American Homes 4 Rent (AMH) 2013 Q2 法說會逐字稿

Good morning and welcome to the American Homes 4 Rent second-quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. Following the Company's speakers there will be an opportunity for questions.

(Operator Instructions)

As a reminder this conference is being recorded.

I would now like to turn the conference call over to Mr. Peter Nelson. Mr. Nelson, please go ahead.

Good morning and thank you for joining us for our second-quarter earnings call, our initial call as a public company. I'm here today with Dave Singelyn, our Chief Executive Officer, and Jack Corrigan, our Chief Operating Officer.

At the outset I would like to advise you that this call may include forward-looking statements. All statements other than statements of historical facts 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 today's earnings press release and in our report filed with the SEC.

All forward-looking statements speak only as of today, August 21, 2013, and we assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A reconciliation to GAAP -- between GAAP and other non-GAAP financial measures we are providing on this call is included in our earnings press release. You can find our press release, SEC reports and the audio webcast replay of this conference call on our website at www.americanhomes4rent.com, numeral 4.

With that, I will turn the call over to Dave Singelyn, our Chief Executive Officer.

Thank you, Pete. And I thank everybody for your interest today in American Homes 4 Rent.

Today we have the opportunity of having our first investor call as a public company. Our comments today on this call will be brief, as most of the typical discussions of the earnings calls have been reviewed with investors over the last three to four weeks during our recent road show. Yesterday, as Pete indicated, we released our financial results for the second quarter. Pete will be reviewing those results in just a moment. In addition, Jack Corrigan, our COO, will be reviewing our operations including acquisitions and some property management information.

A couple of highlights for the Company. On August 6 earlier this month we closed our initial public offering and two concurrent private placements. The two private placements totaled $75 million. And coupled with the initial public offering we issued a total of more than 48 million common shares at a price of $16 totaling $781 million. Trading began on August 1 on the New York Stock Exchange under the symbol AMH. And last Thursday the underwriters notified the Company of their intent to exercise their full option to purchase more than 6.6 million shares with gross proceeds of $106 million.

With respect to our acquisition activity, as of June 30, the Company had an interest in 18,326 homes of which 17,949 were fully owned, or were wholly owned by the Company. And the Company had an interest of approximately 30% in the other 377 homes which are owned by two small joint ventures. Between June 30 and July 31, the Company acquired an additional 1,500 homes. And Jack will talk a little bit more about that in a moment.

With respect to our leasing activity, as of both June 30 and July 31, the occupancy percentage of homes the Company classifies as stabilized homes was 97%. Looking to the future, we are focused on the continued acquisition of quality homes in attractive neighborhoods. We remain focused on getting properties rent ready, and once rent ready leased to tenants who meet our underwriting requirements, maintaining our high occupancy levels.

We are also exploring future sources of funds including term bank loans, term institutional loans, securitized products, joint ventures and preferred securities. We are evaluating all sources of funding. And we do not expect to rely on just one form of funding for the future. And we expect to be able to identify and announce our future funding sources of capital over the next several months.

And with that I am going to turn the meeting over to Jack Corrigan for a brief overview of the acquisition and leasing activities.

Thank you, Dave.

The second quarter was a strong quarter for acquisitions, renovations and leasing. The strength continued through the month of July. During the second quarter, we acquired approximately 5,700 homes, excluding the Alaska transaction. We maintained our diversified platform by acquiring properties in 36 different MSAs in 20 states. We matched our acquisition volume delayed by 30 days by completing renovations on almost 5,400 homes during the second quarter. Our product continues to be in demand as we increased our leasing production from just under 3,000 homes in Q1 to over 5,500 homes in Q2.

For July, our acquisition pace slowed to about 1,500 homes across our diversified platform. The slower acquisition pace is the result of our effort to match our capital investments with our current capital raising opportunities. The opportunities to acquire properties or homes at attractive yields have not diminished in most of our markets. In fact, there appears to be less institutional competition over the past 30 to 45 days. We completed renovations on over 1,800 homes in July and leased approximately 1,900 homes. Our retention statistics and turnover costs continue to be better than what we anticipated with an approximate 65% retention rate, though it's based on a very limited sample size.

Our rental rates have, at a minimum, validated our rental rate underwriting. Our actual rental rates for leases entered into during 2013 have exceeded our underwritten rates. Our occupancy rates continue to grow with overall occupancy for all properties owned of 32% as of December 31, 2012, 56% on June 30, 2013 and 59% on July 31, 2013. For properties that we have renovated and are rent ready for 30 days or more, we are in excess of 90% occupied. And for properties that have been rent ready and marketed for over 90 days we are 97% occupied.

With that, I'm going to turn it over to Pete who will give a brief overview of our second-quarter financial results.

Thank you, Jack.

My comments will be very brief. The financial statements we have provided are somewhat complex, but very much in line with what we expected and in the pro forma expectations set out in the S-11. Our financial statements will have that complexity for a little while as the transactions that we did in preparation for the IPO kind of seize and go through the course.

Revenues for the second quarter were $18.1 million. It's a 176% increase over the first quarter, mostly due to the June 11 acquisition of the Alaska portfolio, which was 4,778 properties, and a strong, steady flow of new leased properties throughout both the first and second quarters. For the same reason, net operating income for leased properties also increased dramatically to $10.7 million in the second quarter. That's 164% increase over the first quarter. Operating margins for our leased properties in the second quarter were stable at 61%, about the same as for the first quarter. Other items to mention, in our financial statements we show discontinued operations. We segregated the 38 properties in southern California that we sold in June.

The internalization transaction and the Alaska portfolio transaction both closed in June as previously announced and are reflected in both the balance sheet and the statement of operations. Also, as disclosed in our recent S-11, we closed on the acquisition of our sponsor's interest in two joint ventures. Together they own 377 properties and this resulted in some accounting. There was a gain on remeasurement of these assets because the initial basis of these assets was zero. It was accounted for in -- as a transaction between entities under common control previously, and after -- and then we also had the issuance of the new units, series A units, in connection with that transaction. It was a conversion from the prior preferred units.

After the management internalization, accounting rules required these items to be booked up, resulting in nonrecurring and non-cash items in our income statements. If any of the listeners to this call have questions about this accounting, please feel free to call me. We are anticipating filing our initial form 10-Q at the end of this week on Friday, August 23, which will have significant disclosure in footnotes with respect to our financial statements.

With that, I would like to turn it back over to the operator to open up the lines for Q and A.

Thank you.

(Operator Instructions)

At this time, we'll go ahead and start with our first question. Anthony Pallone, JPMorgan.

Thank you. Good morning. Can you talk a little bit about just deal volume and, you know, it's come off just a tiny little bit over the last few months, and how you see that trending as we go out the next few months? And also how it's being originated, courthouse steps versus MLS and so forth?

I'll take that. Hey, Tony, this is Jack. The deal volume has slowed to 1,500 homes in July, probably about one-third of that is auction and the remainder primarily MLS. And most of those are going to be short sales and REO. In going forward, I would expect for the next month or two, right around $100 million worth of acquisitions or somewhere in the 800 to 1,000 property range. It really comes down to when we get clarity on our next capital raise, you know, as to when we ramp back up. It will probably be closer to 50% to 60% at auction, and the remainder MLS. Does that answer your question?

It does. And just a follow-up, to the extent the balance sheet is figured out and your funding sources are locked up, do you see the ability to put more capital to work still existing or has there been any change in the opportunity set? And then also, can you comment on just gross and sort of net yields and where those are trending?

Yes. The yields are trending up as we see less institutional competition at the auctions. On the MLS they're pretty static. And that may change tomorrow. Who knows when Blackstone shows up in a market that we're in and decides to bid us up. Those yields will go back down. So as far as yields, they're kind of ebb and flow. I would say they're slightly higher than they were a month ago. As far as being able to put money to work, we could easily ramp back up to $300 million a month pace if we had clarity that we would have that capital available, but we don't want to get too far out over our skis.

Andrew, Goldman Sachs.

Hi, thanks. Good morning. I've been just curious for a macro question. There's been a lot of debate on whether your business is a long-term operating business or a trade. On the operating business side is it's going to be a debate for awhile.

We just haven't gotten enough history. But there's clear evidence that HPA is occurring in your markets. So my question is, if and this really is an if, multiple years from now HPA is going up 10% a year and rents are only going up 2%, you can't buy below a replacement cost anymore. Can you walk through the steps of how you would be able to wind up a portfolio even though you're in a REIT structure?

Yes, this is Dave. The REIT structure does have rules, and I think that's what you're referring to, and they're called the dealer rules with respect to buying assets and selling assets if the intent is basically to be going into a trading mode. But there are exceptions to that rule that do allow to you sell assets. Those include the -- basically if you decide to exit a market and no longer operate in a market, or you have other business reasons for doing it and it wasn't the intent of selling them when you acquired them, there are means to sell assets under the dealer rule. In addition, there's other ways to structure transactions if you are concerned about being potentially in that dealer category of structuring the transactions through taxable subsidiaries. But I believe that the -- for the most part there are going to be enough exceptions that will allow us to sell the assets under the dealer rules, and I would tell you that we have a significant number of tax advisers that monitor this with us and everything that we do in that arena would be reviewed with them. So I'm comfortable we can get there and I'm comfortable we'll stay on sides if that issue ever came about.

Thanks, David. Sounds like you've put a lot of thought into that already. One other just follow-up. I couldn't find in the S-11 if there was any tax protection given in the units. Was there?

That would be a question I would have to defer to others. Tax protection, I'm not even sure I know what the question is.

Oh, you know, for if there was a -- it's probably a good sign, if there's a given number of years that you would potentially liquidate the portfolio, there would basically be OP unit holders would be made whole.

Again, I'm going to have to defer that question. We can get back to you, Andrew, but I don't know what the answer to that is.

Terrific. Thanks a lot, guys.

Jana, Bank of America.

Thank you. Good morning. It looks like you're now operating in about 44 to 45 markets. I was curious, how many additional ones are you evaluating to potentially enter? And then if you can just remind us how many of those are you internally managing your leasing and how many of those use external partners?

This is Jack. I'll answer that. As far as external partners, we have very few left. I think five to six left, and we're probably in 35 to 36 of our markets are we managing internally or are in the process of taking that over. And it's in excess of 90% of the homes that we own we're internally managing. The second part of that question, remind me. I'm getting old, I guess.

Just how many more are you evaluating to potentially expand into?

We have several markets that we're evaluating. It's unlikely that we would expand until we get more clarity. We have plenty of opportunities in the markets that we're in and until we get clarity of our next capital raise and the size, it would be unlikely that we would enter a new market.

And maybe just a quick one on the future capital raising activity. I noticed that now your credit facility is kind of scaled back down to $500 million. I was curious what Pete's thoughts are around the correct size of the credit facility for a company of your size and activity?

Well, I'll start the answer and Dave can chime in as well. We are looking at a number of options, as Dave mentioned, with respect to our capital raising including an upsize in the credit facility, which would probably be one of the quickest things that we can do since we did it before. I don't know if we'd want to say right now what the right size of that facility is because I think it has delay in next to other capital alternatives that we are evaluating. Dave, I don't know if you want to --

No, that's -- I think that's exactly right. First thing is, the credit facility went from $1 billion pre-IPO, back to $500 million pursuant to its terms. It's not that we chose to reduce it. We had basically taken a bridge to the date of the IPO. We are looking at many, many alternatives and one of them we've already had discussions on an upsize of the credit facility. And we'll determine how much to upsize the credit facility in conjunction with the other alternatives that we do at the same time. So we'll have more clarity over that over the next couple of months as we lay out a more comprehensive capital plan for you.

Thank you.

Alex, Housing Research.

Hi, good morning.

Hi, Alex.

Hi. I was hoping you could help me understand how you guys compute the depreciation, because I guess I was expecting a slightly higher number. I was kind of comparing it to your peers so I was trying to understand your methodology there.

Okay, this is Pete chiming in. The buildings themselves are depreciated on the books over 25 years. Other assets are depreciated over various lives of five to seven years. And you were saying you were expecting a higher or lower result?

Pete, I think the one other piece that needs to be mentioned, I think which will help Alex here, is depreciation for us, and I think for most companies, should be -- should start at the time the asset is put into service. And it's put into service by our definition at the time when renovations are complete. And so if you look at the full portfolio of assets, some of those are still in the renovation phase and are not depreciating.

Got it. Okay, that's probably the explanation. The other question had to do with G&A. I guess I'm trying to get my arms around it since you guys just made the switch to the internal management structure. I mean, this quarter you only showed $811,000 and then plus the advisory fee. So is that a good estimate of a run rate for G&A going forward, the sum of those two?

No. I think the G&A for the quarter was as expected and we did our internalization transaction on June 10, which is basically two months of internalizing the advisor. That resulted in about $200,000 of additional cost. The other costs in there are fairly recurring and they include trustees' fees, D&O insurance, the audit fees and things of that nature. While we were on the road, we were talking about a G&A carry of about 25 basis points for a $1 billion company. And I think the first full quarter of looking at that will be next quarter.

Okay, great. I'll get back in the queue. Thanks.

(Operator Instructions)

Rob, Wells Fargo.

Hi, guys. Just a quick question. Could you comment a little further on your operating margins? I think you had mentioned they were 61% in the quarter, and I was wondering if that varied widely by market and kind of where do you see that going over the next couple quarters?

Well, I think the 61%, I don't see the mix in our assets changing much. So I would say that is pretty predictable in the probably 59% to 65% range. I know that's a big range, but it really depends on the mix in the markets. You have high property tax states in Texas and Florida and Illinois which are going to have lower margins, and so it really depends on if the mix of assets changes, then that will change because that's the biggest cost in our operations.

And I would just chime in, it was stable at 61% as I mentioned. There's kind of many things going on in that number and that's probably why you're asking the question. We internalize property management as well on June 10. So through June 10 we've carried a 6% property management fee, which is in there, and after June 10 there's no such property management fee in there. There's internalized property management expenses. We have relatively young properties, so repairs and maintenance we want to think about a certain way. That said, in some markets we aren't as mature, and the efficiencies are going to improve in many of the markets. So over time, you know, we've said -- like Jack saying 59% to 65%, it may vary, but I think over the longest term, they will improve.

Great. Was there any particular reason that you had seen for the slowdown in institutional competition?

I would say that a lot of our institutional competitors have had limited success raising money.

Okay. That's all I had, thanks, guys.

Buck Horne, Raymond James.

Good morning. I was wondering -- this is going to be a limited sample size, but on the homes that did turn in the last quarter, where the leases expired and you didn't retain the resident, do you have any numbers about what your average expected turn cost on the first turn are going to be for those vacated homes?

Yes, they averaged right between $0.45 a foot and $0.50 a foot. I think it was $0.48 is my recollection, but that was the range. Our average square footage is about 2,000 feet. And most of it was just, I'd say, 90% of them was just cleaning and then you have an occasional one that brought it, which is about $0.20 a foot. Then you have a couple that were a little bit bigger where we were probably fixing stuff up that didn't get fixed up the first time. Most of these are some of our first properties and we didn't have our whole program in place, and so like I said, it's a limited sample size. I think that our systems have gotten a lot better including our walkthroughs of the properties and taking pictures of things so that when we do turn things over, we have documentation that we can apply against the security deposit if there's damage as a result of the leaving tenant.

That's helpful. Do you have -- I guess I was noticing on the sheet for July, looks like Indianapolis has leapfrogged Dallas terms of your number one market. Is that just a function of timing of closings in the -- from month to month? Or is there a more concerted effort to go to Indiana? Or where do you see the best opportunities right now for incremental capital deployment?

I would say that there was -- there's been very little, if any, institutional competition in Indianapolis and the yields and the discounts that we get at auction are really good. Dallas, we hit some institutional competition there and slowed our buying down a little bit. That seems to have waned over the last -- we had our best, I don't know if you are familiar with our Super Tuesday, but we had our best Super Tuesday auction in about 12 months in August. So the institutional competition has -- at the auctions has definitely waned.

So we might see Dallas jump back up when we get August and September numbers?

That wouldn't surprise me.

Okay, great. Thanks.

(Operator Instructions)

All right, at this time there are no other questions. I will turn the call back to Mr. Nelson for any closing comments.

Well, I just want to say thank you all who have participated in this earnings call and we look forward to speaking with you again next quarter. That concludes --

That concludes --

Go ahead.

Sorry. That does conclude today's conference call. You may now disconnect.