Q2 2023 American Homes 4 Rent Earnings Call
Greetings and welcome to M. H second quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation if.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Nicholas from director of Investor Relations. Thank you you may begin.
Good morning, Thank you for joining us for our second quarter 2023 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 the SEC.
All forward looking statements speak only as of today July 28, 2023, 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.
Reconciliation of GAAP to non-GAAP financial measures is included in our earnings press release and supplemental information package.
Our operating and financial results, including GAAP and non-GAAP measures are fully detailed in our earnings release and supplemental information package. You can find these documents as well as SEC reports and the audio webcast replay of this conference call on our website at Www Dot A&H dot com with that I will turn the call over to our CEO David <unk>.
Welcome everyone and thank you for joining us today.
We delivered another quarter of excellent results supported by strong operating fundamentals and leasing momentum. This resulted in 41.
Core <unk> per share for the second quarter or seven 6% growth over the same quarter last year.
Importantly, we generated better than anticipated leasing spreads during peak leasing season. Thanks to continued demand drivers and superior execution from our teams as a result, we have increased full year core <unk> per share guidance by three cents at the midpoint, which represents six 5% growth on a.
Full year basis over 2022, and the high end of our previous guidance range.
The single family rental sector remains on solid footing with durable and consistent fundamentals driven by the growing demand for single family rentals ongoing national housing shortage and challenging home affordability dynamics.
A M H continues to be well positioned by offering a high quality housing option with a superior and convenient resident experience.
In the desirable family friendly neighborhoods of choice.
Further as few signs point to any near term changes, we expect the operating environment to remain durable providing consistent results for the foreseeable future.
Now turning to the investment front.
Responsible growth continues to be the name of the game.
Our traditional and national builder channels are still largely on pause.
Recently, we have seen a few FSFR portfolio opportunities come to market, but they did not meet our criteria for factors such as investment return location and asset quality.
Our teams continued to be in frequent communications with our contacts across the industry and we will be ready when opportunities arise that meet our criteria and are accretive to the <unk> platform.
Our focus remains on investing in a prudent manner through our internal development program, which continues to represent nearly all of our external growth.
Year to date, we have delivered 1100 homes and have started construction on the remaining scheduled deliveries in 2023.
Looking to 2024, we anticipate another year of incremental growth based on current visibility we have into the pipeline.
Finally.
I am happy to announce that we have entered into a second development joint venture with institutional investors advised by JP Morgan asset management. This is a testament to the quality of our development and operational platforms and provides a great Avenue to further expand our development program.
Chris will walk you through additional details later in the call.
As I wrap up I am happy to mention that next week will Mark our 10 year anniversary as being a publicly traded company. We have built something truly remarkable here, Amit and I want to thank everyone, who contributed to our success over the years.
Now I'll turn over to Brian for an update on our operations Brian .
Thank you Dave.
Solid June leasing results capped off a strong quarter that was highlighted by robust pricing momentum throughout the spring leasing season.
For our same home portfolio, we generated better than expected spreads posting new renewal and blended rate growth of nine 4%.
7% and seven 7% respectively for the quarter.
Although we saw a 70 basis point increase in turnover compared to the same period last year.
Average occupied days remains strong at 97%.
To the efforts of our leasing and field teams.
This resulted in same home core revenue growth of six 5% over the same period last year.
Same home core operating expense growth of nine 9% was as expected and.
<unk> continues to be impacted by the timing of property tax expenses in the prior year.
Combined this led to second quarter same home core NOI growth.
Four 8%.
Due to the strength of our results in the first half of the year and our improved outlook for the second half.
We have increased our 2023 same home core revenue growth guidance by 50 basis points to six 5% at the midpoint.
Underlying the new revenue guide is a full year blended spread expectation in the high 6% area.
Which is a significant increase from our previous guide in the mid fives.
Additionally, we now expect full year occupancy to be in the high 90 six's.
Which reflects a slightly higher volume of seasonal move outs than originally contemplated.
And although not yet finalized preliminary July results support these trends with occupancy in the mid 96 range and blended spreads of approximately 8%.
Altogether. This guidance revision reflects the strength of the operating environment and our team's solid execution as we continued to holistically manage the top line.
And unchanged operating expense guide brings our new same home core NOI growth guidance to $4 seven 5% at the midpoint, which represents a 75 basis point increase from our previous expectation.
Before I wrap up I would like to highlight some of the factors driving long term durability and the demand for single family rentals.
And more specifically for A&H homes.
While the macro external factors that Dave referenced benefit everyone in our sector.
A M H is especially well positioned because of our high quality assets and they are desirable locations.
Additionally, we are committed to providing the best resident experience in the industry.
We continue to innovate through investments into our technology platform and through operational initiatives, such as resident $3 60.
These strategic efforts have made a M H, a premier home provider and allow us to efficiently deliver an unmatched level of service and care.
In closing, we just finished a great first half of the year and our increased guidance reflects our confidence in the leasing and demand environment.
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 of my comments today first a review of our solid quarterly results second an update on our balance sheet and capital plan, including our recently announced new joint venture with institutional investors advised by JP Morgan asset management, and third I'll close with an update around our increased 20.
'twenty three guidance starting off with our operating results. We delivered another quarter of strong earnings growth with net income attributable to common shareholders of $98 million or 27 cents per diluted share on an F O share and unit basis, we generated 41 cents of Corpo, representing seven 6% year over year growth.
36 of adjusted <unk>, representing five 3% year over year growth.
Driving this quarter was four 8% year over year core NOI growth from our same home portfolio as well as consistent execution from our development program, which delivered a total of 634 homes to our wholly owned and joint venture portfolios.
Outside of development, our traditional and national builder acquisition programs remained on hold.
However on the disposition side, we saw another quarter of robust activity selling over 400 properties at an average cap rate in the low to mid 3% area generating approximately $127 million of net proceeds next I'd like to share a couple of quick updates on property taxes first outside of Texas or <unk>.
The update is business as usual we have now received initial assessed values for over 50% of the portfolio and as part of normal course, we're underweight challenging many of these values through the appeals process, which will be finalized over the balance of this year.
Second with respect to Texas State lawmakers recently agreed to a large property tax relief program, which among other things is expected to benefit property tax rates. Later this calendar year. However, keep in mind that property tax rates are only one part of the equation and that overall property taxes are heavily driven by annual valuation increases.
Along those lines. We have now received an initial subset of early valuation appeal results and it appears that Texas assessor offices might be taking a tougher stance on valuation reductions this year.
And although it's too early to conclude this has the potential to offset this year's anticipated rate reduction at this point, our 2023 property taxes still have a lot of moving pieces and given the amount of information that still needs to be received our full year property tax expectations remain unchanged from the start of the year.
Next I'd like to turn to our balance sheet and capital plan for starters I'm very happy to share that subsequent to our last quarterly earnings call. We were upgraded by Moody's Investor services to be doubly two with a stable outlook is another great Testament to our best in class balance sheet and continually improving credit profile.
In terms of other balance sheet updates at the end of the quarter, our net debt, including preferred shares to adjusted EBITDA was five three times, we had $200 million of cash on the balance sheet and our 1.25 billion revolving credit facility was fully undrawn.
As a quick update on our overall capital plan, we remain on track to invest approximately $900 million of Anh capital this year and.
And as we look beyond 2023 we remain proud of our existing development pipeline of over 13000 lots that will be delivered into our finished inventory over the coming years with that said as we've shared many times before we believe that the M. H development opportunity is far greater than our existing pipeline of land, which is why we are very excited to announce.
Our new second joint venture with institutional investors advised by JP Morgan asset management.
During this time of continued public capital market uncertainty, our new joint venture will provide $625 million of high quality long term capital to capture incremental development opportunities like our previous venture we will hold a 20% interest in the new JV with economic upside from fees and opportunity for promoted interest.
The new JV has also been structured with an evergreen term and will focus on cultivating its own development pipeline that will likely begin delivering homes in 'twenty 'twenty four and beyond this new JV is a great Testament to the quality of our platform and now brings our total relationship with institutional investors advised by JP Morgan asset management to approximate.
$1.5 billion, which provides us with the capital confidence to continue growing our aim H development program without built and reliance on common equity capital, while also enabling our ability to prudently maintain wholly owned development pipeline assets below 10% of total gross assets.
He did the team for your hard work and dedication on this important transaction that will further enable our ability to continue delivering consistent and predictable growth overtime.
Before we open the call to your questions I'll cover our increased 2023 guidance, which was revised in yesterday evening's earnings press release, starting with the same home portfolio is Brian covered recognizing the strong spring leasing results and continued demand trends into the third quarter. We've increased the midpoint of our full year core revenues growth expectations by 50 basis points.
6.5%, coupled with our unchanged core property operating expense outlook, we have increased the midpoint of our full year core NOI growth expectations by 75 basis points to $4 75 per cent contemplating our increased core NOI expectations across the entire portfolio along with modestly higher interest income on cash generation.
<unk> from better than expected disposition activity, we have increased the midpoint of our full year 2023 core <unk> per share expectations by <unk> <unk>, our new midpoint of $1 64 per share reflects the high end of our previous range and represents a year over year growth expectation of six 5%.
Finally, as we open the call to your questions I'd like to reiterate daves enthusiasm as we approach our 10 year IPO anniversary H is truly one of a kind it's the country's only large scale integrated owner, operator and developer of single family rental homes, which uniquely positions us to continue creating outsized shareholder value our second decade.
<unk> is a publicly traded company and with that we'll open the call to your questions operator.
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One moment, please while we poll for questions.
Our first question comes from one Santa Maria with BMO Capital markets. Please proceed with your question.
Hi, Good morning, I'm, just hoping you could talk a little bit about churn and what drove that increase sequentially and year over year. This this past quarter and I'm, assuming some of that that COVID-19 era of bad debt.
Our our tenancy issues are part of that and kind of where we stand at present and that that cleansing process.
Hi, Ron This is Brian and I. Thank you for the question.
The extra churn there's a couple of factors are involved there one of them is we're seeing an increase more of a return to seasonality.
Then we saw in prior years, so part of it is the seasonal effect.
And then you're exactly right the delinquency resolution process went well in the second quarter.
So there were incremental move outs, there as part of the workouts that we've referenced.
In prior in prior earnings calls.
Okay.
Are we in that kind of thing are we how much is left to get rid of or being out of the portfolio.
And we made very good progress.
It's difficult to quantify exactly how much is left a little bit of it depends on.
Court backlogs and Theres been some temporary procedural changes in a couple of other jurisdictions.
The good news is that it's isolated to a few counties and not system wide.
But the best part about it is we're able to get these homes back our teams are turning them quickly and we're re leasing them back into the market. It really good new leasing rate growth.
Hey, one for Chris here I can give you a little bit more of a broader update as well on just general collections and bad debt you know I'd say generally speaking.
Second quarter, you know good progress, but landed pretty consistent with what our expectations were in call. It the low 1% area for the same home pool.
Again, we're working through the subset of residents that are still taking a little bit longer to work through that delinquency resolution process like Brian was talking about but at this point just kind of zooming out a little bit.
Guidance still contemplates that our current bad debt level in the low 1% area continues over the course of 2023 and.
And the same as we shared last quarter. You know we're optimistic that we may have opportunity to work through that I touch quicker this year, but it's still a little bit too early to count on it until we can begin to see it pull through into our numbers.
Our next question comes from Steve Sochua with Evercore. Please proceed with your question.
Hi, Thanks, Good morning, Brian I was wondering if you could just provide a little bit more color on kind of the blended renewal expectations that you have and maybe just talk a little bit about market trends that you are saying, what where are you seeing some better strength in maybe some markets where things are a bit softer than you expected.
Sure. Thanks, Steve Yeah, we had a really strong spring leasing season, and that continued into July with renewals accelerating to nearly 8%.
Looking forward I would see the July period, as kind of the peak of the leasing season, and I see a slight moderation as we finished Q3 thinking about August and from a renewal perspective.
Closer to seven and high sixes for September you seem a little bit of a moderation there regarding relative strength within the portfolio that the Florida portfolio is performing extremely well for what the raise that occupancy perspective.
Little bit of a soft or softer in this I guess you could say.
And San Antonio and Las Vegas, but if you look at it from a historical perspective, its still extremely strong.
And we're really happy with the demand levels that we're seeing.
Okay, and just a quick follow up on the development, Dave could you just remind us where the development yields are sitting for I guess, the second half 'twenty three deliveries and then what are your expectations may be for deliveries in 'twenty four.
Yes. Thank you.
Let me just start with you know where.
We are in the second quarter is where we expect it to be.
And as we go throughout the balance of the year I'm not sure that we are at this point get all the way to six by the end of the year, but we're making great progress.
Do you know.
Is that the product that we're delivering is a well located high.
High quality durable asset it's embark its in locations next to where homebuilders are building for sale and so it's it's it's the assets that are in the infill positions that you just can't buy them on the MLS or national builder, but today, we see we see a lot of progress between now and.
The end of the year.
Okay.
Hum.
Our next question comes from Honeywell St Juste with Mizuho. Please proceed with your question.
Hey, good morning out there.
Hey, Good morning, guys question is obvious.
First question is on the expense guide you guys highlighted turnover was up quite a bit in the second quarter, but you guys didn't raise the opex not so can you talk a bit about what's keeping that Opex guide intact. It doesn't sound like there's any anticipated benefit from the recent change in the Texas tax law. So curious kind of what's what are the some of the offsets there and what are your expectations for Turner.
Over in the back half of the year.
Yeah sure Hi, it's Chris here.
Look I think it'd probably be helpful. Just to unpack the pieces of the expense guide, which again remain unchanged from the start of the year, let's take up property taxes, which I'm, obviously I've talked a lot about in prepared remarks.
Recall that our expected range on a full year basis, there is call it 8% to 10% and then the remainder of the expense guide is about 10% to 11% on everything else with the various pieces being insurance increasing in the twenties, when we talked about that in past quarters. That's what we're seeing play through.
On a full year basis, we're expecting property management in call. It the 10% to 12% area. You know as a reminder, that reflects the general inflationary environment.
Comparison against somebody modest Understaffing, we saw at the beginning of last year.
And then the investments that we've been making into a resident 360 program. This year and then it's really inflationary like increases on R&M and turn in HOA is in call. It you know the 7% to 8% area on a full year basis.
And as we think about kind of the glide path for the year, we would expect R&M and turn to probably tick up a touch in the third quarter as we're experiencing a slightly higher level of seasonal move outs are in then trend into our full year range in that call it 7% to 8% dairy a blend all that together and it gets you to a midpoint of 975.
That's great color, Chris I appreciate that.
Maybe just a bit more on one line item insurance costs certain doesn't continue to be a headwind I know, it's not a huge component of opex, but can you talk a bit.
More of what you're seeing there and how about yourself and shrink tube has historically and how do you potentially bounce the cost savings it sounds like there versus the potential kind of soft Chris. Thanks.
Yeah. It's a good question insurance is something that is youre right. Its a small line item from an expense standpoint, but very top of mind for us as we're thinking about managing of the business.
You know again, our our insurance renewal for this year is is done that's what we see coming through with the increase in the twenties you know as a reminder, that's pretty consistent with what we had contemplated in guidance, but more broadly I think we touched on this a bit last quarter you know.
I would say our increase really reflects the state of the broader property insurance market, which is which is in trouble. After multiple years of catastrophic losses that are now rippling through rate increases across the board for everyone.
And.
Unfortunately, it's somewhat difficult to envision a scenario, where the insurance landscape looks materially better in the near future, which as we've shared before and we think creates the opportunity to take more control of our insurance trajectory through creative solutions like the captive for example, so you're exactly right a couple of years ago.
We formed our own captive company as we knew it would be important to control more of our insurance programs over time.
And our captive still needs more time to mature today, what we're ensuring it is relatively small it's you know a couple of million dollars of captive insurance layer on an annual basis.
But we see opportunities into the future to use it a little bit more broadly to help us control third party insurance increases in absolute costs overtime, but while doing it responsibly that doesn't change the overall kind of risk of complexion of the portfolio.
Our next question comes from Eric Wolfe with Citi. Please proceed with your question.
Hey, Thanks, we just saw a street so a smaller portfolio just curious whether you looked at it but if you have any opinion on the quality growth prospects are at there and then if you also see another little kind of portfolios being marketed as well.
Yes, Thanks, Eric it's Dave.
Yes, the portfolio that traded a where we're very familiar with the.
Portfolio. It is not the first time that this portfolio or substantially this portfolio is trade it.
We did not bid on this portfolio when we looked at when we look at this that this portfolio. The way we would envision as we're looking at the quality of the assets. We're looking at the location and we're looking at the location of those assets as to whether it's an area that we want to grow at this time.
And because of our development program.
The ability.
The.
The quality of those assets that I've already referred to.
And the yields that we get off of those assets.
The ability to be disciplined in discerning and in all of our acquisitions. So.
As I said in prepared remarks today. The majority of what we are seeing on the MLS and portfolios as well as national builders.
We're largely out of the market.
Doesn't mean that we won't get back in with respect to the second part of your question Eric.
Folios that are out there.
We do continue to see portfolio was very consistent with what we talked about last quarter. Most of them are much smaller than the one that trade it.
And much of them don't meet our quality of assets or.
Economic yield requirements.
Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.
Thank you I guess sticking with investment opportunity.
How do you think about your capital sources, if you were to find larger transactions and opportunities to buy.
I guess, along those lines, how big can of JP Morgan JV get and how are you thinking about the value of your equity or other partnerships or JV or anything along those lines.
Yeah. Good morning, Jamie Chris Here. Good question, you know as I mentioned, the totality of our of our partnerships with J P. Morgan asset management right now are about $1 five that could increase a little bit Ah if we introduce that into the most recent second joint venture keep in mind that our strategically those ventures are.
Specifically focused on development and growing our pipeline there to capture more of that incremental opportunity as we're thinking about broader opportunities whether that be if the MLS becomes more attractive national builder opportunities present themselves portfolios present themselves.
All of us or opportunities to grow the development pipeline further we look at that all have offered we look at all of that opportunistically relative to two than cost of capital.
Equity as an example, we view that as an opportunistic weapon to potentially do more than what we're doing right now, but if we look at it relative to the opportunity on hand, and then I would also.
And that there is capacity on the balance sheet right now as well we ended the second quarter at five three times our debt.
Debt, including preferreds to EBITDA.
And we're comfortable taking that up into the six times area, which gives us some nice capacity to be opportunistic as well.
Okay.
That's helpful and then I guess, just going back to the Texas tax.
Hung twister can you just talk about the.
You know I guess, we're a little surprised that it's not a bigger benefit to you. So can you talk more about you know what the true nuances or that you don't think it'll be much of a help and then as you think about the 20% appraisal circuit breaker.
That not meaningful to you either it just seemed like it was big news to US we just want to make sure we understand what we're missing.
Yeah sure so.
So look I think the notion of being a benefit to us in general I think that that is right, but ultimately what we're talking about here is timing.
Recognizing that even though there is a chance that this year is muted those rate reductions are muted because of the post appeal value increases were beginning to see I do believe that there is a positive read through here to 2020 for as the tax relief program is.
Paid it to keep rates compressed through at least next year and so as we hopefully begin to see some assessment moderation as HPA cools I could see this potentially setting up favorably into 2024.
Our next question is from Kagan call with Wolfe Research. Please proceed with your question.
Yeah. Thanks for the time guys. So your average recurring Capex and average R&M turnover costs appeared materially higher year over year I'm. Just curious how much of it is driven by elevated turnover or something else and are you experiencing more challenging capex periods in particular in your legacy portfolio assets.
Again this is Brian yeah. Thank you for the question.
Turnover does drive higher Capex expenses in particular.
We've done a really good job I think of managing R&M and turnover costs.
Part of it is a product of our increased investment in the field, we've talked a little bit about that when we were discussing the resident 360 program.
They've done a very good job of getting these homes prepared quickly and efficiently.
Some of the additional capex cost that we see this year can be related to inflationary pressures, but also some of the delinquency resolutions that we talked about earlier on the call.
You know again this is a day one the last part of your question about legacy properties in.
And in the channels in which we acquired the properties, yes, we do see.
More cost to maintain in those homes that.
We acquired as existing homes on the MLS.
And looking at the quarterly numbers it appears it's about $850.
Just for the maintenance and cost maintained components.
All of those legacy homes, so homes that we got from the National Homebuilders are significantly less so.
The low four hundreds and the ones that came out of our development portfolio. These are the ones that are in the same home that it's got some history on them about 2000 homes are about $350. So I'm not.
Doing rough math it appears about 50% cheaper for the homes that were coming out of the national builders, 60% cheaper.
For the ones that we developed ourselves.
That's some great color there, Dave and I guess shifting gears here, where do you guys currently seeing in the land market and how is that impacting what markets, you're you're planning future development and just given I think it's as relevant question. Given you have the second JV can you just remind us how you decide what goes into the wholly owned bucket versus your perspective JV land.
Yeah, well, let me separate those two questions. Let me take the first half and I'll have Chris talk about the allocation methodology between <unk> and us but.
Today, the land market. If you look at our our second quarter supplement you'll see that we did acquire some land, but its very nominal.
And I would say, we're kind of in the same place that we are in the development. We are seeing improvements in the marketplace and we're getting ourselves closer to where are.
The opportunities fit our underwriting models.
But.
As of the second quarter, we bought just a few homes with that said.
Keep in mind that we have a significant pipeline.
And we are well set for the next few years.
With or without acquisitions, our goal is to make sure that we replenish that for the 26 27, 28 I'm periods, but.
We're well positioned in the near term. So we have the ability to be patient, we have the ability to be disciplined.
And we don't need to chase.
Chase.
Opportunities just to have the opportunities we're going to make those opportunities be the right opportunities for us with respect to the allocation.
Yep Yep Keegan, Chris here.
I would say you know taking a little bit of a step back.
The nature of the projects, whether they're going into our on balance sheet pipeline or into the G. DS is indistinguishable in terms of location quality et cetera, you know the only nuance that today you know it could be a touch different is as we think about the opportunity to capture some.
Incremental projects with a slightly lower initial yield with.
With great long term growth prospects that may have a similar total return profile just slightly lower.
Initial yield parameters those are a great fit for the joint venture context. So that's the one piece that could be a little bit different or nuanced state, but generally speaking the projects are very very similar again like I said in terms of quality.
And location.
Our next question is from Adam Kramer with Morgan Stanley . Please proceed with your question.
Yeah, Hey, guys really good quarter there so congrats on the on the 10 year anniversary as well.
I just wanted to ask about kind of new lease trends look I think Brian you gave some really good detail on the renewals.
In both July and then going forward, but maybe just kind of on the new lease side.
Where are you from July .
Yeah. Thank you Adam I think you you asked where are we for July .
Cut out a little bit July for new leases, we had eight 5% increase so that was really strong as well the demand as we've talked about has been fantastic through the spring leasing season, continuing into July and we're seeing strength as we get into Q3 as well.
I would expect a slight moderation as we get into Q3 and Q4.
Love to be able to continue at these levels, we're going to do everything we can but the expectations are that they'll be moderating a little bit on the new side into maybe the sevens for the balance of Q3.
Helpful. Thank you.
And then just maybe a couple of short ones just worked the last lease stand today.
And then when Youre thinking about kind of full year market rent growth I know you've provided numbers earlier in the year kind of the full year.
Forecast.
Are those the theme today or you know are you seeing potentially more in market rent growth for full year. It can be kind of the success that you've had so far this year.
Yes, but to answer your first question on loss to lease it's consistent with what we saw last quarter around 6%.
And I think there's an interesting distinction our market expectations. If you look at the broad markets is still consistent with what we saw last quarter I think John Burns started the year in our markets at 2% to 3% expanded that to two to four.
But what we're really seeing is a testament to the quality assets and our quality locations within the markets and that's how we're able to outperform relative to those market expectations.
Our next question comes from Dennis Mcgill with Zelman and Associates. Please proceed with your question.
Hi, Thanks for thanks for the time.
Going back to the JV will the new JV B are seeded with land you already own or will that start from scratch.
No it'll it'll start from scratch Dennis.
So setting that aside then from the wholly owned a piece of it Chris can you give us some context on what you would expect the pipeline can do going into next year. It sounds like you're maybe a little uncertain on what that would be but I would think you'd have to be making decisions now, particularly familiar already part of the year and you already own the land and it seems like it's good yield.
It gets good home prices are going up again, it seems like all the ingredients are there to push forward, but maybe it had been a little bit vague on what the potential could be for next year.
Yes, Dennis it's Dave.
On 2024, though under development, our Si we have that we're not ready to release our numbers, but it's.
As you indicated we have the land.
We have been doing land and treatments on the land that will be the product that is going to come out of the ground in 2024. So yeah. We we have a pretty good idea of where that's going to be.
To giving specific guidance it will be a.
Greater delivery number than we see in 2023.
Our next question comes from Alan Peterson with Green Street. Please proceed with your question.
Thanks, Brian I was just hoping across the portfolio. If you can give an update on where rent to income ratios are today and given that people are spending more on housing today than in prior years, where do you see that pricing opportunity kind of capping out for yourselves or the sector from a rent to income standpoint.
Yeah, well thanks for the question.
Couple of interesting things that we've seen as we've.
We looked at the last few years is that the demand is so great that the applicant income is keeping pace with the increase in rates. If you look at Q2, specifically relative to the prior year. They stated income for applicants went up about 8%, which is consistent with the change in rents for the homes that they were applied.
<unk> two.
Our income to rent ratios have maintained around five times provides a lot of of capacity and there's a lot of confidence.
And the health of the collections going forward.
We're very happy the demand is so good.
The income is falling appropriately.
Not concerned about that particular aspect.
Alan This is David let me add a couple of other one thing I guess to that demand is very very strong and part of the reason is very strong when you talk about the income levels and in the cost of housing.
Today in our top 20 markets every one of the markets is less expensive to rent one of our homes than it is to buy and if you look at the average of those 20 markets. It's 24, 9% at June 30, we look at it quarterly call.
Call. It 25%. So that is one of the things that is maintaining a strong demand.
That said I would also remind you that demand has been strong for.
For the last 10 years getting stronger and stronger as the single about single family rental value proposition and the quality of the assets that are available today in the locations in which they are in the school districts in which they are becoming better known so very very strong demand for single family rentals today.
Understood I appreciate all those comments and maybe Chris just shifting over to the to the JV can you give us a sense for what the stabilized run rate on asset management and property management development fee income could be over the next call. It two to three years. Once these jv's are fully ramped.
Yeah sure you know that the right way to think about the totality of the ventures here you know that the fees for us and we've shared this in the past and.
The fees for us are largely structured as you know cost recovery like are enabling us to leverage our infrastructure over a larger base, there's a margin on them, but it's not a super wide profit margin on those fees for us the real opportunity here is growing the development pro.
Graham further.
<unk> participation in the JV as themselves and then the opportunity for really attractive longer term economics via our promoted interest.
Which as a reminder, is especially unique given the evergreen nature of our venture structures with J P. Morgan asset management that provides us the opportunity to earn our promoted interest after construction and initial operation of the properties, meaning we have the ability.
To effectively monetize a portion of the value creation process from our development program without the need to sell assets, which is really really unique and will be powerful overtime.
Our next question is from Brad Heffern with RBC capital markets. Please proceed with your question.
Yeah. Thanks to everybody can you walk through where construction costs are currently year over year and has there been any change to the previous view that will be and Cree.
<unk> declines just given the strength in the broader housing market.
Yeah.
Uh huh.
Good question Brad.
On both parts of that.
The construction costs year over year, we have seen a significant reduction as we talked about.
Over the last couple of calls in the lumber and the.
That material that goes into the house that is actually a very significant reduction.
Today, it's in the $400 mm 141000 board feet and it used to be in the 1600 dollar range. So very very significant reduction there at the beginning of the year, maybe late last year, we anticipated, having a little bit more reduction in some of the.
Other input costs.
With your comments about the housing market picking up.
That hasn't materialized to the extent, we thought it would but one other thing has materialized and that is we have made investments.
Into many of our platforms, we talk about resident $3 60 today well a couple of years ago, we were making investments into our development platform and today, we're seeing benefits from that in better efficiencies in our construction cost, it's better our ability to control the inventory.
A better ability to get the.
The volume discounts from vendors et cetera, so through that process, we have seen some benefits and all of this is the the drivers are to I think Steve Sock was prior question that leads us to seeing our rental rates are significantly increasing between now and the end of the.
As those lower cost and more efficiencies play out in the construction of homes third and fourth quarters.
And in future years.
Okay got it. Thank you for that and then I wanted to get your thoughts on supply obviously, the MLS acquisitions of ground to a halt for pretty much everyone, but how do you think about build to rent supply and is there anything that would suggest that more people are renting out their homes, because they have a locked in low rate mortgages.
Yeah again, it's kind of two parts one is on the supply for investment and acquisition.
And the the shadow inventory of renting out existing homes I'll, let Brian talk about.
But on the on the acquisition and investing side, you're 100% right. The MLS inventory is significantly reduced.
In many markets, it's 50% what we've seen historically.
Not a surprise people are kind of trapped in their homes with the favorable mortgages that they can't replace so.
Can't move.
And that has led to a scarcity of inventory I think it's part of the reason that the prices have remained.
Strong.
Recently.
With that said.
What we have you know when we got into development one of our thesis for development as we could grow in all economic cycles.
And we're seeing that play out significantly today.
And the benefit of that is really realized today. So we have the ability to grow we're going to deliver 'twenty. Two 'twenty 300 homes. This year are very well located homes very attractive yields when.
When you match it to the cost of capital we are using to fund them.
So we have the ability to grow in all economic cycles, and we have the ability to be disciplined and discerning and buying additional homes. We doesn't mean, we won't we just have the ability to wait until the time is right.
As I indicated are on land, we are seeing that land is getting closer to our buy box on the acquisition side.
Overall, probably not we're still at the scene.
Low fives at best some markets, maybe even force, but there are.
Opportunities once in a while and we're seeing a little bit more of them get very close to the buy box on a sharp shooting opportunity based we continue to write thousands of homes every month. So we may buy one or two here and that volume may pick up it is very very hard to say between now and the end of the year, but if it does.
We are there and we are prepared to two.
Acquired homes, if they are the right homes right locations with respect to shadow inventory and how it impacts rental demand, Brian do you want to take that sure.
Brad I'm going to start with I think your question included that whether we're seeing a lot of extra supply from build to rent are built around inventory was actually down in most of the markets.
That very closely.
We are seeing supply pressures in a couple of our smaller markets. It's part of the reason why the San Antonio occupancy tends to lag the rest of the portfolio I'll keep in mind is still strong and the 96% area, but the reason for that change year over year as we have seen an increase in supply in San Antonio and in Las Vegas to name a couple.
Uh huh.
Let me add back on the build to rent I was a miss I forgot that piece of the question build to rent definitely we're seeing less come to.
To the finish line, we're actually seeing opportunities to take some developed land that is in process that they havent started vertical.
Acquire.
We again, we'll be discerning as to the location of these and whether they are a good fit for the portfolio.
But we have an opportunity to look at a few of those today.
Our next question comes from Daniel <unk> with Scotiabank. Please proceed with your question.
Thank you our first question on occupancy curious, if you've thought about where occupancy would be relative affordability.
The picture there wasn't as strong as it is today.
Just thinking about the longer term run rate healthy occupancy for the business.
And also the 96% high 96% range now in the full year guidance, which would be about I don't know 25 to 50 basis points drop in average for the rest of the year I Wonder if you could quantify or put a range around the impact on occupancy from replacing those non paying tenants.
Thank you Daniel Oh, I'm going to start with talking about the relative strengths of occupancy relationship too.
The being less expensive to rent than it is to.
If you look historically in our business are we've performed very well when that dynamic was flipped one it was actually more expensive to rent.
No.
That's not to say that we're not capitalizing on the economics today, but our business holds up very well in both environments I think it really would affect probably rate growth.
It's more so that occupancy.
We're very pleased with the gains that we've made in occupancy over the past few years seeing a peak during COVID-19, maybe a little bit of an artificial peak and the 97%, but we're settling into the 90 six's.
And we expect the back half of this year to be to be around 96 of which we think is very helpful. How healthy going forward.
Any way you could quantify the impact from replacing those non paying tenants.
It's difficult to quantify that because I don't know the exact speed the court system and some of the regulatory backlog in some of the procedural challenges make it difficult for me to predict that for the balance of the year.
Okay.
Just quickly what are you paying cap rates today, the bid ask spread on the MLS one off and you know maybe what markets have you been in the most efficient in selling these homes.
Well I mean.
The market today as I indicated.
It's in the low fives on average.
There are some markets that may not even be two of five on the MLS.
As I indicated in the prepared remarks, I think earlier.
We were largely on the sidelines IV on the MLS were entirely on the sideline guys. The breakdown, where you know where do you see opportunities there.
There was such a sharp shooting opportunities theyre not necessarily a market trend item, they're just unique opportunities.
And there are there throughout but theyre not necessary not in volume.
Make sure that we.
Clarify that theyre not volume.
Our next question comes from Austin, where Schmidt with Keybanc capital markets. Please proceed with your question.
Great. Thank you.
So based on the 6% loss to lease you have and the implied lease rate growth for the back half of the year should you finished the year with roughly a 3% loss to lease in a 2020 for earn in that's roughly around the same level or maybe even a little bit better my thinking about that correctly.
Yeah. Austin. This is Bryan I think you are in terms of the loss to lease.
Prediction.
We have to wait and see on that a little bit but in terms of the earnings commentary I think youre right on.
Thanks, and then just separately.
You know the dispositions year to date and have exceeded the high end of that $200 million to $300 million disposition target. You previously spoke about what what's the appetite to continue selling either build capacity. If that was you know if more attractive acquisition opportunities materialize or just.
There to pre fund the funding needs for 2024.
Yeah. Good question, Chris Here, you know just in terms of this year's activity you're exactly right same as last quarter, we're continuing to see great traction through the disposition program, which again is is really just driven by the sheer scarcity of housing across the country, meaning that.
Our disposition supply.
<unk> continues to be met with with really strong buyer demand when we bring it to market, which has enable us and enabled us to achieve.
Sales prices that are at or near asking prices and average disposition cap rates in the low to mid threes that are as you pointed out creates a really attractive capital recycling opportunity back into our growth programs with that said you know look every single home that we are selling is being identified.
<unk> through our rigorous asset management program.
Program and process and yes, we are recycling the capital, but these are discrete decisions being made based on operational and asset management decisions.
And as we think about the back part of this year.
You know look I think that we're still gonna see activity, but generally speaking you know.
Transaction volumes in the market are commonly are seasonally moderates in the back part of the year. So we could see our disposition volumes moderate in the back half of this year as well, there's a chance they could do a touch better than this but on a full year basis, we could see this year's disposition proceeds settling in and call it the $350 million to $400 million range.
Our next question is from Jade Rahmani with K B W. Please proceed with your question.
Hi, This is Jason snapshot on for Jade.
Congrats on a nice quarter and four <unk>.
Entering into the joint venture at J P. Morgan on.
On that note do you have a target for JV equity capital under management and how.
How much do you plan to emphasize growing the asset management platform moving forward.
Sure. This is Chris I can start with that there's no hard and fast target, but I would go back to some of our prior comments that for the right opportunities at the right level of return profile relative to on balance sheet cost of capital priority number.
One is to capture those those on balance sheet, but cost of capital considerations come into play and then the other consideration here is that as we think about capturing that development opportunity that we've been talking about it's really mission critical to us that we have the capital confidence to continue to fund.
Our development program without built in reliance on common equity capital and are you know in terms of metrics here. It is very important that we keep our wholly owned pipeline assets prudently below 10% of total gross assets and that's exactly where the joint venture capital strategically comes into.
As the perfect solution to enable us to accomplish all of those goals.
Great. Thank you.
Yeah.
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi, as you look at the 30 plus markets over what's your portfolio's spread you know, which markets do you see as having the most opportunity to expand Christmas trim over the next few years.
Yeah, Linda it's Dave.
I think you know.
Without talking about the specifics I think an easy way to to evaluate how we look at it just looked at the markets that we are building in those.
Those are the markets that we see today that have the greatest long term runway you have to make a long term commitment. So when you do development. So we're not in all 30 markets, but we are in a significant majority of them.
And that's where I I would say that we see the greatest opportunity on an ASP or on the disposition side.
I think Chris touched upon this a little bit I think Brian did too.
We have an asset management process that we look at properties and markets. We look at the markets in detail every.
Quarter end properties pretty much every month.
And.
With that we have pared back a little bit in a couple of markets that we want to get out of them, but we may have felt that were a little bit overweight.
In Chicago comes to mind there.
And then is the cost of insurance or the ability to ensure shifting your decision to expand or leave certain markets or maturing your captive insurance program as a way to reduce risk.
Yeah. So.
On the insurance aspect I think the insurance aspect is probably.
Should be looked at even a little bit greater context.
Context and that is no.
Where is the cost of maintaining a home.
Our repair standpoint, the weather standpoint, the insurance standpoint.
How does that.
Correlate with where the demand is and where the opportunities are.
We have been.
We have looked at this.
Very closely for a number of years and you can see that if you go back and you look at our history on some of the weather related issues go back to Tampa last year Tampa was a major event. There is no doubt about it but the early keen there or impact in our Tampa was pretty minor compared.
What we understand others experience and so theres, a little bit of Uh huh.
There's a greater analysis than just insurance.
In that equation.
So, but we also have to look at where the demand is and where the potential rental rate increases are as well. So it's a very large ballistic bottomline approach to evaluating markets.
We have reached the end of the question and answer session I would now like to turn the call back over to David <unk> for closing comments.
Oh. Thank you operator, thank you to all of you as well we will talk to you again on next quarter's call have a good day.
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