American Homes 4 Rent (AMH) 2015 Q4 法說會逐字稿

Greetings, and welcome to the American Homes 4 Rent fourth-quarter and full-year 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephanie Heim. Thank you. You may begin.

Good morning. Thank you for joining us for the fourth-quarter full-year 2015 earnings conference call. I'm here today with David Singelyn, Chief Executive Officer; Jack Corrigan, Chief Operating Officer; and Diana Laing, Chief Financial 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 the 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 of today, February 26, 2016. 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 our CEO, David Singelyn.

Thank you Stephanie. And good morning and welcome to our fourth-quarter and full year 2015 earnings conference call.

On today's call, I will review our operating performance and results for 2015, and touch briefly on our announced merger with American Residential Properties. I will close with an outlook for our key initiatives for 2016. Jack Corrigan, our Chief Operating Officer, will then review our portfolio performance in more detail, and finally, our Chief Financial Officer, Diana Laing, will discuss operating and financial results and update you on balance sheet and liquidity. After our prepared remarks we will open the call to your questions.

As I've discussed on previous calls, 2015 was an important transition year for American Homes 4 Rent. After raising capital and growing our portfolio aggressively to build scale in our early years, in 2015, we turned our focus to truly building out a truly world class operating platform to drive sustainable sector leading margins and cash flow growth. While these efforts were well underway when 2015 began, our decision to slow down our acquisition pace and the resulting stabilization of the vast majority of our portfolio, provided us with the opportunity to identify and hone best practices with regard to leasing, rental rate maximization, maintenance, capital improvements, and turnover.

While these efforts are not flashy, they are vitally important as we look to build out a national platform for an industry that has little historical operating data and no established direct model from which to draw. Our efforts required new systems, enhanced staffing models and training, and an iterative process of review, feedback, and refinement. All while continuing to execute on the day to day operations of our portfolio. As we enter 2016, while our work continues, I am more confident today that we're well on our way to establishing premier institutional operating platform in the single-family rentals industry.

Before turning to 2016, let me briefly summarize our strong operating and financial performance highlights for the fourth quarter and full-year 2015, which is a testament to the success of our operating performance enhancements and the hard work of our teams. In 2015, total occupancy increased from 79.6% at the start of the year to 92.7% at year-end. Representing an increase of more than 13 percentage points during the year. Our stabilized portfolio occupancy percentage began the year at 90.5%, and increased to 94.5% at year-end, an increase of more than 400 basis points.

During 2015, our primary focus was to fill up our properties and stabilize our occupancy. However, during this period, we were still able to capture renewal rate increases of 3.2% and releasing rate increases of 3.6%. Driven by higher occupancies and strong rent growth, our same home portfolio including 13,436 stabilized homes, owned during all of 2014 and 2015, achieved average revenue growth of 5.5% and average NOI growth of 8.6% in 2015. Again with acceleration in the second half of the year as our market portfolios reached stabilized occupancies and we saw further benefit from operating best practices.

For 2015, we reported core FFO of $190.4 million, or $0.72 per share, representing an increase of 25% over the $0.57 share recorded in 2014. For the fourth quarter, our core FFO per share was $0.21.

We are extremely pleased with these bottom-line results, which were driven substantially by the underlying strength and growth within our operating portfolio. Diana will provide more details on our fourth quarter and full year financial results later on this call.

Moving on, I'd like to provide some thoughts on our most significant initiatives and the opportunity I believe we have to drive sustained sector leading growth in 2016. As we strive to create value for shareholders over the long term.

The work we have done this year to achieve stabilization across our portfolio sets us up for continued strong performance. The improvements we made throughout our organization with regard to new management systems and procedures paid dividends in 2015. And were a significant step in implementing best practices.

These efforts will require fine-tuning and improvement on a continual basis. And we improve and as we improve and learn we expect to identify and implement new initiatives to further drive revenue, improve cost controls, and expand our margins. Jack will provide details around our specific initiatives for 2016 later on the call.

We believe the merger we announced on December 3 last year, with American Residential Properties, will provide substantial incremental value to our shareholders as these homes are integrated into our larger and more efficient platform in 2016. The merger will enhance our position as the largest publicly traded owner-operator of single-family rental homes in the country, with more than 47,000 homes in 22 states. This morning, the shareholders of ARP voted to approve the merger transaction, which is expected to close at the end of business, Monday, February 29. The press release will be issued after the merger closes, providing additional information related to the merger transactions, and details of an additional conference call we will host to review the specifics and benefits of this transaction. As such, we will not be addressing the merger transaction on this call.

Finally, I would like to discuss our capital initiatives as we enter 2016. Since our formation we have maintained a strong and flexible balance sheet at American Homes 4 Rent, as a strategic policy. Subsequent to the completion of our merger with ARP, our leverage will be at the higher end of the target we have communicated. At this point, we remain comfortable with our balance sheet, particularly given our strong and stable cash flows.

However, as we move forward particularly in the current environment we expect to remain prudent with regard to capital allocation and investment decisions. We have been evaluating our asset holdings and expect to dispose of $150 million to $250 million of our non-core assets over the next 12 to 24 months. That said, we have continued to capitalize on recent volatility in the market and execute under the $300 million share repurchase authorization that the board approved in 2015.

During the fourth quarter, we purchased about 226,000 shares and an additional 1.33 million shares so far in the first quarter of 2016. Since the repurchase authorization was implemented, the Company has acquired more than 4.9 million shares at a total cost of approximately $77.8 million. We continue to view our shares as significantly under-valued and will remain opportunistic with additional repurchases moving forward.

Now at this time, I'd like to turn the call over to Jack Corrigan, our Chief Operating Officer. Jack?

Thank you, Dave, and good morning everyone. I would like to expand on Dave's comments and provide a more complete review of our portfolio.

As of December 31, 2015, we owned 38,780 homes. We acquired just 403 homes during the fourth quarter, for a total investment of approximately $70 million. This pace of acquisitions was consistent with the expectations we had communicated all year and represents a prudent approach, given current capital market conditions.

Our pending merger with ARP will add almost 9,000 homes to our portfolio, at a far more attractive entry point then we could find for one-off or small portfolio transactions. Assuming no changes in capital market conditions, we expect that our acquisition volumes will remain modest for the foreseeable future. The upside of a slower acquisition pace is that our portfolio has approached stabilization.

As of December 31, we had 35,958 occupied properties, and our total portfolio is now 92.7% occupied, compared to 79.6% occupied one year earlier. And our occupied home count has continued to grow in January and February.

In the fourth quarter, we had another strong quarter of leasing with approximately 3,600 new leases signed. This was down from the leasing pace we achieved in the third quarter, as a result of seasonality, combined with lower inventory. Our ability to continue to execute on the leasing front allowed us to improve our leased percentage to 93.9%, compared to 92.8% at September 30. Lease percentage for our stabilized portfolio was 95.6%, up from 95.4% three months earlier.

So far in 2016, our leasing activity remains strong and we're seeing the normal patterns, in terms of traffic and inbound call velocity, ticking up in front of the more active spring leasing season. Rental rate increases moderated from the pace achieved in spring and summer as we focused on occupancy through the seasonally slower November December period. Rental rates increased 2.4% on new leases and 3.7% on renewals in the fourth quarter. During the quarter, we had approximately 5,000 lease expirations and we were achieved a renewal rate of 76%, which is in line with our recent trends.

Turning to our portfolio results, in the fourth quarter we reported same home revenue growth of 5.4%, driven by an increase in occupancy, average rents, higher fees, and lower bad debt. Operating expense decreased 1.9% in the quarter, resulting in a 10.5% increase in Same-Home NOI. Core net operating margin increased 280 basis points from 58.6% to 61.4%.

For the full year 2015, same home revenues increased 5.5%, operating expenses increased 1% which resulted in an 8.6% increase in Same-Home NOI for the year. For the full year, our Same-Home portfolio core in-line margin increased 170 basis points from 58.8% to 60.5%.

Across our portfolio, we continue to capture significant improvements in operating efficiency, resulting in lower maintenance cost as well as the cost and the time to turn homes. Our total days to turn homes in the fourth quarter was 65 days, compared to 79 days one year ago. This decrease was driven by efficiencies in the make ready process, which we reduced from 26 days a year ago to 11 days this year.

The marketing time increased slightly year over year, and the fourth quarter is seasonally our slowest leasing period, so expect marketing time to improve in Q1 through Q3. Our maintenance work orders are down approximately 15% and cost per work order is down 5% so far in 2016. These statistics bode well for operating results for the rest of the year.

One of our big operational objectives for 2016 and 2017 is to expand our in-house maintenance program throughout the country. We've been testing the program in two of our markets and like the results today. Further, we will acquire from American Residential Properties 31 maintenance vans and technicians. Those assets and personnel as well as some of there processes will give us a head start on expanding this initiative.

Now I will turn the call over to Diana Laing, our Chief Financial Officer

Thank you, Jack. In my comments today, I will review our fourth quarter and full year 2015 financial results and comment on our balance sheet and liquidity. As a note, our results are fully detailed in yesterday's press release, and in our supplemental information package, both of which have been posted to our website in the for investors section.

For the fourth quarter of 2015, we reported core FFO of $53.8 million or $0.21 per share. On a per-share basis, our core FFO was up 10.6%, from the $0.19 per share we reported in the third quarter of 2015, and was up approximately 30% from the 16% per share we reported in the fourth quarter of 2014.

For the full-year 2015, we reported core FFO of $190.4 million, compared to $143.8 million in 2014. On a per-share basis, core FFO in 2015 was $0.72 per share, which was 25% higher than the $0.57 per share we reported for 2014.

For both the fourth-quarter and the full-year 2015, the increase in core FFO per share was driven by higher property net operating income from our Same-Home pool, and from the contribution from other homes leased in the past year, both of which are partially offset by higher interest expense and slightly higher G&A cost. As a note, we add back acquisition related expenses when we calculate core FFO. In the fourth-quarter and full-year 2015, acquisition expenses were $5.3 million and $19.6 million respectively.

A portion of the acquisition expenses we incurred in the fourth quarter related to our announced merger with ARP. As we anticipate acquisition volumes in the near-term to be moderate, we would expect acquisition related expenses to trend lower other than the cost associated with the merger.

Next, I'll summarize the operating results for our Same-Home property portfolio, which included 23,812 homes which were stabilized for the full fourth quarter 2015 and comparable quarter 2014. The Same-Home portfolio revenues increased 5.4%, property operating expenses were down 1.9%, and NOI was up 10.5% compared to the fourth quarter of 2014. For the full year 2015, there were 13,436 stabilized homes owned during both the current and prior year comparable periods. Our Same-Home portfolio revenue increased 5.5%, property operating expenses increased 1%, and NOI was up 8.6% for the year 2015 compared to 2014.

Moving onto our balance sheet and liquidity. As of December 31, 2015, we had total debt outstanding of approximately $2.6 billion, with an average interest rate of 3.89%. Approximately 82% of our debt is fixed rate and we have no fixed rate maturities until 2019. In total, our outstanding debt represents about 35% of our total market cap at the end of the quarter, and we had about $58 million of unrestricted cash and full availability on our $800 million line of credit.

Our financing strategy remains unchanged as we continue to maintain a strong balance sheet with sufficient capacity and flexibility to support our capital needs. As Dave mentioned, the successful completion of our merger with ARP will increase our leverage to about 42% of total market cap, which is at the high end of our target range. Over time, we will look to utilize retained cash flow and potential dispositions to deleverage.

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

(Operator Instructions)

Jade Rahmani, KBW.

Hi, thanks for taking my question.

On the M&A environment, beyond ARPI, how do you feel about consummating similar sized, or perhaps even larger, transactions? Do you need to wait until you integrate the ARPI portfolio and get those operations stabilized on your platform, or do you think volatility in the capital markets presents a potential opportunity, given where your stock is trading versus peers, and also considering that CMBS spread have widened as sharply as a lot of the larger funds have used CMBS to finance themselves?

Hi, Jade, it's Dave. Good morning.

If you look at the ARP transaction and you go through the background, you will notice that it was a transaction that was more than a year in discussion. We talk to all our peers from time to time. We don't comment on potential acquisitions until they are announced.

But we are in the life cycle component of consolidation and we look at all opportunities that are out there, both with our larger and our smaller peers out there, as to consolidation opportunities. The financing of those is a component of how we look at each transaction. We financed the ARP transaction with equity. It's a function of assets acquired and capital given.

I think it's a very, very good transaction that we look to discuss more later after it closes. But it's a good transaction for all shareholders. So we are --

Go ahead, sorry to cut you off

That's essentially the sum of it.

Can you say anything about the magnitude of earnings accretion you do expect from ARP, and also if you expect degradation to your long-term margin expectations?

Yes, Jade, I'd prefer to -- we will have a fulsome discussion on all of the impacts on ARP after it closes next Monday. We will be issuing a press release and holding a pretty fulsome conference call just on that next week, so I'd like to defer that.

Okay, and on your existing portfolio, not including ARP's, how much first or second term CapEx on a per property basis do you expect to incur, and how does that steady-state CapEx assumptions? In other words, should we expect elevated CapEx spend per property for some seasoning period, may be for the next one to two years?

This is Jack. We had some deferred renovations that run through our CapEx. But as our portfolio seasons, that is moving down. So I wouldn't expect an elevated level by any means.

Okay. And then, just finally, can you remind us what you're steady-state per home assumptions are for repairs and maintenance, turn costs, and CapEx?

Well, I think for 2015, we were somewhere around $2400 for those three items on a per property basis. I expect to bring that down over time. So, I expect that to go down over 2016 and beyond.

Thanks for taking my questions.

Jana Galan, Bank of America Merrill Lynch.

Thank you. Good morning.

Following up on your disposition outlook of about $150 million to $250 million in sales, are you trying to sell out of select markets, and then do you see this more as one-off or potentially smaller portfolios?

I'll take it. We are still evaluating where we are going to be selling from. So we haven't totally identified.

We have a process in place to look at outliers in markets that are core markets and then to look at markets where the yield is low relative to current value. So those are the markets that we are looking at. But we haven't identified properties as of this date.

And with those proceeds, how do you balance share buybacks versus paying down debt?

Well, we will use the capital to pay down our line we have. We currently have nothing drawn on our line. As we go through the merger discussion, we will probably have to draw a little bit on our line for the merger and we will discuss that next week.

But the share repurchase program has another $220 million available on it, I think it's a great opportunity to be buying stock and we have the capacity to do it on our line. We will do that off our line, we will use the proceeds to retire the debt that we borrow on our line.

Thanks, Dave, and maybe just some color around what you're seeing in the Houston market?

In the Houston market, I would say they are somewhat affected by the oil prices going down, but we are still 95% occupied. We still see a lot of demand. But certain employees that are tenants of ours or potential tenants of ours have struggled, and so you do see a little effect of that. And rates aren't going up as much as they were, even three to six months ago.

Thank you.

Dan Oppenheim, Zelman and Associates.

Great. Thank you very much.

Was wondering if you could just talk about the view on the capital allocation here. You talk little over 1 million shares repurchased start of this quarter but also mentioned that following the closing on Monday you will then be at the higher-end in terms of where you'd like to be in terms of leverage. How do you think about the stock here and how active you'd like to be at these levels?

I'd like to be very active at these levels, and we've got about $200 thousand left on our authorization. The buying back will increase the leverage marginally, no doubt. But through stock repurchases, through retained cash flow which is significant in this Company. I think our ability to manage our leverage will be just fine.

I think Dave meant $200 million.

$200 million is a closer number. Sorry about that.

In terms of the non-core sales, it sounds as though you are looking sell individual homes within markets as opposed to markets overall. Should we expect those will be gradual in terms of, at the time of expiration of those leases, or would you think about doing more in terms of selling a portfolio of leased homes?

We would consider a portfolio leased homes in the respective markets.

Okay. Thank you.

Buck Horne, Raymond James & Associates.

I wanted to talk a little bit about pricing, and with the stabilized occupancy at 95%, how do you think about tuning your pricing dials going into spring this year? And any color you can give us on what you're going out with on re-leases, or renewals, or what kind of pricing you're seeing through January and February? And do you have any guidance or expectation of what we can think about for Same-Home revenue growth for 2016?

We have benefited from moving occupancy up from, I think, 92% to 94%. So hopefully we will continue to benefit through future growth.

But on the rate side, we will begin, or have begun already, pushing rates on re-leasing, and we are entering 2016 with far fewer aged inventory and far less inventory, so we can experiment with higher rates and see how that goes. And with our make ready process, getting it down to a shorter period of time, we have a little more time to experiment with pushing rates on the re-leasing. On the renewals, we don't want to hammer our existing tenants, so they'll probably stay in the 2.5% to 4% range.

Okay. Would 5% to 6% Same-Home revenue growth be out of the realm of expectations for this year?

It wouldn't be out of the realm of my expectations, but I'd probably guide you to 4% to 5%.

Okay. Just noticing in the same store pool, property taxes actually seem to go down in a year over year basis. Could you give us a little color on what success you may have had on driving down property tax expense?

Well, that's a little misleading. I wouldn't call the financial statements misleading, but that comparison is misleading. I think looking at year over year growth of about 3% is more in line with what happened. But what happens with property taxes, and I'm sure you've seen it with some of our competitors, you estimate what your expense is going to be before you get the assessment and sometimes you are right and sometimes you are wrong. So you have a little change. And I think last year in the fourth quarter we had under accrued previously, based on the estimates we had. And had a little higher than normal last year in the fourth quarter.

I'll just add a little bit to that. Right after you acquire property there's a little more volatility than as you on the properties longer-term. You tend to get reassessed and you tend to get supplemental bills as they are truing up from the time you purchased. So we had a little bit of those extra costs in 2014, providing favorable comparison here. But I think the numbers you see are pretty good to trend off of as you go into 2016.

Great. Thanks for the time. Great quarter.

Dave Bragg, Green Street Advisors.

Thank you. Good morning.

The disposition plans are encouraging and thanks for the insight on that. I'm curious if you could perhaps describe the bid out there for portfolios, and maybe educate us on how pricing could differ between selling a portfolio to investors versus selling homes on a one-off basis that ultimately go to an owner-occupier.

Well, we are not too experienced in selling portfolios at this point. We haven't started marketing them. So I can't give you too much guidance on that. But we know that there is some demand, maybe not as much as there was two or three years ago.

Okay. And based on your experience, what's the cost associated with selling homes on a one-off basis to an owner-occupier?

It's somewhere in the 6% to 8% range.

Okay, thank you. One last question, I think you suggested 4% to 5% revenue growth for 2016, on a same-store basis, is what you would guide us to. What are your expectations for same-store expense growth?

Well, other than property taxes, which I don't really control, little bit in appealing them. But I would hope to keep expenses flat to very modest increase or decrease.

Okay. Flattish, and then property taxes were up 3% in 2015. You can't control it, but is that a reasonable expectation for 2016?

I believe so.

Okay. Thank you.

Patrick Keeley, FBR.

Good morning, thanks for taking my question.

So, first question, you walked through rental growth overall that you are expecting for 2016. Are there any particular markets where you think rental growth is probably better than Company average that you can identify right now, or those expectations relatively broad-based?

There is definitely markets that are better. We have Atlanta, Denver, and the Pacific Northwest. Texas are all really good. Even the Midwest is picking up a little bit. Yes, I would say there ones that are better. And then you have some that are affect by oil but they are smaller markets. So those will be flattish.

Okay. Great.

And as we look at it in 2016, understanding that the ARPI merger completion will change things. But if maybe looking at the standalone AMH portfolio right now in 2016 with all of the changes you have made to optimize the platform, do you have any expectations on NOI margin on a core basis for 2016? How we should be thinking about that? And maybe longer-term, you talked about maybe being a year or two out from hitting your goals as you optimize? So how should we think about those as it flows through the year, and ultimately what we can expect versus 2015?

I think we were at the low end of our target this year of 61. I think we targeted 61 to 63. I think I would go with something similar and hopefully be towards the upper end of that this year.

Great. Thank you.

(Operator Instructions)

Anthony Paolone, JPMorgan

Yes I'm here. Can you hear me? Okay.

Sorry, I may have missed this, but did you talk to why renewal spreads of three seven were higher than re-leasing spreads? I would've expected those to be flipped.

Well, re-leasing spreads as we entered the fourth quarter, we look at any inventory that didn't lease through the hotter leasing period and reduced our rates. To get them leased. And we got them leased. So that had some degrading effects on the overall re-leasing statistics.

On renewals it's really just whatever the mix is. What areas are turning and what the rates were. We try to keep things in the range of 2.5% to 4% and more of the 4%s renewed.

Tony, it is a little seasonal. For the year the rates were flipped at 3.21 on renewals and 3.6 on releasing.

Okay. Got it.

And also on page 17, where you show your renewed levels out of the expirations in the quarter and then I looked down in the middle where it shows the month to month leases. Is the month to month leasing, like when I look at that 4900 of expirations, does that suggest that 1500 of those just became month to month. Is that how to think about it?

No. Some of those were legacy. There are people that go month to month for years. That's the cumulative month to month, and I think in December going into January those quotes of about 200 became month to month. Some of those will move out in a month and some will stay for a long time.

Okay. But when I look at the renewed, that 3,777, does that include the 1,502 in there or some other --

It will include the 200 or whatever each month is, of, there are three months of properties that go month to month. I think for the quarter there might have been 400 or 500 of those that went month to month.

Okay. I understand. And just one item on the margin expectation for 2016, make sure I caught your comments right. Jack, you did 61% in 2015, and if I just pick the midpoint of 4% to 5% on revenue and keep expenses flat, it would suggest 62%, 63% margin, does that sound about right?

I think I said 61% to 63%, so I gave myself some wiggle room.

Fair enough. Thank you.

Ladies and gentlemen, that does conclude our question and answer session for today. I will now turn the call back to management for closing remarks.

We thank you for listening in. We look forward to talking to you, either next week or the following week, as we review our merger that we anticipate closing on Monday, February 29. Thanks again for your interest, look forward to talking to you shortly.

Thank you, ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.