Welcome to Citi's 2024 Global Property CEO Conference. I'm Nick Joseph, here with Eric Wolfe of Citi Research, and we're pleased to have with us AMH and CEO Dave Singelyn. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions. Dave, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we can get into Q&A.
Thank you, Nick. I am joined today with, by Bryan Smith. He's on my left, your right. He's our Chief Operating Officer, and Chris Lau on my right, your left, Chief Financial Officer. Just a quick housekeeping. You know, many of you do know the story of Single-Family Rentals and American Homes. So we had an earnings call about a week ago, so the transcript of that is available. We also put a deck out that is on our website and that has a February update. And when I'm done with a couple of remarks here, I'll ask Chris to give you the highlights of February. Three items to talk about in prepared comments. First, we'll talk about the demand for single-family rentals in housing in general.
For the last 13 years since American Homes has been around, both in its public form and its predecessor, a private company, demand for housing has been continually getting stronger, and today, that's. There's no change there. That's a function of the housing shortage that's been built up over the last number of decades, where household formations have exceeded new housing supply. Today, depending on your survey, it's 3-5 million. So as long as you're in the net migration areas, where migration is moving into the area and not out, you're going to have strong housing demand for the foreseeable future. And I see that being measured not in months or years, but decades. Item two, going into growth. Our growth is rooted in our development program.
We started that program seven years ago, and when we started that program, we had a number of objectives that we talked about. We are going to build the most durable single-family rental homes, putting in high-quality materials so they will wear better. It's all about the long-term maintenance and durability, so plumbing fixtures, flooring, decks, those type of items. Best locations. The homes that we build are contiguous to where homebuilders are building homes for retail sale, not for their single-family rental offerings. So they are in the core of the city where we want to be. We also talked about, which is very, very important today, we wanted to be able to control our destiny, grow in all economic cycles.
Today, where the acquisition market is for us, we are very pleased to have that development program delivering 2,300 ± homes last year, and in 2024, that's our expectation as well. Just a little note on acquisitions. We're very pleased to have that growth vehicle. We continue to look at acquisition opportunities every day. We underwrote more than 10,000 acquisition opportunities in the fourth quarter. That's about the run rate. We tend to underwrite more than 10,000 acquisition opportunities each quarter. They come from all sources. It's from the MLS of existing homes, but they're also the new homes from the national home builders and from the regional home builders.
When we underwrite homes, and we talk about yields, whether it's our development program, or acquisition program, or disposition program, they're all done the same way, same mechanics. So it's the current rents, with a normalized vacancy factor, normalized expenses, and normalized CapEx, economic yield per se. When we look at our acquisition opportunities from national home builders, from the existing homes, what we have been seeing is they all are penciling in the 4% range, the 4% yields. So something with a four handle on it. Our development programs or properties that we're delivering are more than 100 basis points higher than that. That makes a lot of sense because there's no development profit. Even if you're buying at a discount, there's no development profit.
So you can understand why the investment is less, higher quality property resulting in higher yields. Talking about our development program, not only are we well positioned for 2024 in our deliveries, we're well positioned for many years with a pipeline in the markets that we want to grow of 12,000-13,000 homes. Last item I want to talk about is dispositions. In 2023, you will note that our disposition number of dispositions increased to about 1,500 homes. Dispositions, if done properly, are your best acquisition capital. You get the biggest spread on that recycled capital. Again, we are underwriting those with the same methodology.
What would be the current rent in that marketplace with the normalized vacancy, expenses, and CapEx, not what we earned in the last month or, you know, while they were vacant, being renovated. And they're coming out with a 3% handle. So you can see recycling of that capital is 200 basis points. Very, very strong program. And I look for that program also to continue, not only in 2024, but also for the next few years at that more elevated pace than our historical averages. With that, let me just turn it over to Chris for a second to have him talk about February.
Yeah. The update is, we've seen a nice start to the year. Nice start to the year with same home occupancy holding steady at 96%, along with acceleration in our leasing spreads. With new leases growing from 4.3% in January up to 4.9% in February, and renewals growing from 5.7% in January to 6.1% in February. And then just real quick, you know, as we're thinking about 2024, it's important to keep in mind that we are expecting the shape of full seasonality to be back in the business this year. That's very much contemplated in the midpoint of our same home revenue growth, which for this year we expect to be 4.75% at the mid.
We see that paralleled by a moderating expense growth environment this year. Midpoint of the guide is 6.25%. Largely being driven by, as we were talking about last year, a moderating property tax environment that we're seeing for this year, ultimately translating into Same Home NOI growth of 4% at the midpoint this year. You know, key takeaway is, it's early still in the year, but we're seeing nice leasing demand and activity throughout January and February so far.
Great. Dave, congrats on your upcoming retirement. I know you're gonna miss doing this kind of stuff. You know, as you think back since you founded the company and helped found the industry, what would you say surprised you the most about the way the industry has changed? And for all the people in the room here, what do you think is gonna surprise them the most about the way the industry will change going forward?
Yeah. So with looking back, when, when we started, we were doing a number of things with brute force. There were no systems in place. We had to basically... I think, I was at a conference, in those early, early years, and Blackstone was in the program, and Jon Gray was talking about building the bicycle, while you're riding it, and that's kind of what we were doing. And, you know, we, we had grandiose visions, and, those visions were, if we could get to 10 or 20,000 homes, that would be awesome. And here we are, 60,000 homes. We have a development program. We're adding to the housing stock, many things that were not envisioned in those early days.
Really satisfying, you know, we provide high-quality housing any given time to hundreds of thousands, a couple hundred thousand, people at any given time, across the country. More than 1 million people during my tenure. That's kind of rewarding, on that area. Going forward, what I would say is, this is what I've told our team, is we're kind of at a unique time in history. And we're at a unique time in a number of areas. One is, with respect to housing. Housing is in very short supply. That needs to get solved. Right now, affordable housing is out of reach for some people. So we-- but the only way to solve that is not to legislate it. You have to provide more supply, and that needs to get understood and acted upon.
But when I look back at the very beginning, we could not have done what we did in 2011, five years earlier. The technology had progressed to a place where data was flowing through the Internet, allowing us to get property taxes and rents and other things. If you look forward, we're at the same place. And I think there are a couple of events that have really shaped this country. Business-wise, the Industrial Revolution and the creation of the Internet are two that come to mind. We're on the precipice of artificial intelligence, and I think that's going to change how we operate in the next decade. How? I don't know. I mean, that's gonna take shape over the next probably three years.
But I do think artificial intelligence will impact every business, including, real estate and single-family rentals, and, it'll be interesting to see how that all plays out.
That's interesting. I'm sure there'll be some questions on that in a bit. You spoke to the housing shortage that we're seeing, and you have two charts in your presentation that shows the decline in existing home inventories, but also the resulting sort of cost to rent versus cost to own gap, which has never been wider. So just two questions on that sort of cost to rent versus cost to own gap. You know, why do you think that the sort of rental rate growth hasn't kept up with the cost of housing, meaning that the price of homes and affordability of homes has risen, has been worse, right, than the rental rate growth?
So do you think there could be a sort of catch-up period where you see this sort of 5%-6% type rent growth for the foreseeable future, simply as a result of the fact that the home prices and affordability is out of reach for the majority of people?
You know, let's go back in history, so we understand that graph. If you go back 3-4 years ago, we're pretty close to parity. Today, we're 28% in our top 20 markets, cheaper to rent than to own. So it's all happened in the last couple of years. It's also happened during a period of time where rental rates were increasing pretty rapidly. But during that period of time, I think the housing shortage, and the lack of supply for people to buy homes has forced home prices to move up or to remain stable at a time when interest rates were rising, and they should have fallen.
The increase in the interest rates, as fast as it has been, the velocity faster than at any time in my memory, in my lifetime, is what really has driven that significant gap over a short period of time. The way you framed it, Eric, is exactly the way I would look at it, and that is it really provides a long runway of sustainable rental rate growth because that gap does have to close over time. You can't close it in one year, though.
Got it. And maybe speaking to the update that you put out, obviously, the metrics look good. They're a little bit down, I guess, from last year. I mean, would you say that if I took this time, this year versus last year, that the difference is just the tough comps, meaning you're starting to see some unsustainable comps from COVID? Has anything changed from a supply-demand perspective versus last year? Just trying to understand why there'd be a difference versus last year, and if maybe we could probably get back up to that kind of like 7%-8% type of growth that you were seeing last year.
Yeah. So let me address a little bit of that, and maybe Bryan has some additional comments. What we are seeing in 2024 is pretty much a full return to the traditional seasonal patterns that single-family rentals experienced pre-pandemic through 2019. What you see if you compare our first quarter and you compare what we believe 2024 is going to look like, it's going to look like 2019, if you graphed it out, with one exception, the graph and the rental rates will be higher than what we saw in 2019, 2018. So think of the shape being the same, just elevated on the piece of paper. When you compare it to 2023, we were returning to normal seasonality.
Really got there towards the end of the year, but I don't think we were there in the first quarter of 2023. So your second point about a little bit of the overflow of the pandemic, yeah, I think there's a little bit of that in the prior year. We could even argue there's still a little bit of it in maybe bad debts out there. We talk about bad debts a lot in our meetings. We haven't adjusted our bad debts until we have clarity. It's not that we're going to do it on a hope or, you know, just to put it out there. But we still have a number of jurisdictions that collection practices through the court systems are not what they were pre-pandemic.
A couple on the East Coast and at least one on the West Coast as well. So to me, it's really a return to the pre-pandemic patterns. But they do look a lot stronger than pre-pandemic times.
Just to add a little context to that, too. If you take a look at occupancy pre-pandemic Q1, it was in the 95% range. We entered this year at 96, and we're well set up to take advantage of the spring leasing season. It's playing out as planned. Comparing to last year's comp, though, things were a little bit different back then. As we talked about numerous times over the past six months, we saw that return of seasonality towards the back half of the year, and our expectation this year is that it'll have similar shape.
You made a comment on the call, that was basically to the effect of the strength of demand will really start showing itself in March occupancy numbers. So I was hoping you could maybe expand upon that and sort of how much sort of forward visibility you have towards future occupancy increases.
Sure. The demand profile has played out as we expected this year, with a really nice increase towards the back half of January, and continued into February, and it's continued to show really nice strength. There's a delay in the time from that demand, from the tours through application to move-in, which we think will start showing in March. March is obviously still early, but it's playing out as we expected, and we would expect to see an improvement in occupancy in the market.
Okay. And as you think about your strategy over the peak leasing season, are you willing to sort of... Do you want to keep occupancy around this 96%? Does it not really matter? I know your sole goal is just to maximize revenue growth, but is there a certain sort of strategy that you're going to use to try to do that?
Our strategy has remained the same for a long time, and that is to maximize revenue, as you stated. There's a couple of ways that we're looking at it. Consistency in pricing is really important to us. That includes really good communication with our residents through the renewal process, to make sure they understand the rationale behind it, and that they realize the value that they're getting with these new offers. And then we have a really strong digital leasing platform for new leases. We're able to continue to leverage that for a competitive advantage in the market. Through the course of the year, we're going to, again, maximize revenue. There's going to be a little bit of a balance in rate through the spring leasing season.
You'll see consistency, relative consistency in renewal rates through the year as planned, and then we're going to test the market during the season, the good season on the releasing rate growth.
I know it's early days, but any sort of commentary on markets that are maybe seeing a bigger inflection in pricing power and if there's sort of any common theme to that? So for instance, maybe you're seeing stronger rent growth in markets where the existing home market is maybe a bit more depressed, affordability is a bit more stretched.
... Yeah, there are a number of different dynamics at play. I think the strength that we'll have in pricing corresponds to the strength in occupancy in a lot of these markets. So in the past, call it five or six years, we've seen outstanding strength in Phoenix and West Coast markets, Las Vegas. That's changed a little bit over the past six months with some added supply. It's nothing but temporary. Our assets are very well located there, and we're already seeing some real nice signs of life in those markets. But in terms of pricing power, maybe less so there and more so, into some of our other markets in the Southeast, into Florida, Tennessee, and the Carolinas.
And then maybe just one last question on, on sort of the, the peak leasing season. If you think about sort of the top-of-funnel demand indicators that you see every day, website traffic, conversion ratios, what, you know, what is that telling you about what the next couple months could look like?
Yeah, again, we've seen the expected increase. The website activity is way up, even year over year, off of last year's high occupancy levels. And not only is the traffic up, but what they're doing on our website, we're monitoring very closely. And we're encouraged by the fact that a lot of the prospects are setting up search accounts. I've talked in the past about how we've added a lot of functionality to our website. It's similar to what maybe an agent would have on their local MLS, the ability to set up search accounts for the residents to notify them when homes that fit their criteria become available. We've added a lot of digital tour virtual tour functionality. We own our own access solution now, so the platform is very tightly integrated.
From a demand perspective, we're watching that progression from initial shopping through tour, through the application process, and everything is showing very nice signs of life so far this year.
Yeah. And then, Dave, you touched upon this a bit, you know, in terms of thinking about how the business is gonna change going forward. What are sort of the technology initiatives that you think today are gonna be the most impactful, for the company, potentially providing sort of other income sources as well? What are sort of the main initiatives that you're working on that you think could be, you know, big contributors to shareholder value?
Well, I think you start not at the shareholders, you start where the revenue stream comes in, and that's our residents. You may notice that we have a new website about a year ago. The real benefit of that website is not what you see. The benefit of that website is the backbone of that website. Technology today is very different than when we first became a public company and put out our first website. So the website today, the backbone has the capacity for a lot of plug-and-play modules that can go in behind it, regarding the logistics of maintenance, so people can know exactly when the maintenance people will be at their house. It's all about better application process, but it's also about better account management, as well.
We have spent the last couple of years focused on the residents. We have focused on our employees. We had an initiative last year called Resident360. We talked about that at this time, as it rolled out today. We've seen some very, very tangible benefits of that. If you look at our Google scores, in the year of 2023, and you have to parse them out of the lifetime scores, we're averaging in the 4.7-4.8 range. A significant improvement for us and tops all of our peers. You look at our employee turnover and what we have done over the last couple of years, gone from high 30s to 25% employee turnover.
All of that, at the end of the day, falls out into shareholder value, whether it's better revenue or better expense controls. A lot of the Resident360 program also focused on bringing the maintenance decision-making closer to the residents, into the local markets, and that's how you get the better Google scores. It's also, we have seen the ability to control the expenses better that way.
Got it. I guess when you're managing a portfolio of, you know, 60,000+ sort of disparate homes, you've done a lot to centralize, improve technology, take away sort of the manual pain points. But I guess, where along the process and in the management are you still doing things a little bit more manually, where you think there could be improvements to come, things that are taking sort of inordinate amounts of time that you think could be streamlined going forward?
You know, the low-hanging fruit obviously has been picked up. We today have a little bit better pricing module than we did 2 years ago. But an area that we actually are seeing the best benefits in the last year, maybe the last 18 months, is in our development program. We put new systems in. It's a very well-known system that home builders use that's on a J.D. Edwards platform. And if I was sitting here in November of 2022 and, or that earnings call, you would have heard us talking about a forecast of having a reduction in expenses for our development program related to reduction in commodity costs, because at that time, the home builders production was slowing. Well, that didn't happen.
You get to February of 2023 and initiatives or incentives on interest rates were being given, and the production of the home builders was as strong in 2023 as you saw in prior years. But we still realized that 5%, and that realization was in better management of the supplies, ordering less wood, less lumber, less waste in the development process. But also to be able to track better the volume discounts and other incentives that we can get due to the levels of development that we were doing, and how to package orders in a little bit differently. So that is a combination, not only of systems, but of the human intel going into it, but the human intel by itself couldn't have done it.
The systems that we worked on in 2018, 2019, started paying dividends in 2021, 2022.
And you mentioned the development pipeline, obviously a big differentiator for you. Now, what have been the sort of learnings over time, as you sort of started this program, you've scaled it, now you have sort of this capacity, to continue scaling it going forward. What have been sort of the best learnings, from the early days that you're now applying to make it more efficient, keep your yields higher, effectively create more value for shareholders?
Well, I think, you know, from, like everything else, if you go back 13 years ago and look at the first homes that we bought, I wouldn't buy those homes today, ever. They were condos. I thought they were much more akin to what people would want to rent. And you learn as you go forward. The development process was no different. We started developing in North Carolina, and the first homes that we built, they turned out to be nice homes, and they do have nice yields. But we learned a lot on those homes. We learned a lot on the second development down in Jacksonville.
So the thought that you know how to do everything exactly right on day one is a fallacy, but you got to start, and you got to do it, and you'll learn as you go. Today, you know, we are looking a little bit more at refinements, not large-scale changes. But those changes are not only in the development side, they're also in the asset management side, and that is a part of it. Exactly, are we in the right location? Do we have the right amenities in each of these facilities? Do we get paid for a Tier Five, or could we do better with a Tier Four, which is a little bit cheaper?
Those are all analyses that need to occur today, but you have to have enough experience and enough history to put into—that gives you the data to analyze it. And we're, we're still a little bit early in the ability to analyze some of these items. Over time, there will be changes, and there will be refinements. There—I don't think... We'll call them enhancements, but they're not going to be wholesale changes.
You mentioned your guidance for this year in terms of expected number of homes, expected amount of investment. Now, how did you sort of come up with that number, and what would it take for you to accelerate it? Or is it, you know, you have a sort of a maximum amount that you're just simply willing to do as just a risk mitigation tactic? Trying to understand how you come up with those numbers and what could change that.
Over the last 3-4 years, through the pandemic, a lot of variables have been moving very, very fast, and many of them, faster than we've ever seen in this, this country's history. When you think about development, the difference on development versus acquisitions, it's, it's got a long lead time. So land you buy today is going to be delivered 5 years from now. Acquisitions, we can throttle those up and down, on a daily, you know, notice. We just need to access the capital, but we can throttle those up and down. As I said, we continue to underwrite, homes, you know, 5 digits every, every quarter, 10,000 plus every quarter.
On the development side, we're making decisions today based on what we know today for the future, and we don't want to get ourselves caught short, in any area, and we don't want to change the, the velocity of our development program too much from year to year. So you do not want to throttle it up and then throttle it down. It doesn't work well in the development side. So we are looking at how much capital can we be highly comfortable that we will have available to us. We then factor that into the land development and the delivery cadence, for the next number of years.
So if you look at how we are structured today, we can finance our development program with retained capital and with a small amount of debt, which is incremental each year, and as we grow, that becomes that capacity becomes available to us. As time goes on, if the conditions are right, we will increase the number of homes that we put into our portfolio, either through acquisitions or through development by buying land that has already got infrastructure in it. So those we can deliver in a 9-month or so period of time. But right now, we are doing development based on what gives us the confidence that we can deliver this year and for the next 5 years. ...
Yeah, so there are, generally, the answer to that is no, we don't want to sell. We have not ruled out selling. We have to be careful on how we do a sales transaction, inside a REIT, so we don't blow the, what is called the Dealer Rule, of a REIT structure. Last thing I want to do is become a home builder and blow my REIT status and end up being a tax-paying entity. And it is a consideration. It's not as easy to do. It is, doable, but it's not easy. Yeah, I don't think it's gonna be as big a headwind as you may perceive.
My basis for that is to go back three years ago when we were in parity, and our demand was very, very strong then as well. I actually think it's a positive, to be quite honest, if the interest rates would come down, because I think we'd be doing more acquisitions, and it would be more accretive to the company. But I don't think the demand for housing being 3-5 million housing units short, and more, that impact is even more accentuated in the markets that have net migration in, is going to be an issue. We need more housing, and you can put a lot more housing in, and I don't see it having a significant impact.
Maybe another way to ask that first question around sort of. You referenced available capital, capital that's available to you. I don't think I've ever seen such a sort of wide spread between where you can sell homes, you know, effectively into the retail market, you know, in the mid- to high $300,000s versus where you're developing. I mean, that's effectively like a 50, 60, maybe plus % increase in sort of unlevered asset value between one and the other. So I know I've asked this question in the past, but, you know, is there any way to potentially accelerate the sale of non-core homes right now, just given that there's such a wide gap between, you know, where you're developing versus where you can sell?
You want to take that?
The answer is yes, and we're doing that right now. If you think about what we accomplished in 2023, we sold $450+ million of disposition product, an average dispo cap rate in the mid threes. This year, we're expecting to do something similar as well. Guidance contemplates another $400 million-$500 million of sales, you know, probably in a similar ballpark from a disposition cap rate perspective. The key consideration, though, is there is a natural governor on how many sales we can accomplish in any given period of time because of the channel through which we're selling the homes, right? Ultimately, we are achieving this disposition outcome by selling to end-user home buyers via the MLS, which means we need vacant homes to be able to sell.
It's a good problem to have, but, you know, 96% of our homes are not vacant. So when we're identifying homes for disposition, we need to naturally let leases roll, right? We're in the business of providing housing, not taking it away. We'll never kick someone out of a home to sell it. We let the lease roll, the tenant move out. Oftentimes, we will invest a few dollars into that home to ready it for sale. It goes onto the market, and then it moves quickly, right? But there's a natural timeline to how quick we can move through these dispositions, and this year is a perfect example of really leaning into the program to the tune of $400 million-$500 million.
Let me add one thing to that. The other consideration is we have a number of homes that are not eligible to be sold. They are collateral on our four securitizations. One of those securitizations, we've already given notice, and all the collateral should be released in the first quarter, in the next couple of weeks. Another one does mature this year. This session has ended. The session will begin in ten minutes. And the other two mature next year. That's going to free up all that collateral for sale.
We're going to try to do rapid fire over the music. Same store, NOI, for single-family rentals next year overall?
Sorry.
Same story, NOI, for the sector.
For 2025.
Mid, mid-single digits.
More, fewer, the same number of public companies next year?
There is two. There will be two.
And then, best real estate decision today: buy, sell, build?
Build.
Thank you.