American Homes 4 Rent (AMH) 2013 Q4 法說會逐字稿

Welcome to American Homes 4 Rent 2013 fourth quarter and year-end earnings conference call. At this time, all participants are in a listen-only mode. After the Company's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to Peter Nelson. Mr. Nelson, please go ahead.

Good morning. Thank you for joining us for our fourth quarter earnings conference call. I'm Pete Nelson, Chief Financial Officer. I'm here today with Dave Singelyn, our Chief Executive Officer, and Jack Corrigan, our Chief Operating Officer. At the outset, I need to advise you that this call may include forward-looking statements.

All statements, other than statements of historical fact, included in the 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, March 14, 2014. 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 of the 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. With that, I will turn the call over to David Singelyn.

Thank you, Pete. Welcome to our fourth quarter 2013 earnings call.

I will begin with a discussion of our overall strategy and some of the highlights of 2013, which was truly a transformative year for American Homes 4 Rent. Then I will turn the call over to Jack to discuss the current operating environment and our progress with regard to operations and our external acquisitions. Finally, Pete will review operating and financial results for the fourth quarter and 2013 year and update you on our balance sheet and liquidity.

Yesterday, we issued a press release reporting our operating and financial results for the fourth quarter and full year 2013. We also issued a press release announcing the declaration of a dividend of $0.05 payable on April 10, 2014 on our Class A common shares. In short, we are extremely pleased with our results this quarter, which was our first full quarter of operations since the completion of our IPO last summer.

At this point, I think it would be helpful to take a step back and summarize our achievements and review our operating and investment strategy. Our Company was founded in November of 2012 with the goal of becoming the premier owner and operator of single family rental housing in the United States.

Since that time, the Company has raised nearly $2.4 billion in capital and have issued another $1.5 billion of equity and acquisition transactions. We have invested this capital in acquisitions of high quality, single family homes in our identified target markets in 22 states.

Let me summarize our strategy. First, to develop a national operating platform that provides significant scale and advantages in renovating and operating cost efficiencies, standardization of best practices, as well as brand awareness. With a professional operating platform, we are able to bring structure and consistent performance to an industry historically dominated by small mom and pop landlords.

We have built such a structure highlighted by the completion of the internalization of our property management platform. To date, all homes owned by AMH are managed and leased by AMH personnel.

Second, we seek to acquire high quality homes in a select number of markets with strong local economics and demographics, attractive submarkets, and of significant size to allow us to build a larger portfolio to capture operating efficiencies and brand awareness. We have concentrated our acquisitions in newer built homes, within middle to upper class, upper middle class neighborhoods.

Today, we have surpassed 25,000 properties. Our largest concentrations are in Texas, Georgia, and various Midwest markets. We purchase our properties at below replacement cost and we continue to see a steady flow of opportunities in our target markets.

Third, we look to enhance these returns with a reasonable level of leverage. As we mentioned in our press release, we have received preliminary feedback from the rating agencies and continue to work diligently with them. We expect to complete the securitization transaction in the next 60 days.

Moving on to our financial and operating results, I am pleased with our performance this quarter. Let me provide some highlights, Jack and Pete will follow later with additional details. Earlier this month, we reached the 20,000 leased home milestone, bringing our current overall portfolio of occupancy to 80%. We acquired more than 2,000 homes during the fourth quarter and leased 3,473 homes, resulting in a year-end occupancy of 74.5% for the portfolio.

Our occupancy rate of rent-ready 90-day plus homes was 94.5% in the fourth quarter; a small decline reflecting the slower holiday rental season. Our tenant renewal rate increased to 73.4% in the fourth quarter. Overall, we reported revenues of $64.9 million in the fourth quarter. That was up 31.2% from the $49.5 million recorded in the third quarter.

We produced net operating income from leased properties of $40 million for the fourth quarter; a 26.6% increase from the third quarter. These factors resulted in $0.11 in adjusted funds from operations per fully diluted share. Pete will provide more details on the financial results during his remarks.

Last month, Pete Nelson, our CFO, informed us that he would be leaving the Company. I would like to thank Pete for his dedication and service as our CFO.

Pete was instrumental in assisting the Company through its formation and IPO and we wish him the best in all future endeavors. The Company has identified qualified candidates and expects to complete the process in the second quarter and we are excited for Pete and we're confident that there will be a smooth transition.

At this time, I'd like to turn the call over to Jack Corrigan, our Chief Operating Officer, to provide more details on our acquisition and operating activities for the fourth quarter. Jack?

Thank you, Dave. I will give a little color on acquisitions, then renovations, and finally, on property operations for the fourth quarter and where we are so far in the first quarter. For the fourth quarter of 2013, we acquired a total of 2,001 homes with 1,043 at auction or about 52%. The average net economic yields were approximately 6.6% on a pro forma basis.

So far this year, we have acquired approximately 1,900 homes and expect to acquire an additional 300 through the end of the quarter. These purchases will have an average net economic yield of between 6.5% and 6.6% on a pro forma basis, with about half of these being purchased at trustee auctions. We continue to execute our renovation activity; however, during the quarter in specific markets extreme cold weather slowed our otherwise normal pace.

We renovated 3,108 homes in the fourth quarter and expect to renovate approximately 2,400 properties in the first quarter of 2014. Leasing had its typical seasonal slowdown that lasted roughly from November through early January and the impact continued into February in the Midwest, due to extreme cold weather. However, we have seen this activity pick up dramatically since then.

For perspective, during the third quarter, we averaged almost 1,600 leases per month to new tenants, including second generation tenants. This pace continued through October, but dropped off almost 40% in November and December, where we leased approximately 1,000 to 1,100 homes in those months. In January, leasing activity was up 30% and in February, was up an additional 10%, and in March, we looked like we're going to have the same level of activity that we had in October.

This increased activity is reflected in our total portfolio occupancy, which today is 80% compared to 74.5% at year-end. On homes that are rent-ready, at December 31, we were 84.4% leased. Today, we are over 91% leased. For homes that have been rent-ready 90 days or longer, occupancy is currently just ahead of 96% today compared to 94.5% at December 31.

We continue to see a strong tenant retention rate at about 73% and rental rate increases averaging 2% to 3%. We have decided not to push rates during the slower leasing time frame while we continue to put new homes on the market and we believe there will be ample opportunity to raise rates in the future and have started implementing our spring rate plan.

As Dave previously mentioned, recently, we reached three milestones. We hit the 25,000 homes acquired mark late last week. We hit the 20,000 homes leased mark earlier this week. We have now internalized property management for 100% of our properties and no longer use third party managers, providing us an extremely strong operating platform for our continued growth.

At this time, I will turn the call over to Pete to provide a review of our operating and financial results.

Thank you, Jack. I'd like to begin with a review of the fourth quarter financial results that were detailed in yesterday's press release. For the fourth quarter of 2013, we reported a net loss of $9.5 million or $0.08 per share on total revenue of $64.9 million. As Dave mentioned, these revenues represent an increase of 31.2% over the third quarter amount of $49.5 million.

We recorded fourth quarter 2013 funds from operations of $20.9 million, or $0.09 per FFO share, and adjusted funds from operations of $25.6 million, or $0.11 per FFO share. We had 17,328 leased properties as of the end of the year. Revenues from leased properties in the fourth quarter were $64.5 million, a 31.1% increase from the amount reported for the third quarter.

Cost of operations of leased properties was $24.5 million, resulting in net operating income of $40 million; a 26.6% increase over NOI for the third quarter. The resulting operating margins were 62% for the quarter.

Expenses related to properties that are rent-ready and have not been leased for the first time are reflected in the Company's property operating expenses. These expenses are included in the lines shown as vacant properties and other operating expenses.

As you may know, on average, it takes the Company about 30 days to lease a property once it is rent-ready and there are expenses incurred during this period. Also included in this category of expenses are certain costs incurred related to the internalization of our property management operations in the amount of $600,000 for this quarter.

As mentioned by both Dave and Jack, we are now 100% internalized for our property management to our own proprietary platform, which will minimize property management expenses and provide for consistency of operations. For the fourth quarter, our direct G&A expenses were $3.7 million. This compares to $2.7 million of expenses reported in the third quarter.

The increase was largely due to costs associated with the initial ramp-up in our first full quarter as a public company. For the last two quarters, G&A is running at approximately 32 basis points on an annualized basis as a percentage of total assets which falls into our expected range of 30 to 35 basis points.

As some of you may recall, we have a number of items in our financial statements that require non-cash mark-to-market adjustments on a quarterly basis. With respect to our formation transactions prior to the IPO, these items have left us with some unusual accounting.

The Series E units are treated as a liability that is remeasured each quarter, which resulted in a non-cash expense of $1.6 million during the quarter. We have added this amount back in our computation of AFFO.

Our participating preferred stock also requires a non-cash mark-to-mark remeasurement of the liability associated with the HBA factor on a quarterly basis. This remeasurement resulted in a non-cash expense of $1.8 million in the quarter and we have also added that back into our computation of AFFO.

On December 31, 2013, we had $375 million outstanding on our credit facility, leaving available capacity of $425 million. Our line bears interest at LIBOR plus 2.75%. In addition, we had in excess of $100 million of working capital available on our balance sheet.

As Dave mentioned, we are continuing to aggressively pursue the conclusion of our securitization transaction and we are also working on a number of alternatives to provide us short-term and long-term flexibility to continue to grow our business.

With that, I will turn the call back over to Dave for closing remarks. Dave?

Thank you, Pete. In closing, let me thank the entire team at American Homes 4 Rent for their hard work and dedication in making 2013 a truly remarkable year for the Company. We are excited about the opportunities we have at American Homes 4 Rent.

We own a large and growing platform of high quality homes in select, growing markets. We have internalized our management platform and we look forward to capturing growing efficiencies as we build and continue to grow in 2014 and beyond.

With that, we will open the conference call here for questions. Operator?

(Operator Instructions) Steve Stelmach, FBR.

Pete, you gave some color on expenses. Aside you from those non-cash items, any sort of one-time issues on the property level that we need to be thinking about for the quarter or the numbers you put out today, is that a pretty good run rate?

On the property level, like the lease property operating expenses?

Yes.

There are things that occur, and we didn't mention them in our comments, but margins last quarter were 64%, this quarter, they're 62%. A lot of this still remains to be related to the internalization of property management.

As we've taken the books of account, we look over things like the accounts receivable and we had some additional bad debt that probably should have been recorded previously by the third party property managers. And that honestly, is a big portion of that tick-down from 64% to 62%.

Nothing alarming. It just brings us to our standards. Jack, you may talk about our tenant underwriting standards that we've really worked hard on in the past several months.

One of the benefits of being fully internalized is we can now centralize our lease underwriting in Las Vegas in our central operations office. Last year, I think we had roughly 2% to 2.5% bad debts. I would expect that to go down to the 1% range in 2014.

I'll speak to the exact numbers. For the whole year, it was 1.6%. For the quarter, it was 2.3%. But going forward, it will be in the 1%, 1.5% range.

Got it. Okay.

That's a little color looking through into the margins.

That's helpful. On the securitization, any updates in terms of more specific timing or structure on the transaction?

No. The issue there is we're still working through the rating agencies as is others in our sector. There are three rating agencies that we need to bring up to speed and I think we're getting very near the finish line in that process. We're very hopeful that we'll be out here in the very short term.

Okay. Maybe this is for Jack, on the rent bumps you gave some color. Are those numbers just on the tenant renewal side or is that the entire rent bump? Is there any difference between the renewals versus new tenancy?

It's pretty close to the same. We're implementing a pricing strategy, on a test market basis, to bump up our re-leasing increases for second or third generation tenants. We did it in seven of our stronger markets and it appears to be holding. We may expand that and could see higher increases over the rest of the year, if that holds.

Great. Thanks, guys.

Jade Rahmani, KBW.

I wanted to ask about repair and maintenance, as well as turnover cost. Regarding repair and maintenance, can you speak to where the costs are coming in on a per home basis? Also provide some color as to the service call frequency?

I know you guys have a strong call center. What percentage of service calls you can address through those? On turn costs, if you could give some insight into where those costs are running?

I'll take that. On a repairs and maintenance level, we are, depending on the home, but with pools and everything, probably running $400 to $500 a year on average. Some will be $1,000 and some will be zero, but that's where we average. On the volume of calls per house, we really get most of the calls in the first 30 to 60 days of a lease and that's --they want to know where the GFI switch is.

In fact, less than half are calls to actually fix anything. We have a pretty high volume of calls as we lease more properties. But the properties that have been leased for a while have a much lower volume of calls. The call center can handle almost any -- I can't think of anything they can't handle, other than a fire or something in the house.

We have vendors in each market that they can send out and we have fixed pricing with those vendors, some national vendors that we use for the appliances and they will handle anything under warranty for free and anything else, we have fixed prices with them on. That works out pretty well.

On the turnover costs, we're averaging about $0.72 per turn, but that's a little bit, I think, overstated, because we take in pet deposits and because of accounting rules, they're non-refundable. You take them into income and if you offset them against the turn cost, you'd probably be somewhere in the $0.60 range. I think that hit all your questions.

Yes, it did. Back on the service calls, regarding potential maintenance requests, what percent are you able to actually handle through a call center?

I can't think of anything we don't handle through the call center.

In other words, address the issue with a tenant over the phone by providing further instruction.

Or coordinate with a vendor, but they're the ones coordinating.

Right. The call center just coordinates the vendor and the customer, the interaction between the two, and also helps determine whether it's a tenant expense or our expense.

Okay. Great. On the expenses pertaining to vacant properties, since the vacant property count increased in the quarter, can you just talk to what drove that increase and if the current quarter is an acceptable assumption to make for the next few quarters? Thanks a lot.

Yes, the vacant home went up primarily due to the November, December slowdown in leasing. It's gone down dramatically since the end of the fourth quarter. I think we're currently at about 1,900 versus I think we were at 3,200 at December 31st.

We thought there was nothing alarming about the vacant and other property operating expenses. It kind of tracked with the increase in vacant homes. We gave a quarter end amount on page four of our supplemental which had gone up from 2,736 to 3,152. I called out the one item, which is the termination fees and other costs with the internalization of the management of $600,000.

There's a casualty loss. We have a high deductible. We had a fire on a home that's in there for $150,000. There's things in there like that really don't cause the alarming increase in that expense category.

Great. Thanks for the color.

Dan Oppenheim, Credit Suisse.

In terms of the acquisitions, you talked about the securitization. How are you thinking about acquisitions through 2014 in terms of just the overall pace? Should we expect that to accelerate once the securitization is completed? What are your views on the market here?

Yes, acquisition pace, number one we expect the securitization to happen in the next 60 days, but we can't count on it. So we're going to have to probably slow down a little bit on our acquisition pace until we have certainty of the capital being available. We have approximately $220 million left on our line and we'll probably slow down to primarily auction purchases until that capital is available.

Okay. Thanks. You talked about the bad debt and the expectation coming down. Previously, you talked about potentially moving into or looking at some of the lower price point homes and just pondering that. Does the bad debt make you hesitant in terms of going lower in terms of price point or do you think that's just property management and a short-term issue there?

Yes, we don't have enough experience. We have about 5% of our homes have rents below $1,000 and we're monitoring that portfolio but don't have enough experience yet to say whether that's a business we want to get into on a larger scale yet. It is something we're monitoring because we do believe there will be chances of consolidating some of our smaller competitors and a lot of them have homes in that area.

Okay. Thank you.

Greg Van Winkle, Morgan Stanley.

You mentioned you're buying about half your homes at auctions right now. Correct me if I'm wrong, but I think that's down a little bit from where it was earlier in 2013. What's the competition like at the auctions these days? What's your thought process behind your mix of where you're sourcing homes?

We're targeting a certain number of homes each month and auctions so far have always been our best value in terms of acquisitions. We toggle on the MLS. If we want to buy 800 homes and we think we can buy 400 to 500 at auction, we might just put a budget of $300,000 to $350,000 on the MLS purchases. That's how we do that. What was the second part of that question?

Just what the competition is like at those auctions these days, is it still pretty heated or are there less people showing up?

There's definitely less people showing up, but there's less opportunities coming and a lot more full credit bids by the lenders. The competition may not have shown up, but the lender is our competition and I think that may have to do with more portfolios of loans being bought by investors and then using that as a source of their acquisition.

Okay. Got you. Once the securitization's in place, how about portfolio acquisitions? Are we getting closer to the point where we might see you become somewhat of a consolidator?

I think we're getting closer. There's been a lot of talk, but nothing yet where we could announce anything, anyway.

Okay. That's it from me, then. Thanks.

Richard Adler, Ell Capital Management.

That was my question, whether the process of portfolio acquisitions has commenced, as that should be an opportunity that you would see going forward, but you've just answered it.

I think I'd like to add a little bit to that. We believe that our stock price is undervalued relative to the underlying homes and so using our stock as a currency is one way of acquiring and another is cash. Cash, right now, is kind of a commodity that we're hoping to have more of soon, but we don't. We're not interested in using our stock if it's not priced appropriately to acquire until it does get priced appropriately, or we get a discount on the properties.

You might use the upreach strategy or approach, whether you might be able to negotiate or that at some point as one of the ways of dealing with the specific stock price at a moment in time in due course. Has any of that discussion been considered?

It's all involving units, that's the whole discussion. We are looking at using, potentially, our preferred stock as preferred units in transactions, as well.

Thank you.

Jana Galan, Bank of America.

Can you provide an update on your joint venture to purchase non-performing loans?

Yes. We have acquired, between the two funds -- our joint venture has two funds, one that's going to feed the REIT properties and what we call our rental fund and the other is for quick resolution of the loans. Under the two funds, we have an 80% interest in the rental fund and 20% interest in the other fund at this point. We purchased about 25 loans; 10 in the rental and 15 in the other fund. We expect that activity to quicken in the second quarter.

Thank you.

Jack Micenko, SIG.

When you look at the renewals coming forward through the balance of the year, is there a way to think about the bucketing or timing of when some of these one years are rolling as we think through the rest of the year?

Yes. I guess you could do six month leases or 11 month leases or 14 month leases and try to move it to a different time frame. I think, over time, it'll gradually spread out throughout the year and I don't know that we want a heavy concentration in any one month of expiration.

Right now, we leased, June, July, and August, about 2,000 homes per month in those months and we'll probably have our highest level of renewals and turnovers. I think it's fairly well-balanced the way it is. I'm not even sure which way to push it if I wanted to push it.

Right. Okay. With the timing and with the foreclosure process in recovery in Florida, it's a market you guys are, I think, relatively light in. Is that an area that some of your competitors are talking about moving more to Florida and the acquisition side? Is that something you're looking at as well or is something in the economy, the job base in the economy maybe something different and you've intentionally not been as heavy there?

We've been pretty active in Florida. It's our second largest state where we hold assets, I believe, and we continue to be active. One of the difficulties in Florida is, in general, the lower yields on the properties because of the level of competition in those markets.

Okay. All right. Great. Thank you.

(Operator Instructions) Jade Rahmani, KBW.

Can you tell us where property management expense ran as a percentage of revenues in the quarter and where you would expect it to go for the next few quarters?

Yes. Property management expense, on the whole portfolio, ran about 12% of revenues. Obviously, we had homes that were not producing revenue and so the percentage on those was much higher than infinity percent. If you take those to start generating income, I think you end up right around 8%, 7.5% to 8%.

12% is -- remember, our overall portfolio is about 68%, I believe occupied in the fourth quarter, on average.

On average for the quarter.

Okay. The number of properties that actually turned over, I think you gave the number. Actually, I don't know if you gave the number before.

Yes, it was somewhere around 450 homes. I don't have it in front of me, but that's the number that we re-leased, so went through the full turnover process.

Okay. Thanks very much.

Thank you. I would you now like to turn the floor back over to Dave Singelyn for closing remarks.

Thank you for joining us today. We look forward to speaking with you on our next quarterly call and that completes today's call, so we thank you all very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.