Q2 2022 American Homes 4 Rent Earnings Call
Greetings and welcome to the American homes, four rent second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
As a reminder, this conference is being recorded at this time I'd like to turn the call over to Nick from Senior manager Investor Relations for American homes four rent. Please go ahead Sir.
Good morning, Thank you for joining us for our second quarter 2022 earnings Conference call with me today are David <unk>, Chief Executive Officer, Bryan Smith, Chief operating Officer, and Chris Lau Chief Financial Officer.
Please be advised that this call may include forward looking statements all statements other than statements of historical fact included in this conference call are forward looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements.
These risks and other factors that could adversely affect our business and future results are described in our press releases and in our filings with SEC.
All forward looking statements speak only as of today August eight 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 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 Thank Len.
Thank you Nick good morning, and thank you for joining us today.
This quarter, we continued delivering strong consistent results with 38 cents core <unk> per share representing 16% year over year growth.
This once again demonstrates the durable and consistent earnings power of the a M H platform.
Before Brian and Chris dive into the quarter's results I want to walk through three areas.
First a macro view of the housing market.
Second our growth programs and how they differentiate American homes for rent from other housing companies and finally, how are we doing as a socially responsible company.
Starting with some thoughts on the macro housing environment.
It is estimated that our country is anywhere from three to 5 million housing units short no small number.
And this is not likely to get any better as the latest numbers from the U S Census Bureau, Mark the fourth consecutive monthly decline in single family starts.
Second while single family rentals were deemed the housing option of last resort 15 years ago. Today. They are desired as a premium housing option of choice American homes for rent has been at the forefront of changing the narrative by providing high quality homes and new communities with best in class.
<unk>. Additionally.
Additionally, our professionally managed platform and services have elevated the resident experience.
In the last year alone our residents have gone on record in media outlets like CNBC USA today, and the Orlando business Journal to voice their support of our rental homes, which gives them access to a simplified single family lifestyle.
Third not only is single family rental living more convenient than homeownership today. It is also more affordable and finally, the American homes four rent portfolio is located where Americans want to live.
Our assets are strategically positioned in high quality of life markets benefiting from migration patterns fueled by long term demographic shifts and changing lifestyle preferences.
All in the current housing environment supports sustained single family rental demand for the foreseeable future and American homes for rent continues to be well positioned.
Now turning to our growth programs. Our in House development program is the backbone of our growth strategy and now more than ever is demonstrating the benefit we envisioned when we launched the program over five years ago.
We continue to add high quality assets to our operating platform while at the same time retaining full control of the development process.
This results in a consistent and predictable growth channel that we can rely on throughout all economic cycles.
Further our internal development program differentiates us in two ways when compared against other housing business models.
First we are the only public single family rental owner and operator with a fully integrated development program.
This means we do not depend exclusively on the MLS markets or a third party homebuilders to drive external growth.
Second we build homes for our own portfolio. Therefore, we are not subject to for sale market risk like traditional homebuilders.
And as a reminder, on the economics.
Our internal development program delivers premium yields over our open market and national builder acquisition channels and creates shareholder value.
As we do not incur builder profits, which enables us to add homes at a significant discount to market value.
Now turning to our investment strategy more broadly.
Interest rates have risen while home prices have yet to react in a meaningful way.
In addition, these are uncertain times and the capital markets.
As such we have temporarily scaled back one off MLS transactions to allow the market time to recalibrate and stabilize.
This will preserve dry powder for future investment and when better opportunities become available we'll be ready to act.
This revision reflects our disciplined investment approach and highlights the competitive advantage of our three pronged growth strategy.
Lastly, I would like to touch on a few ways American homes for rent is focused on social responsibility.
Through our differentiated development program and strategic investments, we are doing our part to help solve the critical housing shortage in America.
With am H development, we are not only adding high quality homes to the nation's housing stock we are providing homes in high demand safe communities with good schools, where families want to live. Additionally.
Additionally, in the face of an ownership affordability crisis, we are providing an attractive rental solution for households across the country.
Separately, we are also investing in partnerships with innovators at the intersection of technology and sustainability.
Through our recent prop tech collaborations we are funding initiatives to reduce carbon emissions in the industry and enhance the resident experience by developing new amenities, both of which will unlock the next era of housing.
Okay.
In closing I am excited about these initiatives and optimistic about our future the single family rental demand tailwind combined with our differentiated M. H growth strategy puts us in a great long term position to remain the leader in residential housing.
Now Brian will provide an update on our operations Brian .
Thank you Dave.
Our industry has evolved dramatically over the past decade.
During that time American homes threat has transformed single family rentals by offering a premium housing option with an unmatched level of convenience service and quality.
And given all the points that Dave mentioned the demand for our homes continues to be outstanding.
In the second quarter, we had over 285000 inbound leasing inquiries.
Nearly 50% of these where digital highlighting the importance of our strong technology systems.
At the house level showings per rent ready property are nearly double pre pandemic levels.
These robust metrics drove strong quarterly results that modestly outperformed our expectations.
Same home average occupied days finished at 97, 4%.
And rental rate growth showed continued strength with new renewal and blended spreads of 14, 2% seven 4% and nine 3% respectively.
This led to same home core revenue growth of nine 4% for the quarter.
Core operating expenses were in line with our original projections and our.
Taishan for expense growth rates to moderate for the balance of 2022 remains unchanged.
All of this resulted in 10.2% same home core NOI growth representing consecutive quarters of double digit growth.
Looking forward to the third quarter July demand remain robust driving same home average occupied days of 97, 2%.
New and renewal spreads were 13, 2% and eight 1% respectively.
Resulting in a blended rate growth of nine 7% for the month.
As a reminder.
Our original guidance contemplated elevated move outs around the middle of the year and included the workout of Covid impacted homes.
July's results were directionally as expected, but we are seeing less seasonality than we originally anticipated.
Therefore, we are increasing the midpoint of our same home core revenues guidance by 25 basis points to eight 5%.
This translates into an increase in our same home core NOI guidance by 50 basis points to 10% at the midpoint.
As I close I would like to thank all our team members for their consistent execution.
Our second quarter results and the outstanding demand for our homes set us up for a strong finish to 2022.
I will now turn the call over to Chris. Thanks.
Thanks, Brian and good morning, everyone I'll cover three areas of my comments today.
First a brief review of our quarterly results second an update on our balance sheet and strategically revised capital plan for this year and third I'll close with a few comments around our updated 2022 guidance starting off with our operating results. Once again the image platform delivered another quarter of strong and consistent performance with a net income attributable.
<unk> to common shareholders of $56 $6 million or <unk> 16 cents per diluted share.
On an F O share and unit basis, we generated 38 cents of core <unk>, representing 16% year over year growth and 34 of adjusted <unk>, representing 16, 8% year over year growth driving our results was another quarter of strong operational execution generating 10, 2% same home.
Core NOI growth as well as another quarter of consistent performance from our three pronged external growth strategy. During the quarter. We added a total of 928 homes to our wholly owned portfolio and 214 homes to our joint venture portfolios. Some of which included 529 homes delivered from our A&H development program.
And on the disposition side, we sold 197 properties during the quarter generating total net proceeds of approximately $61 million.
Finally during the quarter, we grew our owned and optioned land pipeline to over 15000 lots, including lots that have been auctioned through our various land banking relationships strategically enable us to continue growing our pipeline, while also prudently managing land risk. Additionally, at the end of the quarter, we had approximately 7000 additional lots undergo.
Due diligence in escrow.
I'd like to share a few updates around our balance sheet and revised 2022 capital plan.
For starters I'm very happy to share that we were recently upgraded by S&P to Triple B with a stable outlook is a great Testament to our best in class balance sheet and continually improving credit profile, which is especially important during these uncertain times and the capital markets.
In terms of other balance sheet updates at the end of the quarter, our net debt, including preferred shares to adjusted EBITDA was 6.2 times or 1.25 billion revolving credit facility was fully undrawn and we had approximately $490 million of available forward equity shares that remain outstanding from our January equity offering additional.
As we discussed on our last quarterly call.
During the quarter, we closed our 900 million dollar dual tranche of unsecured notes offering as well as the redemption of our $155 million five and seven 8% series F perpetual preferred shares.
Now turning to our capital plan for the remainder of 2022 I'd like to share two updates with him.
As Dave mentioned in his prepared remarks, we recently began moderating our traditional channel acquisition activity and now expect to acquire between 1500 and 1900 total properties during the full year 2022.
This represents an estimated total Amish capital investment of approximately $700 million at the midpoint and for context represents a reduction of about 500 properties or $200 million from our previous full year expectations.
And second given recent market changes to our new issue cost of capital. We've also made the decision to not redeem our $115 million five and seven 8% series G. Perpetual preferred shares at this time as a reminder, our redemption option on this series a preferred shares has no expiration date.
In total these capital plan modifications have reduced our 2022 image capital needs to approximately $1 $6 billion.
Relative to our previous capital plan, which was already externally funded this now strategically creates between 300 and $400 million of dry powder capital capacity as Dave talked about this will enable us to be highly opportunistic as we evaluate all forms of potentially emerging growth opportunities. During this changing economic environment final.
I'd like to provide a quick update on our 2022 guidance, which was modestly revised in yesterday's earnings press release.
Starting with the same home portfolio as Brian discussed we continue to experience robust levels of demand and now expect full year leasing performance to be slightly ahead of our prior expectations with that in mind, we've increased the midpoint of our full year core revenue expectations by 25 basis points to eight 5%.
Coupled with our unchanged core property operating expense outlook, we've increased the midpoint of our full year core NOI growth expectations by 50 basis points to 10%.
For context, the revisions to our same home portfolio outlook represents approximately one penny a full year core <unk> benefit.
However, we expect the near term impact of our strategically reduced 2022 capital plan to have a similar core <unk> impact in the opposite direction with that in mind, our 2022 core <unk> expectations have remained unchanged at $1 56 per share, which as a reminder continues to represent as if our industry leading growth.
<unk> thousand 14, 7%.
And before we open the call to your questions I wanted to quickly reiterate our bullishness as we head into the second half of 2020 to.
Fundamentally imbalanced single family supply and demand remains a tailwind at our back.
Our internal development program continues to differentiate us with a pipeline of consistent and predictable external growth and our balance sheet is incredibly well positioned to take advantage of potentially new emerging growth opportunities moving forward and.
And with that we'll open the call to your questions operator.
Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your hands.
Before pressing the star keys.
And then just uptime, we ask that you need to keep to one question and one follow up thank you.
Our first question comes from the line of Nicholas Joseph with Citi. Please proceed with your question.
Thanks, and I appreciate the comments on the updated capital plan. So as you think about the 300 and $400 million I think you talked about being a highly opportunistic in evaluating all forms of potentially emerging growth opportunities can you elaborate on that and is there anything that you're considering outside of acquisitions or land.
Purchases.
Yeah, Good morning, Nick.
Dave.
Yeah. The first thing I just want to mention is having three different acquisition channels allows us to be flexible in times like this these uncertain times. So we still have a very strong growth channel are going today and our development program are delivering a high.
All of the assets and the yields are getting better and better as we see the input costs coming down in our construction.
With respect to other opportunities as you know the.
The MLS markets than the National Homebuilders are the inventories are growing we're starting to see some price discovery.
Happening, but we're still early in that process. So I'm pretty confident we will see the opportunity to get back into both of those are acquisition channels are later this year when the yields are that those opportunities offer a match up well with our cost of capital with <unk>.
Respect to other acquisition channels. It. It is a very interesting time, we are receiving many inbound telephone calls that we were not receiving previously whether it's from owners of small portfolios or even national homebuilders with excess inventory.
Where we are though in those in that process is we still have a gap in our bid to ask expectations between buyer and seller. So I see all of that are coming together you know one of the things that's interesting about this industry and I just wanted to rewind a little bit on history here.
In 2011 and 2012.
As we were in difficult economic times is a little bit of uncertain times and maybe even called the housing recession back then that's when we built our company. That's when we saw tremendous opportunities I expect the same is going to occur going forward I think we need to be patient, we need to be strategic we need to be disciplined and we're going to come out.
Sometime next year with tremendous opportunities going forward.
Hey, David It's Michael Bilerman, so when you're talking about.
Emerging growth opportunities it sounds like it's much more the sources of buying homes, rather than some extension of your business into related.
Residential things or you know maybe a larger.
Services angle it really is how to get access to a variety of channels.
And homes is that fair or where you're trying to put emerging growth opportunities or something else.
No I think that's Michael but that's the primary opportunity I would never foreclose out other opportunities, but today I believe that to be the primary opportunity and I believe we're going to see some very very attractive opportunities.
As we get through the price discovery phase of resetting and stabilizing the marketplace.
Thank you. Our next question comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Yeah.
Hey, everyone. Thanks.
So can you talk about on the.
Are you entirely out of the market on MLR and the Homebuilder program right now or can you. If not can you talk about the criteria for homes that are still meeting. The hurdle is that just at a higher cap rate target are being more selective on markets or something else.
Yeah. Thanks, Thanks Brent.
We're not 100% out we are we're still acquiring but it has had a very significant a very reduced level I'm, probably more than 80% reduction from what we received earlier this year.
It is.
On what are the attractive opportunities are when you're underwriting many homes and we're starting to see a growing list of opportunities on the MLS The MLS as many more homes today available are the times that they are sitting there as much.
Greater we're starting to see opportunities I would say, we're a sharp shooting right now we are seeing some declines on average in the MLS. If you look in like markets like mainly on the west maybe today, Seattle is down about 6% Denver.
And Portland, probably about two Austin, maybe three.
But one off homes here and there we are finding opportunities we are obviously buying at higher yields.
We work, but the opportunity set today is still very very limited to compare to what it was first in first quarter of this year and what we closed in the second quarter.
The majority of that is stuff that we put under contract late in the first quarter.
And Brad it's Chris here, just to frame that with a few capital dollars are you in terms of what that means on the year.
As Dave mentioned, we're we're still buying we're being very precise in selective and sharp shooting opportunities year to date director for acquisition channels, we've deployed a call it rounded about $550 million of capital.
Feeling we stay at this pace for the balance of the year and if nothing changes.
Expectations is it will deploy about $700 million of total capital through our acquisition channels, which means you know call. It remaining about $150 million of capital deployed through our acquisition channels in the back half of the year.
Okay I appreciate that color.
And then there's the slowdown extending to the land side at all and can you talk about what you've seen in terms of changes in land pricing.
Yeah. It's a it has extended to the land side again, I think it will follow a very similar suit maybe.
Maybe even to a better even to a greater extent, we'll see better opportunities.
Land landowners that are looking to sell.
<unk> are still going through their price discovery no different than.
And then the MLS side.
But one thing that's different on the land side is.
Land is a commodity used by primarily by people that are building homes and we are seeing the national homebuilders significantly reduce their land acquisition as they are slowing down and seeing their sales orders has slowed down so we've already seen some.
Price reductions, we have been opportunistic and be able to get some very attractive deals.
So far the volume of what we have done over the last couple of months is a little bit less than what we saw at the beginning.
Of the year, but no different than the MLS and.
What we're seeing is more opportunities coming our way.
One thing I would add.
For to you on this is we have a number of relationships with land banking firms and then Thats really.
Good to have a lot of options within your land banking.
The more important piece, maybe what we will see is the opportunities coming from them. They control a lot of land and we are getting a lot of inbound calls from them about our interest in berry various parcels that are in very very attractive locations that are coming back to them from other.
Parties, and so we're going to see some really good land opportunities going forward.
I think it's going to follow the same suite of MLS and it's again, a story of needing to be patient and disciplined as you go through this this time period.
Yeah.
Thank you. Our next question comes from the line of Bryan Spillane with Evercore ISI. Please proceed with your question.
Hey, Thank you I was wondering if you could talk about affordability and in particular the impact that in migration has had on your tenant's affordability screenings, presumably the average income is up quite a bit but are you seeing a wider range of incomes or are there any concerning signs you're seeing just from an affordability standpoint.
Maybe for the previously in place renters.
Yes. Thank you Brian this is Brian .
The affordability piece, it's very interesting if you take a look at our business.
I think the affordability gap between renting and owning is greatest at least I've seen.
About 17% cheaper or less expenses to ramp right now in our markets than.
That it is to buy.
That being said in migration patterns and we're tracking those very carefully as you know are paying very close attention to our applicants incomes.
The best metric that I can give you for this year is through the first six months, our applicant incomes have risen about 9% year over year.
And the rents that they are applying for have risen a little bit less than 8%. So not only are we maintaining that really strong income to rent ratio, it's actually improved a little bit.
And I think part of that's due to the migration patterns of strong out migration from California and are in the northeast.
Part of it is due to just really high demand for our products and appreciation of the value proposition.
Got it thanks, Thanks, Brian and I guess, just as it relates to bad debt in the quarter.
It ticked down nicely, but maybe could you just touch on expectations for that in the back half of the year and yeah any what impact if any do you expect from the reduction of the rental assistance payments.
Yeah sure morning, Bryan Chris here.
You know look taking a step back generally speaking I.
I would say consistent with our expectations are that we talked about last quarter and at the start of the year.
Collection trends overall are holding a nice and strong in fact, we actually saw a couple of markets that received a few catch up payments this quarter, resulting in second quarter same home bad debt that landed at that 90 basis points.
In reference to rental assistance as expected.
As compared to call it in the second half of 2021.
We've continued to see a reduction in rental assistance payments, but that's really been paralleled by just a broader improving collections landscape. So as we head into the back half of this year.
Sure well see some of those.
Catch up payments, we saw like in this quarter, but we definitely expect collections to remain strong and likely expect bad debt to run in that call it 1% to maybe low 1% area.
What is contemplated in guidance.
Thank you. Our next question comes from the line of Joshua <unk> with Bank of America. Please proceed with your question.
Yeah, Hey, guys I appreciate some of the comments on the land banking.
And now you're starting to see some opportunities there I think last time. We spoke you mentioned that there were potential lead more partnerships on that side just what's the latest on on those conversations.
Yeah.
Yeah, we were in discussions with.
Between five and six.
Parties that are very very interested in have done deals with a few of them are not all all six but those discussions as I said.
Theres opportunities.
Each have a little bit different criteria, but all of them are in discussions with us now on some of their land opportunities. So.
It's going to be a good partnership both ways, we're going to be able to get some high quality land, that's going to help them out and that's going to help us out indirectly and having better terms and better relationships with our land banking parties.
Got it and then one quick one.
Set of your residents sign leases longer than one year.
I was thinking like two year leases in particular.
Hi, Josh its Brian .
The lease term initial lease is almost all in all cases, one year.
The extended lease terms I think it runs at about a 10.
10% of our portfolio, our two year lease.
<unk> offers to establish residents who have really been asking for it. So I was thinking about it more in terms of of a renewal extension rather than an initial lease term.
Thank you. Our next question comes from the line of Handel St Juste with Mizuho Securities. Please proceed with your question.
Hey, guys good morning to you.
I was hoping you could speak to the yield on the development projects breaking ground today and what the rent growth in construction cost embedded within those assumptions are.
Yeah, so instead of talking about exactly what the yields are today I will tell you that our yield expectations are continue to move up as we evaluate our cost of capital on a monthly basis. So there's a relationship there but the second.
Part of your question I think is very important and that's where the cost of construction is going.
Today, we have seen the early components of the construction lifecycle. The foundation work the concrete that goes into foundations the framing the lumber all of those costs are coming down.
The cost from drywall on are still pretty steady, but the reason for that is the homebuilders are still completing homes that they had started prior to March and so the earlier trades that we indicated they are through that part of the lifecycle and we are seeing.
The favorability of lower demand on those vendors.
But.
Resulting in favorable pricing to date, we are seeing about 5% favorable pricing and those components with maybe the exception of lumber which is much more significant.
Recall, we are in the mid thousands of dollars of.
For 1000 board feet 15, $1600 for a 1000 board feet, we are back now down to about $500.
Per thousand board feet. The other costs are down about 5% and I would expect they may fall a little bit more.
Put all of this into context, a 5% reduction in the vertical construction cost.
Results in a 20 basis point improvement in our yields and that is over and above any improvement in yields that you would get from rising rental rates.
So we are seeing some very very favorable economics right now in our development program.
Okay, I understand where you are.
The context, you're providing I was hoping to get a bit more quantification of that.
The other question I wanted to ask was on expenses, Brian you expected some relief in the back half of the year.
Maybe can you talk to some of the the bigger pieces of what you've seen in this quarter, where you start to see the release and then more broadly.
Real estate taxes.
Early innings mid innings, when do we get to peak headwinds on the real estate taxes.
Thanks, Andy I'll start and I think Chris can can finish with commentary on the tax side.
Expenses are largely playing out as we expected this year.
The first half we expect them to be maybe more front weighted at least in terms of increases due to the comp set and are worked through some of the COVID-19 related households.
But it is playing out as we expected there is inflationary component in there.
Specifically, what's the property management line item you can see the timing effect through.
Through the first six months, it's about six 6% over comparable period last year and that's right in line with our expectations.
And then handle Chris here just to hop in on property taxes I can start with you.
It's a general update on where we're at for this year.
Today, we're about halfway through the assessment calendar, we've received assessed values on a little over 50% of the portfolio at this point and.
And so far has seen a couple of offsetting puts and takes a couple data points. For example, Georgia came in a little bit higher than what our original expectations were but then that was largely offset by some slightly better than expected news in a couple of other states.
So with that said, we still have about 50% of our assessments are left to go for this year and then as I'm sure you probably recall, we don't receive news on updated tax rates until towards the end of the year, but.
But at this point, we're really not seeing anything that materially changes our full year view of 5% property tax growth and then to your question around kind of the Crystal ball of where we are from a broader property taxes cycle, it's really too early to speculate.
But you know I think our view in general is that there are certain parts of.
The portfolio of the country, where we're likely to see some slowdown in home price appreciation that will eventually trickle its way through through property taxes, as well exactly the timing and the lag effect of that is hard to predict.
But our expectation is that that will be on the horizon.
Thank you. Our next question comes from the line of Alan Peterson with Green Street. Please proceed with your question.
Good morning, everyone and thanks for taking the question.
David I, just wanted to touch on the emerging growth opportunities and particularly the portfolio inbound calls that you've had can you share a range of cap rate expectations for where you think those portfolios when trade and how those cap rates have trended over the last year.
Yeah.
You know in many situations the inbound telephone calls today still have expectations of pricing that you would've seen in March.
And so people are realizing in my in my mind that the market is changing and they are seeing if they can still get a deal done based on the old pricing.
So they're still on the assemble portfolios in many cases still some time necessary.
To get those re.
<unk> priced into the more.
Yeah.
The current pricing.
With the current interest rates et cetera. So that is the good part of that is that people are starting to call.
So there is some.
Some desire to sell but the pricing that we are seeing today is still a march pricing and that needs to be adjusted so I would say that the bid ask is still too wide to really talk about that.
The expectations are market.
So the numbers are not that relevant until we actually start having transactions trade and we haven't seen that yet.
I'm sorry, Allen what was the second part of your question.
Just just where cap rates have trended well your commentary on March was was fair enough.
That yeah.
Okay.
Second question for me Christian Brian Capex is starting to trend towards 20% year to date. Just wondering if you can provide some additional commentary on what's driving that those that capex increase this year that we're saying for your portfolio.
Certainly I think Sal this is Brian .
Youre seeing the a couple of different impacts on the increase that we saw in the quarter.
First there is there is the impact of those COVID-19 related move outs. Those those terms are more costly, especially on the capex side as we work through.
Worked through that that cohort.
And then there is general inflation to at that line item. So it is it is slightly elevated.
But again, we're hoping to get some relief as we work through that.
The co head I am sorry, the Covid move outs.
And then Alan it's Chris here I would just also add part of what Youre seeing to has a little bit to do with how the timing of our 2021 comps fell if you go back and look at last year by quarter and Theres, a little bit of a different picture first half versus second half of 'twenty one.
It really was kind of a defining line being our collection practices beginning to return back to normal and so as we head into the back half of 'twenty, two and we're comping against the second half of 'twenty, one comps our expectation is that that capex growth rate will moderate a touch into the back half of this year.
Okay.
Thank you. Our next question comes from the line of Adam Kramer with Morgan Stanley . Please proceed with your question.
Hey, guys. Good morning out there and and thanks for taking the question just wanted to ask about kind of expectations built into the guide for lease growth you know second half of the year, and then kind of where we might kind of finish finish 'twenty two and enter twenty-three you know whether it's whether it's newer blayne I think it'd be helpful. Just to kind of understand how you guys are thinking about.
Lease growth over.
Over the next little while.
Yeah sure Chris here.
Oh go ahead, Chris.
Okay I can frame it detection and then Brian can share some more details if that's helpful.
As we mentioned in our prepared remarks.
No we're actually beginning to see it a touch less seasonality in the back half of the ore coming into the back half of this year than was originally contemplated in our prior guidance and so with that that's giving us the opportunity to lean in a little bit more.
Into rate growth as we're coming into the back half of the year. So just to kind of help you with the components.
Generally speaking I would say on a full year basis.
Renewals, we see being in the high <unk> or so that kind of implies about 8% area in the back half of the year new leases, we see in the double digit area on a full year basis.
So that's a you know a low double digit to high singles in the back half of the year, but overall blend into a blended spread on a full year basis in the mid eights.
And that's up about call it a quarter point from our prior expectation, which was in the low eights and then you can see that pull through into the revenue guide and then couple that with again, our unchanged expense outlook on a full year basis and that translates into the revised 10% NOI growth outlook on a full year basis.
So that's that's really helpful guys, Thanks, and and just just I guess, along similar lines or are you able to kind of remind us what where you lost the leases currently.
Yeah. Adam this is Brian our loss to lease still is in the low double digits that we talked about last quarter.
We're seeing some really nice kind of sequential improvement on the renewal side, which were found very encouraging you can see the results in July where were quite positive, but I would think of it in the in the low double digits.
Thank you. Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you.
Can you elaborate on what you mean, when you say.
Less seasonality in July than you expected is that on a tonnage.
So our demand and why do you think that's occurring.
Thank you John This is Bryan there are a couple of components to seasonality at least when we talk about it.
One there is just the distribution of the move outs. So we have more move outs during the peak summer season.
Which adds a little bit to the vacancy pressure because it does take time to to turn and re lease those properties that's been relatively.
Consistent and as expected the other piece of seasonality has to do with the demand backdrop.
And traditionally we've seen a little bit of a slower drop off as you get towards the back half of summer, we're not seeing that right now the demand has remained extremely strong.
We look at a bunch of different demand indicators and they are all pointing towards continued strength.
I talked about it in my preferred or my prepared remarks about 285000 inbound.
Leasing inquiries last quarter.
It's a fantastic volume on that side website users are up 28% year over year. Our web sessions are up 30%. Our API leads from the aggregators into our system and through our website or our way up as well.
Coupled with the migration patterns, which continue to hold.
We're seeing outstanding demand, which is which is really causing the results of that seasonality would be to be muted.
That's great color. Thank you.
And following up on the recurring Capex, which is which has been increasing is there a way to quantify the difference.
Between Capex on your default persons purchased homes.
Yeah, I think if you were in the early <unk>.
Ages of getting the Capex and expense results on the newly developed toes, but keep in mind those are new homes. So the capex burden in the initial years is very very light and what we're seeing on the limited number of returns that we've that we process as it is right in line with our expectations those are brand new homes built.
To be durable and that's how it's playing out in a limited experience we've had.
Thank you. Our next question comes from the line of Neil Malkin with capital One Securities. Please proceed with your question.
Okay.
Hi, Thank you for taking my questions.
I look forward to.
Renewing our relationship and.
Yeah.
Glad to be here.
Hum.
Well.
The first one.
No I was just hoping you could give me Brian a bigger picture of how you go about training.
And then maintaining best practices with regional managers, because those are the the renter or people facing parts of the business in such a crucial.
Part in maintaining high brand standard and.
Things along those lines.
Particularly in you know when you have those sort of SR markets that are <unk>.
Proximate to markets, where you have larger exposures.
If you could just share how you guys go about doing that.
Obviously in the air we live in now Yelp other things are important.
Important so I'd love to get your thoughts on that.
Sure. Thank you Neil yet at the center of our business is the high quality resident experience and what are the key components of that is the way to communicate with our residents and the levels of personal customer service we provide.
That's what our trainings based on we have very.
Very specific training modules incentive programs and we're seeking out the type of people, who can provide excellent customer service.
Our technology system is allowing us to manage this at scale you talked about the SR markets.
The fact that we might not have a property manager for example living in that city. They are still assigned a kind of a hub and spoke system. So there is a very personalized.
Care, whether you're close to an office or not.
But our training focuses on the way that we communicate.
The frequency setting expectations.
We talk about it from the very initial contact on the leasing side all the way through the move in and at any of the customer contact points.
And we're monitoring that as a company by having a pretty extensive internal survey system.
Surveys of the residents that each of these contact points and we follow closely on feedback were also paying very close attention to the Google scores.
Which is a pretty good indicator of how well we're administering that program.
And we're taking all of that feedback and re incorporating it into our training programs. So it's a pretty robust loop with good feedback.
Clear objectives for our team members.
And I think we're doing a really good job of administering a high level of customer service.
Neil It's it's Dave Let me just add a couple of things one is our training is not a onetime thing.
And you know the way we are organized is.
The load the regional managers, we have districts. So we have many many districts and we are each district has a monthly training module that is sent to the to.
Two the district they go through it and it's all about whole playing it's it's all about as Brian indicated.
Improving and making sure that we maintain high quality restaurant experiences and then the feedback loop is very important with all the surveys.
We are in the process of trying to develop for ourselves a net promoter score very similar to what you would see.
Other industries that this industry is new.
But we are working on net promoter scores for these for us as well as our peers.
Really appreciate all that all that in.
Thank you the other one for me is just on development.
And talked a lot about that today.
Particularly with some potential upside it sounds like you could or are seeing with land bank providers and just parcels that have fallen through you know can you talk about what your what you expect your.
Sort of or what level of deliveries.
Do you see you know kind of by 2024, I think I think before you've talked about you know trying to reach out.
A five year or something like that.
You know to complete that.
20000 or so.
Our souls, including escrow and just I think it would be helpful for modeling and just accretion.
To understand how you see that program ramping again over the next.
12 24 months.
Yeah.
And Neil in the long term, you're absolutely right. It continues to ramp up and it continues to ramp up.
Each and every year over the prior year based on the land availability of what we really acquired.
Three to five years prior.
The last three years as we've come out of our test phase of the building program, we've focused significantly on land acquisitions today.
Today.
We own or control more than 20000 lots, it's closer to 22000 lots that's going to be the fuel for future years, we're in 15 markets today.
That we are building.
The infrastructure's in place that we can do four and 5000 homes.
With little additions other than some construction superintendents and the land is coming through the pipeline as expected on its horizontal and infrastructure improvements and while 2023 will still be a year that we will be ramping up as we get into 2024 as you indicate.
We're going to start seeing numbers that are more akin to where our purchasing levels are and so four and 5000 homes should be the expectations in those outer years.
Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi, maybe just following up on that last question I'm not sure. If the answer was buried in there can you remind us at the time. It takes after you have new box added to the time it takes to be delivered so to the extent that you're purchasing more lots from land banking firms now when those get delivered.
Yeah.
Linda it's it's.
Condition that answers conditioned on a couple of things and I'll give you the general rule, but generally if you're buying raw land.
You need to improve that land put the infrastructure the roads the.
The sewers, so all the utilities in.
And the process of going through the planning department and getting your permits and all of your inspections that can take a couple of years two to three years, depending on which marketplace you're in.
We're fortunate enough to be able to buy the property that's already.
Ben horizontally developed you get to skip that phase when you get to the phase of building homes.
You can build homes.
Anywhere from 120 days to 150 days on the typical average.
We will build a community out over an extended period of time. So we may have the land ready to go and we will build at a pace of six to 12 homes per month, and it's really determined and guided by property management more than it is by the development team we.
We do deliver homes at a cadence that we feel we can absorb without having any impact to rental rates or occupancy going forward. So we do it at a pretty consistent cadence do you have a community of 120 homes and you're doing 10 a month.
It's going to take you a year to deliver all of them and that's not because you can't build faster you can't get permits you can't get supplies, it's due to be disciplined.
Planned and how you are <unk>.
Delivering those homes for operational reasons. So it's a four to five year process before you start delivering homes and the size of the community. It may stretch it out a couple more years to get them all delivered.
Yeah.
For that detailed response and then just on the regulatory environment are you seeing any notable changes in any specific markets.
No I would say the regulatory market is kind of where it was last quarter. When we talked to it really hasn't changed it hasn't improved it hasn't gotten worse, there's still a lot of.
Inquiry a lot of Oh.
A lot of attention being paid to single family rentals.
It's when we got into this business 10 years ago, we knew the regulatory piece was going to be a significant piece of this industry. It's an industry that we are providing a necessity to every American and so it's going to be in a high visibility area for us we are.
It's noise around the edges.
We are not in the in the middle of any significant investigations and.
It's something that we deal with from time to time.
Thank you. Our next question comes from the line of Dennis Mcgill with Zelman and Associates. Please proceed with your question.
Hi, Thank you all Dave I, just want to go back to a couple of comments you made earlier in time tie them together on one hand, you've got what you believe to be a three or four or 5 million unit shortfall in housing rent growth still very strong.
Your cost of capital is probably lower than all of your peers are most of your peers, but yet you're pulling back on acquisitions, because you think theres going to be an opportunity and you draw a parallel to last cycle and that to me implies that you think home prices are going to go down a lot. So I'm trying to understand how those two things can potentially coexist.
Yeah.
Dennis I think I think they are.
The two comments that I have out there actually are consistent with one another we did not talk about the fact that we are slowing down our development program. Our acquisition program in the long term in fact, I have expectations and hopes that it will improve and get get larger.
What we're talking about is price discovery and price discovery and resetting our prices on an upward market are immediate.
And you have a bidding war and you get to a place where you know where the new market is on the downside when rates are going up and prices are coming down. It takes time and that is the period of time that period that we are in we are seeing inventories expand we are seeing the law.
Length of time that homes are on.
The market, we are seeing national homebuilders inventories increase and it's one we've been seeing this over the last two to three months. It's only been in the last two to three weeks, we have actually seen any price declines we have seen price declines as I think I previously indicated.
In the MLS markets, mainly on the West Coast is where those price declines are occurring in Seattle, Denver, and Portland, and Austin, its 2% to 5% to 10%. We're just starting to see the price declines in the national Homebuilder offerings again, it's driven more by the west coast, but.
Not entirely.
And we're seeing some of those declines in the 10% to 15% in markets like Seattle and Denver.
So the.
The statement of slowing down acquisitions.
Not a statement that we don't believe in acquisitions, we do it as a statement that we need to be patient and allow the market to reset and those opportunities will be available to us.
As we move forward, it's all about.
Fact that capital cost for us as well as for the individual homeowner has changed and that's got to get reflected in the marketplace and it's getting there, but it's not there yet.
Yeah, and I think I would agree with all of that Dave actually I think youre right in that values are probably going down and trends are likely to get worse before they get better I think where I am struggling as if they were three or four or 5 million households, waiting for product on the sidelines that that price discovery it wouldn't have to happen.
Well.
You can have people on the sidelines.
But they also have to be able to afford the offering and when you think about interest rates rising and you go with the home mortgage and you go from 3% to 5.5%, it's a significant increase in the payment reducing affordability.
And this is not about demand.
Give you a comment on demand in the second but it it's all about the pricing of the homes based on affordability to me.
You mentioned, a 10 years ago and the concept of recession.
At least a housing recession back then and that's when we built this company win.
We had tremendous opportunities there was dislocation in the housing market I think youre going to see dislocation in this housing market as well as giving us tremendous opportunity.
It will be driven by different factors.
But when I look at demand.
Yes, its demand on two sides demand for rentals.
Demand for rentals has always been strong over 40 years I do not know of a year in those 40 years, where there has been a decline in rental rates on a national basis and occupancy has always been strong in the nineties.
We came through a pandemic I'm very very strong affordability is as Brian indicated today is tilted towards the single family.
Rentals.
And if you look at our platform.
And you looked at the American home.
It's a diversified platform it mirrors much better to a national average.
But it's also better than the national average because we are in the markets, where the migration trends, where the population is growing where the.
Employment is growing its where America wants to live and we're going to see very very strong demand and that is that's the long term view of this opportunity.
All we are talking about right now is a very short period of time to allow the market to recalibrate.
And as it recalibrates the all the demand functions that you talk about dentists are going to play in and it's going to facilitate a very very strong growth for this industry for American homes for rent in the long term, but it's we're in a just a reset period of time are very short.
Temporary thing and it's got nothing to do with the long term future of the long term future is fantastic in this industry.
Okay.
Thank you. Our next question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question.
Hi, guys.
Just wanted to go back to the renewal spreads.
I mean, you guys disclose in I mean, what the June update that May quarters renewals was seven five and ended up at seven four which kind of suggests there was some sort of deceleration in June before going back up to one just trying to understand your comment about <unk>.
Seasonality the changes on how you think about pad and it kind of readjusting your expectations on renewal spreads to the high severance.
Hi, Sam this is Brian .
I wish we could be as nimble as you're suggesting with renewals, but keep in mind that those renewals are price way in advance in excess of three months out.
I think what you're seeing on the adjustment in Q2 that was probably just a market mix.
Slight adjustment I'd point your attention more towards our results for July .
And the continued trend like I mentioned earlier, I think six consecutive quarters.
<unk> Q2, which was relatively flat to Q1 of improvement on the renewal side.
And then acceleration into into July .
I think the seasonality piece plays and more so to the re leasing spreads.
But we're really excited about the momentum we have on our renewals.
Expect to continue that through the end of the year.
Got it got it okay. That's helpful color and then I guess, how have you guys noticed any changes in the characteristics of the tenants moving out of the properties or has it stayed pretty much the same.
Yeah.
Yeah, Sam I think it's pretty consistent to what we talked about last quarter.
Rack their reasons for move out as we've talked about in the past. The biggest reason for move out is to buy a home we've seen a slight decrease there, but we would expect that to continue to decline as the affordability gap changes.
So we're just starting to see the effects of that but I would expect that to the percentage of moving out to buy a home to decrease throughout the back half of the year.
Thank you. Our next question comes from the line of Austin, where Schmidt with Keybanc capital markets. Please proceed with your question.
Great. Thank you just wanted to go back to sort of prioritizing capital commitments and just thinking about the extent capital markets remain volatile I guess, I'm curious, how or if that could impact the pace of the development deliveries ramping or if youre kind of pacing that ramp with.
You know your ability to self fund development.
Yeah.
This is Dave Austin.
We self fund our development from day, one and one of the things that you may recall is earlier. This year. We raised just short of $1 $8 billion between equity and debt offerings are much of that is still available on an equity forward in.
<unk>, we have liquidity provisions through a one in a quarter or $1 billion to $5 billion line of credit. So we have the ability to manage through short term liquidity.
Times.
Our development program today is.
We I have no expectations that deliveries are going to be anything different than what we talked about at the beginning of the year and that's approximately 2200 homes 20 to 50 homes between our balance sheet and those that are.
Designated to go into joint ventures that we had set up a couple of years ago, but we do have the ability to do it in an honest finish out what we have in our pipeline.
One of the other pieces here as you know.
Chris did go through a couple of facts, we've seen an improvement in our credit rating.
The debt markets are tough to date and I don't disagree with that but we have the capacity to do that we have the capacity to do equity and do it accretively today, but we also have good relationships as evidenced by the fact, we have a couple of joint ventures, and those always remain possible.
<unk> is an option if we decide to go that route as well. So we have many avenues in which we can fund our future growth.
The success of future growth as being able to do it accretively and for the benefit of all the investors involved in and I see that being.
Available to us for many many years to come.
That's really helpful. And then you know you guys have talked in the past about the opportunity to scale up the business.
Certainly seems to be a focal point with some of the excess dry powder and focus on acquisitions, but I'm curious what drove that above average increase in property management expense this quarter, both year over year and as a percentage of it.
The percentage of total revenue.
Yeah.
Yeah, Austin I think it's more of a timing issue. If you look at the year to date increase in property management expenses are about six 6%.
Although second quarter was a 15 point to there.
A little bit of a timing aspect there.
A little bit of wage inflation to get to the $6 six and then the good news is our property management teams are fully staffed for the peak busy season this year.
Really good position to continue to execute towards towards the back half of the year.
Yeah, Hey, Austin, It's Dave Let me just add one thing that might help you. There. If you look at 2021. This is a story about 2021 more than 2022, the timing of our expenses is a little skewed to the back half of the year.
Recall last year, we recognized the fact that.
Salary inflation and salary adjustments.
We're moving in the middle of the year, we made a decision to increase.
Salaries in August of last year.
<unk> are now rolling through.
<unk> comped against the first and second quarter of 2021, where they were not in place.
But we will have much better comps going forward in Q3 and Q4 as a result.
Okay.
Okay.
Thank you. Our next question comes from line of Tony <unk> with Goldman Sachs. Please proceed with your question.
Hi, Thank you for taking my question.
So looking out to the next 12 months to 24 months, how should we think about margins as you begin to deliver homes and land with respect Chase say a year ago.
As land that was acquired a three to five years ago and therefore, perhaps.
Cost consideration that is higher plus you know when you couple that with the fact that there's potentially some moderation in rents in a tougher economic setup. So how should we think about margins going ahead.
Yeah, John it's Dave.
You're 100% right the margins on our development.
Much more favorable than the margins of similar properties in the same markets.
We build our homes with the the thought or the design to reduce our maintenance costs, we have higher quality plumbing fixtures in these homes, we build them with a.
Durable flooring durable patios and all of that is going to facilitate two things one is lower repairs and maintenance and the second is a quicker turn times both beneficial top regions.
So as we see more and more of these homes and up in our same home portfolio.
As the season, they take a year to season, we need to have a year of operations in.
In the comp period before they can move into same home. So today, we have very few in the same home.
We are delivering right now 2000 homes or so per year against our portfolio of 60000 homes, its still a small percentage, but that will.
As time moves on have a benefit to our merchants.
Got it and if I could ask my second question about the land banking JV opportunities could you talk about.
As Youre evaluating these partners is there anything different in terms of the geography, or perhaps micro locations or the price point that you'd be willing to target a win with these newer partners down the line.
Thank you.
Yes.
The land banking is is more a means to derisk land on your balance sheet at the end of the day. These homes are going to come into our inventory and be operating assets on.
<unk> American homes balance sheet, so we underwrite these opportunities.
No different than we underwrite.
Homes that are presently on our balance sheet.
This is the.
Basically a technique or of a means to fund the land acquisitions and de risk the company and doing so that's what land banking is it's more that than it is that we are going to go into different markets. If we're going to do the different markets.
I'm not saying we have we're doing this but it would be a straight up joint venture with a partner land banking is not.
It is not that.
Thank you. Our next question comes from line of Anthony Powell with Barclays. Please proceed with your question.
Hi, Good morning, just a question on I guess, a longer term rent growth it sounds like youre going to exit the year with renewal growth in the 70% range, which is great I'm curious about next year.
You're not seeing kind of a step down that and grow faster than the multifamily company youre, saying so.
Is it reasonable to expect to see that kind of renewal growth to persist into next year or should we moderate our expectations given kind of the overall macroeconomic environment.
Hey, Anthony this is Brian that's a great question.
I can speak to current demand environment, and our expectations going forward as I talked about before.
The demand backdrop is fantastic I don't see any supply relief I don't see any new supply coming into the market, that's really going to eat into that.
So I anticipate having pricing power through the balance of this year and my expectations operationally or to be able to enter next year in a position of strength strong occupancy good momentum to take advantage of the spring leasing season. When it arrived. So so everything is really lined up nicely to have continued our continued growth.
All right great. That's it for me thank you.
Thanks Anthony.
Thank you. Our next question comes from the line of Jade Rahmani with <unk>. Please proceed with your question.
Thank you very much and the last couple of weeks with the mortgage rate, having dipped below 5% have you seen any change in the market in terms of cadence of closings in terms of pricing a home prices.
No Jay.
No we havent the inventories are still extended on MLS the time.
Time on market remains extended from what we saw in March.
We're starting to see.
See some of these statistics are getting back to <unk>.
A more normalized levels, but then the frenzy that we had in March.
But that's in part due to the fact that while there may be a little bit more affordability today than there was two weeks ago. Our affordability is nowhere where it was in March of this year or even towards the latter part of last year, even with the little pullback. So we still have.
A fair amount of price discovery and time to get the markets to stabilize but theyre volatile theres no doubt about it and you see them go up and you do see them come down, but we're still significantly higher than we were in March.
And a follow on to Dennis his question.
About the outlook in terms of a clearing of band of price discovery or you're just waiting for prices to stabilize or is it that you are waiting you are solving for a cap rate that's higher than you've underwritten in the past they are targeted in the past.
Yeah, I would say, it's a little bit of both quite honestly with our cost of capital a little higher.
For us to have the same accretive benefits in our growth program that we enjoyed last year, we're going to need to see the prices at a slightly or the yields at a slightly higher level and you can get there either through rent growth or through price declines, it's going to be a combination of the two.
So for us to be.
Doing the right thing for.
You and our shareholders.
Yeah. It is.
It's prudent to be disciplined and to be patient and wait for those numbers to come into line.
And the <unk>.
Fact that it takes time.
Is it.
It's just part of the process it doesn't mean that the opportunities won't be there they will be there.
And they will be there in the good markets that we operate in.
Thank you. Our next question comes from the line of Handel St Juste with Mizuho Securities. Please proceed with your question.
Hey, guys. Just a couple of quick follow ups, Brian I was hoping with the first get your perspective on if you expect your low double digit master leased to increase decrease or stayed the same over the remainder of the year and then I'm not sure if I missed it earlier, but did you provide an estimate of your 2023.
I'm, sorry, I didn't hear that 2023 what.
Hernan have you give me could you give all of it yet.
Okay.
So lots of waste as we talked about earlier are still estimated to be in the low double digits.
We expect through the remainder of the year to have it remains the same if we don't get that.
So don't even do it a little bit so it might come down just a hair towards the back half of the year.
Of our really our strength at our renewal rates.
If you want to talk about the earn in.
What's in place right now in the next year, but I, probably think about it in the 4% to 5% range as we as we get into 2023.
Thank you.
Consisting Q&A session I'd like to turn the floor back to Mr. England for any final comments.
Thank you operator, and thank you to all of you for your time today.
As you heard I am excited and optimistic about our future and with the single family rental demand tailwind combined with our.
Our growth program, so it's going to put us in a great position for long term strong future results.
With that we will talk to you again next quarter and have a good day bye bye.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.