American Homes 4 Rent (NYSE:AMH) Q2 2023 Earnings Call Transcript July 28, 2023
Operator: Greetings, and welcome to AMH 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nicholas Fromm, Director of Investor Relations. Thank you. You may begin.
Nick Fromm: Good morning. Thank you for joining us for our second quarter 2023 earnings conference call. With me today are David Singelyn, 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 28th, 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. A reconciliation of GAAP to non-GAAP financial measures is included in our earnings press release and supplemental information package. As a note, our operating and financial results, including GAAP and non-GAAP measures, are fully detailed in our earnings release and supplemental information package. You can find these documents as well as SEC reports and the audio webcast replay of this conference call on our website at www.amh.com. With that, I will turn the call over to our CEO, David Singelyn.
David Singelyn: 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 $0.41 of core FFO per share for the second quarter or 7.6% 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 FFO per share guidance by $0.03 at the midpoint, which represents 6.5% 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.
AMH 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 SFR portfolio opportunities come to market, but they did not meet our criteria for factors such as investment return location and asset quality. Our teams continue 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 AMH 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 1,100 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 JPMorgan 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 at AMH. And I want to thank everyone who contributed to our success over the years. Now, I'll turn over to Bryan for an update on our operations. Bryan?
Bryan Smith: 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 9.4%, 7%, and 7.7%, respectively, for the quarter. Although we saw a 70 basis point increase in turnover compared to the same period last year, average occupied days remained strong at 97%, thanks to the efforts of our leasing and field teams. This resulted in same-home core revenue growth of 6.5% over the same period last year. Same-home core operating expense growth of 9.9% was as expected and 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 of 4.8%. 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 6.5% 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-5s. Additionally, we now expect full year occupancy to be in the high 96s, 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 continue to holistically manage the topline. An unchanged operating expense guide brings our new same-home core NOI growth guidance to 4.75% 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 in the demand for single-family rentals and more specifically for AMH Homes. While the macro external factors that Dave referenced benefit everyone in our sector, AMH is especially well-positioned because of our high-quality assets and their desirable locations. Additionally, we are committed to providing the best resident experience in the industry.
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We continue to innovate through investments into our technology platform and through operational initiatives such as Resident 360. These strategic efforts have made AMH 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.
Chris Lau: Thanks, Bryan and good morning everyone. I'll cover three areas in 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 JPMorgan Asset Management, and third, I'll close with an update around our increased 2023 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 $0.27 per diluted share. On an FFO share and unit basis, we generated $0.41 of core FFO, representing 7.6% year-over-year growth and $0.36 of adjusted FFO, representing 5.3% year-over-year growth.
Driving this quarter was 4.8% 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, our quarterly 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 are underway 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 BAA2 with a stable outlook. This 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 5.3 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 AMH capital this year. And as we look beyond 2023, we remain proud of our existing development pipeline of over 13,000 lots that will be delivered into a finished inventory over the coming years. With that said, as we've shared many times before, we believe that the AMH development opportunity is far greater than our existing pipeline of length, which is why we are very excited to announce our new second joint venture with institutional investors advised by JPMorgan Asset Management. During the 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 2024 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 JPMorgan Asset Management to approximately $1.5 billion, which provides us with the capital confidence to continue growing our AMH Development program without built-in reliance on common equity capital while also enabling our ability to prudently maintain wholly owned development pipeline assets below 10% of total gross assets.
Thank you to 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 over time. 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, as Bryan 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 revenue growth expectations by 50 basis points to 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%, contemplating our increased core NOI expectations across the entire portfolio, along with modestly higher interest income on cash generated from better-than-expected disposition activity, we've increased the midpoint of our full year 2023 core FFO per share expectations by $0.03.
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 6.5%. Finally, as we open the call to your questions, I'd like to reiterate Dave's enthusiasm as we approach our 10-year IPO anniversary. AMH is truly one of a kind as 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 into our second decade as a publicly traded company. And with that, we'll open the call to your questions. Operator?
