American Homes 4 Rent (AMH) 2014 Q1 法說會逐字稿

Welcome to American Homes 4 Rent 2014 first-quarter earnings conference call.

(Operator instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to Stephanie Hime, Counsel for American Homes 4 Rent. Thank you Ms. Hime, you may begin.

Good morning. Thank you for joining us for our first-quarter earnings conference call. I'm here today with Dave Singelyn, Chief Executive Officer, and Jack Corrigan, Chief Operating Officer of American Homes 4 Rent.

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 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, May 6, 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, Stephanie. Welcome to our first-quarter 2014 earnings call.

Before we discuss our first-quarter operations and financial results, I would like to introduce Diana Laing. Diana is present with us today and has accepted the position of Chief Financial Officer of American Homes 4 Rent beginning on May 19. I am pleased to have Diana join our team as she brings years of senior executive finance experience with a strong track record of success and deep capital market's experience in the real estate field.

For those of you who are not familiar with Diana, she previously served as Chief Financial Officer of Thomas Properties Group, a publicly traded real estate operating company engaged in the development, redevelopment and operations of Class A office properties until it merged with Parkway Properties last December. Before that she held a number of senior executive finance positions in the real estate industry, including as CFO of Arden Realty. She is also member of the Board of Directors of Macerich Company, a real estate investment trust that owns and operates regional malls, where she is Chair of the Audit Committee and a member of the Compensation Committee.

With respect to today's earnings call, I will review our first-quarter accomplishments. I will then turn the call over to Jack Corrigan to discuss current operating environment and our progress with regard to operations and external acquisitions. Finally, I will review operating and financial results for the first quarter of 2014 and update you on our balance sheet and liquidity.

Since our Company is still new to many of you I would like to begin with a short review of who we are and what we do. We seek to build the premier company focused on single-family rentals by executing a focused strategy including three main objectives. 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 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 economies and demographics, attractive sub- markets and of significant size to allow us to build a larger platform to capture operating efficiencies and brand awareness. We have concentrated our acquisitions in newer-built homes within middle- to upper-middle class neighborhoods. Today, we have now surpassed 26,000 owned homes. Our largest concentrations are in Texas, the Southeast, and various Midwest markets. We purchased our properties at prices below replacement cost and continue to see a steady flow of opportunities in our target markets.

Third, we look to enhance our returns with a reasonable level of leverage. Maintaining a strong balance sheet with significant capacity and flexibility to finance our growth and investment strategies will allow us to be nimble as opportunities arise. I will provide an update on our securitization transaction later on.

Moving on to our accomplishments for the first quarter, I am extremely pleased with our performance this quarter. Let me provide you some highlights. As of March 31, we owned more than 25,500 properties. During the quarter, we acquired more than 2,200 properties. During April our acquisitions brought our inventory of homes to more than 26,000 homes. As of March 31 we had 20,666 leased properties. This is an increase of 3,338 properties from the 17,328 properties leased at December 31. As of April 30 we had more than 21,900 leased properties.

As a result, our portfolio occupancy percentage increased from 75% at December 31 to 81% at March 31 and was 84% or over 84% at the end of April. Our occupancy rate of rent-ready, 90-day plus homes was 95.1% in the first quarter. That is a 60 basis point improvement from the fourth quarter of 2013.

After a slow start in the quarter reflecting typical seasonal weaknesses in rental demand, we saw a pickup in early spring months. Our tenant renewal rate was approximately 72% for the first quarter. As we have said before, we are still just beginning to experience renewals of the homes we have renovated, leased and managed. We expect the renewal rate may be volatile until we reach a larger pool of leased renewals on a regular basis.

Overall, we reported revenue of $77.3 million in the first quarter. That's up 19.1% from the $64.9 million recorded in the fourth quarter. After operating expenses, our net operating income from leased properties was $47.7 million, a 19.4% from the fourth quarter of 2013. Again, demonstrating strong trajectory.

These factors resulted in $0.12 in core funds from operations per FFO share. I will provide more detail on core FFO later during this call.

At this time I would like to turn the call over to Jack Corrigan, our Chief Operating Officer, to provide more detail on our acquisition and operating activities for the first quarter.

Thanks, Dave. I will give a little color on acquisitions, then renovations, and finally on property operations for the first quarter as well as an update on our April 2014 activities.

For the first quarter of 2014 we acquired a total of 2,237 homes, including 1,056 at trustee auctions, or about 47% of our acquisitions. The average net economic yield are estimated to be approximately 6.5% on a pro forma basis. We anticipate approximately 2,000 acquired homes in the second quarter.

We continue to execute our renovation program. We renovated approximately 2,600 homes in the first quarter, excluding turns, and we expect to renovate about the same number in the second quarter of 2014. Our internalized property management platform continues to pay dividends while improving its efficiency each quarter. Our centralized leasing and service center, as well as tenant underwriting and collections, provides real-time information to allow us to actively manage our business.

One of those benefits is our abilities to lease our properties. In the first quarter, despite some challenges as a result of extreme cold weather, we saw a pickup of leasing activity throughout the quarter going progressively from 1,000 new leases in December to almost 1,700 in March.

For the quarter, we leased a total of approximately 6,000 homes, including first-time, second-generation and renewal leases. Excluding renewals, we leased approximately 4,300 homes, up from approximately 3,500 in the fourth quarter. April leasing was strong with a total of approximately 2,900 homes leased and, excluding renewals, over 1,600 homes leased.

We continue to lease up our portfolio going from 31% to 81% over the past 12 months, and up to 84.5% as of April 30, 2014. For homes that have been rent ready for 90 days or more, we were approximately 95% leased at March 31 and April 30. This compares to 94.5% at December 31.

We continue to see strong tenant retention of 70% to 75% with rental rate increases in the 2% to 3% range on renewals and 3% to 5% range on re-leasing. We are beginning -- in mid-February we began a program to analyze the effects of more aggressively pushing rates.

One item of note during the quarter that resulted in increased expenses, particularly on un-leased homes, was the extreme cold weather in the Midwest and Southeastern markets. We had three different storms resulting in damage to 479 of our homes. The bulk of this damage was covered by insurance subject to $125,000 deductible for each event. This deductible multiplied by three for the three storms resulted in an expense of $375,000.

We had additional expenses as the storms required us to drive all of our vacant homes on a more frequent basis as well as snow removal costs and additional utility costs to heat the homes for showings.

With that, I would like to turn it back over to Dave.

Thank you, Jack. I will now review the first-quarter financial results, which were detailed in yesterday's press release.

To better present our operating performance without the effect of certain items that by their nature are not comparable from period to period, we have defined a new measurement that we call core funds from operations. We define core funds from operations as funds from operations as defined by NAREIT, adjusted for acquisition fees and costs related to properties acquired with in-place leases, and for recurring non-cash items of equity-based compensation and re-measurement items related to the Series E partnership units and the derivative component of preferred securities.

For the first quarter our core FFO was $28.1 million or $0.12 per FFO share. This compares to $25.6 million or $0.11 per FFO share for the quarter ended December 31.

With respect to property operations, net operating income from our leased properties was $47.7 million, an increase of 19.4% from the $40 million reported in the fourth quarter. Revenues were $77.3 million for the first quarter, also an increase of 19% over amounts reported in the fourth 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 we have previously indicated, on average it takes the Company about 30 days to lease a property once it is rent ready.

As mentioned last quarter, we completed our property management internalization. The trailing costs related to the internalization process, as well as costs related to cold weather that Jack discussed, are included in the line vacant properties and other costs. For the first quarter, vacant properties and other costs was $9 million.

On a per-property basis, costs related to vacant properties increased from the prior quarter resulting from the unusual cold weather in many parts of the country. As Jack mentioned, we had increased costs for utilities to keep the houses warm for showings and to assist in the prevention of cold-weather freeze issues. In addition, we increased the frequency of visits by our field inspectors to ensure no cold-weather freeze issues occurred. In addition, the $375,000 insurance deductible Jack referred to with respect to cold-weather freeze issues is also included in the $9 million of vacant property and other costs.

For the first quarter, our general and administrative expenses were $5.1 million. This compares to $3.7 million of expenses reported in the fourth quarter of 2013. This expense was driven by a couple of items, namely for additional professional fees related to 2013 audit and tax work and required testing under Sarbanes-Oxley legislation, and for additional state taxes related to operations in a couple of states that do not recognize REITs as full pass-through entities.

We expect our base level of G&A will increase $400,000 to $500,000 on a quarterly basis over the $3.7 million reported in the fourth quarter to reflect these additional expenses on an ongoing basis. We still believe that our G&A will be within a range of 30 to 40 basis points on assets.

As some of you may recall, we have a number of items in our financial statements that require non-cash mark-to-market adjustments. The Series E operating partnership units are treated as a liability for accounting purposes and are re-measured each quarter, which resulted in a non-cash expense of $2.8 million for the quarter. As previously mentioned, we have added this amount back to our computation of core FFO.

Our participating preferred stock also requires a non-cash mark-to-market re-measurement of the derivative component of the preferred securities. This re-measurement resulted in a non-cash expense of $457,000 in the quarter and was also added back into our computation of core FFO.

For more information on our first-quarter operations, our operating trends and the details of funds from operations and our computation of net operating income, we posted last night a supplemental information package on our website under the For Investors tab. The package was also filed with the SEC in a Form 8-K filing.

As of March 31, we had $671 million outstanding on our credit facility, leaving available capacity of $129 million. Our line bears interest at LIBOR plus 2.75%. In addition, we had in excess of $45 million of working capital available on the balance sheet.

With respect to capital transactions, last week we closed on $190 million of gross proceeds from the offering of our Series C participating preferred shares. After this offering, we have in excess of $200 million of available capital.

Earlier today, we issued a press release indicating that a subsidiary of the Company plans to launch a securitization transaction this week. The transaction is intended to reduce the Company's cost of capital over the long term. The transaction will not be registered under the Securities Act of 1933, but will be sold as a private placement subject to Rule 144A. As such it is not appropriate for me or the Company to be providing any additional details at this time. As soon as it is appropriate to provide details publicly, we will do so through a press release.

In closing, 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, and through our select financing are laying the groundwork to continue to grow and scale this tremendous business. We have begun to see and experience the benefits of our fully internalized platform and look forward to continue to enhance these efficiencies as we continue to grow in 2014 and beyond.

With that, we will now open the call to your questions. Operator?

(Operator Instructions)

Jana Galan, Bank of America.

Given the change at the CFO level, can you comment on target leverage levels and net debt to EBITDA ratios and any preference for preferred versus debt?

The change of the CFO -- Diana will be starting in her official capacity in about a week and a half or two weeks. At this time, we have no change to the guidance of our leverage.

We had indicated, historically, that we're looking at 30% to 35% leverage. At that time, we will evaluate where we are and determine whether we want to increase it or stay firm.

With respect to preferred capital and debt capital, we see both as attractive sources of capital. To date, we have relied on the preferred capital as its been readily available.

We are pleased that our securitization transaction has progressed to where we made our announcement this morning that we are launching.

Thank you.

Jack, you mentioned the program started in mid-February to be more aggressive on rates.

Can you comment on just initial findings and how is that working out? Are you sending out renewal notices at 4% or 5% increases?

No, what we did -- I think it was February 10 -- we were reluctant to push rates in the slow leasing period of the holidays up through probably January. Then we developed a program where we would test our increases in rates strictly on releasing, so not on renewals but on new leases of previously-leased properties in our stronger markets. We started bumping the rents 4% to 5%.

We have seen relatively little resistance to those rate increases. We have maintained, on renewals, a rate of about 2% to 3%. And we are going to do this in a measured way.

Because of the lack of resistance, we've now expanded that to more markets and have seen similar findings. So I would expect us to push this out, except into markets where we know are very competitive. The Phoenix and Tampa markets are two of those.

Thank you.

Can you just then comment on how bad-debt expense has been trending?

Bad-debt expense has been trending down.

In the first quarter, we still saw some bleed of -- what happens when we internalize from a third-party manager is we get a lot of games played with us where the tenant said they sent it into the third-party manager, especially the tenants that aren't that good. So it takes us a while to figure out when to evict because we don't want to evict somebody who is actually paying.

We finished our internalization December 31. We saw some bleed through into the first quarter. I would expect to continue to see that trend down to the approximately 1% range.

Thank you.

Jade Rahmani, KBW.

Firstly, I wanted to see if you've heard or seen anything about insurance or reinsurance firms developing any blanket home warranty insurance policy programs geared toward the single-family rental sector with the goal of providing some certainty around long-term CapEx?

We haven't, but the theory on insurance is that there is a profit level in there that we prefer to keep ourselves. It's probably more for the 100- to 200-operator than for the 26,000-home operator.

Okay. I appreciate the comment.

With respect to the issue of long-term CapEx, can you talk about what guides your thinking and what kind of analytical process you have gone through with respect to modeling long-term CapEx?

At this point, our guidance is in the about $400 per property range. Again, like many of the attributes in this Company, or a few of the attributes in this Company, we don't have enough history to validate that number or provide you any validation of that number.

To date, we are experiencing less than the amount that we are projecting. But, again, the homes were recently remodeled homes; and we have had very, very little turn.

I think what Dave meant to say was $400 per property per year, plus we have an additional reserve of $0.25 a foot.

Per turns.

$0.25 per turns.

Per turns, okay.

Just regarding the incremental buying opportunity, are you starting to see more portfolios that you view as attractive? Can you also comment on the NPL side with respect to your joint venture?

Yes, we are seeing attractive portfolios on a stuff-that-we'd-want-to-own basis. We have not seen anything yet on a price-that-we-want-to-pay basis, so we haven't closed. There are a number of opportunities that we have evaluated and continue to evaluate.

As far as the NPL, non-performing loan program, we have accelerated that program through the second quarter. We're walking on wobbly legs in the first quarter, and I think we are pretty strongly walking now and will be running by the end of the year.

We think that's tremendous opportunity there, and we are starting to really take advantage of it.

Great, thanks very much.

Steve Stelmach, FBR.

Jack, you gave some color on the expenses and the one-time, weather-related issues. With the deductible on the insurance, that $375,000, was that the largest extraordinary expense on the property level this quarter?

I know you mentioned some other things, like snow removal and having more personnel to go out there and visit the properties. But is the $375,000 the biggest number that you can calculate that impacted the quarter?

It is the biggest single number.

It is really a little more difficult to quantify then you would think because it's not like office buildings, where you have a separate snow-removal company come in, your landscapers are doing your snow removal, and in just shows up in your landscaping bill.

My best estimate would be the total is somewhere in the $1 million to $1.5 million range. But that could be a little low, and it could be a little high.

In addition to snow removal, which is a significant number, our utilities, on a per-house basis, are significantly higher on the vacant homes in the first quarter than they were in the fourth quarter.

On the very positive side, our rent-ready homes have dropped dramatically from the start of the first quarter. I think we were at about $3,300, and somewhere in the $1,500 to $1,600 range by the end of the quarter. I think the vacant house expenses is going to be significantly lower going forward

Yes, that leads to my next question.

If you look at the vacant-home expense relative to the occupied-home expense, vacant obviously is higher. Then you think about getting the vacant homes up to what's average occupancy for your portfolio, that 95% or so.

How should we think about incremental margins on those vacant properties being occupied? It seems to be relatively large.

You're already assuming expenses, if not a little bit higher expenses than is typical, without any associated revenue. How should I think about that?

I think that the margins should expand.

The expenses of a vacant home are substantially higher than the expenses of a leased home. We have the ongoing landscaping expenses.

We have to drive by every two weeks instead of every six months. There are utilities that are normally paid by the tenant. There's just a number of expenses that are higher as a result of a vacant home.

Getting rid of those expenses should dramatically increase our -- I don't know about dramatically increasing the margins -- but should increase our margins.

Steve, the homes that are vacant at the beginning of the first quarter or the end of the first quarter, as well as to date, are in the same markets as our leased properties are. I would expect that those homes, when they become leased, will have the same margins as what you are seeing in our leased portfolio today.

One thing just to be clear on is that our un-leased homes expenses does not include homes that are un-leased that had been leased for at least one time. Those going to the leased homes.

Just recurring vacancy or frictional vacancy factor is included in the margins.

In other words, the homes in turn, the costs of the homes is in the leased-homes expense category.

Understood. That's helpful.

Lastly, on the renewal rate, still very, very strong, but a little bit of a dip sequentially. Is there any seasonality in that number at all?

In which?

I'm sorry, the quarterly renewal rate, 71.8% versus 73% last quarter.

I don't think it's significant enough.

I think one of the things that happens, I think January and June are probably two of the biggest percentage move-out months that you will see because they're transition months for families. They want to get through the holidays.

And then in June, they want to get through the school year and then make a decision. So I would expect that that probably played into it more than any weakness in renewals.

It is still a very, very good number, especially relative to multifamily. I was just wondering if there was anything seasonal in there Thanks, I appreciate it

Tony Paolone, JPMorgan.

Can you give us a property management expense amount that was in the first quarter, by any chance?

You know what? I do not have it at my fingertips.

The supplemental package that was distributed or posted online, it can be derived from there. We have the cost percentages in there.

Alright, I may have missed it. I'll take a look at that again.

Jack, on the yields, the 6.5% you cited, can you maybe just walk us through again how you calculate that? Does that include vacancy and bad debt, or what is in the number?

In the number is pro forma rent and then a vacancy factor of one month for every two years, which would also include your bad debt portion; and then all expenses, including CapEx reserve and turn reserve for the property for the first year.

There is no projection of rental rate increases or anything of that nature.

Okay.

The CapEx, though, for the first year, is that that $400? Or is that a lesser number because it's in the first year?

It's $400 plus we reserve $0.25 per foot for turns. That is our base analysis.

We, additionally, if the property has a pool, will add approximately $100 a month for maintaining the pool.

Okay, got you.

Then, I know you talked about some of the revenue experienced thus far. Can you give us a little color and some of the OpEx like property taxes; maybe some of the folks that have been with you for a year or so now; rent -- just a variety of items like that and what that year-over-year growth is maybe looking like?

Right now we have not seen a lot of growth. And we are still experiencing efficiencies and comparing to what was operated by third-party managers.

Property taxes have seemed basically flat. Homeowners Association, basically flat. Insurance has gone down slightly. So I would say overall, our expenses are trending down, but not by much.

Okay. Last question.

I think a couple of quarters ago you talked about looking more closely at your properties where rents were $1,000 or less, to see just how much you make on that. Any conclusions or color you could add to that?

I don't think we could add any at this point.

It's going to take a little bit before we can evaluate those tenants. I think we'd need to look at it a little longer-term basis.

Okay, thank you.

Andrew Rosivach, Goldman Sachs.

I just wanted to ask a little bit on your portfolio mix.

If I got the math right, it looked like you were continuing to buy quite a bit in some of your largest markets, like Dallas and Indianapolis.

Do you have any sense of where you think the long-term portfolio mix might be versus where it is today? And if maybe you are concentrating on a smaller group of markets than you thought you were going to do?

I would say that we're concentrating on a smaller group of markets than we originally did.

Most of the West Coast, the yields have dropped. And due to our limitations on capital, we have selected the markets that we think we can do the best in, to the exclusion of some markets that we think we can do okay and but not as well.

I would say North Carolina, Atlanta, the markets in the Midwest and Texas and Florida are still very strong markets for us.

We're buying, but we have not excluded buying in the other markets. But it may be that any sustained growth in some of the West Coast markets may have to be through bulk acquisitions.

I'm just curious. You have sold in the past, and I'm wondering if some of these markets, the 4,200 units that are in the All Other, or I guess we all know this, but it was cool when you put in that sheet on that the HPA. You got Phoenix 17%, 2013; Vegas 25%, 2013.

Are there any markets that might be worth harvesting and putting into a different part of the country?

Well, we still think that those markets are trading at below replacement costs. So any gains have definitely not been maximized, and the demand for the rentals has been tremendous.

I think that we are happy with holding onto what we did, and probably we sold 200 something homes in Southern California last year about this time. Hindsight is 20/20, but I think we'd rather have those than have sold them.

That's a good point. Alright, thanks a lot.

Jack Micenko, SIG.

This is actually Ming Zhao for Jack.

My first question is in terms of the overall industry and sector, how do you think M&A is going to play out over the next year? The follow up to that is do you think you are going to be able to consolidate here?

As Jack indicated earlier, we are seeing a lot more discussions occurring in this space right now. There are a lot of small operators that are initiating discussions with parties like us. We will be one of the players in the consolidation of this sector.

What Jack also mentioned is what we are seeing today is a lot of discussions, but still a little bit of a gap between expectations on price between buyers and sellers. I would expect that to narrow as the year goes on and for there to be some consolidation over the next 9 to 12 months.

Yes, we will be evaluating and pursuing opportunities as they arise during the year.

Got you, great, thank you.

My second question is on NPLs. Can you give us how many loans you guys made or didn't in this quarter? I know you guys had 25, I think, by the end of fourth quarter.

Yes. Well, 25 was the total of both.

I will remind you of how we are structured. We have Fund 1, which is designed for the loans to be converted ultimately to rentals. And then we have Fund 2, which is primarily invested -- we have small interest -- but it's primarily invested by a joint venture partner, which is for resolution of the loans and ultimate disposal of the properties.

I think the 25 was the total of the two. We had 10 in the conversion-to-rental pool, and I think 15 in the other. I would expect that to grow substantially, the joint venture for the rapid resolution.

The capital, a significant amount of capital has been raised for that and that is accelerating. Now that we have seen some of the benefits on the rental portfolio, we are convinced we know enough about it to push forward pretty strongly.

Got you. Great, thanks very much.

Robert LaQuaglia.

Jack, just a question on acquisitions.

How do you think the mix will trend going forward? More towards auctions or brokered sales?

And then maybe just a comment on the competition you are seeing at the auctions.

We are seeing less competition at most of the auctions. Actually, I would say virtually all of the auctions, we're seeing less competition.

One of the things that we are seeing, and it may be from guys like us on the NPL side, is full-credit bids for properties going to auction. Basically, that means that they are bidding the total amount of the loan, plus accrued interest, plus late fees, et cetera, and generally is well in excess of the value of the property.

Those full-credit bids are by the actual owner of the loan, who may have paid far less than what they're bidding for the loan. We are seeing that. It's limiting our opportunity somewhat.

We're still buying in the 300 to 450 homes a month at auction. I don't expect that to continue indefinitely, but I don't expect that to drop off the map either.

Great, thanks.

(Operator Instructions)

Steve Stelmach, FBR.

Real quick, in a previous question you were asked about the home price appreciation and mentioned, I think, referring to page 12 of your supplement.

Just to clarify, the FHFA index is comprised of both distressed and non-distressed sales data. Whereas your portfolios, the vast majority you acquired via distressed acquisitions.

Is it fair to say that home price appreciation on page 12 understates what would be embedded in your own portfolio?

I would say that is fair to say.

I would too.

It does not reflect the undermarket aspect of our acquisitions program.

Right, so we would sure caution against using that 11% as a de facto way to back into an NAV. That would severely understate what your NAV would look like. Is that (multiple speakers)?

I agree with that.

Thank you.

That is all the questions we have at this time.

I would like to turn the floor back to Management for closing comments.

This is Dave.

Thank you again for joining us today. We look forward to speaking with you next quarter on our quarterly-earnings call. Have a good day.

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