a debt needs are as we think about capital plan for full year 2022, and just to walk through the components are just so everyone has all of them you're exactly right for a capital plan of.
A total of $2 $1 billion for this year. The equity component has been raised that was at $864 million from.
From the first quarter, a little over half of which was placed on our forward. So we can be very efficient with those proceeds and draw them down over the course of the year matching that funding against the deployment into our investment programs and then the balance of this year will come from a combination of retained cash flow you know somewhere in the $250 million to $300 million range.
Even after our 80% increase to the distribution this year.
You can find this on the balance sheet for coming into the year with about $50 million of cash on the balance sheet for this year will probably recycle about another $100 million of proceeds from our disposition program that will be reinvested and then the balance of this year will come from from leveraged capacity off of the balance sheet, which would be in the $800 million area or so that no.
A different than the past couple of years will look to fund into the unsecured bond market over the course of the year.
Yeah.
Got it and then you've got a couple of preferreds that are callable. This year could you maybe talk about your plans there and this guidance currently assume any redemption of those.
Yes. It does great question and I mentioned that in my prepared remarks, as well, but the components of that $2 $1 billion of total capital uses on the year is $1 8 billion of growth and then just about 300 million natural dollar amounts $270 million of preferred redemptions, where we've got.
A great opportunity there.
Two to refinance those which become due are callable in April and July and just as a reminder, our coupons on those are five and seven eighths, which create a nice and attractive refinancing opportunity relative to current cost of capital and that's included in our guidance and capital plan.
Right, Okay. Thanks for the clarity there.
Thanks, Brian .
Our next question is from Handel St. Jude Mizuho. Please proceed with your question.
Hey, good morning out there.
Chris appreciate the detail on source.
Sources and uses are and how you're thinking about capital this year I guess I'm curious.
Whats the capacity of equity left in your existing GE. These and what's your view on using J DS versus on balance sheet here as you grow the development platform and pursue acquisitions.
Yeah, the the right way to good question good morning by the way.
The the way to think about it is the the JV you still have a decent amount of runway to them between as a reminder, we have two of them both focused on internally image developed properties between the two there about you know just a little bit under 50% deployed or developed on their individual pipelines.
Combined so there's still some runway there development will likely take another year or two before those are fully deployed in terms of broader joint venture considerations from an overall capital perspective, you know look at no different than some of my comments from from past quarters. We've got two great joint venture partners that we're really proud to partner with that it brought in.
No different than we've shared the last couple of quarters as we're thinking about incremental capital dollars are objective and plan is to use the balance sheet and deploy a image capital from the balance sheet on a wholly owned basis.
Great. Thank you for that quick follow up I guess on on the development side, maybe for Jack can you talk more about the cost inflation, you're seeing in the development pipeline I think you've mentioned last quarter that there was some degradation in development yields are down the road I think it was in 'twenty three but curious if the timing of your view there has changed at all or.
Are you still expecting rents to outpaced cost near term and any incremental pressure on this yields are and then maybe how much of this year's development costs are locked in at this point. Thanks.
Thanks for that question and Bill.
In terms of inflation, we've seen things Spike and then come down in lumber is a good example of lumber was got up to $1200 per thousand linear board feet in a in the third quarter came down to a 650 in the fall.
And now it's back up.
1200, I think mostly related to the Canadian trucker.
Event, so and we expect at least the expectations of the experts.
Is that it will come back down at another $600 range. So we're gonna see fluctuations throughout the year.
We haven't seen a degradation in yields.
Due primarily to the the demand out there for <unk> for the new product in and are in the accelerated rent.
That we have over.
Over what we pro form it.
Our next question is from Jane.
W.
Please proceed with your question.
Yes, thank you very much.
Did you provide an update on <unk> collections.
Oh sure good morning, Jay Chris here.
Yes, I would say in general I mentioned this a bit in my prepared remarks, we continue to see improvements overall from a collections perspective that you can see reflected in our bad debt just as a refresher for folks you know high watermark for us at the peak of the pandemic was bad debt kind of into the mid twos area and.
And we started seeing improvement in that into the third quarter third quarter improved into the 1.6% area or so fourth quarter came down to a one 3% and we see that trend line continuing into 2022 with a gradual return back to normal levels over the course of the year as a reminder for.
Us.
Regular way pre pandemic bad debt is 1%, sometimes a little bit less of revenues.
Okay. Thanks very much.
Secondly on land.
Have you looked at how your land underwriting compares with that of homebuilders.
Specifically are you underwriting land with a developer's cost of capital in mind.
Or are you underwriting to a single family rental stabilized cap rate.
Cause that.
Potentially imply significant differences in the value of land to you versus to a developer which could cause differences in.
The way real estate assets are valued so curious if you could provide some color on that land underwriting.
Thanks, Jay for that question, we actually look at it both ways. We are a primary way that we look at it is it.
Is yield.
The property and and then secondarily, we look at just to validate where we are what what the implied developer profit would.
It would be if we were building for a building for sale. So I think were right in line with the where the national builders are in terms of.
In terms of what their underwriting for their profit.
Hey, Jay This is Dave let me add just a couple of things you bring up that there is differences between us and national Homebuilders and I totally agree with that and it's in a number of different areas.
Or our risk profile is very different than a national homebuilder.
We don't have the market risk that a national homebuilder, we will have at the time. The product is complete we also have the ability to develop.
In a different way, we delivered to a cadence that we want to absorb homes.
And lastly, the fact that we are building homes for ourselves.
And we're not building homes.
Our sale, where there is an owner that is going to make selections late in the development timeline or lifecycle allows us a very very different ability to manage the supply chain and Jack mentioned.
And this I just want to reiterate it I mean, we started 2022 for 2021 with an expectation of delivering 2050 homes. We ended up delivering 2054 homes in a very difficult supply chain environment and that's just a testament to the team but also the fact that we do have.
A different product that we built.
Thank you and just a last clarification would be in your underwriting since youre paying today's prices for land are you underwriting these deals based on in place rents or you're underwriting some inflation in the rents.
Yes.
We start with today's rents and then we inflate the rents through the first delivery and then we don't inflate after that and we inflate the operating cost as well so.
So far we've been doing better.
On the right.
And then what.
What we projected even with inflating it and and the costs are coming in about where we expected.
Thank you very much.
Thanks Jade.
Our next question is from John Pawlowski.
Please proceed with your question.
Thanks, very much for the time.
About 10 years from acquiring homes, just curious Brian .
For home until you have a very long vintage curve on capex, how much higher is the capex burden as a percentage of rents or percentage of NOI.
Pick a metric, but how much higher is the capex burden versus the kind of portfolio average on those.
Long held homes.
Sure.
Thanks, John .
I don't have exact details on that but what I can tell you rather than the age what's really important is what level of renovation went into these homes.
And at what time, so the older homes that were that.
We're completely renovated I might have a different profile than ones that we bought more recently that didn't have such a high level of renovation because they were in good shape I don't have a breakdown obviously age in terms of roofs. Other mechanicals plays an effect on the Capex expense.
But we've been continually investing in our homes throughout the entire ownership cycle.
I've made replacements, where necessary so the average age of those homes, even though we've owned them for 10 years might be very different.
Okay.
One for me just curious if you could give us some type of quantification for the knock on benefits of the build to rent communities on the margins of the stabilized.
The stabilized portfolio, so youre in a lot of markets and you're you're dumping a lot of homes in each market and it's a meaningful expansion of the footprint within like a Vegas and Phoenix. So just curious what kind of knock on benefits you have of margins for your stat inside homes would be helpful.
Yeah. Thanks, Thanks for that question.
We have a couple of benefits one is that obviously the maintenance costs on a brand new home is going to be lower or our underwriting in general will range based on where we're building because property taxes is a big factor in it.
In determining the margin, but in general we're running in the mid Seventy's for for margin on the Newbuild.
Yeah, John just to.
Basically tied the two questions that you had together.
When we build homes, we have the ability to build them with long term maintenance in mind, and so you're going to hear.
Here that we put in higher quality Oh.
Plumbing fixtures, we build the house slightly different we put in hard surface flooring all of that.
With maintenance long term maintenance in mind, and so the benefit of getting us from the <unk> into the <unk> and the margin on these new homes as is.
Potentially deep through the design of the homes and so theres a lot of benefits. When you can build the home yourself and you managed to whom you have that feedback loop and I think we're the only ones that really can say that we have that feedback loop.
Sorry, I should've been more clear my question, So I would take a las Vegas or Phoenix I mean.
You got 2000 lots to deliver in Vegas.
Last year and once you deliver those lots are you going to basically double your Vegas portfolio. So what I was asking is what's what's the knock on benefit to the prior scattered site legacy Las Vegas portfolio in terms of margins.
Yes, as we add to these portfolios we have.
Excellent operational infrastructure in place and we're gonna be adding for field maintenance staff proportionately theres not a lot of benefits to scale there, but there are benefits to scale at the centralized operations.
Leasing, whether we're making our maintenance and take on all the things that we're doing operationally at the headquarters in Las Vegas, not to mention the benefits overall to scale for corporate expenses too.
Yeah. The benefits of scale are really system wide. So it's not necessarily market by market. It's just adding to your overall, our overall portfolio, but you still have to have X number of.
Maintenance personnel for a given house so.
In a particular market.
There is a little bit of benefit, but it's really to the system.
Our next question is from Cagny with Goldman Sachs.
And with your question.
Hi, Good morning, guys. Good afternoon everybody.
Hi, Thank you for taking my question so thank.
Thank you call you guys talked about getting into the CLO portfolio.
Could you, perhaps give us more color in terms of you don't what you found out and where you are with that what are your thoughts not just from a portfolio standpoint, but also from an employee base standpoint.
Yeah.
With respect to Zillow as we indicated on our prior earnings call.
We're in discussions with them and we remain in discussions with them today.
The number of homes that we've actually or will actually acquire is far less than the number of homes that we had an interesting and while that process is still going on.
We will not get a material number of homes out of where the real benefit has been is.
We've been able to acquire or higher some of their personnel their field personnel and that is a big benefit in a tight labor market. When we are trying to grow our operations. So we.
We talked about labor, a little bit earlier, and the need to focus on labor in a tight market and we've been able to hire people and that's going to allow us to continue to grow both in the renovation process when we acquire through the MLS as well as in our.
Everyday ongoing maintenance program.
And just to follow up on that so what sort of changed I mean was it in terms of valuation or wasn't in terms of you know.
Portfolio overlap and kindness.
DHL, but did geography placement of those homes, all you that strategic and he'd ever not let's say from me.
Need standpoint.
What changed.
Nothing really changed though what it is it's a competitive environment.
And we are we made bids at prices that we found we believe we're very very aggressive and in light of our opportunities <unk> placed in us.
Other places.
And a number of those homes went to other parties that are bidding at a cap rates that are far below where we.
We would be buying homes.
So it was it's more not a change of strategy, we would love to have a lot of those homes. It's not a change of view on markets. It's a it comes down to the competitive market that we operate in and pricing and the desire to take yields that are below our desired deal.
Levels.
Gotcha.
Speaking of the competitive market. So obviously, you know that the level of capital that's flowing into build to rent has been.
It's not that the elevated level right. So what are you seeing anything tangible some on the ground yet.
The fleet supply chain affects everybody how do you think about that dynamic developing.
Or are there you know.
Paul just coming around in your markets anything that youre seeing on the ground it would be helpful for us too.
Get some color on that.
Yeah, I think there's a number of.
Yeah.
Things to unpack in that question first of all there is talk about a lot of capital chasing single family rentals.
Specifically build to rent and that's a.
I think thats, just a validation of a concept that we started many years ago and how successful it's been.
But keep in mind the amount of capital that is chasing it if you break that down into the number of homes and you look at what that is as a percentage of existing single family rentals or another way to look at us is as a percentage of the.
The shortfall in housing in the United States that a number of different parties, it's anywhere from $4 million to $8 million is the surveys that we see some very very small percentage, we're talking less than 1% of single family rental lessened, maybe two maybe 2.5% of the the other side.
The shortage.
But.
This is where our program of having three different ways that we can acquire homes, whether it is from the the traditional acquisitions, whether it's from national Homebuilders, which is kind of a build to rent strategy, but with retail pricing attached to it.
Or it's our own building program, we have the ability to grow in every economic cycle as a result of having multiple channels to grow in and the the most consistent the most predictable growth which.
Which gives us the ability to have the stable growth in <unk> that we have seen over the last three years is to have your own development program, especially a development program that is <unk> got a foundation of the amount of land that we have in inventory today.
So we've spent a lot of effort over the last couple of years, ensuring that foundation.
And we're in a great place for the next three four years.
Or even past that.
And I would add one other advantage that we have is our diversified footprint. It allows us to.
If one market is priced too high we can still grow in the other 29 markets.
Our next question is from Sam Choe of Credit Suisse. Please proceed with your question.
Hi, guys congrats on the great corner.
Just wanted to start with your non stabilized properties.
Just looking at the average occupied days of 80 per Se I think a year ago, 90% not saying it is low.
Hello box I guess I just wanted to make sure that I'm reading. This correctly is it because you have been active with your acquisition volume.
Okay.
That decline is a positive step of any changes in quarantine.
As a leading up to your new property ads.
Sam It's Chris Great question, No you hit it right on the head.
It's a function of the ramp in the acquisition pace that we've seen.
Keep in mind that we've been growing and ramping that acquisition volume over the course of 2021, adding far more properties in the back part of beer.
On the first part of the year, and so with that Youre going to see that flow through.
Think of it from a total portfolio occupancy standpoint really.
And as those properties come online work their way through the renovation process and then get leased they'll flow through obviously you know the other category stabilize and ultimately same home and then from a turn time perspective, I guess, Brian didn't comment on this yet, but generally speaking on a year over year basis. We saw continued really strong and quick turn times in the fourth quarter pretty similar with a year ago as well.
Got it.
Regards to the turnover rate what have you guys assumed for the low end.
Guidance.
Yeah.
Generally speaking, we're expecting turnover to continue in a similar area that it's in right now we've seen great improvements there for many many quarters actually years at this point I'm sure you noticed that.
For full year 2021, we're now sub 30% on full year turnover rate, which implies a greater than three year length of stay.
So our general view is that we'll be in that area recognize as we mentioned in our prepared remarks and as contemplated in guidance. We are expecting to see some continued level of remaining COVID-19 move outs.
We're contemplating in occupancy and on the expense side as we progressed throughout the year, but underlying turnover trends in the portfolio continuing to remain really really strong.
Got it thanks, so much Chris for the color.
Thanks Sam.
Our next question is from Brad Heffern of RBC capital markets. Please proceed with your question.
Hey, everyone. Thanks.
Follow up to the Zillow question earlier, what yields are you currently underwriting and then what are the implied yields that youre seeing from the more aggressive buyers.
Yeah. This is Jack thanks for that question.
I'll tell you what we acquired at.
In the fourth quarter, we were on average in the $4 75 to four eight.
Range.
It's hard to tell what I don't know exactly what they are accepting on the other side, but.
They are acquiring it.
Probably below four and a half and sometimes in the very low fours.
This is Dave.
With respect to the Zillow, we were more aggressive than normal and again we.
As we talked about earlier.
We found that the competitive bidding was even more aggressive than where we were so we were more aggressive than our typical bids. So we were down in that mid <unk> mid to lower for range because of the.
<unk>.
Assembled nature of that portfolio and still it was a very competitive bid.
Okay got it thanks for that and then Chris I know you don't normally guide to this but can you give any perspective on what.
With the G&A number is that's included for 'twenty two.
Oh sure and you can get to it a little bit.
Through the <unk> bridge in the back of the supplemental.
But generally speaking.
We're expecting to likely see a full year G&A increase in call it the 10% area or so.
Really reflecting two components, an inflationary piece that plus or minus call. It the 7% area and then this year very importantly, we are planning to make some continued investments into a number of strategic areas.
Our technology platform.
Supporting a lot of great stuff that Brian is talking about and really preparing ourselves for more and more growth over time investing into areas like our ESG efforts government affairs et cetera, just to name a few.
Okay. Thank you.
Thanks, Brad.
Our next question is from Austin <unk> of Keybanc. Please proceed with your question.
Great. Thanks, everyone.
Should we read data should we read through from your your Zillow comments, there that it sounds like you'd be willing to pursue kind of the larger scale opportunities in that low 4% range versus just sticking with.
You know what you're achieving.
For yields on development and one off acquisition opportunities.
Yeah, I think we have to be careful on how we interpret that assemble portfolios.
And ability.
The intangibles that come with an assembled portfolio are very different in acquiring homes, one by one and so.
At the end of the day.
First and foremost our primary way to grow is going to be development.
And there's going to be very limited number of assemble portfolios that youre going to have an opportunity to acquire so they're a little bit different in addition to assemble portfolios you also.
Be acquiring personnel and other things we have been successful in acquiring personnel, but the.
The character of an assemble portfolios different than just acquiring homes one off.
So where Jack indicated we are in acquiring through our traditional acquisition systems is where we're comfortable and where we'd like to keep that.
But and the fact that we have three pronged we want to lean on our in house developments. The best economics. So all of these channels bulk acquisitions are a little bit different than the other acquisitions and they're all unique.
That's helpful. Thanks, and then.
In the prepared remarks, I think it was Jack that referenced several impacts to the timing of development deliveries.
So first I'm just curious how much cautiousness is embedded in your expected delivery pace this year versus maybe six months to 12 months ago.
Certainly recognize that it's up year over year, but just relative to what you may have thought it would be at this point in 2022 and any impact to the plan to achieve that 3000, plus home delivery target in 2023.
Thanks for that question and before I get into that I give a shout out to our development team for for hitting the midpoint of our guidance. This year in a very very difficult.
Supply chain market, but.
When it comes to.
Predicting the next year's <unk>.
Deliveries it obviously becomes easier the closer you get to the next year.
And one of the main drivers of that is opening up communities.
Because when we open up a community we know the cadence that we want to deliver at for for a good absorption and and then we can predict that out.
What happened late in 2021 .
We started noticing it became more and more difficult to get inspectors from the various <unk>.
Government entities to come out and clear, even though we were done with our horizontal development to come out and and clearance to start building houses. So.
We're kind of predicting a little more of that.
In 2022, if it if it doesn't happen that will pave the way for 2023.
The increase in a significant increase in 2023 deliveries but.
But we're not there yet so.
Not right now prepared to give what we're gonna.
<unk> deliver in 2023, yeah Austin.
Dave.
The supply chain has been challenging no doubt, but it was challenging in 2021 and our I mean, we've got individuals that manage our purchasing and supply chain have done this for years and years and as I indicated earlier, we have a kind of a unique program that we can order very early in the.
And the.
The development process, because we don't have to wait for owner decisions, but as Jack indicated we are really the difference was is not in the supply chain, but in getting inspectors out on the land improvements and if you look if you go back one year ago today and asked US whether we think we would be in 2022, it would probably be about 10.
Percent higher and it's not because we're not going to be able to build at the right cadence in 'twenty. Two it's the fact that we it's the land getting it inspected and signed off so we can start that process has been delayed and that I would say is truly a COVID-19 impact are these city halls have been slowed down.
As a result of Covid and so I see it as being temporary and once that writes itself I think our we're still on track for all of the guidance that we've previously given.
Our next question is from Keegan pile of Barron. Please.
Please proceed with your question.
Hey, guys. Thanks for taking the questions and I don't mean to harp on deliveries, but just just.
One more point, you're kind of on the development side of things I mean, how should we think about the cadence. This year I know in years past, you've said the kind of one time of peak leasing season.
Kind of felt any impact at all on the supply chain side of things. So it may be kind of push this back in the.
The second half of the year.
Thanks for the question.
It's a fairly even cadence, particularly for the.
Delivery of the homes into a wholly owned REIT.
Maybe slightly.
Towards the end of the year, but not significantly so I would I would say a fairly even cadence.
Got it just probably follow up with any color on the central Bank.
Okay.
Yeah.
This is Dave.
That is a strategic investment for us a strategic alliance or partnership.
It's not a very large investment, but what it does is it gives us access to a number of prop tech companies ESG related.
Companies that impact the single family rental industry.
Things such as pet screening pet insurance pet.
Solar programs that are unique to things.
Things that we want to co develop with different partners. So it it's a basically a strategic alliance more than an economic investment the investments very small is $5 million to $10 million.
It's more.
Putting us into a kind of a.
Well a true strategic partnership is what it really is.
Our next question is from Anthony Powell of Barclays. Please proceed with your question.
Hi, good morning.
One of your peers did an investment in a lease to own I guess platform is that something that you would consider.
And expanding in that segment.
Yeah.
That investment.
It's kind of a an investment also into third party.
A program into providing additional housing.
Into the marketplace for working families and we are already in that program through our development program.
And we are building communities.
We've opened over 100 communities to date and the housing is designed for working families.
You probably noticed.
The 45th largest homebuilder I think that will grow and it's all designed to provide the type of product that others are looking for on the <unk>.
On the <unk>.
Basically the option to acquire homes.
We have that program and when we look to dispose of homes, but it's going to be our options. If we were looking to dispose of homes in our portfolio and we look at who the occupants are we also.
Look at the marketplace the occupants are not interested.
Just in and acquiring it but it's going to be at our option just because somebody wants to own the home, they're renting no we don't option that today.
And that's a program that as some of our peers are doing as well and.
And we just haven't branded it or really talked about it.
Got it thanks, and then maybe one more on cap rates. It sounds like is still a pretty competitive environment have you seen any I guess expansion of cap rates given the overall interest rate environment or is it are they still kind of.
Compressed here.
What I, what I've seen is theirs.
There is still pretty compressed if you look at our HPA last year was.
Close to 20% nationally and probably a little higher in our markets, which are generally higher growth markets.
So youre seeing high HPA, good rental growth, but the cap rates are pretty compressed and I don't see any.
I mean, I'm not expecting 20% in 2022, but the.
But I could see close to double digits.
Coming up in 2022.
Where we want to be.
Is where all the people are moving to where the employment is better and where there's not enough housing and that makes a very very competitive marketplace. It's very good for the long term health of.
Our rental portfolio, but at least.
<unk> to be a very competitive marketplace.
Alright, thank you.
Our next question is from rich Hightower at Evercore ISI. Please proceed with your question.
Hey, good morning, guys. Thanks, Thanks for squeezing me in here.
This this topic came up on a competitor's call last week and I certainly don't expect you to comment on that situation specifically, but it is a question about permitting for renovation work and I just want to know it's kind of a basic question, but walk us through a M. H process for how that works average time to retain.
Permits how do you ensure that everything is done properly.
Whether it's with your own vendors are outsourced.
Outsource or what have you had to walk us through that process and explain how it works if you don't mind.
Yeah, Hi, rich it's Dave.
I'll start with.
As you indicated you know I really can't talk about other companies I really don't know other than what Ive read and probably you have read.
With respect to us.
What I can what I can do is I'll walk you through how our internal process works when we rehab homes.
And first of all that process has overseen from end to end by our own personnel, but it starts that process starts not when we.
Start renovating the homes it starts in the vendor selection and on boarding process during that process, we verify that all of our general contractors or property license, then have insurance et cetera.
Why that's important is because most of all the renovation work that we do is done with third party general contractors and our standard contractual terms and conditions and keep in mind that the GC also in their licensing requirements has obligations.
That required them to obtain permits and on all the work that requires permits.
And I also would be mindful of the fact that permitting requirements are very very different.
From one jurisdiction to another.
And when you, but the other general comment when you think of the work that we primarily do and renovation is going to be cosmetics is gonna be painting. It is gonna be flooring and those don't generally required permits.
I'd also add.
I guess, one other thing it's not necessarily on the process, but.
We we considered the regulatory environment and in many ways and.
We've talked about.
Trying to be a company that does the right thing we've talked about the fact that we've actually been called out.
Hearings about doing the right thing.
But we when we consider the regulatory environments. It starts when we look at what markets, we want to go into and in our market selection not all markets are equal.
And.
We're talking market, sometimes it states, sometimes it's very local jurisdictions and we've avoided certain markets with significant regulatory headwinds.
In fact.
As we have discussed many times the regulatory environment was one consideration that we had in our decision to exit California.
And so to.
To date.
That's you know that's well that's the process of how we do it.
And we don't have.
No.
Any knowledge of any place that we have an issue.
To date, it's a very manual process.
But.
That's the process rich.
And maybe thanks, David when one quick follow up if you'll indulge me here.
As far as the process generally being outsourced to non A&H general contractors is is there an internal M H team or group of employees, who does.
It does make sure that all the i's are dotted and t's are crossed and so forth as far as what the what the G. CS are supposed to be doing a.
Per the documentation between your company and theirs, but you know is there someone internally.
That process every step of the way to make sure that everything is as it should be in the way you're describing.
Well, there's two there's two pieces to that rich.
One is.
In the field.
We have a <unk>.
A dedicated team that are the individuals that oversee all the renovations and they are market by market and we on a prior question, we talked about Zillow and we've talked about the one of the benefits of <unk> being able to supplement that team.
They are the ones that have the day to day touch points with the general contract, but behind them sits another group and that's a group in our centralized office a group of paralegals and they are involved in many aspects of the real estate lifecycle.
From reviewing contracts of acquisitions to reviewing contracts with general contractors.
They are involved not only in the real estate contracting, but all contracting whether it's <unk> et cetera, and so theres multiple touch points in that process.
Okay and would you say a M. H is sort of best in class in this regard or would you say that the process. You've just described is sort of generally what you see your competitors doing in the marketplace can you comment on that at all.
Rich I don't know I don't even know how to comment on that because I don't really know how the others do it I'm not inside their shop I know what we do.
But it would be very I mean, I don't know how to comment on that okay.
Okay I appreciate the answer thank you very much.
Yep.
Our next question is from Nicholas Joseph of Citi. Please proceed with your question.
Thanks for keeping it going just one quick question on traffic, obviously occupancy is high but internal for slow, but as you look at leads or traffic currently how does it compare to 2020 wanted than historical levels.
Yeah. Thanks, Nick This is Bryan as I said in my prepared remarks, measuring traffic by distinct shoppers checking into rent ready homes that was up 60% year over year.
Demand has just been fantastic continues to accelerate as a couple of notable points, we've talked in the past about Interstate migration and the effect that.
People moving out of California, and out of East coast into our markets had on demand.
And theres been discussions about the.
The consistency and trajectory of that that's continued to be strong in fact, even accelerating.
Q4 over Q4, if you look at the applications that we're getting out of people moving from California on our Q4 'twenty one over Q4 'twenty basis, it's up almost 40%.
Taking a look at the other side.
Applications from New York, and New Jersey Europe .
Over 33%.
And then I think a really key factor if you look at the portfolio overall and this is my migratory patterns is that our applications.
Are people coming from non Ami states into the portfolio.
Was up over 12% in Q4 over Q4.
Thank you.
Thanks, Nick.
We have reached the end of the question and answer session I will now turn the call back over to management for closing remarks.
Thank you operator, and thank you to all of you for your time today.
I indicated previously we are really excited about our strong performance in 2021, but.
We are even more excited about the foundation, we have built and the prospects for strong operational and growth the performance in 2022 as well as all future years talk again with all of you next quarter have a great day.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
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