Q3 2022 American Homes 4 Rent Earnings Call

Ladies and gentlemen, please standby the conference will begin momentarily. We thank you for your patience and please standby the conference will begin momentarily. Thank you.

[music].

Greetings and welcome to the American homes, four rent third quarter 2022 earnings conference call at.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Nick from senior manager of Investor Relations. Thank you Sir you may begin.

Good morning, Thank you for joining us for our third quarter 2022 earnings Conference call with me today are David Singleton, Chief Executive Officer, Bryan Smith, Chief operating Officer, and Chris Lau Chief Financial Officer.

<unk> be advised that this call may include forward looking statements all statements other than statements of historical fact included in this conference call are forward looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in our press releases.

And in our filings with the SEC all.

All forward looking statements speak only as of today November 4th 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 pack.

<unk> 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 Singleton.

Welcome everyone and thank you for joining us today.

Before we begin I want to take a moment and thank our team members for their efforts surrounding hurricane Ian.

The safety of our residents and team members is our number one priority.

And our disaster response team was in place and ready to act within a moment's notice.

Chris will talk through the numbers later in the call, but we were fortunate with the ultimate path of the hurricane.

That said, we recognize many others are suffering hardships from the storm.

And to help American homes for rent has donated to various hurricane Ian relief efforts.

Our employees are also assisting their communities by working with shelters contributing to charitable groups and providing necessary food and supplies.

Our thoughts go out to everyone, who has been affected as we hope for a quick recovery.

Now turning to the quarter.

We delivered another round of consistent results with core <unk> per share of <unk> 39.

Representing 11, 6% year over year growth.

Brian and Chris will provide more details on our operating results in a moment.

But first I will discuss the macro environment.

This country is in an uncertain economic period.

Elevated inflation has been persistent and has forced the fed to significantly raise interest rates.

Today, the housing market is showing signs of disruption like it did in the 19 eighties and the global financial crisis.

In this environment the resiliency of the single family rental asset class is on full display.

Our national platform and strong balance sheet position us to capitalize on any opportunities that may arise.

Cyclical durability has been at the core of the American homes four rent thesis from day one.

Housing is a bedrock needs and single family rental fundamentals are supported by favorable long term supply and demand dynamics.

On the supply side, our country has a housing shortage.

This is only getting worse as projections for single family housing permits continue to decline.

On the demand side, our business continues to benefit as the value proposition of high quality housing without the headaches of homeownership becomes more appreciated.

Recently this demand trend has been supplemented by the fact that renting today is significantly more affordable than homeownership.

Using recent John Burns data it is about 15% cheaper to rent versus own across our top 20 markets.

On the investment front, we continued to deliver high quality homes from our development program.

I am excited to see the progress we have made in some of our recently open development markets in the west.

Please keep in mind that cost for initial deliveries in newly opened markets tend to be elevated which is reflected in this quarter's deliveries.

Over time, our pipeline in these markets will continue to mature and we will realize economies of scale.

Also as outlined in yesterday's press release, our 2022 delivery guidance was slightly reduced to modest construction delays in Florida. This is purely a timing issue caused by the hurricane.

Now looking forward.

Today, we are taking a patient and disciplined approach to acquiring homes and land parcels.

This discovery continues and.

Further adjustments are necessary before it makes sense for us to come back in a meaningful way to the open market.

With borrowing rates remaining elevated challenging times may be ahead for private portfolios homebuilders and landowners.

This will likely result in significant opportunities for American homes for rent.

Today, there is inventory of tens of thousands of builder homes and a growing backlog of homes on the MLS as days on market continue to elongate.

While the majority of these homes are in secondary and tertiary markets or do not meet our quality standards. We.

We are beginning to see price reductions on those homes that do.

Today these homes do not fit our yield requirements, but over time I believe we will see opportunities to acquire high quality well located homes.

While we are excited about these opportunities our development program remains the best Avenue for consistent growth.

Today, we see two encouraging signs.

First high quality and well located land is becoming available including vacant developed lots that are ready for vertical building.

We continue to see price adjustments and remain patient and disciplined in our land acquisition program.

Second with homebuilders slowing their development programs, we are seeing favorable price movements in construction materials and labor.

To date prices have declined on most early stage homebuilding input cost through the drywall phase.

As homebuilding slows I expect we will continue to see favorable movement in our cost to build homes.

This along with favorable operating trends should result in higher yields for future development deliveries.

At quarter end, we owned our option more than 15000 lots, representing a long runway of built in growth.

We will continue to take a prudent and disciplined approach with investments as we execute on our long term growth plans.

On the sustainability front, we continue to make great progress to date, we have installed solar systems on amenity centers and begun pioneering solar build to rent communities. Our sustainability department remains hard at work <unk>.

Evaluating science based targets focusing on energy efficient solutions, and creating action plans to achieve net zero carbon emissions over time.

In closing, we all need to acknowledge that we are in uncertain times.

I remind you that our asset class was born out of an opportunity created by a housing disruption.

While these uncertain times may lead to some short term issues and noise.

The Big picture here is that long term opportunities will present themselves and separate the players in our industry.

Today, we are prepared for those opportunities with a diversified portfolio and scalable platform supported by a strong balance sheet.

Now I'll turn the call over to Brian for an update on our operations.

Thank you Dave.

Before I discuss our operating results I would like to join Dave in recognizing our team for the care and support they showed our residents during hurricane in.

Not only did they secure all the vacant properties before the storm, but.

But they made sure operations were back online immediately after the storm had passed.

Our teams performed wellness checks in the hardest hit areas where.

We're prepared with emergency supplies.

Extended around the clock residents support.

And maintaining communications with those affected by the storm.

This highlights one of the major advantages of our internal services platform, which enables us to divert critical field personnel and resources to assist our residents.

Moving on to operations <unk>.

Demand for single family rentals remained strong.

In the third quarter, we received nearly 250000 inbound leasing inquiries.

Website traffic was up 21% year over year.

And most importantly, our distinct showings per rent ready property remains 60% higher than pre pandemic averages.

Same home average occupied days was 97, 1%.

And new renewal and blended rental rate growth was 12, 5% eight.

Eight 3%.

And nine 5% respectively.

Which drove eight 1% same home core revenue growth for the quarter.

For operating expenses came in at six 1%, resulting in nine 3% same home core NOI growth.

We had another outstanding quarter.

But as expected the current operating environment is showing a return of seasonality.

Which was a natural part of our business prior to the pandemic.

For the month of October same home average occupied days was 96, 9%.

And new and renewal spreads were nine 1% and eight 2% respectively.

This resulted in blended rate growth of eight 5% for the months.

More color on next year's outlook will be provided during our fourth quarter call.

But as we think about 2023, two major areas come to mind.

First on the revenue side.

The combination of earn in from leases signed this year.

Expected loss to lease recapture.

<unk> robust demand.

And increased deliveries from our development program.

Set us up favorably for 2023.

Second because inflation does not seem to be leading up in the near term.

One of our top operational priorities next year as expense mitigation through optimization of our services platform.

To sum things up this was a great operational quarter and our outlook remains optimistic.

We are looking forward to a strong finish to 2022, which will position us well for growth in 2023.

With that I'll turn the call over to Chris for the financial update.

Thanks, Brian and good morning, everyone I'll cover three areas in my comments today first a brief review of our quarterly results, including a summary of our estimated financial impact from Hurricane Ian <unk>.

Second the latest updates on our balance sheet and capital plan and third I'll wrap up with an update on our 2022 guidance and latest property tax outlook.

Starting off with our results we reported another strong quarter.

With net income attributable to common shareholders of $57 million or <unk> 14 per diluted share, which included a $6 1 million dollar estimated net loss from hurricane Ian.

As Dave shared we were fortunate with the ultimate path of the storm, despite hurricane and being one of the most powerful storms in recent history are damages largely consisted of cleanup and repair costs across Florida, and the Carolinas as well as our insurance deductible primarily related to a small subset of flooded homes and the Orlando area. Please keep in mind.

These amounts still represent preliminary estimates and may continue to change going forward excluding.

Excluding the estimated net loss from hurricane in during the third quarter, we generated 39 of <unk> per share and unit, representing 11, 6% year over year growth and 33 of adjusted <unk> per share and unit, representing nine 8% year over year growth.

Underlying our performance was another strong operational quarter generating nine 3% same home core NOI growth as well as continued steady deliveries from our <unk> development program.

During the quarter, we delivered 501 homes from our image development program, which was in line with our expectations of our total deliveries 265 homes and 236 homes were delivered to our wholly owned and joint venture portfolios respectively.

Additionally, we continue to execute on our recently moderated acquisition plan acquiring a total of 145 homes during the quarter in total for our wholly owned portfolio. During the quarter. We added 410 homes for an estimated total investment cost of approximately $155 million.

This is especially notable during the currently constrained acquisition environment, which add extra reinforcement to the value of our <unk> development program and land pipeline of over 15000 lots not only we have years of built in development growth, but as we've talked about many times. We also have the balance sheet and cash flow profile to fund our existing developer.

Pipeline each calendar year going forward without the need for additional equity capital.

Finally on the disposition side, we sold 164 properties during the quarter generating total net proceeds of approximately $49 million.

Next I'd like to share a few updates around our balance sheet and recent capital activity at the end of the quarter, our net debt, including preferred shares to adjusted EBITA was five nine times or 1.25 billion revolving credit facility was fully undrawn and we had approximately $97 million of cash available on the balance sheet.

Finally during the quarter, we utilized $186 million of forward equity shares that were previously raised in our January equity offering at the end of the quarter. We had approximately $300 million of remaining forward equity shares that we anticipate utilizing towards the end of this calendar year or beginning of 2023.

Finally, I'll close with some additional color around our 2022 guidance, which was updated in yesterday's press release for our latest property tax outlook in a few refinements around our moderated capital plan.

From a high level I'd like to highlight that all aspects of our full year same home operating outlook remain unchanged other than property taxes in the state of Texas, where we recently received some surprising and disappointing news.

As you May recall during 2019, Texas passed the property tax reform and Transparency Act, which created a three 5% cap on overall property tax revenue growth for cities counties and certain special districts and since being passed in 2019. The property tax Reform Act has served as an important governor a property tax growth for all.

All asset classes.

However, based on preliminary information, we recently learned that for 2022 non owner occupied single family homes are expected to receive a disproportionately large year over year increase and while we are still actively appealing assessed values in the state of Texas. It is likely that our 2022, Texas property taxes will now increase by over <unk>.

The percent outs.

Outside of Texas, However, the remainder of our 2022 property tax estimates, which contemplated elevated increases in Florida, and Georgia continue to track in line with our previous expectations as I mentioned, please keep in mind that our estimates are still based on preliminary information and that our full year 2022, Texas property tax true up.

We will be reflected in our fourth quarter earnings when actual property tax bills are received however, taking our latest estimates into account we have increased the midpoint of our full year 2022 same home core operating expense growth expectations by 200 basis points to 775%.

At the midpoint this translates into our revised full year same home core NOI growth expectation of 9% and full year core <unk> per share of $1 54, which still represents SF our industry, leading growth of 13, 2%.

And before we open the call to your questions I'd like to leave you with three key takeaways from our comments this morning.

First Dave is right. These are uncertain economic times, but remember that our business is built on a fundamental need of housing which continues to be in short supply with growing demand across our diversified footprint second our operating platform as efficient scalable and ready to stand up to the test of today's inflationary.

Ironman.

And third our growth programs supported by our investment grade balance sheet are unparalleled in their ability to consistently deliver inventory from the backbone of our development program, while our nimble acquisition channels stand ready to create unique shareholder value from the likely growth opportunities ahead, and with that we'll open the call to your questions operator.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Thank you. Our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.

Thank you and I appreciate the early 2023 building blocks, but I was hoping you can quantify the expected earn in for next year and then the loss to lease both currently and then.

What you would expect it to be at the end of this year based off of.

Like your guidance had rent trends.

Hey, Thanks, Nick this is Bryan.

You had to earn in that we're expecting from this year is in the 4% to 5% for 2023.

That reflects our in place leases are in terms of the loss to lease where.

We're estimating it to be in the high single digits at this point.

And our expectations for the balance of this year on rate growth. If you look at the re leasing side.

Continuing in the 8% range with renewals consistent with what we posted in October for November and December .

Thanks, that's helpful. And then just on real estate taxes I understand.

The impact of taxes, but as you look to 'twenty three are there other states that.

That could be at risk of elevated.

And our mill age or real estate taxes, probably and then could you see additional kind of separation between owner occupied versus owner.

Considerations on the tax front.

Yep, Thanks, Nick Chris here.

Great question and I appreciate you're connecting the dots to to other states, which I think is really important.

Look on the topic of our property taxes overall.

I would start by saying that our property tax team did a really really good job this year outside of the Texas curve ball.

Which by the way I mentioned this in my prepared remarks really surprise the entire property tax consulting industry, but outside of that our overall property taxes. This year of landing pretty in line with our 5% growth expectations from the start of this year.

Which.

As I mentioned contemplated some pretty hefty increases in states like Florida and Georgia.

Which are in part being offset by other states that have caps in place and then the portfolio diversification benefit from other multi year revaluation states that did not revalue. This year. So at this point you know look we still have some moving pieces, but for the most part we've nearly all of our assessed values in hand at this point our teams have a good feel.

For where appeals are likely going to land.

And we're just waiting now for our remaining tax rates to be published towards the balance of or the end of this year and overall as I mentioned, excluding the curve ball in Texas, our remaining states are shaping up pretty much largely as as expected.

And then to your point about 23, you know look it's a little bit too early to speculate with numbers, especially given the moving pieces in Texas.

But as we've talked about many times before over time, we generally expect property taxes to trend directionally with each P. A.

Oftentimes on a partially lagged basis.

But as home price appreciation has clearly hit an inflection point, we think it's reasonable to assume that property tax growth has an inflection point on the horizon at some point as well, but with that said you know, it's just a little bit too early for us to comment on whether or not we think we will see that inflection point in 'twenty three versus later, but we definitely notes out there on the horizon.

And Nick This is Dave let me tackle your second part of that question about whether this is a precursor to a to other states.

The answer is I don't know to date, what we have seen is that there is cemetery between homeownership van and rental rates. What we can tell you is this is very new news.

And we are looking into it and we have a government affairs department and we are having discussions with those individuals' but.

Too early to report back on what we are finding there one thing I will tell you is we have seen in other forms where there's either rent control measures or other ways that impact housing in the long term those are those provisions get reviewed in many cases.

Tested or repealed the.

The most recent one we can look at is November of 'twenty, one very recent St. Paul Minnesota passed a rent control measure limiting.

Rents to 3%, 8% on releasing and today, they're seeing their housing stock in their ability to grow their economy being impacted that provision is being reviewed today and so these type of actions do have a negative impact in the long term we are working through our.

Channels to have discussions with the appropriate people, but I would tell you it's too early to have a firm answer.

Thank you.

Thanks, Nick.

Our next question comes from the line of Juan Sanabria with BMO capital markets. Please proceed with your question.

Hi, good morning.

I was hoping to talk a little bit about the developer market.

For sale in Canada.

Impact of rising mortgage rates that they've had on their business and whether as a result of.

The softening on the for sale market Youre seeing any dislocation or convert some of those for sale houses to rentals and if weather was a dislocation in occupancy or leasing transfer for new homes or what have you.

Yeah, Good morning Juan.

There is a lot to unpack in in your comment.

The first thing I will tell you is that.

Yeah.

We look forward look in and see tremendous opportunities in growth and what you're talking about not only impacts our ability or gives us opportunities to buy from the builder. It first and foremost has a very positive impact on our development program as the as the builders slow.

Down their development, which they are doing today, there is still building and completing their inventory that they started but as they slow it down we are seeing benefits in our development program in the reduced cost of being able to build homes all the way from land all the way through the vertical.

<unk> cost.

If you look at the construction cost benefits to date I'd call them about 10%, but where we see them coming out is much greater than that.

Turning to your direct question about build their inventories and are they available to acquire there is significant builder inventories are in the marketplace.

They are in the tens of thousands of homes that we have seen.

To date, the majority of them don't meet our location or quality.

Requirements, but many of them do but those today are not priced at a point that we believe are attractive prices for us to be acquiring those homes today. The builders are continuing to protect their backlog and when that backlog is resolved then they will be lowering prices that could be later this year.

Or it could be early next year, and we will be prepared.

To take advantage of those opportunities when they do come about.

Sorry, David.

The question was more meant around whether that inventory thats now being delivered that theyre not being able to sell to homebuilders, whether that's affecting the rental market and any impact to your kind of core business not a development business in terms of what you were able to stop at <unk> charge them.

The tenants.

Yes, sorry, if I misunderstood, but on that point yeah. There you are correct a number of the homes that builders have they are looking at alternative ways of.

Resolving their backlog and they are turning some of them into rentals I remind you that the majority of these homes are in secondary and tertiary markets not located where our homes are located.

So they don't they're not direct competitors to us I'd also remind you that over the last 10 years, we've seen single family rental inventory increased by 4 million homes from 13 million to 17 million homes. That's 400000 homes on average per year and the backlog we're looking at.

Is 20 to 30000 homes.

Those homes that 400000 per year were absorbed well Occupancies remained very very strong demand for single family rentals is higher today than we've ever seen so while they may have a very short term impact on absorption they will be absorbed and they will not have an impact to the long term viability of single family.

In rentals.

Yeah.

Great and then just.

With regards to the development platform as a whole here just curious on the yield.

Our expectations there are.

Are those keeping up with significantly higher capital costs, given the move we've seen in rates or.

How do you how do you think about putting incremental dollars to work on our pipeline.

In the face of higher.

Capital cost today.

Yeah.

Yeah.

One you're correct I mean, you got to look at the capital that you're raising and the investment opportunities and you have to match them and if capital is more expensive your yield opportunities need to be better. What we are seeing in development is significant reductions in the cost to build homes as I indicate.

Good.

As the homebuilders slowed their production.

We are seeing a land that was previously not available including very important land.

We call them <unk> vacant developed lots. This is this is land that we can acquire and immediately go vertical don't have to do any land infrastructure. We're seeing these are land opportunities today being offered at discounts to what we saw six months ago and they range from small.

Once all the way up to 40% discounts and.

As time goes on we expect those to get even more attractive and come more in line to what we historically saw before the pandemic on the construction.

<unk> cost same thing if you look at the pre pandemic trends.

Weird, we're moving back towards those trends a couple of cases in point lumber has come down from $1600 a thousand board feet to $500 up to two thirds decline that's more than a 20000 dollar savings in building a home. We've also seen it in the trades at all.

Through drywall.

So we've seen it in the products and the trades in the framing in the electrical et cetera post drywall, we expect to see it we haven't seen it yet the homebuilders are still finishing up the homes that they're building and then theyre going to slow the post drywall phase down as well so we expect that.

We're going to see 20% to 25% reductions in input costs. The yields are still very very strong.

No change to the yield all of that results in significant increases to the ultimate yield.

For our invested dollar.

So we I just go back our development program.

I see tremendous opportunities in this is this is the benefit of having a diversified portfolio, where we can build in many places but also have the multiple channels that we can acquire so yes. The development program is very very healthy today, the existing program as well as opportunities on the horizon.

Very helpful. Thank you David.

Mhm.

Our next question comes from the line of Steve <unk> with Evercore ISI. Please proceed with your question.

Hi, Thanks, Good morning out there, Dave I realize the Texas things kind of new and you don't really know where it all settles out but you know to the extent that it seems like the state sort of has a target on the S. O far back would that I guess ultimately gets you to rethink your long term commitment to owning in Texas.

Yes.

Yeah, Steve I think that's a little early to draw any conclusion. So we haven't had discussions with the taxing authorities or government affairs.

Department will I think the part of it is also education of of many parties may be us, but definitely the the state parties as well.

And and kind of show them what has happened in other instances, where theres been regulations that had been adverse to rentals and what the long term impact is so I'm not I'm not here willing to say that we're adjusting any programs at this stage I think it's just way too early to make those calls.

Got it and Chris could you just remind us sort of what's embedded excuse me in Q4 guidance for for bad debt and just remind us overall, what the I guess the net bad debt figure is for 'twenty, two and maybe how you see that trend playing into 'twenty three.

Yeah, Great Great question Steve.

You know look on collections more broadly.

I would say collection trends have continued to hold strong with third quarter bad debt as you saw landing in the low 1% area, which was pretty consistent with our expectations.

And just.

Unpacking that a bit.

As expected we have continued to see a reduction in rental assistance payments.

And that's been paralleled by improving collections more broadly.

And another piece of information in there I would say the overall bad debt picture is supported by the fact that you know for any remaining households that we may have that have been impacted by COVID-19 that are continuing to work their way through the process.

If you recall, we took a very conservative and prudent stance to how we accrued for our bad debt in earlier stages of the pandemic and so those types of households have largely been provided for previously in our in a prior period bad debts and so as we head into to fourth quarter at this point.

It's still very consistent with our prior expectations are we see collections continuing to remain strong and expect that bad debt will likely continue to run in the low 1% area, which is what we have contemplated in guidance.

Yeah.

Sorry, sorry, so where does that bring you sort of for the full year on 'twenty 'twenty. Two if you kind of were to just wrap up kind of the gross the net the rental assistance bad debt will be what for the year.

About 1% to low ones area, it's difficult to unpack the pieces because there's so many different moving layers at this point, but wanted to low ones on a full year basis.

And would you broadly see that being kind of consistent or do you think that without rental assistance.

Given the state of the economy does that number maybe go up next year do you think there's a possibility that could go down and be a tailwind.

You know look at this point rental assistance is has done its job rental assistance has been very successful in helping to bridge our households in need.

But it's been winding down for some time now just to give you some context in the third quarter of this year rental assistance I was down in the 3 million dollar area.

And if you recall that compares to $7 million to $9 million per quarter towards the second half of 'twenty. One so we've already seen that winding down.

We've already seen that again paralleled by improving collections more broadly.

You know it's too early for me to comment specifically on the shape of all of that into 'twenty, three but so far we felt and seen we've seen positive information and felt good about the improving collections.

Situation alongside rental sensitive assistance tapering off.

Okay and one last question for Brian just if you kind of parse through the data.

Terms of showings or collection issues ability to push rents. There are renewals is there anything that you can discern from the demographics of the renter base them you know in terms of average incomes are.

Or types of jobs, I guess I'm, just looking for anything anecdotal that might suggest.

You know something kind of regional or you know by by consumer type that might be helpful.

Yeah. Thanks, Steve.

There are a number of different data points that I want to.

Want to bring up.

Talk about the rent coverage. The income rent covers that are resident base has and the five times range.

And the fact that the average household has multiple earners gives us a lot of confidence going into.

This kind of uncertain times.

In terms of where our residents are employed and in the industries that they work in.

Well first of all it's generally characterized by by knowledge of professional industries. Our survey show that is close to 90% of our residents have college degrees.

They're employed in essential industries health care education.

Government military.

With functions on a professional side like Tech support as an example, so we feel like they're in they're in a really good position.

In the event that there is.

Any economic pressures for individual cases, we're still very very happy about the demand backdrop. So we're able to turn homes quickly. If there was it was any.

Any sort of stress on our resident base, but in terms of of their industry is where they work there. They are existing in place income and they're kind of excess capacity, we feel like they're at a really good position.

Great. Thanks, that's it for me.

Thanks, Steve.

Our next question comes from the line of Adam Kramer with Morgan Stanley . Please proceed with your question.

Hey, I appreciate the question guys just to follow up a little bit on Steve's question, and that's really good color on kind of them early and bad debt, but just to confirm kind of in that 1% figure I think that you've cited for bad debt. That's net of the rent rental system.

$3 million of rental assistance.

That's correct.

Bad debt are recorded to the P&L, which is net of that and again there are a lot of moving pieces to it but thats one component.

Got it.

Total sense and then just thinking about some of the expense line items.

<unk> property taxes.

Focus for people when we kind of think about <unk> in 2023, but just thinking some of the other property tax law or some of the other expense lines.

Or any I guess kind of puts and takes too.

Whether it's whether it's potentially turnover, increasing and kind of how that might shake through come through the P&L.

Are there other inflationary impacts certainly and recognizing you guys are certainly doing something to mitigate costs.

Improvements because of tissue in the portfolio.

But just would love to come here, maybe some puts and takes with some of the other expense lines.

Yes, sure Adam Chris Here again, Oh, let me walk you through the fourth quarter and what's contemplated in guidance and then I'm sure Brian would love to talk about some of the great initiatives, we have going on from an efficiency standpoint.

But if you if you do the math on the midpoint of guidance actually implies a deceleration in our fourth quarter non property tax expense growth.

Which is largely a function of the timing of where some of our prior year quarterly comps fell.

If you recall towards the tail end of 2021.

We began to see some of the current period's inflationary pressures are.

And then you May also recall that we made the decision to accelerate the timing of some of our calendar year end salary increases to bolster talent retention coming into the fourth quarter of last year. So the combination of all of that created an easier non property tax expense comp in the fourth quarter of 2021, which is what we're seeing contemplated in <unk>.

Guidance. So I just wanted to unpack that for you and I am sure Bryan we'd love to talk about all the good stuff, we have going on from an efficiency initiative standpoint.

Yeah, Adam I think the best place to start on that side would be on on repairs and maintenance.

You can see the increases are well below kind of the inflationary expectations and our team has just done a wonderful job of increasing salt performance are there certain areas that we can control and certainly mitigate inflation and that's by doing more work internally by preparing early for a supply chain issues that we might have seen this year.

We're really taking an active approach of doing a.

Self performance work, so you're seeing that reflected in and the R&M line on.

On the property management side.

The changes there reflect the fact that we're fully staffed we're in a really really good position from a personnel perspective are to finish this year strong and be prepared for a strong 2023.

Great and just.

Last one a quick one here just on the kind of a Florida, Georgia I know, Chris you kind of cited with them earlier, but the kind of the initial guidance.

You did have the increase was there just wanted to and you are going to be something you can comment just kind of confirm I guess there was a testament to have our own becoming for you guys.

In other words, you've kind of seen the final product.

You know in terms of kind of be the increase in there.

But what was what was baked in.

That's correct I think your line might have.

Broken up for a second but I think the question was.

What was Florida, and Georgia fully contemplated in what we were expecting previously and the answer is yes, and both of those we've seen some pretty heavy increases to where market values have gone in the 20% to 30% area for those two states, but the simple answer is yes, those were contemplated in our expectations previously.

Great. Thanks, so much for the time really appreciate it guys. Thanks.

Thanks, Adam.

Yeah.

Our next question comes from the line of Handel St. Juste with Mizuho. Please proceed with your question.

Hey, good morning out there.

Good morning first question please.

Those pay there.

Wanted to go back and clarify your comments on development a bit the cost and yields.

How did the yields on home.

Being started today compared to the 6% you've seen historically and when do you expect the lower input costs you outlined to benefit those yields are we thinking that's more of a 'twenty four 'twenty five I'm just trying to get a sense for how you could be looking here. The next couple of years. Thanks.

Yeah, Good question, Aldo and <unk>.

When you look at development.

We talk about development being in cycles, and so the homes that we would acquire today, we would get the benefit of the land and we would get the future benefit of the the reductions in the cost of the commodities and input cost for homes that we delivered this this.

Period, those that we will be delivering a next quarter.

Those homes were not only started earlier this year when the pricing of those commodities were at their peak.

What are the commodities were contracted a few months before that and so the homes that are being delivered.

In.

In the third quarter fourth quarter, and maybe even the very first quarters of next year are going to be.

With the commodity costs that are incurred in the early part of 2022, so you're going to be more elevated the yields are going to be you know in the fives that we underwrote them on and the capital that is being utilized for those was raised early in 2022.

And those acquisitions, even though in the fives, if you match it to the capital that's being utilized remained to be accretive, but there is a time lag between the time that the commodity prices change in the time that those deliveries occur that benefit from those commodities.

Thank you for that maybe a follow up on undeveloped just thinking about proportionately. The starts near term just curious if we should expect to see more start being done via the JV.

Versus on balance sheet, and then would you or should we expect incrementally better yield on that given the opportunity there. Thanks.

Sure handheld Chris here I can start with where we see starts shaking out in that and jump back in on the second part of that.

But generally speaking and we've talked about this before.

As our development program continues to grow we would expect a larger and larger proportion of those to be started on balance sheet at this point.

<unk> are still very active in and going very well there are about 60% or so developed and deployed on their capital and probably have another 12 to 24 months to finish off but as the program continues to grow and we expand starts and deliveries are the expectation is that a larger and larger proportion of that.

We will be on balance sheet.

Thank you. Our next question comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.

Hey, good morning, everyone.

The acquisitions that made it over the finish line. This quarter can you get the cap rate and then was there anything unique about them.

Where are the opportunities that just happened to be priced more appropriately it at a higher cap rate.

Was there a greater proportion of new homes anything like that thanks.

Yeah, Brad its Dave.

The acquisitions that we reported in the third quarter.

We're contracted really in the second quarter of this year. They closed in the early part of the third quarter.

Those acquisitions are in the fives.

So those but again they were contracted at a little bit different time.

We continue to look at all of the acquisition and growth opportunities.

We are for the most part on the sidelines right now as pricing is.

We're going through price discovery on where you are looking for where are those new prices are going to.

Bottom out at least get to a place where they.

They match fund with our capital so we havent put anything into the growth program on MLS in the last couple of months, what we closed were 'twenty or second quarter.

Contracts that closed early in the third quarter.

Okay got it thanks for that.

And then going back to the Texas property taxes, I guess I'm, a little surprised to hear that there is a differentiation forming between renter occupied.

Family homes in owner occupied, especially just given things tend to be controlled at the local level. So.

It is this formalized in some way.

At the regulatory level, and I guess, where it will higher valuations specifically for for renter occupied homes hold up to appeal.

Yeah.

Sure. Brian you know look we we were surprised as well as as was the industry.

But I would also say, it's a little bit more than just owner occupied versus non owner occupied and how all that works within the three 5% cap set by the Texas property tax reform Transparency Act you need to mix in commercial as well and so what we really saw this year is just an unprecedented disproportion.

That treatment across all of the asset classes.

As landing very low if not flat in certain cases.

And then owner occupied homes are in or around 10%.

And then that means that the balance or the resultingly large increases to non owner occupied single family where.

Which allows overall property tax revenues to remain within the three 5% cap anchored by commercial and owner occupied homes and just again for context.

That's pretty inconsistent with the historical treatment out of Texas, We've just never seen that level of disparate treatment between the asset classes.

Thank you. Our next question comes from the line of Dennis Mcgill with Zelman and Associates. Please proceed with your question.

Hey, Thank you, Chris sorry to hit you with another one on property taxes, but I just want to clarify a couple of numbers. You said I think that you had already been contemplating in the accruals are Florida, and Georgia being up in the neighborhood of 20% plus and I guess, if Texas joins that and that's 40% of the assets across those three.

I think it implies that there is not any increases anywhere else.

So I just wanted to make sure I'm triangulating those comments correctly.

So a couple of different things in there, Florida and Georgia are what I was commenting on is the the market component of where those values floats to Georgia was was in the 20% area, Florida has a couple of different components, and we're getting pretty granular here, but theres two pieces theres a market floating.

Component and then they call it a capped assessed value component.

That caps out at a 10% increase represented about 60% of property taxes in Florida and in our balance.

Or 40% is what floats to market and that's what is a what went up about 30%.

So.

The nets to Florida is a little bit lower I think it's high teens or so.

And then everything else.

Isn't flat, but keep in mind there are a number of other states that have caps in place and then also there are jurisdictions across our portfolio just given the broad diversification that only re values on a multiyear basis.

And there were a good number of those that did not revalue this year, bringing everything down to 5% outside of Texas.

Okay. That's helpful.

And then also just following up on a comment Dave I think you made on construction cost.

You didn't catch it exactly did you say that you're starting to see outright declines in construction costs and I would maybe exclude lumber for that we know that that'll be a pass through but and non lumber categories are you already seeing it or labor <unk> construction bids come down on current phases our future.

Yes, yes.

Yes, we are Dennis but it's in the construction phases that are up through the drywall phase we haven't seen it in the post drywall the finished trades the cabinetry etcetera.

And there's still a significant demand for those trades by the builders, but the the pre drywall trades.

We're getting inbound calls from vendors looking for work and we now have the ability to be bidding.

Multiple vendors.

More vendors against one another and it is benefiting in a reduction so anywhere from.

Single digits to low double digits at this point, but I do expect it will continue to go up and B. If you go back to historical trend lines and trend it and take out the pandemic aberration.

There's 20, 25% reductions to get back to the trend line of what construction has historically been.

Thank you. Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.

Good morning, Christopher Brian could you give us a sense of what's driving the 24% year to date increase in recurring capex per home.

Hi, John This is Bryan.

Yes, a couple of different factors in there.

Some that we anticipated at the beginning of the year, we talked about the work out of some of the distressed COVID-19 residents. So it's a little bit attributed to that.

More importantly, it's too just inflationary increases.

Centered around kind of third party work and materials that we have.

Less control over less of an opportunity to mitigate.

It really provides a contrast between the capex spend and the way that we're managing the R&M line. So we're just more susceptible to third party increases, especially in the case of HVAC as an example, where owner occupied home we need to get that done quickly.

Or just more vulnerable as you've seen.

In Q3 numbers.

Okay could you can you give us a sense of what you think a normalized total cost to maintain is right now I mean turnover has gone down the last several years, but capex.

Capex in R&M and turnover costs are going up and so it feels like if turnover stabilize or even increase these numbers would look a lot worse. So.

As a 3000 dollar type total cost to maintain a reasonable run rate going forward and we just kind of grow off that at whatever CPI is or just any sense for what a real normalized cost figure any comments there would be great.

Yeah, Thanks, Sean I'm I'm, not ready to concede that retention is going to do anything but improve.

But for an estimate for a longer term run rate.

Thank you.

You're pretty close by expectation to be a little bit lower than that but over the long term, we would expect that line item to probably increase inflationary levels.

Thank you. Our next question comes from the line of Neil Malkin with capital One Securities. Please proceed with your question.

Hey, everyone. Thank you.

First one.

David.

<unk> talked about on the call a fair amount about.

More opportunities land builder inventory, maybe can you just can we just talk a little bit about the land bank owners I think you made a reference to that last call that.

Some of the major players have seen really well located deals come back to them or fallout you know just given the horizon and borrowing.

Cost you know can you can you give us an update there can you talk about what you see in terms of land bank opportunities.

And then you know is it does it vary regionally you know like for example.

Phoenix or flu.

Florida, whatever you know a certain market that may have more upside more things that look priced well or.

That are more attractive to you at present.

Yeah.

We still are.

In the last few weeks, we have seen a number of our properties come back to land bankers.

If you cover the homebuilders you've heard a number of the large national homebuilders talk about returning a large numbers of homes to the land bankers.

Today the bid the bid ask spread is very very wide. So there's really.

No activity no trading occurring at this point the the homes the the more attractive opportunities as of today and this is very dynamic and very you know it's changing.

Daily here, but the biggest opportunities are all out west.

So it's all of the western markets.

The north northwest it is down in the Phoenix Las Vegas areas, It's Denver.

Those are where we're seeing the.

The majority of the opportunities today.

The southeast while there are some opportunities not as plentiful as what we are seeing in the west.

So, but and the other thing that I mentioned in the prepared remarks or at least maybe a prior question here is for the first time in a number of years, we are seeing a vacant developed land. That's land that if we can acquire we can turn into homes much quicker than the raw land that we have built this.

Business on.

The opportunities are showing up but still a little bit of a gap on the bid asked to where we want to be trading.

There's really nothing trading at all there's nobody hitting the ask and its just a little bit more price discovery needs to occur.

Yeah.

Okay.

Follow up on that to be clear when you when you referenced the.

The homebuilders, giving back or you know inventory sitting out there in the tens of thousands.

Talking about in terms of the inventory and tens of thousands actually homes versus when people are you're talking about the homebuilders, giving back to the you're talking about the actual lots correct just to be clear you're not home.

That's correct Neil.

With the land bankers they they have option land homebuilders have optioned land.

With these land.

Banking firms and that is those options are being canceled the deposits forfeited and the land bankers now control the land that's that's the land and I'm talking about.

Yeah.

Thank you. Our next question comes from the line of Tianjin Luther with Goldman Sachs. Please proceed with your question.

Alright, Thank you for taking my question.

I wanted to ask about supply what are you seeing on the MLS channel are you seeing more.

More home position for rank now, especially now that you know a home buying has to come from them.

For a lot of people and is that driving any pressure on pricing from your standpoint.

Hi, John This is Bryan. Thank you for the question.

The supply we're seeing some supply pressure in some of our msas, but it's really not direct competition for our homes.

Our homes generally are in superior locations.

And in some cases with the newer builds really superior assets. It's a case of not all rental houses are are the same.

The effect that this supply it's really been minimal on our on our occupancy and our rate growth, we're still maintaining very high levels of occupancy healthy rate growth and one thing I want to point out we're able to do this without the use of any concessions.

Concessions.

Are being used in some of our some of our areas, but not by us I want to make that clear.

Got it.

That's helpful and just on the flip side of that question.

Our move outs to purchase homes tracking can know how how much has come down.

From the beginning of this here and what are you seeing on that from that standpoint.

Yes, they have come down slightly but there is a little bit of a lag I expect them to continue to come down.

We saw a decrease off of off of August .

Two into the last couple of months.

But it's probably a similar proportion to the decrease in overall home sales in the low double digits.

Thank you. Our next question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question.

Hi, guys. Thanks for taking my question just going back to your comment about not using a lot of concessions, Brian I guess I understand there I mean, your inbound inquiries are 250000, but I guess just in general if the macro backdrop worsens like what's your guys' view on it.

Using that lever for your overall rental strategy.

Yeah. Thanks, Sam.

It is a tool we.

Have used it in the past not for a number of years, but at this point the demand is so healthy for our specific product.

I think it has to do with a number of different things our homes are very very well located in growing markets.

In good neighborhoods.

And we have an efficient leasing platform, that's able to capture this demand.

And utilize the demand across the entire marketplace to benefit our portfolio.

The number of inbound inquiries as one piece website.

Website traffic is up year over year off a record levels from last year.

Our distinct showings per rent ready properties continue to be well.

Way above the pre pandemic averages so the demand side for our specific product.

Is extremely high.

At this point, we just don't see the need to change anything on the concession policy.

Got it got it and one quick one.

Absolutely ancillary revenue side anything that you're rolling out in the near term or is it just business as usual with what you guys have right now.

Yeah, I think I would probably consider it business as usual, we're continuing the rollout of our pet program as we've talked about before but really no major changes to announce at this point.

Yeah.

Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Hi, Thank you.

Are you still seeing the benefits of in migration to your markets or is that trend slowing at all.

Yes. Thank you Linda this is Brian .

No we're continuing to see it specifically one of the major drivers migration to into our portfolio is out of California.

And even though on a year over year comparative basis, it's still up 30%. So that that has not stopped it has not slowed down at all and.

It has a big impact on our western markets. So that's continuing.

If you look at another metric that we follow closely.

And that's the number of residents that are moving from out of state into our into our homes and that's still way up.

Both year over year and to pre pandemic levels.

So it's still it's still a significant part of our of our application volume.

Thanks, and then on the flip side to the extent move outs are occurring you know what are the reasons being listed.

Other reasons or are consistent with what they've been in the past maybe its proportions has changed slightly.

Out to buy still the number one reason.

The rest of them are smaller in nature of life changes and so forth.

We are <unk>.

Increasing renewal rates a little bit so that that reason has.

<unk> has gone up too, but really no major change on the move out reasons percentage. We're just really happy that the retention continues to improve and I think it's a testament to the overall value proposition of our platform.

Thank you. Our next question comes from the line of Jay remind with K B W. Please proceed with your question.

Thank you very much I had a question maybe for Bryan on the demand side, how do you view single family rental with respect to multifamily is it a substitution product.

In other words are the incremental tenants coming from apartments generally in choosing to form a household and single family.

<unk> house or are they would be homeowners choosing single family rental as an alternative can you just give some color on maybe.

The majority of the tenants that you're saying.

Sure.

Thanks for the question Jay.

Multifamily is a valuable source of our of our residents we track, we survey where theyre coming from.

We haven't seen a huge change if you remember at the beginning of the pandemic there was a big spike on applications from multifamily.

But its normalized back down to near pre pandemic levels, but I would think of it in the low 20% range. So it is a it is a valuable component, but it's not the majority.

I would think of it more in terms of as as the residents.

Mature they get married to start families. So it's a natural progression to move into into single family homes, it's not necessarily directly out of out of multifamily.

So most of our residents are coming from some single family whether they own oriented prior.

Okay.

Thank you very much and in terms of the slowing new lease demand that we're seeing playing out in multifamily. What do you think is driving that and do you expect that to eventually affect the single family for rent market.

I think theres, a theres a difference between the types of residents difference.

Demographic or demographic, it's been pretty consistent for a long time now.

Average age in the 37 year range.

High levels of income people, who are choosing kind of higher quality of life I think some of the migration would point to that.

And we have a different product and multifamily single family homes offer yards in space excellent neighborhoods.

We're adding a class a multifamily type of entities into our communities. So we're adding them, but really really nice features that I don't think existed in the past it certainly not on the rental side and you couple that with our services platform. So I think people are really starting to understand the value proposition that we're that we're offering.

And I think that's going to be a main driver.

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, Good morning, I just wanted to ask a supply question a different way are they concerned that we hear from investors is that if rates are going to be higher for longer and many more interest rates that people don't need to sell their home for whatever reason I will opt to choose to rent their home out instead, including in some of the higher quality neighborhoods papers like you mentioned, so that could lead to maybe higher support.

Life in the next couple of years is that something that you worry about or track and what's your view of that potential risk.

Hi, Anthony Yeah, it's it's something that we're monitoring we're monitoring supply on a daily basis in our in our marketplace.

It is possible that that scenario plays out we're not seeing it to a great extent yet.

But I want to remind you too that there is a difference between the mom and pop product and in our homes. Both on our services platform. The improvements that we're making to these homes on the turns so there's a differentiation in the product.

But I think puts us in a.

Good positioning and our competitive advantage, but to date, we're not seeing a ton of pressure from owner homes that are being flipped to read.

Thanks, and maybe one more on Phoenix as a market that's always highlighted as being some pretty sharp declines at home values. Yet your lease spreads there are very very strong what's what's your view on the Phoenix market overall and can cause divergence of home price acceleration in your strong rents continue.

Yeah, Phoenix has always been one of our one of our favorite and top performing markets. It's fantastic from a number of different areas you've seen the occupancy levels that you've seen the rate growth.

It's also really strong on the collection side as well.

So we're really really happy with that marketplace. It's benefited from the California migration as I've spoken to on prior calls.

It's also a market that has a lot of investment activity and it is one of the markets and the Msas that I referenced earlier, where we have seen an increase in supply but.

But I want to remind you that the supply increases that we're seeing in Phoenix.

Our with product that's not in direct competition with ours is that neither of these are homes that are good at locations.

In many cases, we've talked about the.

Horizontal apartment boom that you saw in Phoenix, So our product is differentiated there, but Phoenix remains one of our one of our top markets.

And we're continuing to see strength.

Thank you. Our next question comes from the line of Austin, where Smith with Keybanc capital markets. Please proceed with your question.

Everyone, Dave just going back to your comment about the inventory of homes on the market that that meet your quality and kind of location parameters, but aren't quite there on price. How can you quantify how far that bid ask spread is and how long you think owners can hold onto them before maybe needing to to move up.

Sure.

Yeah.

First the.

The area that we were talking about I believe on that discussion was the national builder inventory.

And today, we have seen a little bit of price movement are maybe 5%, we're going to need to see another 15, 20% movement.

So.

Got it and then just kind of when you pair that with development can you remind us what that spread is between those market cap rates or where do you think values need to be in and what you guys target on development is.

Yeah, well the the spread between acquisitions and development has historically been about 100 basis points in yield.

And we are still in that seems if code when we analyze opportunities today.

Yeah.

Thank you we have reached the end of the question and answer session mistress, England I would now like to turn the floor back over to you for closing comments.

Thank you operator.

In closing, let me just reiterate that our you know today the S F. Our industry is.

Moving to be very resilient, we are set up very very well for 2023 and are seeing the early signs are very attractive incremental development opportunities as well as acquisition opportunities. So thank you very much for your interest this quarter. We look forward to speaking with you next quarter.

Have a good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.